<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-14477
SPORTSNUTS.COM INTERNATIONAL, INC.
----------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 87-0561426
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
The Towers at South Towne II, Suite 550, 84095
10421 South 400 West, (Zip Code)
Salt Lake City, Utah
(Address of principal executive offices)
(801) 816-2500
Issuer's telephone number
<PAGE> 2
(Former name or former address and former fiscal year, if changed since
last report.)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act of 1934 after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of the issuer's classes of common equity, as of the
latest practicable date. As of June 30, 1999, the Company had outstanding
15,691,483 shares of common stock, par value $0.0001 per share.
Transitional Small Business Disclosure Format (check one) [ ] Yes [x] No
<PAGE> 3
PART I
FINANCIAL INFORMATION
The Financial Statements of the Company are prepared as of June 30, 1999.
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
SPORTSNUTS.COM INTERNATIONAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30,
1999
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,381,771
Accounts receivable 6,729
Inventory 60,654
Other current assets 76,929
-----------
Total current assets 2,526,083
Property and equipment, net 688,253
-----------
Total assets $ 3,214,336
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 273,278
Accrued liabilities 133,875
Accrued compensation and other benefits 15,821
-----------
Total current liabilities 422,974
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.0001,
15,691,483 issued and outstanding at June 30, 1999 1,569
Additional paid-in capital 7,975,391
Accumulated deficit (3,648,098)
Subscription receivable (1,537,500)
-----------
Total shareholders' equity 2,791,362
Total liabilities and shareholders' equity $ 3,214,336
===========
</TABLE>
See accompanying notes
<PAGE> 4
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net sales $ 322,137 $ 178,047
Operating expenses:
Cost of sales 320,803 108,558
General and administrative 521,322 112,395
Selling and marketing 313,353 53,806
Research and development 28,945 -
----------- ----------
Total operating expense 1,184,423 274,759
Operating loss (862,286) (96,712)
Other income (expenses):
Gain on sale of assets -- 5,040
Interest expense -- (47,968)
----------- ----------
Total other income (expense) -- (42,928)
----------- ----------
Loss from continuing operations before income taxes (862,286) (139,640)
Income tax benefit -- 16,178
----------- ----------
Net loss after taxes (862,286) (123,462)
Minority interest 66,804 --
----------- ----------
Net loss $ (795,482) $ (123,462)
=========== ==========
Loss per common share - basic and diluted $ (0.06) $ (0.02)
=========== ==========
Weighted average number of common and common equivalent shares 14,213,242 6,799,978
=========== ==========
</TABLE>
See accompanying notes
<PAGE> 5
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net sales $ 463,441 $ 304,383
Operating Expenses:
Cost of sales 444,416 230,861
General and administrative 777,319 314,261
Selling and marketing 814,702 86,724
Research and development 123,574 --
----------- ----------
Total operating expense 2,160,011 631,846
Operating loss (1,696,570) (327,463)
Other income (expenses):
Other income -- 5,040
Interest expense (3,097) (60,765)
----------- ----------
Total other income (expense) (3,097) (55,725)
----------- ----------
Loss from continuing operations before income taxes (1,699,667) (383,188)
Income tax benefit -- 32,457
----------- ----------
Net loss after taxes (1,699,667) (350,731)
Minority interest 66,804 --
----------- ----------
Net loss $(1,632,863) $ (350,731)
=========== ==========
Loss per common share - basic and diluted $ (0.14) $ (0.05)
=========== ==========
Weighted average number of common and common equivalent shares 11,976,874 6,695,065
=========== ==========
</TABLE>
See accompanying notes
<PAGE> 6
SPORTSNUTS.COM INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,632,863) $(350,731)
Adjustments to reconcile net income to net cash used
in operating activities
Depreciation 111,843 18,713
Non cash operating expenses 114,000 27,069
Deferred income taxes (1,258) (32,745)
Minority interest (66,804)
Gain on disposal of fixed assets -- (5,040)
Changes in operating assets and liabilities:
Accounts receivable (6,729) 1,930
Inventory (44,070) (135,098)
Other current assets (39,284) --
Accounts payable 78,078 100,023
Other liabilities (31,715) 989
----------- ---------
Net cash used in operating activities (1,518,802) (374,890)
Cash flows from investing activities:
Purchases of property and equipment (708,526) (9,285)
----------- ---------
Net cash used in investing activities (708,526) (9,285)
Cash flows from financing activities:
Increase (decrease) in cash overdraft (47,683) 49,247
Proceeds from issuance of long-term debt -- 242,100
Net proceeds from issuance of common stock 4,873,400 203,000
Payments on stock subscription receivable 85,000 --
Principal payments of long-term debt (301,618) (125,934)
----------- ---------
Net cash provided by financing activities 4,609,099 368,413
----------- ---------
Net increase (decrease) in cash and cash equivalents 2,381,771 (15,762)
Cash and cash equivalents at the beginning of period 0 15,762
----------- ---------
Cash and cash equivalents at the end of period $ 2,381,771 $ 0
=========== =========
Non Cash Financing Activities:
Issuance of common stock for fund raising commissions $ 100,000
</TABLE>
See accompanying notes
<PAGE> 7
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SportsNuts.com International, Inc. (formerly Durwood, Inc.) (the "Company") is
an online, personalized sports community offering a comprehensive bundle of
sports, outdoors, and fitness-related products, services, and information in a
club environment. The Company has combined the three powerful forces of sports,
the Internet, and network marketing in an effort to build the largest, targeted
online customer base of global sports enthusiasts. To date, the Company has
derived revenues principally from four sources: (i) proceeds from enrollments of
club members, (ii) recurring monthly purchases of promotional products offered
by the Company, (iii) purchases of sales aids by independent distributors, and
(iv) purchases of sports, outdoors, and fitness-related products and services.
The Company's strategy is to build and test its business model on a localized
scale, and thereafter deploy the model across the United States and
international markets. The Company was incorporated under the laws of the State
of Delaware on July 12, 1996. Prior to the merger with SportsNuts.com, Inc., a
privately held Delaware corporation ("SportsNuts"), on April 6, 1999, the
Company had not commenced active business operations and was considered a
development stage company.
The accompanying interim financial statements for the three and six month
periods ended June 30, 1999 have been restated in this Form 10-QSB/A from those
previously issued in the Company's 10-QSB for the quarter ended June 30, 1999 to
reflect SportsNuts.com, Inc. as the accounting acquirer in a reverse merger into
an inactive public company. The previously issued interim financial statements
of the Company for the three and six month periods ended June 30, 1999 reflected
the merger as if the Company was the accounting acquirer. In addition, certain
adjustments and reclassifications have been made to certain accounts to conform
with the current presentation.
FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-B.
Accordingly, certain information and footnote disclosures normally included in
complete financial statements have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's 1999 filing on Form 8-K/A No. 2.
<PAGE> 8
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and these accompanying
notes. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing the net loss by the weighted
average number of shares of common stock issued and outstanding during the
period. The Company excluded 9,302,548 options and 2,869,452 warrants from the
weighted average shares outstanding computation at June 30, 1999 because their
effect would be anti-dilutive. The Company did not have any options or warrants
outstanding at June 30, 1998.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. There have been no items of other comprehensive income to
date.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company has sustained significant net losses which have resulted in an
accumulated deficit at June 30, 1999 of $3,648,098 and has experienced periodic
cash flow difficulties, all of which raise substantial doubt regarding the
Company's ability to continue as a going concern.
The net loss for the year ended December 31, 1998 and the six months ended June
30, 1999 was $1,624,074 and $1,632,863 respectively. To date the Company has
funded its operations through a combination of short and long-term loans and the
<PAGE> 9
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
private placement of its common stock. The Company anticipates a net loss for
the year ended December 31, 1999 and with the expected cash requirements for the
coming year, there is substantial doubt as to the Company's ability to continue
operations.
The Company believes these conditions have resulted from the inherent risks
associated with the small startup technology-oriented companies. Such risks
include, but are not limited to, the ability to (i) generate membership revenues
and sales of its products and services at levels sufficient to cover its costs
and provide a return for investors, (ii) attract additional capital in order to
finance growth, (iii) further develop and successfully market commercial
products and services, and (iv) successfully compete with other comparable
companies having financial, production and marketing resources significantly
greater than those of the Company.
The Company is attempting to improve these conditions by way of financial
assistance through issuances of additional equity and through membership
revenues and sales of products and services. Management is confident that
appropriate funding will be generated and future product sales will result from
these opportunities and that the Company will continue operations over the next
fiscal year.
3. MERGER
On April 6, 1999, the Company merged with SportsNuts.com, Inc. ("SportsNuts") a
private company, (the "Merger"), wherein the Company issued shares to accredited
investors (the "Participating Shareholders") for approximately eighty-one
percent (81%) of the outstanding capital stock of SportsNuts. The Merger was
accounted for as a reverse merger into a non-operating public company, wherein
SportsNuts.com, Inc. was treated as the accounting acquirer. In conjunction with
the Merger, the Company changed its name from Durwood, Inc. to SportsNuts.com
International, Inc. Prior to the Merger, the Company conducted no active
business. SportsNuts is an internet based, "on line" sports club and retail
distributor of sports, outdoor, and fitness related products, services, and
information.
In connection with the Merger, the Company effected a 2.213 for 1 forward stock
split (the "Forward Split") of all then currently outstanding shares of its
common stock, $0.0001 par value (the "Common Stock"). The Forward Split resulted
in an increase in the outstanding shares of the Company's Common Stock from
1,103,500 to 2,441,713 shares. Immediately prior to the Merger, the Company sold
to accredited investors 1,000,000 post Forward Split shares of Common Stock
<PAGE> 10
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
at $1.00 per share to raise gross proceeds of $1,000,000 (the "Private
Offering"). As part of the Merger, the Company issued 7,651,252 shares of Common
Stock to the Participating Shareholders of SportsNuts in exchange for their
collective 11,683,000 shares of SportsNuts common stock. Each Participating
Shareholder of SportsNuts received 0.654904748 shares of the Company's Common
Stock in exchange for each share of common stock of SportsNuts. Additionally,
the Company issued to holders of warrants in SportsNuts who were also accredited
investors (each a "Participating Warrant Holder") warrants for the purchase of
3,353,113 shares of the Company's Common Stock. Each Participating Warrant
Holder received the right to purchase 0.654904748 shares of the Company's Common
Stock in exchange for each share of SportsNuts common stock it was entitled to
purchase pursuant to its SportsNuts warrants. In the future, the Company may
issue up to an additional 1,808,192 shares of Common Stock to acquire the
remaining 2,761,000 shares of Common Stock of SportsNuts that were held by the
remaining shareholders (other than the Company) as of the closing date of the
Merger. As compared to prior statements describing the Merger on Forms 8-K and
10-QSB filed previously with the Commission, the number of shares and warrants
issued to Participating Shareholders and Participating Warrant Holders has been
increased to reflect conversions by certain SportsNuts shareholders of their
shares and warrants for shares and warrants of the Company during the second
quarter, subsequent to the closing of the Merger. These transactions were
treated by the company as being effective as of April 6, 1999.
4. STOCKHOLDERS EQUITY
ISSUANCE OF COMMON STOCK
Effective April 8, 1999, the Company issued 1,351,268 shares in exchange for the
exercise of warrants held by certain individuals.
Effective May 8, 1999, the Company issued 2,807,000 shares and reserved for
issuance 25,000 shares of common stock at a price of $1.00 per share, net of
issuance costs of $271,350. Additionally, in connection with the receipt of
funds pursuant to the issuance of such shares and as compensation for the same,
the Company issued or is obligated to issue (i) an aggregate of 443,500 shares
of Common Stock to certain individuals, and (ii) warrants to certain individuals
to acquire an aggregate of 237,151 shares of Common Stock at an exercise price
of $1.00 per share. The warrants expire two years from the date of grant.
<PAGE> 11
SPORTSNUTS.COM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
JUNE 30, 1999
(UNAUDITED)
Effective June 15, 1999, the Company accepted subscriptions from certain
investors to purchase 750,000 shares of Common Stock at an exercise price of
$1.95 per share, net of issuance costs of $131,625. In connection with the
receipt of such funds and in conjunction with the Company's capital raising
activities, the Company intends to issue warrants to certain individuals to
acquire an aggregate of 67,500 shares at an exercise price of $1.95 per share.
Such warrants will expire two years from the date of grant.
ISSUANCE OF WARRANTS AND OPTIONS
During the three-month period ended June 30, 1999, the Company issued warrants
to acquire 352,151 shares of Common Stock at a weighted-average exercise price
of $0.96 per share. The warrants were issued primarily in connection with
capital raising efforts undertaken on behalf of the Company by certain
individuals as discussed above. The warrants expire two years from the date of
grant (see "Issuance of Common Stock). Also during the three-month period ended
June 30, 1999, the Company issued to various employees and service providers
options to purchase 363,098 shares of Common Stock at a weighted-average
exercise price of $4.31 per share. Such options were issued pursuant to the
Company's 1999 Stock Option Plan and expire five years from the date of grant.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of SportsNuts.com International, Inc. (hereafter, "SportsNuts.com" or
the "Company") should be read in conjunction with the Unaudited Financial
Statements and related Notes thereto included herein. This discussion may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, including,
without limitation, statements regarding the Company's expectations, beliefs,
intentions, or future strategies that are signified by the words "expects,"
"anticipates," "intends," "believes," or similar language. Actual results could
differ materially from those projected in the forward looking statements.
Prospective investors should carefully consider the information set forth below
under the caption "Risk Factors" in addition to the other information set forth
herein. The Company cautions investors that its business and financial
performance is subject to substantial risks and uncertainties.
OVERVIEW
SportsNuts.com is an online, personalized sports community offering a
comprehensive bundle of sports, outdoors, and fitness-related products,
services, and information in a club environment. The Company has combined the
three powerful forces of sports, the Internet, and network marketing in an
effort to build the largest, targeted online customer base of global sports
enthusiasts. To date, the Company has derived revenues principally from four
sources: (i) proceeds from enrollments of club members, (ii) recurring monthly
purchases of promotional products offered by the Company, (iii) purchases of
sales aids by independent distributors, and (iv) purchases of sports, outdoors,
and fitness-related products and services. The Company's strategy is to build
and test its business model on a localized scale, and thereafter deploy the
model across the United States and international markets.
INTERNET REVENUE MODEL
Electronic Commerce. The e-commerce revenue model is generally
characterized by four types of Internet retailers: (i) traditional retailers
which possess existing internal fulfillment and customer service capabilities
and have developed their own web site and reporting systems as an additional
venue to market their products and services, (ii) traditional retailers which
possess internal fulfillment and customer service capabilities but have formed
partnerships with Internet-based companies to outsource the Web promotion of
their products and services, (iii) retailers which market their products and
services exclusively through the Internet and have developed internal
fulfillment and customer service capabilities, and (iv) retailers which market
their products and services exclusively through the Internet and have outsourced
fulfillment and customer service obligations to third parties. These four models
suggest that strategic alliances are likely to be formed between retailers
possessing fulfillment and customer service capability without an e-commerce
presence and Internet-based retailers, such as SportsNuts.com, desiring to focus
on site promotion and implementation of systems but outsourcing fulfillment and
customer
<PAGE> 13
service obligations. In any event, the complete e-commerce business model is
similar to a traditional retailer inasmuch as Internet retailers generate a
gross profit margin and have incidental expenses related to the electronic
transaction.
Advertising. Although continuously evolving, the advertising model for
Internet-based companies relies heavily upon user demographics being captured to
provide advertisers return-on-investment feedback. Most Internet-based
advertising comes in the form of banner ads or identifying icons. Banner ads are
usually sold in blocks of 1,000 impressions (referred to as CPMs or "cost per
1,000 impressions"), averaging $30.00 per CPM. Targeted advertising (page
specific or user specific) can typically generate $60.00 per CPM. Advertisers
generally reward originating sites for "click throughs" (users following an
electronic link or pursuing an activity via their Web browser in order to
receive a prescribed economic benefit). Advertisers are constantly developing
new rate determinative criteria that allows advertisers to more precisely gauge
the level of exposure for their ads, including advertisements which appear
immediately while a new page is being loaded in the background of the Web
browser. Of available advertising space, most Internet sites sell less than 20%.
The Company anticipates that its emphasis on Web site development, together with
the increase in membership (in terms of sports enthusiasts and participants in
its network marketing operations) will likely generate advertising revenues
within the next six months.
NETWORK MARKETING REVENUE MODEL
Distributor and Customer Enrollments. Companies which use network marketing
successfully are typically characterized by a sharp increase in distributor
enrollment once these companies achieve a critical mass of active distributors
within a geographic area. The Company's use of an aggressive media promotion
campaign is intended to accelerate the enrollment of distributors and customers
to achieve critical mass at an earlier stage.
Product Sales. Product sales in companies involved in network marketing are
primarily a function of the number of distributors and customers affiliated with
the company. Because a certain level of product sales are generally required for
distributors to receive commissions, revenue projections can be fairly
predictable once an activity rate among all distributors is known.
Sales Aids. Most companies involved in network marketing view distributor
sales aids as a significant profit center. Similar to product sales, revenue
from sales aids is primarily a function of the number of active distributors
affiliated with the company.
RESULTS OF OPERATIONS
The accompanying interim financial statements for the three and six month
periods ended June 30, 1999 have been restated in this Form 10-QSB/A from those
previously issued in the Company's 10-QSB for the quarter ended June 30, 1999 to
reflect SportsNuts.com, Inc. as the accounting acquirer in a reverse merger into
an inactive public company. The previously issued
<PAGE> 14
interim financial statements of the Company for the three and six month periods
ended June 30, 1999 reflected the merger as if the Company was the accounting
acquirer. The following is management's discussion of the relevant items
affecting results of operations for the periods ended June 30, 1999 and 1998.
REVENUES. The Company earned net revenues of $322,137 during the three
month period ended June 30, 1999, an 81% increase from $178,047 during the
second quarter of 1998. For the six months ended June 30, 1999, net revenues
were $463,441, a 52% increase from $304,383 during the six months ended June 30,
1998. These increases were primarily due to increased spending by the Company in
marketing and sales. Using sports radio programs as a venue to reach prospective
members, in April, 1999, the Company began airing thirty-second radio
advertisements in the Phoenix, Arizona metropolitan area, using a well-known
sports personality as a sponsor. The Company has also begun airing additional
advertisements on sports radio stations in Orange County, California and Salt
Lake City, Utah. Approximately $286,322 and $366,804, or 89% and 79% of revenues
for the second quarter and six months ended June 30, 1999 were attributable to
membership sales from new distributors and customers. The Company anticipates
that membership sales as a percentage of overall revenues will decline slightly
over time as the Company launches its brokered Internet service and continues to
develop its Web site. With respect to the Web site, over the next six months,
the Company expects to begin receiving sufficient site traffic to generate (i)
advertising revenues, (ii) electronic commerce sales, and (iii) revenues from
other paid electronic services.
COST OF SALES. Cost of sales were $320,803 during the three month period
ended June 30, 1999, a 196% increase from $108,558 during the second quarter of
1998. For the six months ended June 30, 1999, cost of sales were $444,416, a 93%
increase from $230,861 during the six months ended June 30, 1998. Cost of sales
consists primarily of commission payments to the network marketing distributor
force, as well as the cost of the distributor kits, sales aids, and products
sold through e-commerce transactions. The increase from the prior year is
related to the corresponding increase in sales revenues previously discussed.
The cost of sales as a percentage of revenues has increased from 61% and 76%
during the second quarter and six months ended June 30, 1998 to 99% and 96%
during the second quarter and six months ended June 30, 1999. This increase is
due to a temporary restructuring of the commission payments in the network
marketing business to provide a higher payout to distributors as an incentive to
generate a larger distributor base. The Company anticipates that cost of sales
will decline as a percentage of sales, and it will generate an increased gross
margin percentage within the next six months as it restructures commission
payments within its network marketing operations.
SELLING AND MARKETING EXPENSES. Selling expenses for the three-month period
ended June 30, 1999 were $313,353, a 482% increase from $53,806 during the
second quarter of 1998. Selling and marketing expenses for the six months ended
June 30, 1999 were $814,702, an 839% increase from $86,724 during the six months
ended June 30, 1998. These increases were primarily attributable to (i) the
Company's advertising campaign and (ii) promotional efforts with respect to the
Company's direct sales force in an attempt to increase branding awareness and
<PAGE> 15
promote involvement in the network marketing operations of the Company. During
the second quarter, the Company initiated a system-wide increase in sales
bonuses available to distributors. The sales bonus increases were intended to
create incentives for distributors to enroll additional customers with the
Company in the short-term. Over the long term, the Company anticipates that
costs associated with the promotion and development of its independent sales
force will increase commensurate with the number of distributors enrolled with
the Company. In addition, over the long term, the Company expects that expenses
incurred in connection with its distribution force will constitute a majority of
the Company's selling expenses.
PRODUCT DEVELOPMENT. Product research and development expenditures were
$28,945 and $123,574 during the quarter and six months ended June 30, 1999,
compared to none in the second quarter and six months ended June 30, 1998.
Product development expenses related to the Company's web site consist primarily
of payroll, software and systems, and related costs for programmers and software
developers. Such internal web site development activities commenced during 1999.
In the prior year, the Company's web site was developed and hosted by a third
party. The Company believes that significant investments in product development
are required to remain competitive. Accordingly, the Company expects to incur
increased expenditures with respect to product development in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended June 30, 1999 were $521,322, a 364% increase from
$112,395 during the second quarter of 1998. For the six months ended June 30,
1999, general and administrative expenses were $777,319, a 147% increase from
$314,261 during the six months ended June 30, 1999. These increases were
principally due to increases in personnel salaries and benefits, professional
fees, contract labor, and rent and occupancy-related expense. Payroll expense
and professional fees accounted for approximately $370,920 and $49,556,
respectively, of this amount during the second quarter of 1999, as compared to
$23,360 and $14,056 during the second quarter of 1998. For the six months ended
June 30, 1999, payroll expense and professional fees totaled $623,771 and
$59,603 compared to $67,352 and $42,892 during the six months ended June 30,
1998. The Company anticipates incurring approximately $50,000 in general and
administrative expenses in the third quarter of 1999 related to its Merger of
Sportzz.com, Inc. (see "Summary of Recent Merger).
EXPENSES RELATING TO PRIVATE OFFERINGS. During the second quarter, 1999,
the Company conducted three separate private offerings of its Common Stock
solely to accredited persons, receiving commitments for approximately $5.3
million in gross proceeds (the "Offerings") which consisted of $1 million
initial capitalization as of April 6, 1999, $2.8 million in proceeds as of May
8, 1999, and a commitment for $1.5 million which has been reflected in the
Company's Balance Sheet as a subscription receivable. The Company has paid or is
obligated to pay out approximately $402,975 in cash commissions with respect to
the Offerings.
SUMMARY OF RECENT REORGANIZATION
On April 6, 1999, Durwood, Inc., a Delaware corporation approved for
listing on the
<PAGE> 16
NASD Electronic Bulletin Board, merged with SportsNuts.com, Inc., a private
company, wherein the Company issued shares in exchange for approximately 81% of
the issued and outstanding shares of SportsNuts.com, Inc., a Delaware
corporation ("SNC"). The above-described transaction was the first step in a
two-stage transaction involving the Merger of all of the shares of SNC by
Durwood, Inc. on the basis of .654904748 shares of Durwood, Inc. for each share
of SNC (hereafter, the "Reorganization"). After the consummation of the first
step of the Reorganization, Durwood, Inc. held approximately 11,683,000 shares
of SNC common stock in exchange for approximately 7,651,000 shares of Durwood,
Inc. common stock. In addition, certain warrant holders of SNC also exchanged
their SNC warrants for warrants issued by Durwood, Inc. on the same conversion
basis as the SNC common stock. Also following the first phase of the
Reorganization, Durwood, Inc. changed its name to SportsNuts.com International,
Inc. As compared to prior statements describing the Merger on Forms 8-K and
10-QSB filed previously with the Commission, the number of shares and warrants
issued to Participating Shareholders and Participating Warrant Holders has been
increased to reflect conversions by certain SportsNuts shareholders of their
shares and warrants for shares and warrants of the Company during the second
quarter, subsequent to the closing of the Merger. These transactions were
treated by the company as being effective as of April 6, 1999.
Pursuant to the Agreement and Plan of Reorganization entered into by SNC
and the Company, the remaining shares of SNC are anticipated to be acquired by
the Company, together with an exchange of all options and warrants of SNC,
sometime within the twelve-month period following the consummation of the first
step of the Reorganization. As part of the second step of the Reorganization,
the Company intends to issue shares of its Common Stock, options, and warrants
equal to 1,808,192, 8,939,449 and 635,258 shares, respectively. On April 20,
1999, the Company filed with the Securities and Exchange Commission a report on
Form 8-K summarizing the Reorganization.
SUMMARY OF RECENT MERGER
On July 28, 1999, the Company concluded an Agreement and Plan of Merger
with Sportzz.com, Inc., (the "Merger Agreement") a Utah corporation ("Sportzz"),
with a wholly-owned subsidiary of the Registrant, SportsNuts Merger Sub., Inc.,
a Utah corporation ("Merger Sub"), ObjectSelect, L.C., a Utah limited liability
company, being the sole shareholder of Sportzz (the "Shareholder"), and the
members thereof, providing for a reverse triangular merger of Merger Sub into
Sportzz (collectively, the "Merger"), with the result that Sportzz became a
wholly-owned subsidiary of the Company. Immediately prior to the Merger, Sportzz
was engaged in the development of internet based database management and
application development software, and it maintained an internet web site
employing its products for purposes of inputting, searching, and retrieving
local sports information including from leagues, schools, teams, and their
player rosters, game schedules, game results, photographs, articles, and
statistics.
As part of the Merger, the Company issued 944,882 shares of its Common
Stock to the Shareholder of Sportzz, in consideration for the 100,000 shares of
the issued and outstanding Sportzz common stock. In addition, cash consideration
of $100,000 was paid to the Shareholder.
<PAGE> 17
Of this consideration $10,000 of the cash, and one half of the shares of Common
Stock were placed in escrow pending completion of certain post closing covenants
described in the Merger Agreement. The Merger is more particularly described in
the Company's Form 8-K filing made with the Commission on August 12, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999. The Company's primary source of liquidity consisted of
$2,381,771 in cash and cash equivalents. The Company holds most of its cash
reserves in commercial sweep accounts with various local financial institutions.
Since inception, SportsNuts.com has financed its operations through a
combination of short and long-term loans, and through the private placement of
its Common Stock. All of SportsNuts.com's loans outstanding have since been
converted to Common Stock as of June 30, 1999.
The Company has sustained significant net losses which have resulted in an
accumulated deficit at June 30, 1999 of approximately $3,648,098 and has
experienced periodic cash flow difficulties, all of which raise substantial
doubt regarding the Company's ability to continue as a going concern. The net
loss for the year ended December 31, 1998 and the six months ended June 30, 1999
was $1,624,074 and $1,632,863, respectively. The Company anticipates a net loss
for the year ended December 31, 1999 and with the expected cash requirements for
the coming year, without additional cash inflows from investors, there is
substantial doubt as to the Company's ability to continue operations.
The Company believes these conditions have resulted from the inherent risks
associated with the small startup technology-oriented companies. Such risks
include, but are not limited to, the ability to (i) generate membership revenues
and sales of its products and services at levels sufficient to cover its costs
and provide a return for investors, (ii) attract additional capital in order to
finance growth, (iii) further develop and successfully market commercial
products and services, and (iv) successfully compete with other comparable
companies having financial, production and marketing resources significantly
greater than those of the Company.
The Company believes that its capital resources are sufficient to meet its
working capital needs for the next three months. Accordingly, the Company
intends to raise additional funds through a private offering of its common stock
in an amount sufficient to maintain operations until such time as the Company
can sustain operations internally from its revenues. Notwithstanding the
foregoing, the Company's capital needs will depend upon many factors in the
execution of the Company's future strategy, including the Company's future
growth rate, capital equipment needs, the number of distributors and customers
who enroll with the Company, the success of the Company's external marketing
effort, the number of visits (in terms of page views, unique visitors, and
"sticky" time) on its web site, and various other factors.
YEAR 2000 COMPLIANCE
The Company has assessed and will continue to assess the impact of the Year
2000 on
<PAGE> 18
its information technology ("IT") and non-IT systems. The Company believes it
has allocated sufficient resources from its operating capital to upgrade and
test existing systems so that they are Year 2000 compatible. The Company does
not anticipate significant further expenditures in connection with Year 2000
compliance efforts.
The Company's three servers have all been tested for Year 2000 compliance
and each has been found to meet the National Software Testing Laboratories
Standard. Each of the Company's two operating systems has also been updated for
Year 2000 compliance. With respect to the Company's hubs, switches, and PIX
Firewall, each have been found to meet the Information Technology Association of
America standards for Year 2000 compliance. Management believes that its IT
systems are Year 2000 compliant, and intends to work with its Internet retail
affiliates over the coming year in their efforts to become Year 2000 compliant.
The Company also intends to continue to test and upgrade its IT systems
throughout the remainder of the year. Nevertheless, significant uncertainty
exists concerning the potential impact of the Year 2000 on computer systems
generally. Any year 2000 compliance problems of the Company or any of its
customers or such affiliates could have a material adverse effect upon the
Company's business, results of operations, or financial condition. (See "Risk
Factors - Year 2000 Compliance").
FORWARD LOOKING STATEMENTS AND RISK FACTORS
FORWARD LOOKING STATEMENTS
To the extent any statement presented herein deals with information that is
not historical, such statement is necessarily forward looking. As such, it is
subject to the occurrence of many events outside of the Company's control that
could cause the Company's results to differ materially from predicted results.
RISK FACTORS
The risk factors described below are based on the Company following the
Merger of SportsNuts.com, with the Company pursuing the business conducted by
SportsNuts.com and so the risk factors should be read in that light.
LACK OF EXTENSIVE OPERATING HISTORY. The SportsNuts.com business was formed
in 1996 and is subject to all risks inherent in the creation of a new business
and the development of new products and services, including the absence of a
history of significant operations and of proven products and services which have
been produced and sold over a significant period of time. SportsNuts.com is
continuing to establish many functions which are necessary to conduct business,
including without limitation, managerial and administrative structure, marketing
activities, financial systems and personnel recruitment. SportsNuts.com has a
limited operating history and limited sales revenues.
<PAGE> 19
DEVELOPMENT STAGE COMPANY. Since the date of its inception, the Company has
operated on a small scale and has not yet generated a profit. To achieve any
significant measure of profitability, the Company must create substantial
activity through its Web Site to generate advertising revenues, product sales,
and the enrollment of distributors, with each such distributor attracting
additional customers to participate in the SportsNuts.com club or otherwise
purchase products and services from the Company. Although the Company has
generated increased activity on its Web Site and has increased the number of
distributors and customers on a monthly basis over the course of 1999, there can
be no assurance that the Company will continue to do so in the future or that
such increases will ultimately lead to the Company becoming profitable.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends, in large part,
upon the talents and skills of its management and, in particular, Kenneth
Forrest, the founder of the Company and the President and Chief Executive
Officer of SportsNuts.com Network, Inc. the network marketing subsidiary of the
Company. To the extent that any of its key personnel are unable or refuse to
continue their association with the Company, a suitable replacement would have
to be found. In addition, the competition for qualified personnel in the
computer software and Internet markets is intense, and there are limited numbers
of such qualified personnel in the metropolitan Salt Lake City area. There is no
assurance that the Company would be able to find suitable replacements for its
existing management personnel or technical personnel or that such replacements
could be obtained for an amount affordable to the Company.
DEPENDENCE ON MARKET AWARENESS OF BRAND. If the Company fails to
successfully promote its brand name or if the Company incurs significant
expenses promoting and maintaining its brand name, there could be a material
adverse effect on the Company's business, results of operations, and financial
condition. Due in part to the emerging nature of the market for Internet
management solutions and the substantial resources available to many of the
Company's competitors, there may be a time-limited opportunity to achieve and
maintain a significant market share. Developing and maintaining awareness of the
"SportsNuts" brand name is critical to achieving widespread acceptance of the
Company's management and reporting systems. Furthermore, the importance of brand
recognition will increase as competition in the market for the Company's
products increases. Successfully promoting and positioning the SportsNuts brand
will depend largely on the effectiveness of the Company's marketing efforts and
ability to promote a sufficient variety and high quality of useful Products at
competitive prices. Consequently, the Company may need to increase its financial
commitment to creating and maintaining brand awareness among potential
customers.
ADDITIONAL FINANCING REQUIREMENTS. The Company may require additional
capital in the future for expansion, additional marketing, computer software and
systems, overhead, administrative, and other expenses. There is no assurance
that the Company will be able to raise additional funds or that financing will
be available on acceptable terms. Lack of additional funds could significantly
affect the Company and its business. Further, funds raised through future equity
financing could be dilutive to holders of the Shares.
<PAGE> 20
RELIANCE UPON INDEPENDENT DISTRIBUTORS. The Company's principal sales force
consists of independent distributors ("Distributors") who are not employees of
the Company. Relationships with Distributors are voluntarily terminable by the
Distributors, or the Company at any time. The Company's revenue is substantially
dependent upon the efforts of the Distributors, and any growth in future sales
volume will require an increase in the productivity of existing Distributors
and/or growth in the total number of Distributors. As is typical in the direct
selling industry, there is turnover in distributors from year to year, which
requires the sponsoring and training of new distributors by existing
distributors to maintain or increase the overall distributor force and motivate
new and existing distributors. With respect to the Company, the size of the
distribution force can also be particularly impacted by general economic and
business conditions and a number of intangible factors such as adverse publicity
regarding the Company, or the public's perception of products and services sold
through the Company or its Web Site, the content of the material and the overall
theme of the Web Site, product ingredients or components, the Distributors
themselves, the Internet or Internet-based companies in general, or network
marketing. Because of the number of factors that impact the sponsoring of new
Distributors, and the fact that the Company has little or no control over the
level of sponsorship of new Distributors, the Company cannot predict the timing
or degree of those fluctuations. There can be no assurance that the number or
productivity of the distributors will be sustained at current levels or
increased in the future. In addition, the number of Distributors as a percent of
the population in a given market could theoretically reach levels that become
difficult to exceed due to the finite number of persons inclined to pursue a
network marketing business opportunity. Since Distributors are independent
contractors, the Company is not in a position to provide the same level of
direction, motivation and oversight as it would with respect to its own
employees.
SEASONALITY. While neither seasonal nor cyclical variations have materially
affected the Company's results of operations in the past, the Company's short
operating history may have suppressed these factors. For example, with respect
to product sales, the use of sports, outdoor, and fitness equipment and apparel
is generally seasonal and therefore demand for these items can fluctuate greatly
depending upon the time of year. There can be no assurance that seasonal or
cyclical variations will not materially adversely affect the Company's results
of operations in the future.
RELIANCE UPON MANUFACTURER-SUPPLIERS. The Company produces only a small
number of products sold from its Internet Web Site, and therefore relies upon
its electronic commerce retail vendors ("Affiliates") which sell products and
services through the Web Site to manufacture and/or supply all of the products
and services to SportsNuts.com customers. These Affiliates are primarily
manufacturer's representatives. The Company's profit margins and the ability for
consumers to receive existing Products on a timely basis are substantially
dependent upon these Affiliates. The development of additional new Products in
the future will likewise be dependent in part on the services of suitable
Affiliates. The failure of any one of the Company's Affiliates to produce and
deliver quality products and services in a timely manner on a consistent basis
could negatively affect the sale of Products from the Company's Web Site and
could have a material adverse affect on the Company's financial condition and
results of operations.
<PAGE> 21
POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution force
and the results of the Company's operations can be particularly impacted by
adverse publicity regarding the Company, including publicity regarding the
content of material displayed on the Web Site, activities and events sponsored
by the Company, the legality of the Company's distribution system, the quality
of the products distributed through the Company's Web Site, regulatory
investigations of the Company and the products distributed by Affiliates who
sell such Products through the Web Site, actions by certain Distributors, and
the public's perception of the Distributors as representatives of the Company
and of direct selling and network marketing-based businesses generally.
POTENTIAL NEGATIVE IMPACT OF DISTRIBUTOR ACTIONS. Actions by certain
Distributors can negatively impact the Company and its Products. The publicity
resulting from Distributor activities such as inappropriate earnings claims and
Product representations by Distributors can make the sponsoring and retaining of
Distributors more difficult, thereby negatively impacting sales. There can be no
assurance that these or actions of other Distributors will not have a material
adverse effect on the Company's business or results of operations.
MANAGEMENT OF GROWTH. The Company anticipates that it will experience rapid
growth in the next few years of operations. The management challenges imposed by
this growth include entry into new markets, growth in the number of persons
accessing the Web Site, Affiliates, employees, Distributors, and customers,
expansion of facilities and computer systems necessary to accommodate such
growth, and additions and modifications to the Product lines offered through the
Company's Web Site. To manage these changes effectively, the Company may be
required to hire additional management and operations personnel and to improve
its operational, financial, computer, and management systems. If the Company is
unable to manage growth effectively or hire or retain qualified personnel, the
Company's business and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as "pyramid" or "chain sales" schemes, that promise quick
rewards for little or no effort, require high entry costs, use high pressure
recruiting methods and/or do not involve legitimate products. As is the case
with most companies which are involved in network marketing, the Company may
receive inquiries from various government regulatory authorities regarding the
nature of its business and other issues such as compliance with local business
opportunity and securities laws. Although the Company has not received any such
inquiry to date, there can be no assurance that the Company will not face such
inquiries in the future which, either as a result of findings adverse to the
Company or as a result of adverse publicity resulting from the instigation of
such inquiries, could have a material adverse effect on the Company's business
and results of operations. While the regulations governing network marketing are
complex and vary from state to state, based on research conducted to date, the
Company believes that its method of distribution is in compliance in all
material respects with the laws and regulations relating to direct selling
activities of the states in which the Company
<PAGE> 22
currently operates, and intends to modify its network marketing system to comply
with various regulatory authorities. The failure to comply in any one state
could cause the Company to pay fines as well as cease operations in that state,
which in turn could influence the decisions of regulatory authorities in other
states and could have a material adverse effect upon the Company's financial
condition and results of operations.
GOVERNMENTAL REGULATION OF NETWORK MARKETING IN GENERAL. The Company's
network marketing system is or may be subject to or affected by extensive
government regulation of marketing practices and federal and state regulation of
the offer and sale of business franchises, business opportunities, and
securities. In addition, the Internal Revenue Service and state taxing
authorities in any of the states or U.S. territories where the Company has
distributors could classify the distributors as employees of the Company (as
opposed to independent contractors). Any assertion of determination that the
Company's business is not in compliance with government requirements could have
a material adverse effect upon the Company's financial condition and results of
operations.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. The Company is subject to
or affected by extensive governmental regulations not specifically addressed to
network marketing. Such regulations govern, among other things, (i) content of
material displayed on the Internet, (ii) product formulation, labeling,
packaging and importation, (iii) product claims and advertising, whether made by
the Company, the Company's Affiliates or Distributors of the Company, (iv) fair
trade and Distributor practices, and (v) taxes. Based on the Company's
experience and research (including assistance from legal counsel), the Company
believes that it is in material compliance with all regulations applicable to
the Company. Despite this belief, the Company could be found not to be in
material compliance with existing regulations as a result of, among other
things, the considerable interpretative and enforcement discretion given to
regulators or misconduct by its Distributors. Any assertion or determination
that the Company or any of its Distributors are not in compliance with existing
laws or regulations could potentially have a material adverse effect on the
Company's business and results of operations. In addition, in any jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on the Company's business and results of operations. The
Company cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Regulatory action, whether or not it results in a final
determination adverse to the Company, has the potential to create negative
publicity, with detrimental effects on the retention, motivation, and
recruitment of distributors and, consequently, on the Company's sales and
earnings.
GOVERNMENT REGULATION OF THE INTERNET. There are currently few laws or
regulations directly applicable to electronic commerce. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet which could materially
increase the cost of transacting business on the World Wide Web. Although
transmissions from the Company's Web Site will originate from the States of Utah
and California, the government of the United States and the governments of other
states and
<PAGE> 23
foreign countries might attempt to regulate such transmissions or assess taxes,
fees, tariffs, duties, or other payments against the Company, the Company's
Affiliates, or customers purchasing Products through the Web Site.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. The Company's future
success is substantially dependent upon continued growth in the use of the
Internet and the World Wide Web in order to support the volume of activity
necessary to generate advertising revenue and the sale of the Products. Rapid
growth in the use of the Internet is a recent phenomenon, and the Company relies
on consumers who have historically used traditional means of media and commerce
for entertainment and the purchase of goods and services. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. There can be no assurance that
communication or commerce over the Internet will become more widespread or that
the Internet will otherwise become a viable commercial marketplace. Moreover, to
the extent that the Internet continues to experience significant growth in the
number of users and frequency of use, there can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
upon it by such growth, or that the performance or reliability of the World Wide
Web will not be adversely affected thereby. In addition, certain factors such as
Internet commerce security and the speed of Internet transmissions may deter
existing as well as potential SportsNuts.com customers from engaging in
transactions on the Internet. The occurrence of any of these risks could
adversely affect the Company's business, operating results, and financial
condition.
RISK OF COMPUTER SYSTEM FAILURE. The success of the Company is
substantially dependent upon its ability to deliver high quality, uninterrupted
access to its Web site, which requires that the Company protect its computer
hardware and software systems and the data and information stored in connection
therewith. The Company's systems are vulnerable to damage by fire, natural
disaster, power loss, telecommunications failures, unauthorized intrusion, and
other catastrophic events. Any substantial interruption in the Company's systems
would have a material adverse effect on the Company's business, operating
results, and financial condition. Although the Company carries general
commercial insurance coverage, such coverage may not be adequate to compensate
for the losses that may occur. In addition, the Company's systems may be
vulnerable to computer viruses, physical or electronic break-ins, sabotage, or
other problems caused by third parties which could lead to interruptions,
delays, loss of data, or cessation in service to persons desiring to access the
Company's Web site. The occurrence of any of these risks could have a material
adverse effect upon the Company's business, results of operations, and financial
condition.
ELECTRONIC COMMERCE SECURITY RISKS. A significant barrier to electronic
commerce is the secure transmission of confidential information over the
Internet. The Company relies upon encryption and authentication technology to
provide the security necessary to effect secure transmissions of confidential
information. There can be no assurance that advances in decryption technology,
computer espionage, and other developments will not result in a breach or
compromise of the algorithms used by the Company to protect transaction data of
persons accessing the Web Site, and therefore lead to the misappropriation of
such data by third parties.
<PAGE> 24
Any such breach, compromise, or misappropriation could damage the Company's
reputation and expose the Company to a risk of loss or litigation and possible
liability, and could have a material adverse effect upon the Company's business,
results of operations, or financial condition.
RAPID TECHNOLOGICAL CHANGE. The Internet and on-line commerce industries
are characterized by rapid technological change, changing market conditions and
customer demands, and the emergence of new industry standards and practices that
could render the Company's existing Web site and the services provided pursuant
thereto obsolete. The Company's future success will substantially depend on its
ability to enhance its existing services, develop new services, and otherwise
respond to technological advances in a timely and cost-effective manner. If the
Company is unable, for technical, legal, financial, or other reasons, to adapt
in a timely manner in response to changing market conditions or customer
requirements, or if the Company's Web site does not achieve market acceptance,
the Company's business, operating results, and financial condition would be
adversely affected.
RELIANCE ON CERTAIN DISTRIBUTORS. The Company's compensation plan allows
existing Distributors to sponsor new Distributors. The sponsoring of new
Distributors creates multiple Distributor levels in the network marketing
structure. Sponsored Distributors are referred to as "downline" Distributors
within the sponsoring Distributor's "downline network." If downline Distributors
also sponsor new Distributors, additional levels of downline Distributors are
created, with the new downline Distributors also becoming part of the original
sponsor's "downline network." As a result of this network marketing distribution
system, Distributors develop relationships with other Distributors. A few key
Distributorships comprise the Company's highest Distributor levels. These
Distributorships have developed extensive downline networks which consist of
many sub-networks. Together with such networks, these distributorships account
for substantially all of the Company's revenue attributable to direct sales.
Consequently, the loss of such a key Distributor together with a group of
leading Distributors in such Distributor's downline network, or the loss of a
significant number of distributors for any reason, could adversely affect sales
of Products, impair the Company's ability to attract new Distributors and
adversely impact earnings and the business, and financial condition of the
Company.
NO PROPRIETARY PRODUCTS/NON-EXCLUSIVE LICENSE FOR PRODUCT SALES. The
Company does not offer products or services through its Web Site that enjoy any
significant proprietary protection for the benefit of the Company. Moreover,
because written distribution agreements are not common for firms which sell
sporting goods, apparel, and outdoor products, many of the Company's Affiliates
distribute most of the Products without licenses from the manufacturer. The lack
of proprietary protection and exclusive licenses substantially diminishes the
barriers to entry for potential competitors of the Company, and could adversely
affect the Company's future prospects for growth and profitability.
FAILURE TO EXPAND SALES OPERATIONS AND CHANNELS OF DISTRIBUTION WOULD LIMIT
COMPANY GROWTH. In order to maintain and increase the Company's current and
future market share and revenue, it will need to expand its direct and indirect
sales operations and channels of
<PAGE> 25
distribution. Failure to do so could have a material adverse effect on the
Company's business, results of operations, and financial condition. The Company
needs to expand its relationships with domestic and international channel
partners, Product and service distribution partners, value-added resellers,
systems integrators, on-line and other resellers, Internet service providers,
and maintain strategic relationships with key hardware and software vendors, its
Distributors, and its customers.
NO TRADEMARK REGISTRATION. Although the Company has submitted applications
for trademark protection for the name "SportsNuts.com" name and related slogans,
the U.S. Patent and Trademark Office ("USPTO") has not approved the Company's
applications for use of the name "SportsNuts.com," the Company's logo, and such
other related terms and slogans. If the Company is unsuccessful in obtaining the
right of full usage of its name from the USPTO, other companies with names,
marks, or slogans similar to those of SportsNuts.com could seek to require that
the Company obtain a license from them or require the Company to change its
name, either of which could entail substantial costs. Additionally, if the
Company were required to change its name, it could lose all goodwill associated
with the "SportsNuts.com" mark. In addition, future products and services
offered by the Company may need to be marketed under different names if the mark
"SportsNuts.com" or similar name is likely to cause confusion with another trade
name being used by another company. The Company could also incur substantial
costs to defend any legal action taken against the Company pursuant to a
trademark or service mark dispute. If, in any legal action against the Company,
its asserted trademarks, or service marks should be found to infringe upon
intellectual property rights of a third party, the Company could be enjoined
from further infringement and could be required to pay damages. In the event a
third party were to sustain a valid claim against the Company, and in the event
any required license were not available on commercially reasonable terms, the
Company's financial operations and results of operations could be materially
adversely affected. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may also be necessary to enforce
intellectual property rights of the Company or to defend the Company against
claimed infringement of the rights of others.
COMPETITION. The Company competes with other sports-themed Internet sites,
sports clubs, and direct selling and electronic commerce-based organizations,
many of which have longer operating histories and higher visibility, name
recognition, and financial resources. Management envisions the entry of many
more direct selling organizations into the marketplace as this channel of
distribution expands over the next several years. Moreover, as use of the
Internet grows, Management also anticipates a rapid increase in the number of
firms selling goods and services over the Internet. There can be no assurance
that the Company will be able to successfully meet the challenges posed by this
increased competition. The Company's Affiliates compete in the intensely
competitive market for sports, outdoor, and fitness goods and apparel and
compete directly with companies that manufacture and market these goods and
services. Many competitors of the Company's Affiliates have much greater name
recognition and financial resources than the Company's Affiliates. While the
Company believes that consumers appreciate the convenience of ordering products
from home through a sales person, through a catalog, or on the Internet, the
buying habits of many consumers accustomed to purchasing products through
<PAGE> 26
traditional retail channels are difficult to change. The Company's offerings on
its Web Site in each Product category are also relatively small compared to the
wide variety of products and services offered by other electronic commerce
companies. There can be no assurance that the Company's business and results of
operations will not be affected materially by market conditions and competition
in the future.
PRODUCT LIABILITY. Although the Company does not manufacture any of the
Products purchased or sold through its Web Site, it may be subject to liability
for losses caused by such Products. While the Company maintains a general
commercial liability insurance policy, there is no guarantee that this policy
will provide coverage for or that any such coverage will be sufficient to
satisfy the claims of a successful product liability claim. Accordingly, a
successful products liability claim against the Company could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
SECURITIES CLASS ACTION CLAIMS BASED UPON PRICE FLUCTUATION. Securities
class action claims have been brought against issuing companies in the past
after volatility in the market price of a company's securities. Such litigation
could be very costly and divert the Company's management's attention and
resources, and any adverse determination in such litigation could also subject
the Company to significant liabilities, any or all of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
NO DIVIDENDS. To date, the Company has not paid a dividend on its Common
Stock. The Company does not anticipate paying dividends on its Common Stock in
the foreseeable future, and may be restricted from paying dividends in the
future pursuant to future financing arrangements.
CONCENTRATION OF VOTING POWER. Kenneth Forrest, the founder of the Company,
and certain other shareholders of the Company, may be able to control the
election of the Company's Board of Directors. In addition, pursuant to the
Company's Certificate of Incorporation, the Board of Directors has been divided
into three classes, with only one class subject to reelection in a given year.
The Certificate of Incorporation requires a vote of 66% of the shares of the
Company to amend the provision governing the election of directors.
Consequently, even if a shareholder or group of shareholders were to acquire a
majority of the outstanding shares of the Company, such Merger would not
necessarily lead to a change in control of the Company. Although current
shareholders of the Company do not hold preemptive rights to acquire additional
shares of Common Stock and, consequently, share amounts as a percentage of
Common Stock outstanding for existing shareholders are expected to decline after
consummation of the Offering, the Company cannot guarantee that certain persons,
either collectively or individually, will not be able to control the election of
the Board of Directors and that minority shareholders will not be adversely
affected as a result.
PRIVATE CAPITAL/NEED FOR ADDITIONAL CAPITAL. SportsNuts.com presently has
limited operating capital with which to engage in its business. The amount of
capital available to
<PAGE> 27
SportsNuts.com is limited and may not be sufficient to enable it to conduct its
business operations without additional fund-raising. The Company will likely be
required to raise additional capital in order to fund its anticipated growth. If
the Company seeks new equity investors in order to raise additional capital, it
will dilute the ownership of the Company's stockholders, and such dilution could
be significant.
ANTI-TAKEOVER PROVISIONS. The Restated Certificate of Incorporation of the
Company ("Certificate") contains certain provisions which could be an impediment
to a non-negotiated change in control of the Company, namely an ability, without
stockholder approval, to issue up to 5,000,000 shares of preferred stock with
rights and preferences determined by the board of directors, staggered terms for
directors, and super-voting requirements. These provisions could impede a
non-negotiated change in control and thereby prevent stockholders from obtaining
a premium for their Common Stock.
SECURITIES ELIGIBLE FOR PUBLIC TRADING. Of the 15,691,483 shares of the
Company's Common Stock outstanding at June 30, 1999, 2,441,713 are freely
tradeable or immediately eligible for resale under Rule 144 promulgated pursuant
to the Securities Act of 1933, as amended (the "Securities Act"). Sales of
substantial amounts of the freely tradeable stock in the public market could
adversely affect the market price of the Common Stock.
PRIVATE LIABILITY OF MANAGEMENT. The Company has adopted provisions in its
Certificate which limit the liability of its Officers and Directors and
provisions in its bylaws which provide for indemnification by the Company of its
Officers and Directors to the fullest extent permitted by Delaware corporate
law. The Company's Certificate generally provides that its directors shall have
no personal liability to the Company or its stockholders for monetary damages
for breaches of their fiduciary duties as directors, except for breaches of
their duties of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, acts involving unlawful
payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derives an improper personal benefit. Such
provisions substantially limit the shareholders' ability to hold directors
liable for breaches of fiduciary duty.
POTENTIAL ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK. The Company is
authorized to issue up to 50,000,000 shares of Common Stock. To the extent of
such authorization, the Board of Directors of the Company will have the ability,
without seeking shareholder approval, to issue additional shares of common stock
in the future for such consideration as the Board of Directors may consider
sufficient. The issuance of additional Common Stock in the future will reduce
the proportionate ownership and voting power of the Common Stock offered hereby.
The Company will also be authorized to issue up to 5,000,000 shares of preferred
stock, the rights and preferences of which may be designated in series by the
Board of Directors. To the extent of such authorization, such designations may
be made without shareholder approval. The designation and issuance of series of
preferred stock in the future would create additional securities which would
have dividend and liquidation preferences over the
<PAGE> 28
common stock.
VOLATILITY OF STOCK PRICES. In the event that there is an established
public market for the Company's Common Stock, market prices will be influenced
by many factors and will be subject to significant fluctuations in response to
variations in operating results of the Company and other factors such as
investor perceptions of the Company, supply and demand, interest rates, general
economic conditions and those specific to the industry, developments with regard
to the Company's activities, future financial condition and management.
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS. The Common
Stock of the Company may be considered a low priced security under rules
promulgated under the Exchange Act. Under these rules, broker-dealers
participating in transactions in low priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker-dealer's duties, the customer's rights and remedies, and certain market
and other information, and make a suitability determination approving the
customer for low priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent of the customer, and provide monthly account statements to the customer.
With all these restrictions, the likely effect of designation as a low priced
stock will be to decrease the willingness of broker-dealers to make a market for
the stock, to decrease the liquidity of the stock and to increase the
transaction cost of sales and purchases of such stock compared to other
securities.
YEAR 2000 COMPLIANCE. Although the Company believes that it is Year 2000
compliant, it may be wrong. If the Company is wrong, it could face unexpected
expenses fixing Year 2000 problems or unanticipated Web site outages related to
the Year 2000, either of which could have a material adverse effect upon the
Company's business, results of operations, and financial condition. Furthermore,
the Company's Web site is integrated with equipment provided by third parties
that may not be Year 2000 compliant. SportsNuts.com is unable to make
contingency plans covering the possibility that a significant number of
computers constituting the Internet may fail to properly process dates for the
year 2000 and that there may be a system wide slowdown or breakdown. Any
interruption or significant degradation of Internet operations, whether due to
Year 2000 problems or otherwise, could have a material adverse effect upon the
Company's business, results of operations, or financial condition.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
<PAGE> 29
ITEM 2. CHANGES IN SECURITIES
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:
The following document is incorporated by reference from the Form 8-K of
the Company filed August 12, 1999:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of July 28, 1999 among
SportsNuts.com International, Inc., SportsNuts Merger Sub.,
Inc., Sportzz.com, Inc., ObjectSelect, L.C., and individual
members thereof.
</TABLE>
The following document is incorporated by reference from the Form 10-QSB of
the Company filed August 16, 1999:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Internet Service Private Label Reseller Agreement between
Eclipse Telecommunications, Inc., and SportsNuts.com, Inc.,
dated as of June 23, 1999.
</TABLE>
<PAGE> 30
SIGNATURES
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.
SPORTSNUTS.COM INTERNATIONAL, INC.
Date: January 17, 2000
By /s/ Kenneth Denos
----------------------------------
Kenneth Denos
Chief Financial Officer
Exhibit Index
