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As filed with the Securities and Exchange Commission on July 10, 2000
Registration No. 333-38872
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PET QUARTERS, INC.
(Exact name of Registrant as specified in its charter)
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ARKANSAS 5999 62-169-8524
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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720 EAST FRONT STREET
LONOKE, ARKANSAS 72086
(501) 676-9222
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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STEVEN DEMPSEY
PET QUARTERS, INC.
720 EAST FRONT STREET
LONOKE, ARKANSAS 72086
(501) 676-9222
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
JOHN R. TISDALE
WRIGHT, LINDSEY & JENNINGS, LLP
200 WEST CAPITOL AVENUE
LITTLE ROCK, ARKANSAS 72201
(501) 212-1256
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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======================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE(1)(2) REGISTRATION FEE(1)
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Common Stock, $0.001
par value.............. 13,693,733 Shares $1.71875 $23,536,103.60 $6,213.53
======================================================================================================================
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(1) Calculated pursuant to Rule 457(o).
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to such Section 8(a), may
determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE> 3
PROSPECTUS
DATED July 10, 2000
13,693,733 SHARES
PET QUARTERS, INC.
COMMON STOCK
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This prospectus relates to the issuance by Pet Quarters, Inc. of up to
4,242,349 shares of common stock of Pet Quarters, Inc., and the resale of up to
9,451,384 shares of common stock, from time to time, by the selling stockholders
listed on page 33 of this prospectus. Of the 13,693,733 shares of common stock
offered hereby:
o 2,758,112 shares may be issued to persons who hold PetQuarters Series A
Convertible Preferred Stock, upon conversion of the preferred stock into
common stock;
o 1,484,237 shares may be issued to persons upon the exercise of warrants to
purchase common stock;
o 3,727,586 shares may be offered and sold by certain persons who currently
own PetQuarters common stock;
o 723,798 shares may be offered and sold by AMRO International, S.A., which
may be issued upon conversion of a 6% Convertible Debenture currently held
by AMRO; and
o 5,000,000 shares may be offered and sold by Splendid Rock Holdings, Ltd.,
which will receive common stock pursuant to our equity line of credit
agreement with Splendid Rock Holdings.
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders, nor will we receive any proceeds from the conversion
of shares of preferred stock or the convertible debenture into shares of common
stock. PetQuarters will, however, receive the sale price of any common stock
that is issued to persons upon the exercise of warrants and to Splendid Rock
Holdings pursuant to the equity line of credit agreement. We have agreed to pay
the expenses of registering the shares under this prospectus. Expenses,
brokerage fees and commissions, and fees and expenses of advisors to the selling
stockholders in connection with the resale of their shares will be paid by the
respective selling stockholder. The selling stockholders may sell shares of
common stock from time to time in transactions on the Over the Counter Bulletin
Board (OTCBB), in negotiated transactions, or otherwise, in each case at prices
satisfactory to the selling stockholders.
PetQuarters common stock is traded on the OTCBB under the symbol
"PDEN." On July 7, 2000, the last reported sale price of the Common Stock on the
OTCBB was $1.140625 per share.
INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or accurate. Any representation to the contrary is a
criminal offense.
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THE DATE OF THIS PROSPECTUS IS JULY 10, 2000.
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You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this prospectus is accurate as of the date on
the front cover of this prospectus only. Our business, financial condition,
results of operation, and prospects may have changed since that date.
PROSPECTUS DELIVERY REQUIREMENT
Until 40 days after the commencement of this offering, all dealers
that effect transactions in these securities, whether participating in this
offering, may be required to deliver a prospectus to purchasers of these
securities. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................................................................................................1
OUR COMPANY.......................................................................................................1
RECENT DEVELOPMENTS...............................................................................................2
SUMMARY FINANCIAL DATA............................................................................................3
RISK FACTORS......................................................................................................6
USE OF PROCEEDS...................................................................................................9
DILUTION..........................................................................................................9
PRICE RANGE OF COMMON STOCK.......................................................................................9
DIVIDEND POLICY..................................................................................................10
CAPITALIZATION...................................................................................................10
SELECTED FINANCIAL DATA..........................................................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION......................................................11
BUSINESS.........................................................................................................15
MANAGEMENT.......................................................................................................25
PRINCIPAL STOCKHOLDERS...........................................................................................29
RELATED PARTY TRANSACTIONS.......................................................................................31
DESCRIPTION OF CAPITAL STOCK.....................................................................................32
SELLING STOCKHOLDERS.............................................................................................33
PLAN OF DISTRIBUTION.............................................................................................34
LEGAL MATTERS....................................................................................................36
EXPERTS..........................................................................................................36
FINANCIAL INFORMATION...........................................................................................F-1
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS...............................................................II-1
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PROSPECTUS SUMMARY
This Summary highlights information contained elsewhere in the
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in the common stock. You should read the
entire prospectus carefully, including the "Risk Factors" section, the financial
statements, and the notes to the financial statements.
OUR COMPANY
Pet Quarters, Inc. ("PetQuarters" or the "Company") is a retailer and
wholesaler of pet products and supplies, offering more than 7,500 items for sale
over the Internet, at www.petquarters.com, and through our mail-order catalogs,
Home Pet Shop(R) and Dog's Outfitter(R). Matthew Hoff and Mike Parnell organized
our Company on May 22, 1997. On August 1, 1999, the Company acquired Humboldt
Industries Incorporated and its affiliate, Maplewood Industries, Inc. for $4.6
million cash and an equal amount in PetQuarters common stock. The Company
borrowed from Sun Valley Trust to pay the cash portion of the purchase price and
issued a promissory note to Sun Valley Trust (the "Bridge Loan"). A substantial
portion of the securities registered in this offering were privately placed to
provide funds for repayment of the Bridge Loan.
Our primary objective is to become a leading seller of pet products to
both consumers and pet professionals through our web sites and catalogs. Our
goal is to provide customers with an efficient, low cost, and value-added
shopping experience. We believe that consumers want the convenience of on-line
shopping with at least the same breadth of products that they can find at
traditional outlets. Our in-house fulfillment, distribution, customer service,
and technology operations allow us to control costs and provide customers with
quality service.
The pet products industry in the United States is a large and growing
market consisting of a loyal customer base. Americans spent approximately $23
billion on their pets in 1998. Pets remain an integral part of family life in
the United States, with 58 million or 59% of 98 million U.S. households owning
one or more pets. By 2001, the pet products and services industry is expected to
grow to $28.5 billion.
We currently provide pet products on a wholesale basis to pet
professionals, including proprietors of boarding facilities, managers and staff
of animal shelters and humane societies, as well as veterinarians, groomers,
breeders, and show exhibitors. These sales predominately occur through our Dog's
Outfitter(R) catalog. We intend to develop a related web site located at
www.dogsoutfitter.com to service the needs of the pet professional community,
including an information clearing house where pet professionals can share
knowledge and experiences as well as build a network of references. The
relationships we develop with veterinarians and other pet professionals should
provide us with valuable referral opportunities to the pet consumer.
We are in the process of building a fully-integrated content and
commerce site for consumers, based upon the idea that the content of our web
site will attract more consumers and build brand loyalty. We are developing
content for our web site through strategic acquisitions of content-based online
pet companies and strategic relationships with leading pet professionals and
pet-related organizations. We expect our content to be the most authoritative
and useful advice available anywhere on the Internet. When we speak of content,
we mean:
o Information concerning the origin, development, and
personality factors of various pets;
o Extensive information concerning pet care and health matters;
o Articles by veterinarians concerning issues associated with
various pets; and
o Information concerning specific pet and breed organizations.
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RECENT DEVELOPMENTS
From January 2000 through March 2000, we raised approximately
$3,000,000 through the private placement of our common stock. A portion of the
shares issued in that private offering are being registered under the
registration statement of which this prospectus is a part. The proceeds from the
private offering were used to reduce the principal amount of the Bridge Loan by
$1,000,000 on February 3, 2000 and for working capital.
On April 27, 2000, we acquired all of the outstanding equity securities
of WeRPets.com, Inc. ("WeRPets") in exchange for 703,316 shares of PetQuarters
common stock. WeRPets is an emerging online pet-related company that has
developed strong relationships with The Health Network and Galaxy.com
(www.galaxy.com). WeRPets has an agreement to be the sole and exclusive pet
portal on www.galaxy.com and has the worldwide exclusive license to selected
content produced by The Health Network in HTML and streaming video formats.
Galaxy.com, a leading vertical Internet directory, provides fast, contextually
relevant searches of the Internet for numerous vertical markets, including
health, education, international, shopping, pets and more. The Health Network is
the first 24 hour-a-day cable channel dedicated to health care that includes
programming on animal care, behavior and training provided by veterinarians and
other professionals. We believe that this acquisition continues to strengthen
our position in the Internet pet space and is an integral step in our
content-driven business strategy.
Effective May 1, 2000, we acquired Chartendure, Ltd., a company
organized under the laws of the United Kingdom, for 400,000 shares of
PetQuarters common stock. Chartendure has existing relationships with various
veterinary organizations and other pet professionals in the United Kingdom and
throughout Europe. Through these relationships, Chartendure will provide web
site content regarding pet care, feeding, and health issues for pet owners. We
intend to enter into contracts with these pet professionals to provide
continuous content for our web site.
On May 8, 2000, we issued 34,642 shares of our Series A Convertible
Preferred Stock for total consideration of $3,464,200, consisting of $2,055,700
in cash and $1,408,500 worth of interests in the Bridge Loan. The acquisition of
these Bridge Loan interests effectively retired an equivalent amount of
principal on the Bridge Loan. In addition, on May 5, 2000, we borrowed
$1,000,000 from AMRO International, S.A., pursuant to the terms of a 6%
Convertible Debenture. The debenture requires us to make quarterly interest
payments, beginning August 5, 2000, and the full amount of the loan is due and
payable on November 5, 2000. The debenture is convertible, at the option of
AMRO, into shares of PetQuarters common stock at a rate of $1.3816 per share,
with a minimum principal amount of $50,000 converted. The proceeds from the
debenture and the sale of the preferred stock were used to retire the Bridge
Loan.
On May 30, 2000, we acquired AllPets.com, Inc. through the exchange of
3,652,785 shares of PetQuarters common stock for all of the outstanding equity
securities of AllPets. AllPets.com is a destination site, providing in-depth
content, robust community, and high quality commerce targeted to the pet
enthusiast. AllPets offers visitors its Petcyclopedia, an on-line reference
guide with over 1,400 articles covering all pet categories and a bi-weekly
magazine with approximately twenty new articles in each issue. AllPets also
offers users an on-line community, including message boards, chat rooms, and an
"Ask the Expert" feature, which allows pet owners to receive advice from expert
veterinary staff.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS)
The following table sets forth a summary of our statement of operations
for the periods presented:
o On an actual basis
o On a pro forma basis to give effect to the acquisitions of Humboldt
Industries, WeRPets.com, Chartendure, and AllPets.com as of the
beginning of the respective periods presented
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Fiscal Year Ended Nine Months Ended
June 30 March 31
1998 1999 1999 2000
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STATEMENT OF OPERATIONS DATA:
Net sales ................................... $ 43,835 $ 262,470 $ 204,059 $ 9,873,570
Gross margin ................................ 21,927 56,696 71,829 3,128,782
Total operating expenses .................... 855,119 1,114,966 601,047 8,196,626
Operating loss .............................. (833,192) (1,058,270) (529,218) (5,067,844)
Net loss .................................... (816,179) (1,052,265) (526,537) (7,454,680)
Basic and diluted net loss per Share ....... $ (0.10) $ (0.09) $ (0.05) $ (0.65)
Weighted average shares outstanding used
to compute basic and diluted net loss
per share ................................. 8,568,125 11,453,000 11,560,000 11,519,146
Pro forma net loss .......................... $ (6,263,166) $ (6,579,803) $ (5,402,014) $(12,029,442)
Pro forma basic and diluted net loss per
share ..................................... $ (0.43) $ (0.38) $ (0.31) $ (0.73)
Weighted average shares outstanding used
to compute pro forma basic and diluted
net loss per share ........................ 14,628,311 17,513,568 17,620,186 16,383,920
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The following table sets forth a summary of our balance sheet data as
of March 31, 2000:
o On an actual basis
o On a pro forma basis to give effect to the acquisitions of
Humboldt Industries, WeRPets.com, Chartendure, and AllPets.com
as of March 31, 2000.
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As of March 31, 2000
Actual Pro Forma
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BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 113,049 $ 524,641
Working capital deficiency ......... $ (3,660,182) $ (3,311,387)
Total assets ....................... $ 10,852,398 $ 22,740,070
Notes and capital leases payable ... $ 4,926,079 $ 4,926,079
Total stockholders' equity ......... $ 3,949,390 $ 15,755,537
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THE OFFERING
This prospectus relates to the issuance of up to 4,242,349 shares of
our common stock to the following persons:
o Up to 130,000 shares may be issued to AMRO International,
S.A., which holds a warrant to purchase such shares at an
exercise price of $4.6575 per share. The warrant expires on
February 23, 2004, and may be exercised in whole or in part,
at the option of AMRO. We are registering the shares to be
issued pursuant to the warrant as part of the terms of the
issuance of the warrant.
o Up to 54,237 shares may be issued to AMRO International, S.A.,
which holds a warrant to purchase such shares at an exercise
price of $2.03 per share. The warrant was issued as an
origination fee for the loan of $1,000,000 by AMRO pursuant to
the 6% Convertible Debenture. We agreed to register the
issuance of the shares of common stock exercisable pursuant to
the warrant in the loan agreement with AMRO. The warrant
expires on June 1, 2003.
o Up to 20,000 shares may be issued to Markham Holdings, Inc.,
which holds a warrant to purchase such shares, also at an
exercise price of $4.6575 per share. This warrant expires on
February 23, 2004, and may be exercised in whole or in part,
at the option of Markham. We are registering the issuance of
the shares under the warrant pursuant to the terms of the
warrant agreement.
o Up to 1,000,000 shares may be issued to Splendid Rock
Holdings, Ltd., which holds a warrant to purchase such shares
at an exercise price of $4.03 per share. The warrant was
issued as consideration for the commitment by Splendid Rock
Holdings to enter into the equity line of credit agreement and
may be exercised, in whole or in part, at the option of
Splendid Rock Holdings. The warrant expires on March 31, 2003.
o Up to 280,000 shares may be issued to Ladenburg Thalmann &
Co., Inc., which holds three warrants to purchase shares -
12,800 shares at an exercise price of $3.59 per share, 320,000
shares at an exercise price of $3.59 per share, and 20,000
shares at an exercise price of $2.30 per share. The warrants
were issued as a portion of brokerage fees agreed to by
PetQuarters in consideration for the assistance by Ladenburg
Thalmann in raising capital for PetQuarters. Much of the
capital raised by us to date has been as a result of efforts
of Ladenburg Thalmann, and many of the shares of common stock
registered in the registration statement were issued in
offerings assisted by Ladenburg Thalmann.
o Up to 2,507,388 shares may be issued to persons who currently
hold PetQuarters Series A Convertible Preferred Stock. Each
share of preferred stock has a par value of $100 and is
convertible into PetQuarters common stock at a rate of $1.3816
per share. Accordingly, each share of preferred stock may be
converted into 72.38 shares of common stock. The preferred
stock is convertible at the option of the holders. At the time
the preferred stock was issued, we agreed to register the
common stock issuable upon conversion of the preferred stock.
For a full description of the terms and conditions of the
Preferred Stock, see pages 32 and 33 of this prospectus.
o Up to 250,724 shares may be issued to Keane Securities Co.,
Inc., upon conversion of shares of Series A Convertible
Preferred Stock. Keane may acquire 3,464 shares of Series A
Convertible Preferred Stock pursuant to a warrant, with an
exercise price of $120 per share. The warrant was issued to
Keane as a portion of its fee for acting as placement agent
for the
4
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preferred stock offering. For a description of the terms and
conditions of the preferred stock see page 32 of this
prospectus. We agreed to register the common stock that may
eventually be issued to Keane at the time the warrant was
issued.
Each of the shares described above will be freely tradeable when issued and may
be resold without further registration or qualification.
This prospectus also relates to the resale of 9,451,384 shares of our
common stock by the following persons:
o 3,727,586 shares may be offered and sold, from time to time,
by the selling stockholders listed on page 33 of this
prospectus. Such persons have purchased the shares offered
hereby in one or more private offerings by PetQuarters, and in
connection with such private offerings, we agreed to register
the shares offered hereby.
o 723,798 shares may be offered and sold by, from time to time,
AMRO International, S.A., which holds a 6% Convertible
Debenture in the principal amount of $1,000,000. The debenture
is due and payable in full on November 5, 2000, and may be
converted in whole or in part, at the option of AMRO, at any
time prior to the maturity date. The debenture is convertible
into common stock at a rate of $1.3816 per share, with a
minimum principal amount of $50,000 converted at a time.
o 5,000,000 shares may be offered and sold, from time to time,
by Splendid Rock Holdings, Ltd., which will receive such
shares pursuant to our equity line of credit agreement. Under
the terms of the equity line of credit agreement, we can "put"
up to an aggregate of $25,000,000 of our common stock to
Splendid Rock Holdings. For a full description of the equity
line of credit agreement, see pages 17-18 of this prospectus.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the following risks before making an investment in us. You should also
refer to the other information in this Prospectus under the headings "Forward
Looking Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operation," "Business," and our financial statements.
Our business, financial condition and results of operation could be harmed as a
result of any of the following risks. Such changes could affect the price at
which our common stock trades, and you could lose all or part of your
investment.
RISKS RELATED TO OUR COMPANY
WE ARE IN AN EARLY STAGE OF DEVELOPMENT. Our company is in an early
stage of development and, as a result, it is difficult to evaluate our business
opportunities. We originally began selling our products over the Internet in May
1998. We acquired Humboldt Industries, Inc. on August 1, 1999 and began selling
products by catalog at that time. Because we have a limited operating history,
it is difficult to determine if we can accomplish all or even some of our
business goals. You should consider the risks and difficulties that we face as
an early stage company competing in a new and rapidly evolving market.
OUR BUSINESS SUCCESS DEPENDS UPON BUILDING OUR BASE OF CUSTOMERS. In
order to be successful, PetQuarters must attract a large number of customers who
shop by catalog or in traditional retail stores and persuade them to shop on our
web site or through our catalogs. Accomplishing these goals may require
additional infusions of cash for advertising and promotional expenditures. If
these amounts are greater than we expect, or if the response to the advertising
and promotional expenditures is less than we expect, we may not attain
profitability or the level of profitability necessary to continue in business.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE. While one of our acquired companies, Humboldt Industries,
has been profitable, the increased cost of advertising on the Internet and the
start-up costs associated with development of our Internet website and related
infrastructure expenditures may affect our profitability for years to come. Due
to our limited operating history, it is very difficult to project our operating
results accurately.
OUR COMPANY HAS ONLY ONE FULFILLMENT CENTER. We plan to close our
Lonoke fulfillment center and rely exclusively upon our Hazelton, Pennsylvania,
fulfillment center. Fires, floods, or other natural disasters at our
Pennsylvania center could prevent us from fulfilling orders. This would cause an
immediate loss in revenue and result in dissatisfied customers. Both of these
results could adversely affect the price of the company's stock as well as its
long-term business opportunities.
WE HAVE LIMITED CAPITAL RESOURCES. Much of the stock registered in this
offering was issued as the result of our earlier capital-raising efforts. As a
result, we have already received payment for many of the shares that are being
registered, and this registration statement will not generate additional capital
or cash to the Company from those shares. We have the ability to sell up to
$25,000,000 worth of common stock under the equity line of credit agreement, but
the timing and amount of capital raised can vary significantly depending upon
various factors, including the market price of our common stock. If our current
stockholders sell a substantial number of the shares that they now hold, our
stock price could fall, which could limit our ability to raise additional
capital as needed. In addition, we cannot be certain that Splendid Rock Holdings
will have the ability to purchase any of the shares of common stock put to it
pursuant to the equity line of credit agreement. Accordingly, we may not be able
to raise necessary capital in the manner we expect pursuant to the equity line
of credit agreement. Our inability to raise capital as expected pursuant to the
equity line of credit agreement could have a material adverse effect on our
business.
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OUR ACQUISITION STRATEGY INVOLVES SUBSTANTIAL RISK AND DILUTION TO
INVESTORS. A significant part of our business strategy involves strategic
acquisitions of pet-related companies or assets that provide value to our
existing organization. We cannot be certain that we will successfully integrate
these acquisitions with our existing business, or that once integrated, such
acquisitions will provide the revenue or other benefits we expect. Acquisitions
also involve special risks, including risks associated with unanticipated
problems, liabilities, contingencies, and diversion of management attention. We
cannot be certain that we will have the capital necessary to complete future
acquisitions. To date, we have financed a significant portion of our
acquisitions through the issuance of PetQuarters common stock. If the market
price for our common stock falls, we may be unable to use it as part of the
consideration for acquired businesses. We may be unable to obtain sufficient
cash resources to make acquisitions without use of our common stock, which could
cause an adverse effect on our business and prospects. In addition, the issuance
of shares of common stock in connection with acquisitions may substantially
dilute the value of shares held by existing shareholders.
RISKS RELATED TO OUR BUSINESS
WE MAY BE UNABLE TO ESTABLISH BRAND NAME RECOGNITION. Our company is
not the only Internet pet retailer. There are numerous Internet pet supply
companies that have the same general business goals as we do. The online market
for pet products, information, and services is highly competitive and sensitive
to brand name recognition. As such, we may be forced to spend significant
amounts of money on advertising and promotional efforts to keep our brand name
in front of the public. If we are unable to establish brand name recognition and
brand name loyalty among our customer base, we could incur additional losses.
OUR BUSINESS PLAN IS UNPROVEN. Our business strategy is based upon the
idea that authoritative content will drive commerce. Because we are in an early
stage of development, our business plan has not been proved successful. We
cannot be certain that the content we provide will cause a sufficient number of
persons to visit our website or that the persons who visit will also purchase
our products. In addition, we depend upon outside sources for the majority of
the content on our site. We have no assurance that these sources will continue
to provide the content necessary to keep the website current and to maintain the
interest of our visitors. The outcome of these uncertainties could have an
adverse effect on our company and business.
WE DEPEND UPON SUPPLIERS AND SHIPPERS. We depend upon our suppliers and
shippers to transport materials to and from our distribution warehouse on a
timely basis. Any disruption in these facilities and any adverse change in the
costs of such services could have an adverse impact upon our profitability.
RISKS RELATED TO INTERNET COMMERCE
WE DO NOT DEPEND ENTIRELY UPON THE INTERNET, BUT WE EXPECT IT TO BE THE
SOURCE OF MOST OF OUR GROWTH. We do not depend exclusively upon the Internet for
our sales. Presently, over 90% of our annual sales are from our catalog
division. However, we believe that the Internet will account for most of the
growth in our future sales. If we do not experience the expected growth of
internet sales, we may not generate sufficient revenue to become profitable.
WE ARE SUBJECT TO PUBLIC PERCEPTIONS OF INTERNET SAFETY. Most of our
current Internet sales are paid for using customer credit card accounts.
Accurate and secure transmission of account numbers and information is required
to protect both the customer and our sales under these circumstances. We must
rely upon the existing encryption and authentication technology, which we
license from other vendors, to use customer credit card accounts. If our
customers perceive that a breach of security could expose them
7
<PAGE> 13
to unfounded charges or other disruptions in service, we believe Internet
transactions will decline. Since we do not insure against fraudulent credit card
transactions, these transactions could have an adverse impact on the company.
CHANGES IN THE TAX TREATMENT OF INTERNET SALES COULD HAVE AN ADVERSE
EFFECT. Currently, we do not collect state sales taxes or other taxes for goods
sold by the Company, except for purchases with a billing address in the states
of Arkansas, California, Pennsylvania and Tennessee. From time to time, states
and other tax levying entities (e.g., cities and counties) have sought to impose
sales tax collection obligations on out of state companies for Internet sales.
Currently there is federal legislation prohibiting states and other local
entities from imposing new taxes on Internet commerce. This protection ends on
October 1, 2001. We do not know whether Internet sales will be subject to
taxation after that date. However, we believe that unrestricted taxation of
Internet commerce would restrict the rate of growth of such commerce and
adversely affect our sales efforts.
TECHNOLOGICAL CHANGES ON THE INTERNET CAN AFFECT OUR BUSINESS. As the
Internet matures, data transmission speed and volume of data transmitted
increase. If we are to compete with other Internet pet suppliers, our equipment
must equal theirs in speed, reliability and security. Continuous upgrading of
equipment will be an ongoing expense necessary for us to respond to the
technological developments in this industry. If we are unable to match or exceed
our competition in taking advantage of technological advances, this could
adversely affect our brand name as well as our sales.
GOVERNMENT REGULATION OF THE INTERNET COULD ADVERSELY EFFECT OUR
BUSINESS. If the federal government or state governments propose laws and
regulations applicable to communications or commerce over the Internet, such
laws could affect our ability to increase sales using Internet commerce. Such
laws may deal with privacy, levels of security, encryption, and encryption keys
and taxation. While it is impossible for us to project the substance of laws
that may be passed, the company generally believes that additional regulation of
Internet commerce is more likely to have an adverse effect on our marketing
efforts than less regulation.
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<PAGE> 14
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders, nor will we receive any proceeds from the conversion
of shares of preferred stock or the convertible debenture into shares of common
stock. PetQuarters will, however, receive the sale price of any common stock
that is issued to persons upon the exercise of warrants and to Splendid Rock
Holdings pursuant to the equity line of credit agreement, if and to the extent
that we elect to put shares to Splendid Rock Holdings. All proceeds from the
sale of common stock under the equity line of credit agreement and from the
exercise of warrants will be used to retire debt and for general corporate
purposes. PetQuarters will have a reduction in its outstanding debt if some or
all of the convertible Debenture is converted into common stock.
DILUTION
The issuance of shares of common stock under the equity line of credit
agreement, upon conversion of shares of PetQuarters Series A Convertible
Preferred Stock, and upon conversion of the 6% Convertible Debenture will dilute
our common stockholders and may adversely affect the price of PetQuarters common
stock. The outstanding shares of our Series A Convertible Preferred Stock are
convertible into common stock at a rate of $1.3816 per share of common stock,
based upon the $100 par value of the preferred stock being converted. (For
example, ten shares of preferred stock may be converted into 724 shares of
common stock. Fractional shares will not be issued.) The 6% convertible
debenture is also convertible at a rate of $1.3816 per share of common stock,
based upon the principal amount of the debenture being converted. The equity
line of credit allows Splendid Rock Holdings to purchase common stock at a
floating rate that is below the market price of the common stock. As a result,
the lower our stock price goes, the more common stock Splendid Rock Holdings
will receive.
PRICE RANGE OF COMMON STOCK
Since May, 1998, our common stock has traded on the over-the-counter
bulletin board under the symbol PDEN. Below are the quarterly high and low
closing prices since inception as recorded by the bulletin board. Bid prices
were not available.
<TABLE>
<CAPTION>
Period Low High
------ --- ----
<S> <C> <C>
April - June 1998 15/16 1-11/16
July - September 1998 11/32 1-11/100
October - December 1998 6/25 2
January - March 1999 9/16 1-13/16
April - June 1999 7/8 4-19/32
July - September 1999 2-15/16 6-9/16
October - December 1999 1 3-11/32
January - March 2000 2-21/32 5-19/32
</TABLE>
As of June 1, 2000, the Company had 2,065 shareholders of record.
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<PAGE> 15
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends on our common shares in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
(i) on an actual basis; and (ii) on a pro forma basis to reflect the acquisition
of WeRPets.com, Chartendure, and AllPets.com. The table below should be read in
conjunction with our consolidated financial statements and the notes thereto,
which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
------------------------------
Actual Pro Forma
------------ ------------
<S> <C> <C>
Notes and Capital Leases payable ................. $ 4,926,079 $ 4,926,079
Stockholders Equity:
Preferred Stock
Common stock: $0.001 par value 40,000,000
authorized, 13,369,613 outstanding ........ $ 13,370 $ 18,126
Additional Paid-in-Capital ....................... $ 13,459,064 $ 25,260,455
Accumulated Deficit .............................. $ (9,323,124) $ (9,323,124)
Stock Compensation ............................... $ (199,920) $ (199,920)
Total Stockholders Equity ................... $ 3,949,390 $ 15,755,537
Total Capitalization ........................ $ 8,875,469 $ 20,681,616
</TABLE>
10
<PAGE> 16
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 NINE MONTHS ENDED MARCH 31
---------------------------- ----------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales ........................................ $ 43,835 $ 262,470 $ 204,059 $ 9,873,570
Cost of sales .................................... 21,908 205,774 132,230 6,744,788
------------ ------------ ------------ ------------
Gross margin ..................................... 21,927 56,696 71,829 3,128,782
Operating Expenses:
Selling Expenses ............................. 196,497 489,272 300,422 1,483,788
General and administrative ................... 647,114 588,870 271,879 5,459,502
Depreciation/Amortization .................... 11,508 36,824 28,746 1,253,336
Total operating expenses ......................... 855,119 1,114,966 601,047 8,196,626
Loss from operations ............................. (833,192) (1,058,270) (529,218) (5,067,844)
Interest expense ................................. (4,384) (290) (289) (402,737)
Net loss ......................................... $ (816,179) $ (1,052,265) $ (526,557) $ (7,454,680)
Net loss attributable to common stockholders ..... $ (816,179) $ (1,052,265) $ (526,557) $ (7,454,680)
Basic and diluted net loss per common share ...... $ (0.10) $ (0.09) $ (0.05) $ (0.65)
Weighted average shares outstanding used to
compute basic and diluted net loss per
share ........................................ 8,568,125 11,453,000 11,560,000 11,519,146
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains some forward looking
statements which are based upon the plans, goals, and objectives of PetQuarters
and its management. Such statements are subject to various risks and
uncertainties, including the inability to secure ongoing financing. We have
various loans outstanding which are due upon demand and could require additional
infusions of capital if one or more lenders called the loans for payment. Our
longer-term development plans also require additional capital for completion.
Consequently, the reader should consider that such uncertainties and risks may
cause actual results to vary materially from those stated plans, goals, and
objectives outlined below.
BALANCE SHEET DATA AS OF MARCH 31, 2000 COMPARED TO JUNE 30, 1999
Assets. The total assets as of March 31, 2000 were $10,852,398 as
compared to $1,042,285 as of June 30, 1999. Most of the increase resulted from
the purchase of Humboldt Industries in August 1999. We had current assets of
$3,020,095 including cash of $113,049 and inventories of $1,564,437 as of March
31, 2000 as compared to current assets of $76,413 including cash of $37,726 and
inventories of $33,783 as of June 30, 1999. As of April 14, 2000 we entered into
a real estate contract to sell the Arkansas facility. These assets are reflected
as Land and Building held for sale in the amount of $500,000. The Company
recorded an expected loss on sale of $400,000 during the quarter ended March 31,
2000.
Long-term fixed assets include land, building and improvements, and
furniture and fixtures. These items total $474,056 net of accumulated
depreciation as of March 31, 2000 as compared to $935,487 net of accumulated
depreciation as of June 30, 1999. On April 14, 2000 we accepted an offer to sell
the facility in Lonoke, Arkansas for $560,000 before expenses and commissions.
The purchase of Humboldt Industries has eliminated the original purpose of the
facility and we believe it is in the best interest of shareholders to increase
our cash reserve or eliminate or reduce any debt outstanding with the sale.
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<PAGE> 17
Goodwill, net of accumulated amortization, was $7,200,097 as of March
31, 2000. The goodwill results from the Humboldt Industries purchase. Currently,
we are amortizing the purchase on a five-year schedule, which results in
amortization $415,665 quarterly. The amortization of the goodwill associated
with Humboldt Industries will end in the first fiscal quarter of 2004. There was
no corresponding entry from the prior period.
Intangible assets in the amount of $158,150 include capitalized costs
associated with our website. We anticipate website design and development costs
will continue and will be capitalized in conformity with Generally Accepted
Accounting Principal Statement of Position (SOP) 98-1.
Liabilities. Total liabilities of $6,903,008 are reflected as of March
31, 2000. Total liabilities as of June 30, 1999 were $541,007. Current
liabilities include accounts payable of $1,590,248 as of March 31, 2000 as
compared to $203,394 as of June 30, 1999. Our accrued expenses increased to
$386,681 as of March 31, 2000 from $12,613 at June 30, 1999. The increases are
the result of the purchase of Humboldt Industries.
We had a note outstanding to the Sun Valley Trust in the amount of
$3,830,000 as of March 31, 2000. The original amount of the funds borrowed by
Pet Quarters, Inc. was $4,600,000. The principal balance increased to $4,830,000
in November 1999. The principal was reduced in February 2000 by $1,000,000
payment and the $3,830,000 remaining balance of the obligation to the Sun Valley
Trust was due in full on May 10, 2000. On May 9, 2000 the remaining balance to
the Sun Valley Trust was retired by the payment of $2,421,500 and the conversion
of the remaining balance to convertible preferred stock.
Demand notes carrying an interest rates from 8% to 9% in the amount of
$350,189 are unsecured. Other demand notes with an interest rate of 10% in the
amount of $429,989 are secured by the facility in Lonoke, Arkansas. We have
accepted an offer to sell this property for $560,000 before commissions and
expenses.
The long-term portion of capital leases payable for in the amount of
$238,300 are secured by telephone hardware and computer equipment in the
Pennsylvania facility.
Stockholders Equity. Common shares increased from 9,800,165 as of June
30, 1999 compared to 13,369,613 as of March 31, 2000. The majority of the
increase in shares outstanding reflects the issuance to investors of private
placements offered by Pet Quarters, Inc, the issuance of shares to purchase
Humboldt Industries, and the granting of shares to Pet Quarters, Inc. officers
and employees. Additional Paid In Capital increased from $2,498,867 as of June
30, 1999 to $13,459,064 as of March 31, 2000. The Humboldt Industries purchase
by Pet Quarters, Inc. produced the largest part of the increase from 1999 to
2000. Retained deficit increased to $9,323,124 in March 31, 2000 from $1,868,444
on June 30, 1999. Total stockholders equity as of March 31, 2000 was $3,949,390
as compared to $501,278 as of June 30, 1999.
Total liabilities and stockholders equity was $10,852,398 and
$1,042,285 as of March 31, 2000 and June 30, 1999 respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH
NINE MONTHS ENDED MARCH 31, 1999
Sales. Sales for the nine months ended March 31, 2000 were $9,873,570
as compared to $204,059 for the nine months ended March 31, 1999. The sales for
2000 include catalog sales of Humboldt Industries for eight months and
PetQuarters, Inc. Internet sales for nine months. All sales in the period ended
March 31, 1999 were Internet sales.
12
<PAGE> 18
Operating Expenses. Cost of sales was $6,744,788 for the nine months
ended March 31, 2000 as compared to $132,230 for the same period in 1999, which
was 68% percent of sales in 2000 and 65% in 1999. Selling Expenses increased to
$1,483,788 for the period ending in 2000 as compared to $300,422 during the same
period in 1999. The increase was primarily the result of catalog costs resulting
from the acquisition of Humboldt Industries on August 1, 1999. General and
administrative expenses were $5,459,502 during the nine months ended March 31,
2000 as compared to $271,879 during the same period in 1999. This increase is
attributed to the purchase of Humboldt Industries and the expense associated
with the acquisition of Wellstone Acquisition Corporation that totaled $782,453.
In March 2000, we recorded a write-down of the land and building in Lonoke,
Arkansas in the amount of $400,000. We intend to sell the warehouse and office
space in Lonoke, Arkansas, and the write-down was based on the difference
between the book value of the property and the purchase price contained in a
purchase agreement for the property. Depreciation and amortization increased to
$1,253,336 in 2000 from $28,746 in 1999. This increase includes a five-year
amortization of goodwill related to the purchase of Humboldt Industries at a
rate of $415,665 each quarter.
Interest Expense. Interest Expense increased to $402,737 for the nine
months ended March 31, 2000 as compared to $289 for the same period in 1999. The
increase is entirely related to the Bridge Loan for the purchase of Humboldt
Industries through the Sun Valley Trust (bridge loan) and other debt issued for
working capital purposes. The Bridge Loan was retired in full on May 9, 2000.
Other Expenses. PetQuarters incurred other expenses associated with the
Bridge Loan during the nine month period ended March 31, 2000, including loan
origination fees in the amount of $651,671 and troubled debt restructuring
expense in the amount of $1,339,461. There were no corresponding expenses in
1999.
Net Loss. Net Loss for the nine months ended March 31, 2000 was
$7,454,680 as compared to a loss of $526,557 for the same period in 1999. The
loss for the nine months ended March 31, 2000 was impacted by non-cash items
including amortization of the goodwill on the acquisition of Humboldt
Industries, expense for stock awards and options granted, the expense of the
common stock issued for the Bridge Loan extension, the beneficial conversion
feature associated with the convertible notes issued in November 1999, the
purchase of Wellstone Acquisition Corporation and the write-down of the facility
in Arkansas.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH
FISCAL YEAR ENDED JUNE 30, 1998
General. The period ending June 30, 1998 contains all of the costs
associated with a start up Internet company for a full year; however,
PetQuarters was a fully operating entity for only the last two months of that
fiscal year approximately. The primary reason is that the PetQuarters website
was not fully operational until May 1998.
Sales. Sales for the year ending June 30, 1999 were $262,470 compared
to $43,835 in fiscal 1998. The Company's belief is that the Christmas season
will typically provide revenues that are significantly higher in the December
quarter than at other times of the year. The Company experienced a large
increase in order flow during the Christmas season of 1998 in comparison to the
other quarters during the year.
Operating Expenses. Cost of sales was $205,774 for 1999 and $21,908 for
1998. The Company operated on a 22% margin in fiscal year 1999. This compares to
approximately 50% for 1998. Two reasons account for this disparity. During the
majority of 1999, PetQuarters primarily used the fulfillment capabilities of
Loveland Pet Products of Mason, Ohio. Loveland's charge increased cost of goods
sold
13
<PAGE> 19
and effectively lowered the gross margin of the Company. Secondly, PetQuarters,
during the 1998 fiscal year and a portion of the 1999 fiscal year, fulfilled its
own orders from its facility in Lonoke, Arkansas. The selling expenses for
fiscal year 1998 were $196,497 and in fiscal year 1999 were $489,272. The type
of selling expenses were primarily the same for both periods and consisted of
both web-based and traditional publications, with web-sites and advertisers
making up the bulk of the selling expenses. The increase for fiscal year 1999
from fiscal year 1998 reflected increased operating activity in 1999 versus
1998. General and administrative expenses for fiscal 1998 were $647,114 and
$588,870 in 1999. The expenses included salaries, general expenses, professional
fees for legal and accounting, travel, website maintenance and other
miscellaneous expenses. The slightly higher amount recorded in 1998 is primarily
due to the one-time start-up cost of the business. New employees were added in
1999, and the general and administrative costs going forward will increase.
During fiscal year 1998, the Company recorded depreciation and amortization on
office equipment, computer and telephone equipment, warehouse equipment, and the
Lonoke, Arkansas facility. Similar items were depreciated in fiscal year 1999.
The largest depreciable asset of PetQuarters during both years is the facility
in Lonoke, Arkansas. The building is being depreciated on a forty-year life.
Net Loss. The loss in fiscal year 1998 of $816,179 increased to a loss
in fiscal year 1999 of $1,052,265, resulting largely from the increase in
selling expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had $113,049 in cash and cash equivalents. Since
our inception, we have financed our operating cash flow needs primarily through
private offerings of equity securities and issuances of debt. Cash utilized in
operating activities was $1,904,030 for the nine months ended March 31, 2000 and
$649,731 for the year ended June 30, 1999.
Net cash utilized in investing activities was $4,490,453 for the nine
months ended March 31, 2000 and $11,386 for the year ended June 30, 1999. The
use of cash for investing activities was primarily attributed to the purchase of
Humboldt Industries, the purchase and development of the web site, and purchases
of equipment.
Net cash provided by financing activities was $6,663,395 for the nine
months ended March 31, 2000. During the nine months, we raised $2,642,605 from
the issuance of common stock. Proceeds from notes payable and the Bridge Loan
were $5,231,850 during the nine-month period. Net cash provided by financing
activities was $323,000 for the year ended June 30, 1999, which was primarily
attributed to borrowings. In May 2000, we issued 34,642 shares of our Series A
Convertible Preferred Stock, par value 100, which provided us with cash of
$2,055,700 and the elimination of $1,408,500 in principal amount of the Bridge
Loan through conversion of Bridge Loan interests into preferred stock.
In August 1999, we borrowed $4,600,000 from the Sun Valley Trust and
issued 153,334 shares of our common stock to the Trust as an origination fee for
such loan, which related to the acquisition of Humboldt Industries. Much of the
cash provided from financing activities was used to repay the Bridge Loan, which
was fully retired in May, 2000. The remaining cash from financing activities was
used for working capital purposes.
We expect negative cash flow from operations to continue until revenues
are increased. We believe an increase in revenues will be accomplished through
increased traffic to our web site and through an increase in catalog sales.
We currently anticipate that the net proceeds from the equity line of
credit, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the next
two years. We may need to raise additional funds prior to the expiration of
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<PAGE> 20
such period if, for example, we pursue business or technology acquisitions or
experience operating losses that exceed our expectations. If we raise additional
funds through the issuance of equity or debt securities, such securities may
have rights, preferences, or privileges senior to the rights of our common
stock, and our stockholders may experience additional dilution. We cannot be
certain that additional financing, when required, will be available to us on
acceptable terms, or at all.
BUSINESS
OUR COMPANY
OUR DEVELOPMENT. Pet Quarters, Inc. was incorporated on May 22, 1997,
under the laws of the State of Arkansas. Currently, our principal business is to
sell pet supplies over the Internet and through mail-order catalogs. We offer
over 7,500 items, or stock keeping units (SKUs), for pets on our web site, which
is located at www.petquarters.com, and approximately 2,500 SKUs in each of our
pet catalogs, Home Pet Shop(R) and Dog's Outfitter(R).
STRATEGIC ACQUISITIONS
Humboldt Industries. As of August 1, 1999, we acquired Humboldt
Industries Incorporated and its affiliated company, Maplewood Industries, Inc.,
for cash of $4.6 million and PetQuarters common stock valued at $4.6 million.
Humboldt is a fulfillment company (i.e., a company which fulfills orders and
ships products purchased from PetQuarters). Prior to the acquisition, Humboldt
circulated the mail-order pet catalogs that we now distribute. The acquisition
provided PetQuarters with its in-house fulfillment operation (i.e., the ability
to fulfill orders and ship products directly to customers of PetQuarters). In
addition to the fulfillment operation, Humboldt provided an existing base of
retail and wholesale customers, both domestically and internationally. Maplewood
circulates the Maplewood Crafts catalog and the Plastic Canvas catalog and
distributes a wide variety of craft kits and craft supplies, primarily to retail
consumers. Maplewood shares the Humboldt infrastructure, resources, and
associated costs. In this prospectus, we sometimes refer to Humboldt and
Maplewood collectively as the "Catalog Division."
WeRPets.com, Inc. On April 27, 2000, we acquired all of the outstanding
equity securities of WeRPets.com, Inc. ("WeRPets") in exchange for 703,316
shares of PetQuarters common stock. WeRPets is an emerging online pet-related
company that has developed strong relationships with The Health Network and
Galaxy.com (www.galaxy.com). WeRPets has an agreement to be the sole and
exclusive pet portal on www.galaxy.com and has the worldwide exclusive license
to selected content produced by The Health Network in HTML and streaming video
formats. Galaxy.com, a leading vertical Internet directory, provides fast,
contextually relevant searches of the Internet for numerous vertical markets,
including health, education, international, shopping, pets and more. The Health
Network is the first 24 hour-a-day cable channel dedicated to health care that
includes programming on animal care, behavior, and training provided by
veterinarians and other professionals. We believe that this acquisition
continues to strengthen our position in the Internet pet space and is an
integral step in our content-driven business strategy.
Chartendure, Ltd. Effective May 1, 2000, we acquired Chartendure, Ltd.,
a company organized under the laws of the United Kingdom, for 400,000 shares of
PetQuarters common stock. Chartendure has existing relationships with various
veterinary organizations and other pet professionals in the United Kingdom and
throughout Europe. Through these relationships, Chartendure will provide web
site content regarding pet care, feeding, and health issues for pet owners. We
intend to enter into contracts with these pet professionals to provide
continuous content for the web site. The agreement to acquire Chartendure for
400,000 shares of our common stock supercedes a prior agreement with the
principal shareholder of
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<PAGE> 21
Chartendure that included a purchase price based upon the accomplishment of
certain milestones. The number of shares issued is less than one-half of the
shares that would have been issued if all milestones were satisfied.
AllPets.com, Inc. On May 30, 2000, we acquired AllPets,com, Inc.
through the exchange of 3,652,785 shares of PetQuarters common stock for all of
the outstanding equity securities of AllPets. AllPets.com is a destination site,
providing in-depth content, robust community, and high quality commerce targeted
to the pet enthusiast. AllPets offers visitors its Petcyclopedia, an on-line
reference guide with over 1,400 articles covering all pet categories and a
bi-weekly magazine with approximately twenty new articles in each issue. AllPets
also offers users an on-line community, including message boards, chat rooms,
and an "Ask the Expert" feature, which allows pet owners to receive advice from
expert veterinary staff.
BRIDGE LOAN
PetQuarters borrowed $4,600,000 from the Sun Valley Trust on July 30,
1999 (the "Trust"), to acquire Humboldt Industries. Both unaffiliated
individuals and entities and affiliated individuals contributed money to the
Trust to enable the Trust to make the Bridge Loan. Individuals affiliated with
PetQuarters accounted for $1,023,000 of the $4,600,000. An unaffiliated entity,
Olympus Capital ("Olympus"), accounted for $2,000,000 of the $4,600,000,
appointed the trustee, hired counsel for the Trust, and negotiated the terms of
the Bridge Loan on behalf of the Trust. Without the contribution from Olympus to
the Trust, we would not have been able to complete the acquisition of Humboldt
and Maplewood. As required by the Trust to make the Bridge Loan, PetQuarters
issued 153,334 shares of its common stock (valued at $651,671, or $4.25 per
share, the closing price on July 30, 1999) to the Trust. The Trust later
distributed these shares to its beneficiaries.
The Bridge Loan was secured by all of the outstanding shares of stock of
each of Humboldt and Maplewood. The original note was payable in full on October
1, 1999. We failed to make the required payment, and shortly thereafter, the
trustee attempted to foreclose on the collateral. On November 10, 1999,
PetQuarters executed an extension of the Bridge Loan. As an inducement for
Olympus to agree to the extension and leave its capital in the Trust, the
beneficiaries of the Trust granted Olympus the power and authority to direct the
actions of the trustee of the Trust. In addition, a five percent (5%) penalty of
$230,000 was added to the outstanding principal amount of the note, resulting in
an outstanding principal balance of $4,830,000. After negotiation, we issued to
the Trust an additional 275,000 shares of PetQuarters common stock valued at
$483,009 or $1.7564 per share, which is an approximation of the average closing
price for the shares on November 9 and 10, 1999. The Trust distributed these
shares to the Trust beneficiaries. In connection with the Bridge Loan extension,
the interest rate was reduced from 12.5% per annum to 10% per annum, and the
maturity date was extended to May 10, 2000. In exchange, we agreed to make
monthly partial interest payments of $20,000 by the 10th day of each month
commencing December 10, 1999.
The accrued but unpaid interest accumulated interest free until we
raised additional capital. In the event we raised additional capital, we were
required to pay all accrued but unpaid interest on the Bridge Loan. The terms of
the extension also required a partial principal payment of $1,000,000 on
February 10, 2000. To further induce Olympus to agree to the extension of the
Bridge Loan, all of the beneficiaries of the Trust agreed that Olympus would be
entitled to preferential treatment, and all of the $1,000,000 due on February
10, 2000 was paid to Olympus through the Trust rather than allocated among all
of the beneficiaries. On February 3, 2000, PetQuarters paid the $1,000,000
principal payment to the Trust.
In connection with the extension of the Bridge Loan, the Company was
also required to pay interest, attorney fees, and associated expenses of the
trustee in the amount of $204,723. These funds were borrowed from the Matthew J.
Hoff Trust and Michael Parnell. Mr. Parnell, in his capacity as
16
<PAGE> 22
trustee for the Hoff Trust and on his own behalf, received two convertible notes
from the Company for $102,361.50 each. These notes were convertible, wholly or
partially, into common stock of the Company at a rate of $.50 of debt for each
share of common stock. The conversion privilege terminated on February 10, 2000.
On January 27, 2000, Mr. Parnell, acting on behalf of the trust and for himself,
converted both of the notes into a total of 409,446 shares of common stock of
the Company.
The conversion feature resulted in an aggregate benefit to the holders
of the notes of $626,452 computed as the closing price for PetQuarters stock on
November 10, 1999 ($2.03), less the conversion price for each share ($.50),
multiplied by the number of shares obtained in the conversion (409,446).
While the Bridge Loan and the extension of the Bridge Loan were
negotiated with related parties of PetQuarters, we believe that the Bridge Loan
and the extension were negotiated in a manner which resulted in terms that are
as good as, or better than, we could have received otherwise. At the time the
Bridge Loan and the extension were negotiated, we could not rely on traditional
methods of commercial financing because of our limited operating history and
lack of credit worthiness. Our negotiations with the Bridge Loan creditors were
protracted and reflected many of the points of concern which prevented the
Company from using commercial lines of credit. We believe that the terms of the
Bridge Loan and extension were better than any other option available to the
Company at the time.
On May 10, 2000, we paid the remaining principal balance and all
accrued interest on the Bridge Loan and received a release of the collateral
from the trustee for the Sun Trust.
EQUITY LINE OF CREDIT AGREEMENT
On March 15, 2000, PetQuarters entered into an equity line of credit
agreement with Splendid Rock Holdings, Ltd., a corporation organized under the
laws of the British Virgin Islands. Pursuant to this equity line of credit
agreement and subject to the satisfaction of certain conditions, PetQuarters may
sell and issue to Splendid Rock Holdings, from time to time, up to an aggregate
of $25,000,000 of our common stock.
Beginning on the date that the registration statement, of which this
prospectus is a part, is declared effective by the Securities and Exchange
Commission, and continuing for thirty (30) months thereafter, we may, from time
to time, in our sole discretion, sell or "put" shares of PetQuarters common
stock to Splendid Rock Holdings at a price equal to 85% of the market price of
the common stock. Under the equity line of credit agreement, the market price of
PetQuarters common stock, for purposes of determining the purchase price, is the
average of the six lowest closing bid prices, as reported by Bloomberg, L.P., of
our common stock for the eleven trading days beginning seven days before and
ending three days after the date we notify Splendid Rock Holdings of our
intention to put common stock to it.
The maximum dollar amount of shares of common stock that may be put to
Splendid Rock Holdings at any one time is 4.125% of the average price of the
common stock for the three month period prior to the date of the put multiplied
by the total trading volume for such three month period (the "Maximum Put
Amount"). We have the ability to exceed the Maximum Put Amount on any put with
an accompanying decrease in the purchase price of the common stock. For each
$100,000 (or portion thereof) that our put exceeds the Maximum Put Amount, the
purchase price of the common stock is decreased by 3.5%. For instance, if the
Maximim Put Amount is $1,000,000 on the date of our put, and we actually "put"
$1,150,000 of common stock to Splendid Rock Holdings, the purchase price for the
common stock would be calculated as follows: 85% of the market price for the
first $1,000,000 of the put amount, 81.5% of the market price for the next
$100,000 of the put amount, and 78% of the market price for the final $50,000 of
the put amount.
17
<PAGE> 23
Our ability to put shares of common stock to Splendid Rock Holdings is
subject to certain conditions and limitations, including, but not limited to,
the following:
o the registration statement, of which this prospectus is a part, must have
previously become effective and shall remain effective and available for
making resales of the put shares;
o our representations and warranties to Splendid Rock Holdings contained in
the equity line of credit agreement must be accurate as of the date of each
put;
o no statute, rule, regulation, executive order, decree, ruling, or
injunction may be in effect which prohibits or directly and adversely
affects any of the transactions contemplated by the equity line of credit
agreement;
o at the time of a put, there must not have been any material adverse change
in our business, operations, properties, prospects, or financial condition
since the date of filing of our most recent report with the SEC;
o our common stock must not have been delisted from the Bulletin Board or
suspended from trading by the SEC or the Bulletin Board; and
o at least twenty (20) trading days must have elapsed since the last date
PetQuarters put shares to Splendid Rock Holdings.
We cannot assure you that we will satisfy all of the conditions
required under the equity line of credit agreement or that Splendid Rock
Holdings will have the ability to purchase all or any of the shares of common
stock put to it thereunder.
Splendid Rock Holdings, or other underwriters of the securities, has
the right to review the registration statement and our records and properties to
obtain information about us and the accuracy of the information contained in
this prospectus and the remainder of the registration statement. Splendid Rock
Holdings is not entitled to reject a put by PetQuarters based on such review.
In conjunction with the equity line of credit agreement, we issued to
Splendid Rock Holdings a warrant to purchase up to 1,000,000 shares of
PetQuarters common stock, at an exercise price of $4.0322 per share. The
Splendid Rock Holdings warrant may be exercised through March, 2003. The warrant
contains provisions that adjust the purchase price and number of shares issuable
to Splendid Rock Holdings upon the occurrence of certain events, such as a stock
split, reverse stock split, stock dividend, merger, or recapitalization.
Splendid Rock Holdings may effect a cashless exercise of the warrant only in the
period prior to the effectiveness of the registration statement of which this
prospectus is a part.
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Splendid Rock Holdings, which will permit Splendid
Rock Holdings to resell the common stock from time to time in the open market or
in privately-negotiated transactions. We will prepare and file amendments and
supplements to the registration statement as may be necessary in order to keep
it effective as long as the equity line of credit agreement remains in effect or
Splendid Rock Holdings owns any of our common stock. We have agreed to bear
certain expenses, other than broker discounts and commissions, if any, in
connection with the preparation and filing of the registration statement and any
amendments to it.
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<PAGE> 24
We have entered into agreements with B-III Capital, LLC and Ladenburg
Thalmann & Co. Inc., pursuant to which B-III Capital will receive one percent
(1%) and Ladenburg Thalmann will receive seven percent (7%) of the proceeds from
the sale of common stock to Splendid Rock Holdings under both the equity line of
credit agreement and the warrant. In 1999, we engaged B-III Capital to assist us
in locating alternative sources of financing, including private investors. B-III
Capital arranged for Ladenburg Thalmann to be a placement agent for PetQuarters.
In an agreement dated November 8, 1999, we agreed to pay B-III Capital a success
fee of 1% of the amount of capital raised through Ladenburg Thalmann On February
11, 2000, we entered into an agreement with Ladenburg Thallman in which we
agreed to pay it a fee equal to 7% of the aggregate capital raised from Splendid
Rock Holdings. Ladenburg Thalmann initiated contact with Splendid Rock Holdings
and assisted PetQuarters in negotiating the equity line of credit agreement.
Each of the fees will be paid by PetQuarters upon receipt of funds from Splendid
Rock Holdings.
DOMESTIC PET PRODUCTS AND SERVICES INDUSTRY
LARGE AND GROWING INDUSTRY. According to industry sources, Americans
spent approximately $23 billion on their pets in 1998, more than they did on
toys ($20.6 billion), on recorded music ($13.2 billion), or on books sold
through general retailers ($12 billion). Pets remain an integral part of family
life in the United States with 58 million, or 59%, of 98 million U.S. households
owning one or more pets. By 2001, the pet products and services industry is
expected to grow to $28.5 billion.
PET OWNERSHIP BREAKOUT. The popularity of dogs and cats as pets in
America is unrivaled and continues to be the primary driver of the pet products
and services industry.
PET OWNERSHIP IN THE UNITED STATES
<TABLE>
<CAPTION>
Total # of U.S.
Total # of Pets % of Total Households % of Total
(Millions) Pets (Millions) Households
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cats 59 30 32 33
Dogs 53 27 36 37
Fish 56 28 6 6
Birds 14 7 5 5
Rabbits & Ferrets 6 3 2 2
Rodents 5 3 2 2
Reptiles 4 2 1 1
TOTAL 197 100%
Source: American Veterinary Medical Association
</TABLE>
Although the number of cats (59 million) surpasses the number of dogs
(53 million), four million more U.S. households own dogs than cats. According to
the Pet Industry Joint Advisory Council, virtually all dog owners purchase their
pets 1-5 packages of treats per month, 66% give their pets gifts, more than 50%
give their pets Christmas presents, and 25% give their pets birthday presents.
FAVORABLE DEMOGRAPHIC TRENDS. Demographic trends suggest that the
recession-resistant pet products and services industry will continue to grow for
years to come.
o Continued Family Formation. Most pets are owned by families
with children between the ages of 5 and 15. Families with
children under 18 years old are projected to grow at a steady
pace over the next several years.
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<PAGE> 25
o Pet Ownership Increasingly Linked to Affluence. Furthermore,
the income distribution among pet-owning households is
increasingly skewed towards higher income brackets that can
afford to spend more on pet products. According to the
American Veterinarian Medical Association, 64.6% of households
with incomes of $60,000 or more own a pet.
<TABLE>
<CAPTION>
HOUSEHOLD INCOME HOUSEHOLDS OWNING A PET
---------------- -----------------------
<S> <C>
Less than $12,500 47.80%
$12,500 to $24,999 55.6
$25,000 to $39,000 60.7
$40,000 to $59,999 64.8
$60,000 or more 64.6
Source: The American Veterinarian Medical Association
</TABLE>
INCREASED CONSUMER SPENDING ON PETS. The $13 billion pet food segment
of the pet products and services industry breaks down into non-premium
supermarket brands and premium brands. Historically, the segment has been
dominated by supermarket brands such as Alpo, Kal Kan, and Purina, which
represent roughly 55% of all pet food supplies and are primarily sold through
grocery stores, convenience stores, and other mass merchant outlets. These
brands grow at a low single-digit annual rate, carry lower gross margins, and
are generally considered less nutritious than premium brands.
Through the 1980s, the supermarket brands had relatively little retail
competition. Over the past five years, however, supermarket brands have lost
market share. Premium brands such as Iams, Nutro, and Science Diet, which are
generally not available through supermarkets or mass merchants due to
manufacturers' restrictions, have increased in popularity as consumers have come
to understand the importance of diet in ensuring their pets' health. These
premium brands are sold primarily through superstores, specialty pet stores,
veterinarians, and farm and feed stores, due to manufacturers' insistence on
ensuring proper retail servicing and stable margins. Premium brand sales have
increased at a compound annual growth rate of approximately 18% over the past
five years and now account for an estimated 25% of the total pet food segment.
The Company believes that premium purchases have increased due to the
demographic trends previously discussed, growing concern for animal welfare and
nutrition, recommendations by veterinarians and breeders, and the increasing
availability and variety of premium pet food products. The Company believes that
as consumers focus on pet health and care, they tend to purchase more and higher
quality pet products and services. This trend has had a positive effect on the
$5 billion non-food pet products segment and the $6 billion pet services
segment. We do not currently offer pet food products directly, but we intend to
discuss the possibility of fulfilling pet food orders with third parties.
Typically, pet products are purchased on impulse during a customer's
regular visit to purchase pet food, cat litter, or flea control products. Demand
for non-bulk products is less price sensitive than for pet food and other bulk
products. Consequently, non-bulk, non-food pet products are less frequently
discounted, resulting in higher gross margins. For this reason, the pet supply
industry has attracted strong interest from supermarkets, although due to space
constraints, supermarkets tend to carry a limited assortment of basic items such
as collars, dog chews, leashes, flea collars, and toys. Pet supply stores carry
a wider variety of these basic items and an assortment of other products such as
grooming products, pet carriers, cat furniture, doghouses, vitamins, treats, and
veterinary products.
The pet services segment includes veterinary, boarding, grooming, and
training services. Approximately 92% of all households with dogs and 78% of all
households with cats seek veterinary care at least once a year, and veterinary
expenditures in the United States have grown at a 9.5% compounded annual growth
rate since 1991. Although pet services vendors generally enjoy high margins,
execution
20
<PAGE> 26
and liability concerns generally restrict the ranks of such vendors to larger
and more experienced specialty retailers.
INTERNET AND RETAIL E-COMMERCE TRENDS
SURGING INTERNET USAGE. International Data Corporation ("IDC")
estimates that there were 97 million Web users worldwide at the end of 1998 and
anticipates this number will grow to approximately 320 million users by the end
of 2002. In addition to the increase in the number of users, both the frequency
of use and the amount of time spent online have grown significantly. In 1998,
nearly 60% of all online households accessed their online service at least once
a day, increasing from only 35% the previous year. Industry observers believe
that this trend will continue in the future as more people use the Internet as a
source of information and news and as a convenient "virtual" marketplace in
which to conduct a wide variety of retail purchases.
The rapidly increasing popularity of Internet usage among a broad range
of age groups and demographic profiles is self-evident. From online news
services and government databases to online bookstores and brokerage firms, the
Internet is now a permanent fixture in the economic and social landscape of the
United States. Although the PC is expected to remain the core means of Internet
access, Intelliquest predicts that by 2000 alternative means of Internet access
will be the driving force of growth. Currently, an estimated 3.7 million people
use a handheld computer to go online, while 3.1 million access the Internet via
a TV-set-top box or WebTV.
RETAIL E-COMMERCE. According to a study released by the University of
Texas Center for Research in Electronic Commerce on June 10, 1999, the Internet
economy in 1998 generated revenues of $301.4 billion in the United States. The
study, commissioned by Cisco Systems, estimates that of the overall figure,
approximately one third, or $101 billion, can be attributed to e-commerce, with
much of the balance attributed to infrastructure and applications. Between 1995
and 1998, the Internet economy grew by 174.5%, compared with a worldwide
economic growth rate of 3.8% during the same period. Finally, the study shows
that a large part of Internet growth can be attributed to the transfer of
existing economic activity to the Internet rather than the creation of totally
new Internet activities.
Although estimates vary, the Yankee Group projects the U.S. consumer
segment of e-commerce to grow to $10 billion by 2000 while IDC forecasts $26.8
billion -- there is a consensus that the Internet e-commerce channel will be a
substantial component of both consumer-to-business and business-to-business
transactions in the future. According to Forrester Research, the total value of
goods and services purchased over the Internet is expected to increase to $1.3
trillion in 2003.
We believe that growth in Internet usage and e-commerce is being fueled
by a number of factors including:
o A large and growing installed base of personal computers in
the workplace and home;
o Advances in the performance and speed of personal computers
and modems;
o Improvements in network security, infrastructure, and
bandwidth (including the development of high-speed
connectivity options for Internet users);
21
<PAGE> 27
o Easier and cheaper access to the Internet; and
o The rapidly expanding availability of online content and
commerce sites.
An April 1999 study by Greenfield Online found that 39% of U.S.
Internet users spend less time shopping in offline stores and malls than on the
Internet. This finding is significant because Americans with Internet access
account for 60% of the total consumer buying power in the United States. An
April 1999 study by ActivMedia showed the online premium specialty goods market
is flourishing, with the majority of premium specialty goods sites already
operating at a profit. The study found that the revenue generated by sites
specializing in items such as gourmet food, personal care, and branded consumer
products is rising steadily. Sales in 1999 are expected to increase tenfold over
1998, while sales in 2000 are expected to be four times greater than in 1999.
The unique characteristics of the Internet provide a number of
advantages for online retailers. Online retailers are able to "display" a larger
number of products than traditional store-based or catalog retailers at a lower
cost. In addition, online retailers are able to frequently adjust their featured
selections, editorial content, shopping interfaces, and pricing, providing
significant merchandising flexibility. The minimal cost to publish on the
Internet, the ability to reach and serve a large and global group of customers
electronically from a central location, and the potential for personalized
low-cost customer interaction provide additional economic benefits for online
retailers. Unlike traditional retail channels, online retailers do not have the
burdensome costs of managing and maintaining a retail store infrastructure or
the significant printing and mailing costs of catalogs. Online retailers can
also easily obtain demographic and behavioral data about customers, increasing
opportunities for direct marketing and personalized services.
OUR BUSINESS STRATEGY
Our primary objective is to become a leading seller of pet products and
supplies to both consumers and pet professionals through our web sites and
mail-order catalogs. To achieve this goal, we intend to provide our customers
with an efficient, low cost, and value-added shopping experience. Key elements
of our business strategy include:
Authoritative Content. We believe that PetQuarters' ultimate success
depends upon our ability to enrich our customer's shopping experience by giving
them access to authoritative information on a variety of pet issues. Through
strategic relationships with leading pet professional organizations and other
authoritative sources of pet-related information, we intend to offer visitors to
our web site the most authoritative and useful advice available.
Strategic Acquisitions. An integral part of our business development
has been the acquisition of businesses that can add value to our existing
organization or satisfy another element of our business strategy. Below is a
list of acquisitions we have completed to date and a brief description of its
addition to the Company or our business plan.
22
<PAGE> 28
o Humboldt Industries - provided the Company with an in-house
fulfillment center and a base of consumer and professional catalog
customers
o Chartendure - provided relationships with leading pet
professionals and professional organizations in Europe to provide
authoritative content for our website
o WeRPets - added exclusive content and networking possibilities
through strategic relationships with The Health Network and
Galaxy.com
o AllPets - contributed in-depth content and an existing community
of pet owners and enthusiasts
We continue to explore acquisition opportunities that would provide us
with additional content, customers, or new technology.
Strategic Relationships. We currently have strategic relationships with
The Health Network, Galaxy.com, and many pet professionals, including
veterinarians, throughout the United States and Europe. These relationships
provide content for our website, product and other advice, and sales referrals.
We intend to maintain and expand these relationships and to build new
relationships as opportunities arise. We continually seek to form strategic
relationships that will increase our access to online customers, build brand
recognition, and expand our online presence.
Superior Customer Service. Through our in-house fulfillment and
distribution system, we are able to accurately fill orders and quickly and
efficiently ship products. In addition, we offer customers a complete in-house
service department which can effectively respond to customer inquiries. By
having these operations in-house, we can control costs, improve product margins,
and provide higher quality customer service. We believe these attributes will
lead to greater customer satisfaction and retention.
Wholesale (Business-to-Business) Sales. We currently sell products to
pet professionals on a wholesale basis, primarily through our Dog's Outfitter(R)
catalog. We intend to expand these sales through development of a separate web
site, www.dogsoutfitter.com, where wholesale customers can purchase products,
exchange information, and access important and useful industry data. We believe
that the wholesale pet segment is largely ignored by competitive internet
retailers. By offering pet professionals convenient wholesale shopping and
authoritative information, we expect to gain consumer referrals to our
PetQuarters.com web site and secure valuable endorsements from the professional
community.
International Sales. We currently sell our products to consumers and
pet professionals internationally, primarily through our Dog's Outfitter(R)
catalog. Approximately 2.5% of our sales in fiscal 1999 occurred outside of the
United States. As our brand expands and through the relationships we have
developed with the acquisition of Chartendure Ltd., we intend to grow our
international sales to take advantage of the global marketplace afforded
internet supply companies.
OUR PROPERTY
REAL PROPERTY. The Company is headquartered in Lonoke, Arkansas. The
Lonoke facility is located at 720 East Front Street and includes a single
building of approximately 50,000 square feet of warehouse and distribution space
and 5,000 square feet of office space. This property had an appraised value of
$975,000 as of October 1997, and has an outstanding lien in the amount of
$429,989. In April 2000, we have entered into an agreement to sell the property
for $560,000, which we expect to close during the third calendar quarter of
2000. After the merger of the company's operations at the Hazelton, Pennsylvania
property, we decided the sale of the Arkansas property for cash was more
important to the
23
<PAGE> 29
Company than continuing to own the facility, given the need for working capital.
The proceeds from this sale will be used to reduce debt and for working capital
purposes.
Our Hazelton, Pennsylvania, distribution center is the primary
fulfillment center and includes a call center, order processing, a catalog
design department, and a warehouse operation which stocks more than 14,000
separate SKUs. The Hazelton facility includes an office and warehouse facility
of approximately 63,500 square feet and is located on a 10-acre site. The July
31, 1999 acquisition of Humboldt Industries did not include acquisition of the
Hazelton facility or the ten acres of property associated with it. Rather,
PetQuarters currently leases these facilities and owns an option to purchase the
building and the ten (10) acre site which expires on August 5, 2004. At this
facility, the Company employs approximately 80 persons including telemarketers,
warehouse personnel, customer service representatives, accounting, purchasing,
technology, marketing, and merchandising staff.
The properties described above are the only properties owned or leased
by the Company. The Company currently has no plans to purchase or lease
additional properties, and intends to expand the Hazelton, Pennsylvania facility
before investing in new properties. Management of the Company believes that all
properties are adequately insured against casualty and risk.
INTELLECTUAL PROPERTY
We have received Federal Trademark registration from the U.S. Patent
and Trademark Office for "PetQuarters.com" and "PQ" and have applied for various
other brand names, and associated logos. We also own or license several other
state and federal trademarks used by our strategic acquisitions, including
"AllPets.com," "Dog's Outfitter," and "Home Pet Shop." Our competitors or others
may use these marks or marks similar to ours, which could impede our ability to
build brand identity and could lead to customer confusion. In addition, there
could be potential trademark or trademark infringement claims brought by owners
of other registered trademarks or trademarks that incorporate variations of the
terms used in trademarks we own or use. Any claims or customer confusion related
to our trademarks, or our failure to obtain trademark registration, would
negatively affect our business. In addition, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
U.S., and effective copyright, trademark, and trade secret protection may not be
available in such jurisdictions. Our efforts to protect our intellectual
property rights may not prevent misappropriation of our content. Our failure or
inability to protect our proprietary rights could substantially harm our
business.
LEGAL PROCEEDINGS
PetQuarters is not currently involved in any lawsuits as a plaintiff or
defendant and has no knowledge of any pending legal action.
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<PAGE> 30
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table gives certain information regarding directors,
executive officers, promoters, and central persons of the Company as of July 1,
2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven Dempsey 44 Chairman and CEO
Niloo Howe 32 President
Mike Kelly 37 Executive Vice President
Gregg Rollins 43 Chief Financial Officer and Secretary
Dino Moshova 38 Director
Robert Brown, III 53 Director
Helene Rosenzweig 60 Manager
Judith Patterson 57 Manager
Michael Parnell 41 Founder and shareholder
</TABLE>
The information set forth below identifies the principal occupation and
activities of the directors and executive officers during the past five years:
MR. STEVEN DEMPSEY has served as the President and Chief Executive
Officer of the Company since May 1998. He was vice president of Sales and
Marketing at Paine-Webber, Inc., between February 1989 and November 1997. Mr.
Dempsey is one of three directors of the Company. Mr. Dempsey was appointed a
director in June 1998.
MS. NILOO HOWE currently serves as President of the Company and has
held that position since June 2000. Prior to joining the Company, Ms. Howe was
CEO and President of Allpets.com, Inc. from June 1999 to June 2000. From July
1996 to June 1999, Ms. Howe was an Associate and Manager with McKinsey &
Company, a management consulting firm, where she provided strategy, marketing,
and change management services to various clients. Ms. Howe was a corporate and
entertainment attorney with O'Melveny & Meyers LLP from January 1995 to May
1996.
MR. MIKE KELLY is currently an Executive Vice President and has been
employed since September 1, 1999. Mr. Kelly was a Vice President/General Manager
with Sporting Dogs Specialties (PetSmart Direct) between April 1987 and April
1998, and Vice President of Home Trends from April 1998 until August 1999.
MR. GREGG ROLLINS has been employed as the Chief Financial Officer of
the Company since April 1999. Mr. Rollins was a senior vice president with
Leiblong Associates from 1998 until April 1999 and was an account vice
president, assistant manager, and sales manager with Paine Webber between 1988
and 1998.
MR. DINO MOSHOVA is a Director of the Company and has been a director
since inception. Mr. Moshova currently serves as a consultant to the Company,
providing technology services related to the Company's website. Mr. Moshova has
operated Moonbark Web Designer since September 1997. From September 1984 until
September 1997, Mr. Moshova owned and operated Leisure Video of New York.
25
<PAGE> 31
MR. ROBERT BROWN, III is a New York-based investment banker and private
investor. Mr. Brown is a former managing director of Lehman Brothers, where he
worked from 1978 to 1994. In 1995 he joined Creditanstalt Investment Bank
("CAIB") of Austria. In 1998, Mr. Brown left CAIB and formed B-III Capital LLC
for which he serves as Chairman and President. He is a founder and Chairman of
Web of Care.com, Inc., an Internet-based home healthcare community and
e-commerce enterprise. Mr. Brown holds a B.A. in Economics from Carnegie Mellon
University and an M.P.A. from the University of Michigan. He is a trustee and
member of the investment committee of Carnegie Mellon University.
MS. HELENE ROSENZWEIG is a co-founder of Humboldt Industries with her
husband, Jack Rosenzweig, and serves as a Manager in the catalog division. Mrs.
Rosenzweig served as the Executive Vice President of Humboldt from January 1982
until July 31, 1999.
MS. JUDITH PATTERSON was the Vice President of Operations for Humboldt
Industries, Inc. from July 1986 until May 2000 and is currently a Manager in the
catalog division. From 1981 until July 1986, Ms. Patterson was Operations and
Distribution Manager for Doskocil Manufacturing Company, the leading
manufacturer of in-flight kennels in the world.
MICHAEL PARNELL, a founder of the Company, settled an action brought by
the Securities and Exchange Commission, where he paid a civil penalty in the
amount of $25,000 and is permanently enjoined from selling securities in
violation of the registration provisions of the Securities Act of 1933 and from
violating the fraud provisions of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Mr. Parnell consented to the proposed settlement without
admitting or denying the allegations of the complaint filed by the Securities
and Exchange Commission.
In connection with the acquisition of AllPets.com, we agreed to allow
the shareholders of AllPets to designate two new members to our board of
directors. These new members will not otherwise be affiliated with PetQuarters,
and the addition will increase the size of our board to five members. We expect
that the new members will be appointed within the next sixty days.
26
<PAGE> 32
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by PetQuarters for
services rendered by our Chief Executive Officer and our four other highest paid
executive officers during the last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
FISCAL COMPENSATION AWARD(S) OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY/BONUS($) ($) ($) (#)
<S> <C> <C> <C> <C> <C>
Steven B. Dempsey,
Chairman and CEO 2000 100,000
1999 100,000 0 0 0
1998 55,000 0 0 0
Niloo Howe,
President (1) 2000 100,000
1999 100,000 0
Mike Kelly,
Executive Vice President 2000 135,000 200,000
1999 135,000 0 221,875* 0
Jack Rosenzweig (2) 2000 100,000
1999 100,000 14,400 (auto) 0 0
1998 31,200 10,860 (auto)
Helene Rosenzweig,
Manager (3) 2000 100,000
1999 100,000 14,400 (auto) 0 0
1998 31,200 13,320 (auto)
Gregg Rollins,
Chief Financial Officer 2000 92,000
1999 85,000 0 84,375 225,000
</TABLE>
------------
(1) Ms. Howe joined the Company in June, 2000, after consummation of our
acquisition of Allpets.com. The compensation figures shown for all of
fiscal year 1999 and fiscal year 2000 up to June 1, 2000 represent
amounts paid by Allpets.com prior to the acquisition.
(2) Mr. Rosenzweig joined the Company in August, 1999, after consummation
of our acquisition of Humboldt Industries, which he co-founded. The
compensation figures shown for all of fiscal year 1999 and fiscal year
2000 up to August 1, 1999 represent amounts paid by Humboldt Industries
prior to the acquisition.
(3) Mrs. Rosenzweig joined the Company in August, 1999, after consummation
of our acquisition of Humboldt Industries, which she co-founded. The
compensation figures shown for all of fiscal year 1999 and fiscal year
2000 up to August 1, 1999 represent amounts paid by Humboldt Industries
prior to the acquisition.
* Shares are being held in PetQuarters lock-box, to be given to Mr. Kelly
on September 1, 2000, the end of one year of employment.
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<PAGE> 33
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE
YEAR NAME ($) FISCAL YEAR ($/SH) DATE ($)
<S> <C> <C> <C> <C> <C> <C> <C>
1999 Gregg Rollins 225,000 100% $1.125 4/1/04 $253,125
2000 Mike Kelly 200,000 $2.96875 12/23/04 $593,750
</TABLE>
EMPLOYMENT CONTRACTS
We have entered into employment agreements with most of our executive
officers as well as certain other employees, including the following persons:
Messrs. Dempsey and Rollins entered into employment agreements with the
Company on June 6, 2000, providing for base annual compensation of $100,000 and
$92,000, respectively. Pursuant to such employment agreements, each such officer
is eligible for additional year-end bonus compensation to be determined pursuant
to an incentive bonus plan. Each employment agreement is for a term of two
years, and unless terminated or not renewed by the Company or not renewed by the
employee, the term will continue thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal. Each of the employment
agreements provides that, in the event of a termination of employment by the
Company, except for specific instances of "cause" as defined in the employment
agreement, such employee shall be entitled to receive from the Company such
employee's then current salary for a period specified in the agreement. Each
employment agreement contains a covenant not to compete with the Company for a
period of one year immediately following the termination of his employment.
Ms. Howe entered into an employment agreement with the Company on May
30, 2000, providing for base annual compensation of $100,000. Ms. Howe is also
eligible to receive additional year-end bonus compensation. The agreement is for
a term of one year, and unless terminated or not renewed by the Company or not
renewed by the employee, the term will continue thereafter on a year-to-year
basis on the same terms and conditions existing at the time of renewal. The
employment agreement provides that, in the event of a termination of employment
by the Company, except for specific instances of "cause" as defined in the
employment agreement, Ms. Howe shall be entitled to receive from the Company her
then current salary for a period specified in the agreement. The employment
agreement contains a covenant not to compete with the Company for a period of
one year immediately following the termination of employment.
Jack Rosenzweig, Helene Rosenzweig, and Mike Kelly each entered into an
employment agreement with the Company, or a subsidiary thereof, effective as of
the consummation of the acquisition of Humboldt Industries, providing for a base
annual compensation of $100,000, $100,000, and $135,000, respectively. Each
agreement is for a term of two years, unless earlier terminated by the Company
or the employee. The employment agreements are substantially similar to each
other, obligating the employees to devote their full attention to the operations
of Humboldt Industries and restricting their rights to compete against
PetQuarters upon departure. Each employee is entitled to his or her salary, the
same employee benefits provided to all other of Humboldt Industries' employees,
and a monthly car allowance.
28
<PAGE> 34
PRINCIPAL STOCKHOLDERS
The Company was founded by Matthew Hoff and Michael Parnell in May of
1997. Mr. Hoff contributed $4,100 for 4,100,000 shares of the Company's $.001
par value common stock. Mr. Parnell contributed $2,000 for 2,000,000 shares of
common stock. During June and July of 1997, the Company conducted a private
offering of securities pursuant to Rule 504 of Regulation D. In the course of
this offering, the Company raised $105,000 in proceeds from the sale of
1,050,000 shares of common stock at $.10 per share. The offering was made to
twenty-one persons, including public investors not affiliated with the Company.
The Company offered its securities through its officers and directors on a
best-efforts basis. Consequently, there were no underwriting discounts or
commissions. Following these two offerings, the Company had a total of 7,150,000
shares of common stock outstanding.
In August 1997, the Company conducted a second private offering of
securities pursuant to Rule 504 of Regulation D. In this offering, common stock
was sold at $.50 per share to fifty-two persons, many of whom were current
shareholders, raising an additional $860,000, less offering costs of $31,567.
This offering was extended to persons who were affiliates with the Company or
some private investors. The Company offered its securities through its officers
and directors on a best-efforts basis. Consequently, there were no underwriting
discounts or commissions.
The Company filed appropriate documentation to allow its stock to be
traded on the Over-the-Counter-Bulletin-Board (OTCBB), and in October 1997, the
Company's stock began to trade on the OTCBB.
In November 1997, the Company issued 1,777,500 shares of its common
stock to acquire land and a building from Ammonia Hold, Inc. The stock had a
fair market value of $888,750 and Ammonia Hold has a substantial ownership
interest in PetQuarters.
In June 1999, we repurchased 2,000,000 shares of our common stock from
Matthew Hoff and retired the shares. During the fiscal year ended on June 30,
1999, we issued 180,000 shares of our common stock to employees. These shares
were issued to retain the service of top management personnel. On September 9,
1999, 95,000 additional shares of common stock were issued to Humboldt
Industries employees to retain them in management. An additional 1,146,417
shares were issued to acquire Humboldt Industries and 153,334 were issued as
part of the financing for the Humboldt Industries acquisition. A total of 60,195
shares were issued to three (3) vendors of PetQuarters in order to secure their
service during fiscal year 1999. Each of the above transactions were private
transactions which did not involve a public offering. The transactions were
exempted pursuant to Section 4(2) and other provisions of the Securities Act of
1933, as amended.
29
<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
NUMBER OF SHARES
CLASS OF BENEFICIALLY
NAME SECURITY OWNED PERCENTAGE OWNED
<S> <C> <C> <C>
Ammonia Hold, Inc. (1) Common Stock 1,647,500 9%
Matthew J. and Rose M. Hoff Common Stock 1,157,449(2) 6%
Michael Parnell Common Stock 1,072,170(3) 11%
Jack & Helene Rosenzweig Common Stock 1,089,097 6%
Steven Dempsey Common Stock 1,085,156(4) 6%
Dino Moshova Common Stock 692,328(5) 4%
Gregg Rollins Common Stock 512,078(6) 3%
Mike Kelly Common Stock 0 0%
Robert M. Brown, III Common Stock 502,392(7) 3%
Zone Ventures, L.P. Common Stock 1,111,974 6%
All officers and directors as a Common Stock 2,791,954 57%
group
</TABLE>
------------------------------
(1) The Board of Directors of Ammonia Hold, Inc., are Michael D. Parnell,
President and CEO; Dan N. Thompson, CFO; Robert S. Ligon, Charles R.
Nickle, and William H. Ketchum. Any transaction concerning PetQuarters,
including the disposition or purchase of common stock, requires board
authorization, effected by a vote of the majority of the directors.
(2) Includes 1,071,842 shares jointly owned by Mr. and Mrs. Hoff; 23,279
shares owned by Mrs. Hoff individually; 60,000 shares owned by the
Hoff's minor children for which Mr. Hoff is custodian, and 2,328
shares owned by Media Max, Inc., a corporation wholly-owned by Mr.
Hoff.
(3) Includes 502,991 shares directly owned by Mr. Parnell and 569,179
shares which may be acquired through the conversion of shares of Series
A Convertible Preferred Stock.
(4) Includes 910,156 shares directly owned by Mr. Dempsey and 175,000
shares subject to stock options.
(5) Includes 517,328 shares directly owned by Mr. Moshova and 175,000
shares subject to stock options.
(6) Includes 5,500 shares held by Mr. Rollins' minor children, 400,000
shares subject to stock options, and 18,095 shares which may be
acquired through conversion of shares of Series A Convertible Preferred
Stock.
(7) Includes 430,013 shares subject to stock options and 72,379 shares
which may be acquired through the conversion of shares of Series A
Convertible Preferred Stock.
At this time, the company is not involved in or aware of any
arrangements that will result in a change of control of the Company.
30
<PAGE> 36
RELATED PARTY TRANSACTIONS
BRIDGE LOAN
The following persons, who are directors or officers of the Company or
hold 5% or more of the Company's common stock, were beneficiaries of the Trust,
which loaned the Company $4,600,000 (the "Bridge Loan") to purchase Humboldt
Industries. The dollar value of the beneficial interest of each person in the
Bridge Loan and his or her relationship to the Company is set forth opposite his
or her name.
<TABLE>
<S> <C> <C>
Dino Moshova $23,000 Director
Gregg Rollins $90,000 Chief Financial Officer
Steven Dempsey $50,000 President and Chief Executive Officer
Michael Parnell $750,000 Founder
Jemima S. Parnell $110,000 Mother of Michael Parnell
</TABLE>
In connection with the extension of the Bridge Loan on November 10,
1999, we borrowed a total of $204,723 from Michael Parnell and the Matthew J.
Hoff Trust, which was evidenced by two notes payable. On January 27, 2000, the
notes payable were converted into 409,446 shares of common stock.
STOCK GRANTS
On September 9, 1999, we made grants of common stock totaling 95,000
shares to three Humboldt employees. The grants were made to retain the services
of these persons and included 5,000 shares to Judith Patterson, 40,000 shares to
Melanie Rosenzweig, and 50,000 shares to Mike Kelly. Melanie Rosenzweig is the
daughter of Jack and Helene Rosenzweig. The stock will vest on September 9,
2000, if each person remains employed with or continues to provide services to
PetQuarters through such date.
OTHER TRANSACTIONS
Ammonia Hold, Inc. has made several advances to PetQuarters in various
amounts totaling $140,000 as of June 1, 2000, which are each represented by a
promissory note from PetQuarters. Each promissory note bears interest at a rate
of 8%.
On December 17, 1999, Michael Parnell loaned PetQuarters $204,989.49
pursuant to a promissory note. The proceeds of the loan were used to reduce
short-term bank indebtedness. The promissory note bears interest at a rate of
10% per annum and is due on demand. The promissory note is secured by our land
and building located in Lonoke, Arkansas.
We borrowed $225,000 from the Matthew J. Hoff Trust on March 3, 2000,
pursuant to a promissory note that bears interest at a rate of 10% per annum.
The proceeds of this loan were used as the cash portion of the purchase price of
Wellstone Acquisition Corporation. The promissory note is due upon demand and is
secured by our land and building located in Lonoke, Arkansas.
Robert Brown's wholly-owned company, B-III Capital LLC ("B-III
Capital") has a contract with the Company to advise and assist the Company in
raising capital and acquisition advisory services. The contract provides that
B-III Capital will receive a monthly retainer of $5,000, reimbursement for usual
business expenses and success fees in connection with financing and acquisition
transactions. Mr. Brown has received $131,650 in payments from the Company under
the terms of his contract in fiscal 2000. Mr. Brown is currently owed $272,639
for services rendered on behalf of the Company under the terms of the B-III
Capital contract. Mr. Brown did not receive compensation from the Company in
fiscal 1999. In
31
<PAGE> 37
connection with the execution of the contract with B-III Capital, Mr. Brown
individually received an option to purchase 573,350 shares of our common stock,
at an exercise price of $1.00 per share. To date, 430,013 shares under the
option have vested. The remaining shares vest on a monthly basis of
approximately 23,889 shares each month.
Dino Moshova, a director of the Company, was paid $69,670 to date as a
consultant for his web-site development services. Mr. Moshova was paid $52,000
during fiscal 1999 for web-site development services. The Company currently owes
Mr. Moshova $20,000 on its 8% unsecured note issued on September 15, 1999 and
due on demand. The note was issued to Mr. Moshova for his loan of working
capital to the Company.
DESCRIPTION OF CAPITAL STOCK
PetQuarters is authorized to issue forty million (40,000,000) shares of
common stock par value $0.001 per share and ten million (10,000,000) shares of
preferred stock par value $0.001 per share. The voting powers, designations, and
preferences of the preferred stock may be fixed by the board of directors.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote for
each share on all matters submitted to the stockholders. The Common Stock is not
subject to redemption or to liability for further calls. Holders of Common Stock
will be entitled to receive such dividends as may be declared by the Board of
Directors of PetQuarters out of funds legally available therefore and to share
pro rata in any distribution to stockholders. The stockholders have no
conversion, preemptive, or other subscription rights. Shares of authorized and
unissued Common Stock are issuable by the Board of Directors without any further
stockholder approval.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to issue, from time to time, shares of Preferred Stock in one or
more classes or series and to fix the designations, voting rights, liquidation
preferences, dividend rights, conversion rights, rights and terms of redemption
(including sinking fund provisions), and certain other rights and preferences of
the Preferred Stock. The issuance of shares of Preferred Stock under certain
circumstances could adversely affect the voting power of the holders of Common
Stock and may have the effect of delaying, deferring, or preventing a change in
control of the Company.
On May 9, 2000, PetQuarters designated 50,000 shares of preferred stock
as Series A Convertible Preferred Stock, with the following terms, rights, and
privileges:
(a) Dividends. The holders of the Shares are not entitled to receive
dividends from the Company.
(b) Liquidation. Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, the holders of the Series A stock
shall be entitled, before any distribution or payment is made upon any shares of
any other class of stock of the Company, to be paid $100 per share.
(c) Redemption. Subject to certain conditions and one year after the
initial date of issuance, the Series A stock may be redeemed (all or none) by
the Company upon the payment in cash of the sum of One Hundred Dollars ($100).
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<PAGE> 38
(d) Conversion. At any time, holders of the Series A stock may convert
all or a portion of those shares into a number of shares of common stock,
computed by multiplying the number of shares to be converted by $100 (the
purchase price of the Series A stock) and dividing the result by the conversion
price. The conversion price is equal to $1.3816. The conversion price may be
adjusted from time to time to account for any stock splits, stock dividends,
recapitalizations, mergers, assets sales, or similar events.
TRANSFER AGENT
The Company has appointed Atlas Stock Transfer Corporation as the
transfer agent and registrar of the Common Stock.
SELLING STOCKHOLDERS
This prospectus relates to the registration of 13,987,447 shares of
common stock of PetQuarters. Of the total shares being registered, 9,451,384
shares are registered for resale by certain selling stockholders. The following
table contains certain information about the selling stockholders and the shares
of common stock that they are offering pursuant to this prospectus. Such
information has been provided to us by the selling stockholders.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NUMBER OF SHARES PERCENT NUMBER OF SHARES BENEFICIALLY PERCENT
BENEFICIALLY OWNED OF OFFERED OWNED AFTER THE OF
SELLING STOCKHOLDER PRIOR TO OFFERING CLASS HEREBY OFFERING CLASS
<S> <C> <C> <C> <C> <C>
AMRO International,
S.A. 1,342,845(1) 7% 1,961,893(2) 0 *
Markham Holdings,
Limited 95,238(3) * 190,476(4) 0 *
Splendid Rock
Holdings, Ltd. 0 * 5,000,000(5) 0 *
Michael Parnell (6) 1,072,170(7) 11% 23,810 2,070,202 11%
Robert Ligon 75,000 * 12,500 63,500 *
Clyde Jester 227,935 1% 100,000 127,935 *
Terry Marbach 183,983 1% 23,810 160,173 *
Namaste Foundation 47,619 * 23,810 23,810 *
Brian Winstead, IRA 25,207 * 11,905 13,302 *
Dennis Wagner 24,000 * 12,000 12,000 *
Bob L. Rollins 19,200 * 6,000 6,000 *
Solvieg and Brent Berry
Family Trust 37,967 * 12,000 25,967 *
Rex Walker, IRA 12,000 * 6,000 6,000 *
Bob & Imogene Cornelius 20,400 * 6,000 14,400 *
Mike Wallace 25,000 * 12,500 12,500 *
Scott Bull 47,620 * 23,810 23,810 *
Tim Young 17,619 * 6,310 11,309 *
Matthew J. and Rose M. Hoff 1,157,449(8) 6% 23,810 998,032
Howard Higgins 50,000 * 15,000 35,000 *
Michael Loveless 12,000 * 6,000 6,000 *
David Luski 50,000 * 25,000 25,000 *
TPG Capital Corporation 130,208 * 130,208 0 *
Petersen Securities 100,000 * 100,000 0 *
Zone Ventures, L.P. 1,111,974 6% 1,111,974 0 *
</TABLE>
33
<PAGE> 39
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES PERCENT NUMBER OF SHARES BENEFICIALLY PERCENT
BENEFICIALLY OWNED PRIOR OF OFFERED OWNED AFTER THE OF
SELLING STOCKHOLDER TO OFFERING CLASS HEREBY OFFERING CLASS
------------------- ------------------------ ------- ---------------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Avalon Technology LLC 225,019 1% 225,019 0 *
The Timothy Draper
Living Trust 91,128 * 91,128 0 *
Eric Ayzenberg 453,098 2% 150,000 0 *
Third Wave Ventures 50,000 * 50,000 0 *
Watsatch Venture II 90,421 * 90,421 0 *
</TABLE>
--------------------
* Less than 1%.
(1) Includes 723,798 shares which may be issued upon conversion of a 6%
Convertible Debenture.
(2) Includes 619,048 shares which may be issued pursuant to a repricing
arrangement included in the terms of the original sale of stock to
AMRO. AMRO also holds a warrant to purchase up to 130,000 shares of
common stock at a price per share of $4.65. The shares to be issued to
AMRO upon exercise of the warrant are also registered under this
prospectus.
(3) Markham also holds a warrant to purchase up to 20,000 shares of common
stock at a price per share of $4.65. The shares to be issued to Markham
upon exercise of the warrant are also registered under this prospectus.
(4) Includes 95,238 shares which may be issued pursuant to a repricing
arrangement included in the terms of the original sale of stock to
Markham.
(5) These shares are issuable pursuant to the equity line of credit
agreement. Splendid Rock Holdings, Ltd. has received a warrant to
purchase 1,000,000 shares of common stock at $4.03 per share. The
shares to be issued upon exercise of the warrant are also registered
under this prospectus.
(6) Michael Parnell is a former director and co-founder of Pet Quarters,
Inc.
(7) Includes 502,991 shares directly owned by Mr. Parnell and 569,179
shares which may be acquired through the conversion of shares of Series
A Convertible Preferred Stock.
(8) Includes 1,071,842 shares jointly owned by Mr. and Mrs. Hoff; 23,279
shares owned by Mrs. Hoff individually; 60,000 shares owned by the
Hoff's minor children, for which Mr. Hoff is custodian, and 2,328
shares owned by Media Max, Inc., a corporation wholly-owned by Mr.
Hoff.
PLAN OF DISTRIBUTION
We are registering (i) the issuance of shares of common stock to AMRO
International, S.A., Markham Holdings, Limited, and Ladenburg Thalmann & Co.,
Inc., who will each receive shares of common stock upon the exercise of warrants
and (ii) the issuance of common stock to holders of Series A Convertible
Preferred Stock, who will receive shares of common stock upon conversion of the
Series A stock. In the case of shares issued pursuant to warrants, the shares of
common stock will be sold at prices set forth in the warrant agreement. No
consideration will be paid for shares issued upon conversion of Series A
Convertible Preferred Stock.
In addition, we are registering the resale of shares of common stock by
(i) the Selling Stockholders described in this prospectus, (ii) AMRO
International, S.A., which may receive shares of common stock pursuant to the 6%
Convertible Debenture, and (iii) Splendid Rock Holdings, Inc., which will
receive shares of common stock pursuant to the equity line of credit agreement.
Splendid Rock Holdings is an "underwriter" within the meaning of the Securities
Act in connection with the sale of the common stock offered by it under this
prospectus. Other Selling Stockholders and any broker-dealers who act in
connection with the resale of common stock offered by this prospectus may also
be considered underwriters.
Shares of common stock offered through this prospectus may be sold from
time to time by Splendid Rock Holdings, the other selling stockholders or by
pledgees, donees, transferees or other successors in interest. Such sales may be
made on the OTCBB, on the over-the-counter market or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in
34
<PAGE> 40
negotiated private transactions, or in a combination of these methods. The
selling stockholders will act independently of us in making decisions with
respect to the form, timing, manner and size of each sale.
We are not aware of any existing arrangement between any selling
stockholder, any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of shares of common stock which may be sold
by selling stockholders through this prospectus. The common shares may be sold
in one or more of the following manners:
o a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account under this prospectus;
or
o ordinary brokerage transactions and transactions in which the broker
solicits purchases.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the common
shares by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating in
such transactions as agent may receive commissions from the selling stockholders
(and, if they act as agent for the purchaser of such common shares, from such
purchaser).
Broker-dealers may agree with the selling stockholders to sell a
specified number of common shares at a stipulated price per share, and, to the
extent such a broker dealer is unable to do so acting as agent for the selling
stockholders, to purchase as principal any unsold common shares at price
required to fulfill the broker-dealer commitment to the selling stockholders.
Broker-dealers who acquire common shares as principal may thereafter resell such
common shares from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common
shares commissions computed as described above. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be underwriters in
connection with such sales.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part.
The selling stockholders will pay all commissions and certain other
expenses associated with the sale of the common shares.
35
<PAGE> 41
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for PetQuarters by Wright, Lindsey & Jennings LLP, Little Rock,
Arkansas. As of the date hereof, partners of that firm beneficially owned
approximately 22,069 shares of the Company's common stock.
EXPERTS
The financial statements of Pet Quarters, Inc. at June 30, 1999, and
for the year then ended, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young, LLP, independent auditors, and at June 30,
1998, and for each of the two years in the period ended June 30, 1998, by
Crouch, Bierwolf & Chisholm, independent auditors, as set forth in their
respective reports thereon, which contain an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern as described in Note 2 to the financial statements, appearing
elsewhere herein, and are included in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
The combined financial statements of Humboldt Industries, Inc. and
Affiliate (Humboldt Industries) at July 31, 1999, and for the seven months then
ended, appearing in this Prospectus, and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, and at December 31, 1998,
and for the year then ended, by Kronick, Kalada, Berdy & Co., independent
auditors, as set forth in their respective reports therein, which contain an
explanatory paragraph describing conditions that raise substantial doubt about
Humboldt Industries' ability to continue as a going concern as described in Note
2 to the combined financial statements, appearing elsewhere herein, and are
included in reliance upon such reports given on the authority of such firms as
experts in accounting and auditing.
The financial statements of Humboldt Industries, Inc. at December 31,
1997, and for the year then ended, appearing in this Prospectus and Registration
Statement have been audited by Kronick, Kalada, Berdy & Co., independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of WeRPets.com, Inc. at March 31, 2000, and
for the period from July 2, 1999 (inception) through March 31, 2000, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements of AllPets.com, Inc. at December 31, 1999, and
for the period from January 4, 1999 (inception) to December 31, 1999, appearing
in this Prospectus and Registration Statement have been audited by Clumeck,
Stern, Phillips & Schenkelberg, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement (of which this prospectus is a part) under the Securities
Act of 1933, as amended, relating to the common stock we are offering. This
prospectus does not contain all the information that is in the Registration
Statement. Portions of the Registration Statement have been omitted as allowed
by the rules and regulations of the
36
<PAGE> 42
Securities and Exchange Commission. Statements in this prospectus that summarize
documents are not necessarily complete, and in each case you should refer to the
copy of the document filed as an exhibit to the Registration Statement.
For further information regarding our company and our common stock,
please see the Registration Statement and its exhibits and schedules. You may
examine the Registration Statement free of charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of the
Registration Statement may also be obtained from the public reference facilities
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or by
calling the Commission at 1-800-SEC-0330, at prescribed rates. In addition, the
Registration Statement and other public filings can be obtained from the
Commission's Web site at http://www.sec.gov.
37
<PAGE> 43
FINANCIAL INFORMATION
PET QUARTERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
(1) Pro Forma Consolidated Statements of Operations for the nine months
ended March 31, 2000 and Year Ended June 30, 1999
(unaudited) F-1
(2) Consolidated Financial Statements - Pet Quarters, Inc. and
Subsidiaries F-5
Reports of Independent Auditors
Consolidated Balance Sheets - March 31, 2000 (unaudited),
June 30, 1999 and June 30, 1998
Consolidated Statement of Operations for the nine months ended March
31, 2000 and 1999 (unaudited), Years Ended June 30, 1999 and 1998
and period May 22, 1997 (inception) to
June 30, 1997
Consolidated Statements of Stockholders' Equity for the nine months
ended March 31, 2000 (unaudited), Years Ended June 30, 1999 and
1998 and period May 22, 1997 (inception) to June 30, 1997
Consolidated Statements of Cash Flows for the nine months ended March
31, 2000 and 1999 (unaudited), Years Ended June 30, 1999 and 1998
and period May 22, 1997 (inception) to
June 30, 1997
Notes to Consolidated Financial Statements
(3) Combined Financial Statements - Humboldt Industries, Inc. and Affiliate F-27
Reports of Independent Auditors
Combined Balance Sheets - July 31, 1999 and December 31, 1998
Combined Statements of Operations for the period January 1, 1999
to July 31, 1999 and for the Year Ended December 31, 1998
Combined Statements of Stockholders' Equity for the period
January 1, 1999 to July 31, 1999 and for the Year Ended
December 31, 1998
Combined Statements of Cash Flows for the period January 1, 1999 to
July 31, 1999 and for the Year Ended December 31, 1998
Notes to Combined Financial Statements
(4) Financial Statements - Humboldt Industries, Inc. F-41
Report of Independent Auditors
Balance Sheet - December 31, 1997
Statement of Operations and Deficit - Year Ended December 31, 1997
Statement of Cash Flows - Year Ended December 31, 1997
Notes to Financial Statements
(5) Financial Statements - WeRPets.com, Inc. F-48
Report of Independent Auditors
Statement of Financial Position - March 31, 2000
Statement of Operations - Period from July 2, 1999 through March 31,
2000 Statement of Stockholder Equity (Deficit) - Period from July 2,
1999 through March
31, 2000
Statement of Cash Flows - Period from July 2, 1999 through March 31,
2000 Notes to Financial Statements
(6) Financial Statements - Allpets.com, Inc. F-60
Report of Independent Auditors
Balance Sheet - December 31, 1999 Statement of Operations - Period
from January 4, 1999
(inception) through December 31, 1999
Statement of Stockholders' Equity - Period from January 4, 1999
(inception) through December 31, 1999
Statement of Cash Flows - Period from January 4, 1999 (inception)
through December 31, 1999
Notes to Financial Statements
</TABLE>
<PAGE> 44
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Unaudited)
The pro forma consolidated statement of operations and for the Company
presented below are based on historical data for the nine months ended March 31,
2000. The pro forma consolidated statement of operations for the nine months
ended March 31, 2000 assume that the acquisitions of Humboldt Industries,
WeRPets.com, Chartendure Limited, and Allpets.com was consummated on July 1,
1999. The pro forma consolidated statement of operations does not necessarily
indicate the operating results or financial position which would have resulted
from the operation of the Company on a consolidated basis during the periods
presented, nor does this pro forma data necessarily represent any future
operating results or financial position of the Company. In addition, you should
also refer to the more complete historical results included elsewhere in this
document.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000
-----------------------------------------------------------------------------------------
HUMBOLDT PRO FORMA
PET INDUSTRIES PRO FORMA CONSOLIDATED
QUARTERS JULY 1999 WERPETS.COM ALLPETS.COM ADJUSTMENTS TOTAL
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 9,873,570 $ 1,220,049 $ -- $ 37,902 $ -- $ 11,131,521
Cost of sales 6,744,788 812,716 -- 34,606 -- 7,592,110
------------ ------------ ------------- ------------- ------------ ------------
Gross profit 3,128,782 407,333 -- 3,296 -- 3,539,411
Selling expenses 1,483,788 129,534 -- 419,583 -- 2,032,905
General and administrative expenses 5,459,502 205,662 100,198 805,817 310,250(1) 6,881,429
Depreciation and amortization 1,253,336 12,651 -- 79,023 2,988,243(2) 4,333,253
------------ ------------ ------------- ------------- ------------ ------------
8,196,626 347,847 100,198 1,304,423 3,298,493 13,247,587
------------ ------------ ------------- ------------- ------------ ------------
Operating income (loss) (5,067,844) 59,486 (100,198) (1,301,127) (3,298,493) (9,708,176)
Other income (expense) (2,386,836) (2,379) -- 29,616 38,333(3) (2,321,266)
------------ ------------ ------------- ------------- ------------ ------------
Loss before income taxes (7,454,680) 57,107 (100,198) (1,271,511) (3,260,160) (12,029,442)
Income tax -- -- -- -- -- --
------------ ------------ ------------- ------------- ------------ ------------
Net income (loss) $ (7,454,680) 57,107 $ (100,198) $ (1,271,511) $ (3,260,160) $(12,029,442)
============ ============ ============= ============= ============ ============
Net loss per share $ (0.65)
============
Pro forma loss per share $ (0.73)
============
Weighted average shares outstanding 11,519,146
============
Pro forma weighted average shares
outstanding 16,383,920
============
</TABLE>
--------------------
(1) The pro forma consolidated statement of operations for the nine months
ended March 31, 2000 reflect additional compensation and costs associated
with being a public company of $23,000, additional salary expense
associated with WeRPets.com employees in the amount of $123,750 and
internet portal contract costs of $82,500, and additional compensation and
expenses associated with Chartendure Limited in the amount of $81,000.
F-1
<PAGE> 45
(2) Consists of additional goodwill for the month of July 1999 to be recorded
as a result of the acquisition of Humboldt Industries, Inc., in the amount
of $138,555, nine months goodwill and intangible amortization in the amount
of $625,000 associated with the acquisition of WeRPets.com and $1,952,813
associated with the acquisition of Allpets.com, and $271,875 associated
with the acquisition of Chartendure Limited.
(3) Consists of additional interest expense for the month of July 1999 in the
amount of $38,333 associated with the bridge loan financing.
(4) The purchase price of Humboldt has been allocated to the assets acquired and
liabilities assumed. The purchase price in excess of the fair value of net
assets acquired has been recorded as goodwill. Goodwill is being amortized
over 5 years.
<TABLE>
<S> <C>
Purchase Price:
Cash $ 4,600,000
Common Stock Issued 4,600,000
-----------
9,200,000
Broker Fees Incurred 180,000
-----------
Total Acquisition Cost 9,380,000
===========
Allocation of Purchase Cost:
Assets Acquired $ 3,164,897
Liabilities Assumed (2,098,173)
Goodwill 8,313,276
-----------
Total Allocation $ 9,380,000
===========
</TABLE>
The common stock issued totaled 1,146,417 shares at an average market price
of $4.01, based on the average closing price for the five days prior to
August 1, 1999. See Note 8 to Pet Quarters financial statements for the year
ended June 30, 1999.
(5) The purchase price of WeRPets.com has been allocated to the assets acquired
and liabilities assumed based on estimated fair values. The purchase price
in excess of the fair value of net assets acquired has been recorded as
goodwill. Goodwill is being amortized over three years.
<TABLE>
<S> <C>
Purchase Price:
Cash $ 38,394
Common Stock Issued 2,461,606
-----------
Total Acquisition Cost 2,500,000
===========
Allocation of Purchase Cost:
Goodwill $ 2,500,000
----------
Total Allocation $ 2,500,000
===========
</TABLE>
The common stock issued totaled 703,316 shares at an average market price of
$3.50 per share.
(6) The purchase price of Allpets.com has been allocated to the assets acquired
and liabilities assumed based on estimated fair values. The purchase price
in excess of the fair value of net assets acquired has been recorded as
goodwill. Goodwill is being amortized over three years.
<TABLE>
<S> <C>
Purchase Price:
Common Stock and Vested Options $8,668,253
==========
Allocation of Purchase Cost:
Estimated Fair Value of Assets Acquired $ 889,000
Estimated Value of Liabilities Assumed (32,000)
Goodwill 7,811,253
-----------
Total Allocation $ 8,668,253
===========
</TABLE>
The common stock issued totaled 3,652,785 shares. These shares were all
accounted for at the closing price of $1.875 on May 30, 2000, the date of
acquisition. Options to be granted in exchange for vested
F-2
<PAGE> 46
outstanding Allpets.com options totaled 1,022,068 options. The vested
options were accounted for based on their fair value at the date of
acquisition as a component of the purchase price.
(7) The Purchase price of Chartendure Limited has been allocated to the assets
acquired and liabilities assumed based on estimated fair values. The
purchase price in excess of the fair value of net assets acquired has been
recorded as goodwill. Goodwill is being amortized over two years.
<TABLE>
<S> <C>
Purchase Price:
Common Stock Issued $ 725,000
=========
Allocation of Purchase Cost:
Goodwill $ 725,000
---------
Total Allocation $ 725,000
=========
</TABLE>
The common stock issued totaled 400,000 shares at the closing market price
of $1.8125 on May 1, 2000.
(8) The acquisition of WeRPets.com occurred on April 6, 2000, the acquisition of
Chartendure Limited occurred on May 1, 2000, and the acquisition of
Allpets.com occurred on May 30, 2000. The pro forma balance sheet as if
these transactions had been completed at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
PET QUARTERS, PRO FORMA
INC. PRO FORMA CONSOLIDATED
CONSOLIDATED WERPETS.COM ALLPETS.COM ADJUSTMENTS TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $3,020,094 $ - $453,243 $ (38,394) $3,434,843
Long term assets 474,056 - 44,569 __ 518,625
Goodwill and
intangibles 7,358,248 - 392,001 11,036,253 18,786,502
--------------------------------------------------------------------------------
Total assets $10,852,398 - $889,813 $10,997,859 $22,740,070
================================================================================
Current $ 1,976,929 $ 49,282 $ 32,243 $ - $2,058,454
Debt 4,926,079 - __ - 4,926,079
Stockholder equity 3,949,390 (49,282) 857,570 10,997,859 15,755,537
--------------------------------------------------------------------------------
Total liabilities
and stockholders
equity $10,852,398 - $889,813 $10,997,859 $22,740,070
================================================================================
</TABLE>
The most significant asset resulting from the purchase of WeRpets.com,
Chartendure and Allpets.com is goodwill. The total of goodwill consists of
the following:
<TABLE>
<S> <C>
WeRPets $ 2,500,000
Allpets.com 7,811,253
Chartendure 725,000
-----------
$11,036,253
===========
</TABLE>
F-3
<PAGE> 47
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
(Unaudited)
The pro forma consolidated statement of operations for the Company presented
below are based on historical data for the year ended June 30, 1999. The pro
forma consolidated statement of operations for the year ended June 30, 1999
assume that the acquisitions of Humboldt, Maplewood, WeRPets.com, Chartendure
and Allpets.com, Inc. was consummated on July 1, 1998. The pro forma
consolidated statement of operations do not necessarily indicate the operating
results or financial position which would have resulted from the operation of
the Company on a consolidated basis during the periods presented, nor does this
pro forma data necessarily represent any future operating results or financial
position of the Company. In addition, you should also refer to the more complete
historical results included elsewhere in this document.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
HUMBOLDT- PRO FORMA
PET MAPLEWOOD ALLPETS.COM, PRO FORMA CONSOLIDATED
QUARTERS INDUSTRIES INC. ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C>
Sales $ 262,470 $ 14,881,529 $ 1,208 $ -- $ 15,145,207
Cost of sales 205,774 10,349,343 996 $ -- 10,556,113
---------------------------------------------------------------------------
Gross profit 56,696 4,532,186 212 -- 4,589,094
Selling expenses 489,272 1,785,500 -- -- 2,274,772
General and administrative 588,870 2,410,722 151,718 752,000(1) 3,903,310
expenses
Depreciation 36,824 47,271 5,462,239(2) 5,543,334
and amortization
---------------------------------------------------------------------------
1,114,966 4,243,493 151,718 6,214,239 11,724,416
---------------------------------------------------------------------------
Operating income (loss) (1,058,270) 288,693 (151,506) (6,214,239) (7,135,322)
Other income (expense) 6,005 86,419 3,095 460,000(3) 555,519
---------------------------------------------------------------------------
Loss before income taxes (1,052,265) 375,112 (148,411) (5,754,239) (6,579,803)
Income tax -- -- -- -- --
---------------------------------------------------------------------------
Net income (loss) $ (1,052,265) $ 375,112 $(148,411) $(5,754,239) $ (6,579,803)
===========================================================================
Net loss per share $ (0.09)
============
Pro forma loss per share $ (0.38)
============
Weighted average shares
outstanding 11,453,000
============
Pro forma weighted average
shares outstanding 17,513,568
============
</TABLE>
------------
(1) The pro forma consolidated statement of operations for the year ended June
30, 1999 reflect an increase in compensation and costs associated with
being a public company of $276,000, additional salary expense associated
with WeRPets.com employees in the amount of $165,000, internet portal
contract costs of $110,000 and administrative expenses of $93,000 and
additional compensation and expenses associated with Chartendure Limited in
the amount of $108,000.
(2) Includes amortization of goodwill to be recorded as a result of the
acquisition of Humboldt Industries, Inc., in the amount of $1,662,655,
WeRPets.com in the amount of $833,333, Chartendure in the amount of
$362,500, and Allpets.com in the amount of $2,603,751.
(3) Interest expense reflects approximately $460,000 in additional interest
expense associated with the bridge loan financing at a rate of 10%.
F-4
<PAGE> 48
CONSOLIDATED FINANCIAL STATEMENTS
PET QUARTERS, INC. AND SUBSIDIARIES
Years ended June 30, 1999, 1998 and
Period from May 22, 1997
(inception) to June 30, 1997
with Report of Independent
Auditors and Nine Months ended
March 31, 2000 and 1999
(Unaudited)
F-5
<PAGE> 49
Pet Quarters, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended June 30, 1999, 1998 and Period
from May 22, 1997 (inception) to June 30, 1997 and
Nine Months ended
March 31, 2000 and 1999 (Unaudited)
<TABLE>
CONTENTS
<S> <C>
Report of Independent Auditors - Ernst & Young LLP........................F-7
Report of Independent Auditors - Crouch, Bierwolf & Chisholm..............F-8
Consolidated Financial Statements
Consolidated Balance Sheets...............................................F-9
Consolidated Statements of Operations....................................F-11
Consolidated Statements of Stockholders' Equity..........................F-12
Consolidated Statements of Cash Flows....................................F-14
Notes to Consolidated Financial Statements...............................F-15
</TABLE>
F-6
<PAGE> 50
Report of Independent Auditors
The Stockholders and Board of Directors
Pet Quarters, Inc.
Lonoke, Arkansas
We have audited the accompanying consolidated balance sheet of Pet Quarters,
Inc. and subsidiary, as of June 30, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pet
Quarters, Inc. and subsidiary as of June 30, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2, the Company has operating losses and is dependent upon future financing
to continue operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Little Rock, Arkansas
October 1, 1999, except for Note 8 as to
which the date is November 10, 1999
F-7
<PAGE> 51
Independent Auditors' Report
To the Stockholders and Board of Directors
Pet Quarters, Inc.
We have audited the accompanying balance sheet of Pet Quarters, Inc. as of June
30, 1998 and the related statement of operations, stockholders' equity and cash
flows for the year ended June 30, 1998 and the two months ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pet Quarters, Inc. as of June
30, 1998 and the results of their operations and cash flows for the year ended
June 30, 1998 and the two months ended June 30, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
operating loss raise substantial doubt about it ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Crouch, Bierwolf & Chisholm
October 25, 1998
Salt Lake City, Utah
F-8
<PAGE> 52
Pet Quarters, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------- MARCH 31
1997 1998 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 111,100 $ 375,843 $ 37,726 $ 113,049
Accounts receivable -- 3,011 2,654 349,944
Inventories -- 73,229 33,783 1,564,437
Deferred advertising costs -- -- -- 486,000
500,000
Land and building held for
sale (Note 12)
Prepaid expenses and other -- 9,428 2,250 6,665
current assets
------------ ------------ ------------ ------------
Total current assets 111,100 461,511 76,413 3,020,095
Property, plant and equipment:
Land -- 225,000 225,000 --
Buildings and improvements -- 708,045 708,600 35,805
Furniture and equipment -- 53,043 35,072 469,867
------------ ------------ ------------ ------------
-- 986,088 968,672 505,672
Less accumulated depreciation -- (6,211) (33,185) (31,616)
------------ ------------ ------------ ------------
-- 979,877 935,487 474,056
Goodwill, net of accumulated
amortization
of $1,113,179 at March 31,
2000 (Note 8) -- -- -- 7,200,097
Intangible assets, net of
accumulated amortization -- 47,671 30,385 158,150
------------ ------------ ------------ ------------
Total assets $ 111,100 $ 1,489,059 $ 1,042,285 $ 10,852,398
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-9
<PAGE> 53
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------- MARCH 31
1997 1998 1999 2000
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 13,679 $ 203,394 $ 1,590,248
Accrued expenses -- 1,141 12,613 386,681
Short-term notes payable (Note 9) -- -- -- 90,000
Bridge loan payable (Note 8) -- -- -- 3,830,001
Current portion of capital
leases payable (Note 7) -- -- -- 77,600
Notes payable to related parties (Note 3) -- -- 325,000 690,178
Unearned revenue -- 5,885 -- --
------------ ------------ ------------ ------------
Total current liabilities -- 20,705 541,007 6,664,708
Long-term portion of capital
leases payable (Note 7) -- -- -- 238,300
------------ ------------ ------------ ------------
Total liabilities -- 20,705 -- 6,903,008
Commitments (Note 10) -- -- -- --
Stockholders' equity:
Common stock, $.001 par value per share,
40,000,000 shares authorized; 7,150,000,
11,560,000, 9,800,195, and 13,369,613 shares
issued and outstanding at June 30, 1997, 1998
and 1999 and March 31, 2000, respectively 7,150 11,560 9,800 13,370
Additional paid-in capital 103,950 2,272,973 2,498,867 13,459,064
Accumulated deficit -- (816,179) (1,868,444) (9,323,124)
------------ ------------ ------------ ------------
111,100 1,468,354 640,223 4,149,310
Less unamortized stock compensation
(Note 6) -- -- (138,945) (199,920)
------------ ------------ ------------ ------------
Total stockholders' equity 111,100 1,468,354 501,278 3,949,390
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 111,100 $ 1,489,059 $ 1,042,285 $ 10,852,398
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE> 54
Pet Quarters, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
MAY 22, 1997
(INCEPTION) TO NINE MONTHS ENDED
JUNE 30 YEAR ENDED JUNE 30 MARCH 31
------------ ---------------------------- ----------------------------
1997 1998 1999 1999 2000
------------ ---------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales, net of allowances and discounts $ $ 43,835 $ 262,470 $ 204,059 $ 9,873,570
Cost of sales (exclusive of depreciation
shown separately below) -- 21,908 205,774 132,230 6,744,788
------------ ------------ ------------ ------------ ------------
-- 21,927 56,696 71,829 3,128,782
Operating expenses and costs:
Selling -- 196,497 489,272 300,422 1,483,788
Administrative and general -- 647,114 588,870 271,879 5,459,502
Depreciation and amortization -- 11,508 36,824 28,746 1,253,336
------------ ------------ ------------ ------------ ------------
-- 855,119 1,114,966 601,047 8,196,626
------------ ------------ ------------ ------------ ------------
Loss from operations -- (833,192) (1,058,270) (529,218) (5,067,844)
Other income (expense):
Interest expense -- (4,384) (290) (289) (402,737)
Bridge loan origination fee (Note 8) -- -- -- -- (651,671)
Troubled debt restructuring expense -- -- -- -- (1,339,461)
(Note 8)
Other income -- 15,001 2,809 -- --
Interest income -- 6,396 3,486 2,950 7,033
------------ ------------ ------------ ------------ ------------
-- 17,013 6,005 2,661 (2,386,836)
------------ ------------ ------------ ------------ ------------
Loss before income tax benefit -- (816,179) (1,052,265) (526,557) (7,454,680)
Income tax benefit (Note 4) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $ -- $ (816,179) $ (1,052,265) $ (526,557) $ (7,454,680)
============ ============ ============ ============ ============
Net loss per common share:
Basic $ 0.00 $ (0.10) $ (.09) $ (.05) $ (0.65)
============ ============ ============ ============ ============
Diluted $ 0.00 $ (0.10) $ (.09) $ (.05) $ (0.65)
============ ============ ============ ============ ============
Weighted average shares outstanding
Basic shares outstanding 6,625,000 8,568,125 11,453,000 11,560,000 11,519,146
============ ============ ============ ============ ============
Diluted shares outstanding 6,625,000 8,568,125 11,453,000 11,560,000 11,519,146
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-11
<PAGE> 55
Pet Quarters, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNAMORTIZED
PAR PAID-IN ACCUMULATED STOCK
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Inception at May 22, 1997 -- $ -- $ -- $ -- $ -- $ --
Restricted shares issued for cash
at $.001 to founders
6,100,000 6,100 -- -- -- 6,100
Shares issued for cash at $0.10
1,050,000 1,050 103,950 -- -- 105,000
------------ ------------ ------------ ------------ ------------ -----------
Balance at June 30, 1997 7,150,000 7,150 103,950 -- -- 111,100
Restricted shares issued for cash
at $.50 119,500 120 59,630 -- -- 59,750
Shares issued for land and
building (Note 3) 1,777,500 1,777 886,973 -- -- 888,750
Shares issued for cash at $0.50
less offering costs of $31,567 1,720,000 1,720 826,713 -- -- 828,433
Shares issued for cash
and services 790,000 790 394,210 -- -- 395,000
Shares issued for cash at $0.50 3,000 3 1,497 -- -- 1,500
Net loss for the year ended
June 30, 1998 -- -- -- (816,179) -- (816,179)
------------ ------------ ------------ ------------ ------------ -----------
Balance at June 30, 1998 11,560,000 11,560 2,272,973 (816,179)` -- 1,468,354
Shares bought from founder and
subsequently canceled (Note 5) (2,000,000) (2,000) -- -- -- (2,000)
Restricted stock issued to
employees (Note 6) 180,000 180 183,570 -- (183,750) --
Amortization of stock
compensation -- -- -- -- 44,805 44,805
Shares issued for services 60,195 60 42,324 -- -- 42,384
Net loss for the year ended
June 30, 1999 -- -- -- (1,052,265) -- (1,052,265)
------------ ------------ ------------ ------------ ------------ -----------
Balance at June 30, 1999 9,800,195 9,800 2,498,867 (1,868,444) (138,945) 501,278
Shares issued for acquisition of
Humboldt (Note 8) - unaudited 1,146,417 1,147 4,598,853 -- -- 4,600,000
Shares issued as origination fee
for bridge loan (Note 8) - 153,334 153 651,518 -- (651,671) --
unaudited
Shares issued as attorney fee for
bridge loan (Note 8) unaudited 4,334 4 18,416 -- -- 18,420
</TABLE>
(continued)
F-12
<PAGE> 56
Pet Quarters, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNAMORTIZED
PAR PAID-IN ACCUMULATED STOCK
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Restricted stock grants issued to
employees-unaudited $ 105,000 $ 105 $ 411,926 $ -- $ (412,031) $ --
Amortization of loan origination
fee-unaudited -- -- -- -- 651,671 651,671
Stock issued for bridge loan
refinancing (Note 8) - unaudited 275,000 275 482,735 -- -- 483,010
Beneficial conversion feature of
convertible debt issued in
conjunction with bridge loan
refinancing (Note 8) - unaudited -- -- 626,452 -- -- 626,452
Shares issued to investors for 178,964 179 256,324 -- -- 256,503
cash
Revocation of employee stock
grant - unaudited (10,000) (10) (11,240) -- 5,979 (5,271)
Shares issued under subscription
agreement- unaudited 1,176,715 1,177 2,384,925 2,386,102
Debt converted to stock - 409,446 410 204,314 204,724
unaudited
Stock issued for Wellstone- 130,208 130 557,323 557,453
unaudited
Stock options issued for services
(Note 6) - unaudited 778,652 778,652
Amortization of stock
compensation - unaudited -- -- -- -- 345,077 345,077
Net loss for nine months ended
March 31, 2000 - unaudited -- -- (7,454,680) -- (7,454,680)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 - unaudited 13,369,613 $ 13,370 $ 13,459,064 $ (9,323,124) $ (199,920) $ 3,949,390
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes
F-13
<PAGE> 57
PET QUARTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 22, 1997 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30 MARCH 31
JUNE 30, 1997 1998 1999 1999 2000
------------- -------------------------- --------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ -- $ (816,179) $(1,052,265) $ (526,557) $(7,454,680)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation -- 6,211 26,974 28,746 140,157
Amortization of goodwill -- 5,297 9,850 -- 1,113,179
Beneficial conversion feature on convertible -- -- -- -- 626,452
debt
Amortization of loan origination fee -- -- -- -- 1,134,681
Amortization of stock compensation expense -- -- 44,805 -- 339,806
Stock options issued for services -- -- -- -- 778,652
Stock issued for Wellstone -- -- -- -- 557,453
Other noncash compensation -- -- -- -- 47,813
Bridge loan default penalty refinanced -- -- -- -- 230,000
Stock issued for services -- 360,000 42,384 -- 18,420
Write down of building and land held for sale -- -- -- -- 400,000
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable -- (3,011) 357 1,747 (186,975)
Inventories -- (73,229 39,446 34,606 570,873
Prepaid expenses and other current assets -- (9,428) 7,178 -- (273,616)
Other assets -- (52,968) 36,238 -- 3,492
Accounts payable -- 13,679 189,715 42,880 (104,393)
Accrued expenses -- 1,141 11,472 (5,010) 154,656
Unearned income 5,885 (5,885) -- --
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities -- (562,602) (649,731) (423,588) (1,904,030)
INVESTING ACTIVITIES
Acquisition of Humboldt, net of cash -- -- -- -- (4,448,454)
Purchase and development of web site -- -- -- -- (120,241)
Purchases of property, plant, and equipment -- (97,338) (11,386) (39,801) (115,347)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities -- (97,338) (11,386) (39,801) (4,490,453)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 111,100 924,683 -- -- 2,642,605
Proceeds from notes payable and bridge loan -- -- 325,000 100,000 5,231,850
Payments on notes payable and capital leases -- -- -- -- (1,211,060)
Redemption of common stock -- -- (2,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 111,100 924,683 323,000 100,000 6,663,395
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash 111,100 264,743 (338,117) (363,843) 75,323
Cash at beginning of period -- 111,100 375,843 375,843 37,726
----------- ----------- ----------- ----------- -----------
Cash at end of period $ 111,100 $ 375,843 $ 37,726 $ 12,454 $ 113,049
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Shares issued for the acquisition of Humboldt
Industries (Note 8) -- -- -- -- 4,600,000
===========
</TABLE>
See accompanying notes
F-14
<PAGE> 58
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Pet Quarters, Inc. and Subsidiary (the "Company") was organized under the laws
of the state of Arkansas on May 22, 1997, for the purpose of marketing and
selling pet supplies over the Internet. From May 22, 1997 to June 30, 1997, the
Company had no operations.
The consolidated financial statements include the accounts of PQ Acquisition
Company, Inc., which was organized in August, 1999 for the sole purpose of
acting as an intermediate corporation to acquire Humboldt Industries, Inc.
("Humboldt") and Maplewood Industries, Inc. ("Maplewood"). (Collectively,
Humboldt and Maplewood shall be referred to as "Humboldt Industries"). PQ
Acquisition currently owns all of the issued and outstanding shares of stock of
Humboldt Industries. All of the stock of PQ Acquisition is owned by Pet
Quarters.
CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned subsidiaries, Humboldt and Maplewood, beginning August 1, 1999. (See Note
8).
INVENTORIES
Inventories are valued at the lower of cost, principally determined by the
first-in, first-out method, or market. Inventory at December 31, 1999, June 30,
1999 and 1998, consists of pet supplies purchased for retail sale.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
depreciable assets, which range from five years for furniture and equipment to
thirty-nine years for buildings and improvements.
INCOME TAXES
The Company provides for income taxes based on the liability method.
No provision (benefit) for income taxes has been made due to net operating loss
carryforwards that may offset future taxable income (Note 4).
F-15
<PAGE> 59
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The company records stock based compensation using provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, for the preparation of its basic consolidated financial statements.
Such provisions require the company to recognize compensation cost over the
vesting period for the difference between the quoted market price of an award at
the date of grant and the purchase or exercise price of the shares.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
lives, ranging from 3 to 5 years.
ADVERTISING COSTS
The Company expenses advertising costs, other than direct responses advertising
as they are incurred. Advertising expenses of approximately $430,000 were
incurred for the year ended June 30, 1999.
The Company's wholly owned subsidiaries, Humboldt and Maplewood, and affiliates,
account for catalog costs in accordance with SOP 93-7, "Reporting on Advertising
Costs" in connection with the marketing of their direct response products. Such
expense is amortized over the period of benefit which is less than one year
using the ratio of current period revenue to the total current and estimated
future period revenues.
CONCENTRATION OF CREDIT RISK
The Company's services are provided primarily to customers throughout the United
States. The Company receives payment largely by customers' use of credit cards
for internet sales and, for sales by Humboldt to per care professionals and
veterinarians, the Company performs ongoing credit evaluations and generally
does not require collateral. Historically, credit losses have been within
management's expectations.
F-16
<PAGE> 60
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of merchandise, net of an
allowance for estimated customer returns and discounts.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets using Statement
of Consolidated Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". Under SFAS No. 121, impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable intangibles and
goodwill related to those assets will not be recovered through future operations
or sale.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting of Comprehensive Income" in 1998.
Because the Company had no other items of comprehensive income, the impact of
adoption was not material.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which requires public business enterprises to report
financial and descriptive information about its reportable segments (see Note
11). In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Under the SOP, qualifying
computer software costs are required to be capitalized and amortized against
income over the software's estimated useful life. The SOP is effective for
fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1 in
the six month period ending December 31, 1999 which did not have a material
effect on operating results or the financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement is
effective for all quarters of fiscal years beginning after December 15, 2000 and
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or
F-17
<PAGE> 61
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liability at its fair value. The Company does not anticipate that the adoption
of SFAS No. 133 will have a material effect on earnings or the financial
position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 regarding revenue recognition. Registrants are to apply
the guidance of SAB 101 by June 30, 2000. The Company believes it is currently
in compliance with SAB 101.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying consolidated financial statements of the Company for the nine
months ended March 31, 2000 and 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial statements.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements and disclosure information are unaudited, but
reflects all adjustments consisting only of normal recurring accruals which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for such interim periods. Operating results for the nine months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the entire year.
2. GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been presented in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has a
significant working capital deficiency and has incurred operating losses since
its formation. As discussed in Note 8, the Company has an outstanding bridge
loan for $4.6 million that matures within the next twelve months. The Company
was able to make a required payment of $1,000,000 on February 3, 1999
(unaudited). Management believes that actions presently being taken will provide
for the Company to continue as a going concern. Such actions may include but are
not limited to a private equity stock placement which would be utilized to
payoff the bridge loan and other current debt, a strategic partnership or
acquisition that would provide the Company with the necessary capital, or sale
of certain assets. However, there are no assurances that management will be able
to secure additional equity capital or complete any other strategic transactions
that will permit the Company to meet its current obligations. If the Company
defaults on the extended terms of the bridge loan, then the ownership of
Humboldt will revert to the Trust, since its stock is held as collateral. See
Note 8.
F-18
<PAGE> 62
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS
In November 1997, the Company issued 1,777,500 shares of its common stock, with
a fair value of $888,750, to acquire land and a building from Ammonia Hold,
Inc., a company owned by a principal shareholder of the Company. As a part of
the exchange an option to repurchase the building for the original sales price
was granted. This option expired on June 8, 1999.
At June 30, 1999 the Company had $325,000 in notes payable to Ammonia Hold, Inc.
The notes are due on demand with an interest rate of 8%. The notes payable are
secured by property and inventory.
At March 31, 2000, the Company had notes payable to affiliates consisting of
$215,000 to Ammonia Hold and $475,178 to certain shareholders. (Unaudited).
Individuals affiliated with and shareholders in Pet Quarters participated as
lenders in the bridge loan in the amount of $1,023,000, which partially funded
the acquisition of Humboldt Industries. See Note 8.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets: (unaudited)
Amortization of stock compensation $ -- $ (44,805) $ (384,611)
Net operating loss carryforward (383,368) (1,843,683) (8,185,184)
----------- ----------- -----------
(383,368) (1,888,488) (8,569,795)
Effective tax rate 34% 34% 34%
----------- ----------- -----------
Deferred tax asset 130,345 642,086 2,913,730
Valuation allowance (130,345) (642,086) (2,913,730)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-19
<PAGE> 63
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The use of the liability method of accounting for income taxes requires that
deferred tax assets are reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Whether a deferred tax asset will be realized depends upon sufficient
future taxable income and consideration of limitations on the ability to utilize
net operating loss carryforwards and other tax attributes.
Under limitations imposed by Internal Revenue Code Section 382, certain
potential changes in ownership of the Company may restrict future utilization of
net operating loss carryforwards. It is management's belief that a change in
ownership which would trigger the Section 382 limitations has not occurred.
However, a valuation allowance has been established for the entire net deferred
tax assets until such time as it is more likely than not that the deferred tax
assets will be realized.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $1,843,000 for income tax purposes that expire in years 2013
through 2019.
No income taxes were paid in 1999, 1998 and 1997. The effective tax rate is
different than the statutory federal tax rate of 34% due to the establishment of
a valuation allowance relating to the deferred tax assets.
5. STOCKHOLDERS' EQUITY
The Company engaged a public relations firm to assist in a Rule 504 offering in
1998. The fees for their services was the sale of 790,000 shares of stock for
$35,000. The stock was selling for $.50 per share in the offering. Therefore,
$360,000 was booked as a consulting expense for the year ended June 30, 1998
(difference between the cash received and the fair market value of the stock).
In June 1999, the Company retired 2,000,000 shares of common stock which had
been held by a founding stockholder of the Company. These shares were
subsequently canceled. This transaction was completed in order to facilitate the
acquisition of Humboldt (see Note 8). These shares were held by the founding
stockholder under a verbal understanding with other stockholders that the shares
would be offered for purchase by the Company and canceled upon the occurrence of
certain future events including a business combination or issuance of additional
equity capital. The shares were originally issued so that the founding
stockholder would have voting control. For purposes of calculating net loss per
share, the 2,000,000 shares were deemed to have been retired and canceled as of
July 1, 1999.
F-20
<PAGE> 64
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Company is authorized to issue 10,000,000 shares of preferred stock. The
voting powers, performances and other rights are subject to resolution of the
Board of Directors. No preferred shares are outstanding at March 31, 2000. See
Note 12.
6. STOCK-BASED COMPENSATION
The Company's Board of Directors gave approval to the establishment of an
Management Incentive Plan (the "Plan") under which shares of the Company's stock
are granted to employees. The shares are restricted for one year following the
date of grant and require that the employee remain in continuous employment for
a period of 1 year from the date of grant. The Plan has not been submitted to
stockholders for approval and there were no grants outstanding under the Plan at
June 30, 1999.
For the year ended June 30, 1999 the Company granted stock awards to employees
totaling 180,000 shares. Total compensation cost for stock awards issued to
employees was $44,805 for the year ended June 30, 1999
In April 1999, the President of the Company granted, to an officer, an option to
purchase 225,000 shares at the fair market value at the date of grant of $1.125.
The grant was authorized by the President in connection with the employment of
this individual in April 1999.
In connection with an agreement to assist the Company with raising capital and
other strategic advisory services, an option to purchase 573,350 shares of
common stock was issued to an individual at an exercise price of $1.00 per
share. As of March 31, 2000, 310,565 shares vested and were earned under the
agreement with the individual. The Company recognized an expense of
approximately $788,000 related to the shares vested in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." (unaudited)
F-21
<PAGE> 65
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. CAPITAL LEASES PAYABLE
<TABLE>
<CAPTION>
JUNE 30 JUNE 30 MARCH 31
1998 1999 2000
--------- -------- ----------
(Unaudited)
<S> <C> <C> <C>
Capital lease payable to a leasing company due in monthly
installments of $5,096 until May 2003 with no stated interest
rate. The lease is guaranteed by a stockholder $ -- $ -- $166,528
Capital lease payable to a leasing company due in monthly installments
of $3,332 until December 2004 with no stated interest rate. The
lease is guaranteed by a stockholder -- -- 149,372
-------- -------- --------
-- -- 315,900
Less current portion -- -- 77,600
-------- -------- --------
$ -- $ -- $238,300
======== ======== ========
</TABLE>
F-22
<PAGE> 66
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. CAPITAL LEASES PAYABLE (CONTINUED)
Maturities of capital leases are as follows:
<TABLE>
<S> <C>
2000 $ 77,600
2001 84,056
2002 88,102
2003 56,589
2004 9,553
------------
$ 315,900
============
</TABLE>
Equipment leased under capital lease obligations is included in furniture and
equipment at December 31, 1999. Amortization of the leased equipment is included
in depreciation expense.
8. ACQUISITION
On August 1, 1999, the Company acquired 100% of the outstanding stock of
Humboldt and Maplewood, both of Hazleton, Pennsylvania, for $4.6 million cash
and 1,146,417 shares of the Company's common stock, valued at $4.6 million on
the date of the acquisition. Humboldt is in the pet supply catalog business and
distributes two pet catalogs - Home Pet Shop and the Dog's Outfitter - to retail
and wholesale customers throughout the United States and in selected foreign
markets. The acquisition was accounted for as a purchase transaction. The
purchase price was allocated to assets and liabilities acquired. This resulted
in goodwill in the amount of approximately $8.3 million. Goodwill is amortized
over a five year life. The cash paid was financed through a bridge loan (the
"Bridge Loan") by borrowing $4.6 million from Sun Valley Trust (the "Trust").
This loan was due in full on October 1, 1999 with interest accruing at a rate of
12.5%. Some of the investors in the Trust are also employees of the Company. In
conjunction with the Bridge Loan transaction, the Company issued 153,334 shares
of Common Stock with an estimated value on August 1, 1999 totaling $651,671 as
payment for origination of the loan. This origination fee was amortized over the
term of the loan from August 1, 1999 through October 1, 1999. In addition, the
Company issued 4,334 shares of Common Stock with an estimated market value of
$18,420 for attorney fees associated with the bridge loan. The common stock of
Humboldt and Maplewood is pledged as security for the bridge loan.
On October 2, 1999, the Company went into default on the $4.6 million bridge
loan noted above. This bridge loan was extended on November 10, 1999 with key
changes from the original agreement as follows: the interest rate was reduced
from 12.5% to 10%, interest in the amount of $204,723 was paid current,
penalties in the amount of $230,000 were added to the principal balance (total
principal $4,830,000), $20,000 in interest payments are due monthly with the
remainder to accrue and be paid upon funding. On November 10, 1999, the Company
issued an additional 275,000 restricted shares to the Trust at a value equal to
the average market value of
F-23
<PAGE> 67
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. ACQUISITION (CONTINUED)
$1.756 or $483,010. The terms of the extension required a partial principal
payment of $1,000,000 by February 10, 2000. This payment was made on February 3,
2000 as required (unaudited). The remaining principal balance plus accrued
interest will be due in full on May 10, 2000. (See Note 12).
In connection with the restructuring of the bridge loan on November 10, 1999,
two shareholders loaned the Company $204,000, which was the amount of the
interest due on November 10, 1999. The loan contained a conversion feature
whereby the holder of the note may convert the note to shares of Pet Quarter's
common stock at a conversion price of $.50. The Company recorded $626,452 in
November 1999 as additional expense of restructuring the debt, which is the
intrinsic value of the conversion feature.
The operations of Humboldt have been consolidated with the operations of the
Company beginning August 1, 1999. Pro forma unaudited information, which
includes goodwill amortization and bridge loan interest expense, as if the
Humboldt acquisition occurred as of July 1, 1998 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30 MARCH 31
1999 1999 2000
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Sales $ 15,143,999 $ 10,807,732 $ 11,093,619
Cost of sales (10,555,117) (6,420,232) (7,557,504)
Operating expenses (7,297,114) (6,556,162) (9,230,307)
Other income (expenses) (367,576) (345,289) (2,827,548)
------------ ------------ ------------
Net loss $ (3,075,808) $ (2,513,951) $ (8,521,740)
============ ============ ============
</TABLE>
The above pro forma unaudited information does not purport to be indicative of
the results which actually would have occurred had the acquisition been made at
the beginning of the respective periods.
9. SHORT-TERM NOTES PAYABLE (UNAUDITED)
In conjunction with the acquisition of Humboldt industries (see Note 8) the
company has an obligation to pay a company a finders fee in the amount of
$90,000.
F-24
<PAGE> 68
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS
In July 1999, Pet Quarters, Inc. entered into an agreement to acquire
Chartendure Ltd., of the United Kingdom. Under the agreement with Chartendure,
Chartendure's shareholders will receive 900,000 shares of Pet Quarters stock for
arranging and contracting for the development of a new website for Pet Quarters.
As part of the agreement, Chartendure will contract with a qualified website
design and development firm for a new Pet Quarters website. The shares of Pet
Quarters common stock will be issued only upon the achievement of certain
development milestones. Management will capitalize the payments to the website
design and development firm in accordance with SOP 98-1. Management will expense
the shares of common stock at the market value at the time the shares are issued
to Chartendure's shareholders. The project has had limited progress to date, and
no shares have been issued to date.
On May 1, 2000, Pet Quarters acquired all of the outstanding shares of
Chartendure in exchange for 400,000 shares of Pet Quarters. The prior agreements
with Chartendure were cancelled. (Unaudited)
11. OPERATING SEGMENTS
Prior to the purchase of Humboldt effective August 1, 1999, the Company operated
in one segment-internet sales of pet supplies. Beginning August 1, 1999, the
Company began, through the purchase of Humboldt Industries, a catalog segment.
Information on the operating segments for the year ended June 30, 1999 and 1998
and the nine months ended March 31, 2000 and 1999 (unaudited) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 NINE MONTHS ENDED MARCH 31
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales:
Internet $ -- $ 43,835 $ 262,470 $ 204,059 $ 435,179
Catalog -- -- -- -- 9,438,400
------------ ------------ ------------ ------------ ------------
$ -- $ 43,835 $ 262,470 $ 204,059 $ 9,873,570
============ ============ ============ ============ ============
Loss from operations:
Internet $ -- $ (833,192) $ (1,058,270) $ (529,218) $ (3,581,252)
Catalog -- -- -- -- $ (1,486,592)
------------ ------------ ------------ ------------ ------------
$ -- $ (833,192) $ (1,058,270) $ (529,218) $ (5,067,844)
============ ============ ============ ============ ============
Other income (expense):
Internet $ -- $ 17,013 $ 6,005 $ 2,661 $ (2,382,276)
Catalog -- -- -- -- (4,560)
------------ ------------ ------------ ------------ ------------
$ -- $ 17,013 $ 6,005 $ 2,661 $ (2,386,836)
============ ============ ============ ============ ============
Assets:
Internet $ 111,100 $ 1,489,059 $ 1,042,285 $ 1,100,372 $ 2,216,949
Catalog -- -- -- -- 8,635,449
------------ ------------ ------------ ------------ ------------
$ 111,100 $ 1,489,059 $ 1,042,285 $ 1,100,372 $ 10,852,398
============ ============ ============ ============ ============
</TABLE>
F-25
<PAGE> 69
Pet Quarters, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. OPERATING SEGMENTS (CONTINUED)
Although the Company sells the same product at the same price through the
internet and catalog segments, the manner of selling is different with the
internet segment having a potential for a much broader distribution with far
more customers than can be reached through the traditional catalog distribution.
Revenues by geographical location of customer is not practical to determine.
12. SUBSEQUENT EVENTS (UNAUDITED)
Pet Quarters acquired WeRPets in April 27, 2000 and Allpets.com in May 30, 2000.
Pet Quarters issued shares of its stock totaling 703,316 shares for the purchase
of WeRPets and 3,652,785 shares for the purchase of Allpets.com. The
acquisitions have been accounted for as purchases and the results of operations
of the acquired companies will be included in the consolidated results of
operations of Pet Quarters beginning at the respective dates of purchase. The
principal asset resulting from the acquisitions is goodwill of approximately
$10,300,000 which will be amortized over three years.
The Company entered into an agreement on April 14, 2000 to sell its facility in
Lonoke, Arkansas for net proceeds of $500,000. As a result of the decision to
sell the building, a write-down in the carrying value of the land and building
of $400,000 was recorded in general administrative expenses as of March 31,
2000.
The Company issued preferred stock on May 8, 2000 totaling 34,642 shares for
cash proceeds of $2,055,700 and the exchange of $1,408,500 worth of interests in
the bridge loan. The preferred stockholders are not entitled to receive cash
dividends and the preferred stock may be redeemed by the Company at par one year
after the initial date of issuance. The Company also issued $1,000,000 of 6%
convertible debentures on May 5, 2000. The proceeds from these transactions were
used to discharge the $3,830,00 bridge loan that was due on May 10, 2000.
The preferred stock and 6% convertible debentures are convertible into common
stock at a rate of $1.3816 per share. The beneficial conversion feature
associated with the 6% convertible debentures will be accounted for in the
fourth quarter of fiscal 2000 as additional interest expense in accordance with
the Emerging Issues Task Force (EITF) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features. The beneficial conversion
feature associated with the preferred stock will be accounted for in the fourth
quarter of fiscal 2000 as a return to the preferred shareholders which will
increase the net loss (or decrease the net income) per share for the fourth
quarter and the year ending June 30, 2000.
F-26
<PAGE> 70
COMBINED FINANCIAL STATEMENTS
HUMBOLDT INDUSTRIES, INC. AND AFFILIATE
Period from January 1, 1999 to July 31, 1999
and year ended December 31, 1998 with
Report of Independent Auditors
F-27
<PAGE> 71
Humboldt Industries, Inc. and Affiliate
Combined Financial Statements
Period from January 1, 1999 to July 31, 1999 and
year ended December 31, 1998
<TABLE>
CONTENTS
<S> <C>
Report of Independent Auditors - Ernst & Young LLP.........................F-28
Report of Independent Auditors - Kronick, Kalada Berdy & Co., P.C..........F-29
Audited Combined Financial Statements
Combined Balance Sheets....................................................F-30
Combined Statements of Operations..........................................F-31
Combined Statements of Stockholders' Equity................................F-32
Combined Statements of Cash Flows..........................................F-33
Notes to Combined Financial Statements.....................................F-34
</TABLE>
F-28
<PAGE> 72
Report of Independent Auditors
The Board of Directors of
Humboldt Industries, Inc. and Affiliate
Hazleton, Pennsylvania
We have audited the accompanying combined balance sheet of Humboldt Industries,
Inc. and Affiliate (the "Company") as of July 31, 1999, and the related combined
statements of operations, stockholders' equity and cash flows for the period
from January 1, 1999 to July 31, 1999. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Humboldt Industries,
Inc. and affiliate at July 31, 1999, and the combined results of their
operations and their cash flows for the seven month period then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As more fully described in Note 2,
the Company is a consolidated subsidiary of a parent company that has operating
losses and is dependent upon future financing to continue operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The combined financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
Ernst & Young LLP
Little Rock, Arkansas
October 15, 1999, except for Note 8 as to
which the date is December 10, 1999.
F-29
<PAGE> 73
Independent Auditors' Report
Boards of Directors
Humboldt Industries, Inc.
and Maplewood Industries, Inc.
Hazleton, Pennsylvania
We have audited the accompanying combined balance sheet of Humboldt Industries,
Inc. and Maplewood Industries, Inc. as of December 31, 1998 and the related
combined statements of operations and deficit and of cash flows for the year
then ended. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Humboldt Industries,
Inc. and Maplewood Industries, Inc. as of December 31, 1998, and the combined
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, the Companies were sold
effective August 1, 1999. The combined financial statements for the seven months
ended July 31, 1999, which included Humboldt Industries, Inc. and Maplewood
Industries, Inc., disclosed an uncertainty regarding their ability to continue
as a going concern.
Kronick Kalada Berdy & Co., P.C.
Kingston, Pennsylvania
February 17, 1999
Note 8 dated December 10, 1999
F-30
<PAGE> 74
Humboldt Industries, Inc. and Affiliate
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JULY 31, 1999
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 148,178 $ 151,473
Accounts receivable 58,039 160,315
Inventory (Note 4) 1,250,853 1,555,469
Deferred advertising costs) 253,000 216,000
Other current assets 4,938 4,291
Due from commonly controlled companies 50,000 --
----------- -----------
Total current assets 1,765,008 2,087,548
Leasehold improvements, furniture and equipment:
Leasehold improvements 33,139 33,140
Furniture and equipment 987,113 1,393,481
Less accumulated depreciation (827,845) (893,803)
----------- -----------
Total leasehold improvements, furniture and equipment 192,407 532,818
----------- -----------
Total assets $ 1,957,415 $ 2,620,366
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,385,955 $ 1,491,247
Current portion of notes and capital leases payable 30,434 48,069
Accrued liabilities 66,138 219,420
----------- -----------
Total current liabilities 1,482,527 1,758,736
Notes and capital leases payable (Note 5) 9,264 339,445
Loan payable to shareholders (Note 5) 324,325 --
----------- -----------
Total liabilities 1,816,116 2,098,181
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $1 par; authorized 100,00 shares; issued
and outstanding 2,000 shares at December 31, 1998 and
July 31, 1999
2,000 2,000
Additional paid-in capital 593,521 790,873
Accumulated deficit (454,222) (270,688)
----------- -----------
Total stockholders' equity 141,299 522,185
----------- -----------
Total liabilities and stockholders' equity $ 1,957,415 $ 2,620,366
=========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 75
Humboldt Industries, Inc. and Affiliate
Combined Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
DECEMBER 31 ENDED JULY 31
1998 1999
------------ ------------
<S> <C> <C>
Sales $ 14,943,683 $ 9,084,885
Cost of sales 10,700,335 5,935,829
------------ ------------
Gross profit 4,243,348 3,149,056
Selling, general and administrative expenses:
Selling expenses 1,849,316 1,336,995
General and administrative 2,350,884 1,546,499
Depreciation 42,671 65,958
------------ ------------
Total selling, general and administrative expenses 4,242,871 2,949,452
------------ ------------
Income from operations 477 199,604
Other income (expense):
Interest expense (5,602) (19,425)
Interest income 5,000 3,355
Other income 100,000 --
------------ ------------
Total other income (expense) 99,398 (16,070)
------------ ------------
Net income, historical 99,875 183,534
Proforma income tax provision 38,365 70,500
------------ ------------
Proforma net income $ 61,510 $ 113,034
============ ============
</TABLE>
See accompanying notes.
F-32
<PAGE> 76
Humboldt Industries, Inc. and Affiliate
Combined Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICITS TOTAL
--------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 2,000 $ 593,521 $(554,097) $ 41,424
Net income for the year ended
December 31, 1998 -- -- 99,875 99,875
--------- --------- --------- ---------
Balance at January 1, 1999 2,000 593,521 (454,222) 141,299
Cash distributions to stockholder -- (76,973) -- (76,973)
Non-cash contribution by
stockholder (Note 5) -- 324,325 -- 324,325
Non-cash distribution to
stockholder (Note 5) -- (50,000) -- (50,000)
Net income for seven months ended
July 31, 1999 -- -- 183,534 183,534
--------- --------- --------- ---------
Balance at July 31, 1999 $ 2,000 $ 790,873 $(270,688) $ 522,185
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-33
<PAGE> 77
Humboldt Industries, Inc. And Affiliate
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
DECEMBER 31 ENDED JULY 31
1998 1999
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 99,875 $ 183,534
Adjustments to reconcile net cash provided (used) by
operating activities:
Depreciation 42,671 65,958
Loss on sale of assets 412 --
Changes in assets and liabilities:
Accounts receivable 84,980 (102,276)
Inventory 237,147 (304,616)
Deferred advertising costs 131,000 37,000
Other assets (1,879) 647
Accounts payable (262,210) 105,292
Accrued expenses 12,341 153,282
---------- ----------
Net cash provided by operating activities 344,337 138,821
INVESTING ACTIVITIES
Capital expenditures (27,365) --
Due from commonly controlled companies (24,962) --
---------- ----------
Net cash used in investing activities (52,327) --
FINANCING ACTIVITIES
Repayments of notes payable and capital leases -- (58,553)
Proceeds from long-term debt -- --
Repayments of long-term debt (32,738) --
Repayment of loan payable, shareholder (218,042) --
Distribution to stockholder -- (76,973)
---------- ----------
Net cash used in financing activities (250,780) (135,526)
---------- ----------
Net increase in cash 41,230 3,295
Cash at beginning of year 106,948 148,178
---------- ----------
Cash at end of year $ 148,178 $ 151,473
========== ==========
SUPPLEMENTAL DISCLOSURES:
Net amounts stockholder contributed as additional
paid-in capital (Note 5) $ -- $ 274,325
========== ==========
Assets purchased through capital lease $ -- $ 406,369
========== ==========
</TABLE>
See accompanying notes.
F-34
<PAGE> 78
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Humboldt Industries, Inc. and its affiliate, Maplewood Industries, Inc.,
(collectively the "Company") are engaged in the mail order sale of pet training
and grooming aids, health supplies and vaccines for dogs, cats and other pets as
well as the mail order sale of arts and crafts supplies. The customer base is
primarily located throughout the continental United States.
COMBINATION
The combined financial statements include the accounts of the Humboldt
Industries, Inc. and its affiliate Maplewood Industries, Inc. These companies
were owned by the same shareholders and have common management. All significant
intercompany accounts and transactions have been eliminated in combination.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment of merchandise. When returned
goods are received, sales are reduced and the related merchandise is restocked
to inventory.
INVENTORY
Inventory consists of purchased finished products held for resale stated at the
lower of cost or market. The last-in, first-out ("LIFO") method is used to
determine cost for Humboldt Industries, Inc. while the first-in, first-out
("FIFO") method is used to determine cost for Maplewood Industries, Inc.
DEFERRED ADVERTISING COSTS
The Company accounts for catalog costs in accordance with SOP 93-7, "Reporting
on Advertising Costs" in connection with the marketing of its direct response
products. Such expense is amortized over the period of benefit which is less
than one year using the ratio of current period revenues to the total of current
and estimated future period revenues for each catalog. All other advertising
costs are expensed as incurred.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT
These assets are stated at cost. Depreciation is being provided by accelerated
methods over the estimated useful lives of the assets.
F-35
<PAGE> 79
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company elected to be treated as an S Corporation for federal and state
income tax reporting, whereby any income or loss will be included in the
individual shareholder's income tax return. As a result of the acquisition by
Pet Quarters, Inc. (see Note 8), the Company, effective August 1999, was subject
to federal and state income taxes. A proforma provision for income taxes is
presented in the accompanying combined statement of operations.
IMPAIRMENT OF ASSETS
The Company accounts for any impairment of its long-lived assets using
Statements of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
Of". Under SFAS No. 121, impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable intangibles and
goodwill related to those assets will not be recovered through future operations
or sale.
CONCENTRATION OF CREDIT RISK
Accounts receivable are comprised of a diversified customer base. The Company
employs credit monitoring policies that, in management's opinion, effectively
reduce any potential risk to an acceptable level.
F-36
<PAGE> 80
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements (continued)
2. GOING CONCERN UNCERTAINTY
The accompanying combined financial statements have been presented in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company is now a consolidated
subsidiary of Pet Quarters, Inc. which has a significant working capital
deficiency and has incurred operating losses since its formation. As discussed
in Note 8, Pet Quarters, Inc. has an outstanding bridge loan for $4.8 million
that matures May 10, 2000. Pet Quarters, Inc. believes that actions presently
being taken will provide for the Company to continue as a going concern. Such
actions may include but are not limited to a private equity stock placement
which would be utilized to payoff the bridge loan and other current debt, a
strategic partnership or acquisition that would provide the Company with the
necessary capital, or sale of certain assets. However, there are no assurances
that management will be able to secure additional equity capital or complete any
other strategic transaction that will permit the Company to meet its current
obligations.
3. CASH
Cash on deposit at a National Bank exceed the FDIC insured limit by
approximately $50,000 and $44,000 at July 31, 1999 and December 31, 1998,
respectively.
4. INVENTORIES
The Company's inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 JULY 31, 1999
------------ -------------
<S> <C> <C>
Humboldt at FIFO cost $ 1,642,000 $ 1,857,751
Excess of FIFO cost over LIFO cost (608,000) (544,531)
------------ ------------
1,034,000 1,313,220
Maplewood at FIFO cost 216,853 242,249
------------ ------------
$ 1,250,853 $ 1,555,469
============ ============
</TABLE>
F-37
<PAGE> 81
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements (continued)
5. NOTES AND CAPITAL LEASES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31 JULY 31
1998 1999
----------- ----------
<S> <C> <C>
Capital lease payable to a leasing company due in monthly
installments of $5,096 until May 2003 with no stated interest
rate. The lease is guaranteed by a stockholder. $ -- $ 195,215
Capital lease payable to a leasing company due in monthly
installments of $3,332 until December 2004 with no stated
interest rate. The lease is guaranteed by a stockholder. -- 170,057
Loan payable to stockholders, unsecured, noninterest bearing, due
on demand. 324,325 --
Other notes payable 39,698 22,242
---------- ----------
364,023 387,514
Less current portion 333,589 48,069
---------- ----------
$ 30,434 $ 339,445
========== ==========
</TABLE>
Annual maturities of notes and capital leases through July 31 are as follows:
<TABLE>
<S> <C>
1999 $ 48,069
2000 82,320
2001 84,056
2002 88,102
2003 56,589
Thereafter 28,378
----------
$ 387,514
==========
</TABLE>
The Company paid interest of approximately $19,000 for the seven month period
ended July 31, 1999 and approximately $6,000 for the year ended December 31,
1998.
Equipment leased under capital lease obligations is included in furniture and
equipment at July 31, 1999 and December 31, 1998. Amortization of the leased
equipment is included in depreciation expense.
The Company has a line of credit which permits borrowings up to $500,000 and
bears interest at the Bank's prime rate of interest 7.75% at July 31, 1999 and
December 31, 1998. Collateral for the line consist of accounts receivable,
inventory and general intangibles. As of July 31, 1999 and December 31, 1998,
zero borrowings were outstanding under this line of credit.
F-38
<PAGE> 82
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company had a $50,000 note receivable from a company
owned by the principal stockholder. This note was non-interest bearing and
consisted of reimbursement of expenses incurred by the Companies on behalf of a
commonly controlled company. Such expense reimbursement aggregated $50,000 in
1998.
During the seven months ended July 31, 1999, the principal stockholder
contributed $324,325 of amounts due to the principal stockholder as additional
capital net of $50,000 the Company had as a receivable from a company owned by
the principal stockholder. These transactions are reflected in the accompanying
statement of stockholders' equity.
The former stockholders lease a building to the Company. A mortgage on the
building, aggregating approximately $1,500,000 and $1,559,000 at July 31, 1999
and December 31, 1999, respectively, is guaranteed by the Company.
Taxes, insurance and maintenance expenses related to the facility are paid by
the Company. Such expenses totaled approximately $75,000 and $60,000 for the
seven months ended July 31, 1999 and for the year ended December 31, 1999,
respectively. Rent expense on the facility aggregated $140,000 and $240,000 for
the seven month period ended July 31, 1999 and for the year ended December 31,
1999, respectively. Future minimum lease payments are $240,000 per year through
July 31, 2004.
7. COMMITMENTS
The Company executed two operating leases in 1998 for a telecommunication system
and a data processing system, which require monthly payments of approximately
$3,300 through December 2004 and $5,000 through June 2003, respectively. Rent
expense approximated $140,000 and $240,000 and for the seven months ended July
31, 1999 and for the year ended December 31, 1998, respectively.
8. SUBSEQUENT EVENT
On August 1, 1999, 100% of the outstanding stock of the Company was acquired by
Pet Quarters, Inc. ("Pet Quarters") for $4.6 million cash and 1,146,417 shares
of Pet Quarters, Inc. common stock, valued at $4.6 million on the date of the
acquisition. The acquisition was accounted for as a purchase transaction with
related goodwill recorded on the books of Pet Quarters, in the amount of
approximately $8.3 million. The cash paid was financed through a bridge loan
(the "Bridge Loan") by borrowing $4.6 from Sun Valley Trust (the "Trust"). This
loan was due in full on October 1, 1999 with interest accruing at a rate of
12.5%. Some of the investors in the Trust are also Pet Quarters employees. In
conjunction with the Bridge Loan transaction, Pet Quarters issued 153,334 shares
of Common Stock with an estimated market value of $651,670 as payment for
origination of the loan. This origination fee is being amortized over the term
of the loan. In addition, Pet Quarters issued 4,334 shares of Common Stock with
a market value of $18,420 for attorney fees associated with the bridge loan.
F-39
<PAGE> 83
Humboldt Industries, Inc. And Affiliate
Notes To Combined Financial Statements (continued)
8. SUBSEQUENT EVENT (CONTINUED)
On October 2, 1999 Pet Quarters went into default on the $4.6 million bridge
loan noted above. This bridge loan was extended on November 10, 1999 with key
changes from the original agreement. The interest rate was reduced from 12.5% to
10%. Interest in the amount of $204,723 was paid current. Penalties in the
amount of $230,000 were added to the principal balance (total principal
$4,830,000), $20,000 in interest payments are due monthly with the remainder to
accrued and be paid upon funding. On November 10, 1999, the Company issued an
additional 275,000 restricted shares to the trust at a value equal to the
average market value of $1.756, or $483,010. The terms of the extension required
a principal payment of $1,000,000 by February 10, 2000. This payment was made on
February 3, 2000 as required (unaudited). The remaining principal balance plus
accrued interest will be due in full on May 10, 2000.
F-40
<PAGE> 84
HUMBOLDT INDUSTRIES, INC.
Year ended December 31, 1997
F-41
<PAGE> 85
Independent Auditors' Report
Board of Directors
Humboldt Industries, Inc.
Hazleton, Pennsylvania
We have audited the accompanying balance sheet of Humboldt Industries, Inc. as
of December 31, 1997 and the related statements of operations and deficit and of
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Humboldt Industries, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Kingston, Pennsylvania
February 18, 1998
KRONICK KALADA BERDY & CO., P.C.
F-42
<PAGE> 86
HUMBOLDT INDUSTRIES, INC.
BALANCE SHEET - DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 92,788
Accounts receivable 141,961
Inventory 1,285,000
Due from commonly controlled companies 108,892
------------
Total current assets 1,628,641
------------
Leasehold improvements, furniture and equipment:
Leasehold improvements 33,139
Furniture and equipment 982,988
------------
Total leasehold improvements, furniture and equipment 1,016,127
------------
Less accumulated depreciation 797,859
------------
218,268
------------
Deferred catalog costs, net 318,000
Other assets 3,059
------------
Total assets $ 2,167,968
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portions of notes payable, bank $ 32,738
Accounts payable 1,544,188
Accrued payroll and related expenses 53,797
------------
Total current liabilities 1,630,723
Notes payable, bank, net of current portion 49,841
Loan payable shareholders, unsecured, non-interest
bearing, due after 1998 466,267
------------
Total liabilities 2,146,831
Shareholders' equity:
Common stock, $1 par; authorized 100,000 shares; issued
and outstanding 1,000 shares 1,000
Additional paid in capital 593,521
Deficit (573,384)
------------
21,137
------------
Total Liabilities $ 2,167,968
============
</TABLE>
See notes to financial statements
F-43
<PAGE> 87
HUMBOLDT INDUSTRIES, INC.
STATEMENT OF OPERATIONS AND DEFICIT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Sales $ 12,237,912
Cost of sales 8,843,253
------------
Gross profit 3,394,659
Selling, general and administrative expenses:
Catalog costs 1,347,872
Other 1,987,431
------------
3,335,303
Income from operations 59,356
------------
Other income (expense):
Interest expense, net of interest income ($7,000, 1997) (426)
Other income 19,205
------------
18,779
Net income 78,135
Deficit, beginning (543,552)
Shareholders' distribution (107,967)
------------
Deficit, ending $ (573,384)
============
</TABLE>
See notes to financial statements
F-44
<PAGE> 88
HUMBOLDT INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 78,135
Adjustments:
Depreciation 87,789
Changes in assets and liabilities:
Accounts receivable (59,792)
Inventory (282,000)
Deferred catalog costs 211,500
Accounts payable 151,391
Accrued payroll and related expenses 9,263
------------
Net cash provided by operating activities 196,286
------------
Cash flows from investing activities:
Capital expenditures (32,873)
Due from commonly controlled companies (44,059)
------------
Net cash used in investing activities (76,932)
------------
Cash flows from financing activities:
Proceeds from long-term debt 25,739
Repayments of long-term debt (42,161)
Distribution to shareholders (107,967)
------------
Net cash used in financing activities (124,389)
------------
Net decrease in cash (5,035)
Cash, beginning 97,823
------------
Cash, ending $ 92,788
============
Supplemental disclosure:
Cash paid during the year for interest expense $ 7,426
============
</TABLE>
See notes to financial statements
F-45
<PAGE> 89
HUMBOLDT INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1. Summary of significant accounting policies:
Description of business:
The Company, a Pennsylvania corporation, is engaged in the mail order
sale of training and grooming aids, health supplies and vaccines for
dogs, cats and other pets. The customer base is primarily located
throughout the continental United States.
Use of estimates:
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported revenues and expenses.
Revenue recognition:
Revenue is recognized at the time of shipment of merchandise. When
returned goods are received, sales are reduced and the related
merchandise is restocked to inventory.
Inventory:
Inventory consists of purchased finished products held for resale
stated at the lower of cost or market. The last-in, first-out (LIFO)
method is used to determine cost.
Advertising costs:
The Company incurs catalog costs in connection with the marketing of
its direct response products. Such expense is amortized in generally
less than one year using the ratio of current period revenues to the
total of current and estimated future period revenues for each catalog.
Leasehold improvements, furniture and equipment and depreciation:
These assets are stated at cost. Depreciation is being provided by
accelerated methods over the estimated useful lives of the assets.
Income taxes:
The Company elected to be treated as an S Corporation for federal and
state income tax reporting, whereby any income or loss will be included
in the individual shareholder's income tax return.
F-46
<PAGE> 90
HUMBOLDT INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
2. Cash:
At December 31, 1997 cash on deposit at a national bank exceeds the
FDIC insured limit by $154,000.
3. Inventories:
At December 31, 1997, inventory was valued at $1,285,000, using the
LIFO method (Note 1), which was less than the corresponding current
replacement value of approximately $1,966,000.
4. Due from commonly controlled companies:
These non-interest bearing amounts consist of working capital advances
and reimbursement of expenses incurred by the Company on behalf of the
commonly controlled companies. Such expense reimbursement aggregated
$110,000 in 1997. Reimbursement amount due at December 31, 1997 was
$25,000.
5. Line of credit:
The Company has a line of credit which permits borrowings up to
$500,000 and bears interest at the Bank's prime rate of interest (8.5%
at December 31, 1997). Collateral for the line consist of accounts
receivable, inventory and general intangibles. As of December 31, 1997,
the balance was zero.
6. Building lease:
The shareholders lease a building to the Company. A mortgage on the
building, aggregating $1,622,000 at December 31, 1997, is guaranteed by
the Company. The Company does not require collateral for this
contingent liability.
Taxes, insurance and maintenance expenses related to the facility are
paid by the Company. Such expenses totalled $52,000 in 1997. Rent
expense on the facility aggregated $240,000 in 1997. Future minimum
lease payments are $240,000 per year through June 2001.
7. Equipment commitments and rent expense:
The Company executed two operating leases for a telecommunication
system and a data processing system, which require monthly payments of
approximately $3,300 through December 2004 and $5,000 through June
2003, respectively. Rent expense approximated $18,000 in 1997.
F-47
<PAGE> 91
Audited Financial Statements
WeRPets.com, Inc.
(A Development Stage Enterprise)
March 31, 2000 and the
period from July 2, 1999
(date of inception) through
March 31, 2000
with Report of Independent Auditors
F-48
<PAGE> 92
WeRPets.com, Inc.
(A Development Stage Enterprise)
Audited Financial Statements
March 31, 2000 and the period from
July 2, 1999 (date of inception) through March 31, 2000
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................................F-49
Audited Financial Statements
Statement of Financial Position.......................................................................F-50
Statement of Operations...............................................................................F-51
Statement of Stockholders' Equity (Deficit)...........................................................F-52
Statement of Cash Flows...............................................................................F-53
Notes to Financial Statements.........................................................................F-54
</TABLE>
F-49
<PAGE> 93
Report of Independent Auditors
The Stockholders of
WeRPets.com, Inc.
We have audited the accompanying statements of financial position of
WeRPets.com, Inc. ( a development stage enterprise) as of March 31, 2000, and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the period from July 2, 1999 (date of inception) through March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WeRPets.com, Inc. (a
development stage enterprise) at March 31, 2000, and the results of its
operations and its cash flows for the period from July 2, 1999 (date of
inception) through March 31, 2000 in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Nashville, Tennessee
April 7, 2000
F-50
<PAGE> 94
WeRPets.com, Inc.
(A Development Stage Enterprise)
Statement of Financial Position
March 31, 2000
<TABLE>
<S> <C>
ASSETS
Total assets $ --
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued professional fees $ 39,000
Accrued portal contract fees 6,932
Accrued other 3,350
----------
Total current liabilities 49,282
Stockholders' equity (deficit):
Common stock, $.01par value; 10,000 shares authorized; 10,000 shares
issued and outstanding 100
Additional paid-capital 50,816
Deficit accumulated during development stage (100,198)
----------
Total stockholders' equity (deficit) (49,282)
----------
Total liabilities and stockholders' equity (deficit) $ --
==========
</TABLE>
See accompanying notes.
F-51
<PAGE> 95
WeRPets.com, Inc.
(A Development Stage Enterprise)
Statement of Operations
Period from July 2, 1999 (date of inception) through March 31, 2000
<TABLE>
<S> <C>
Revenues $ --
General and administrative expenses 100,198
--------
Net loss $100,198
========
</TABLE>
See accompanying notes.
F-52
<PAGE> 96
WeRPets.com, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit)
Period from July 2, 1999 (date of inception) through March 31, 2000
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
--------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at date of inception
(July 2, 1999) -- $ -- $ -- $ -- $ --
Issuance of common stock 9,000 90 -- -- 90
Contributed capital -- -- 50,816 -- 50,816
Issuance of common stock in
accordance with the AHN/FIT
Internet, LLC agreement described
in Note 3 1,000 10 -- -- 10
Net loss -- -- -- (100,198) (100,198)
--------- --------- --------- --------- ---------
Balance at March 31, 2000 10,000 $ 100 $ 50,816 $(100,198) $ (49,282)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-53
<PAGE> 97
WeRPets.com, Inc.
(A Development Stage Enterprise)
Statement of Cash Flows
Period from July 2, 1999 (date of inception) through March 31, 2000
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $(100,198)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash capital contributions 50,916
Changes in operating assets and liabilities:
Accrued professional fees 39,000
Accrued portal contract fees 6,932
Accrued other 3,350
---------
Net cash used in operating activities --
FINANCING ACTIVITIES
Net cash provided by financing activities --
INVESTING ACTIVITIES
Net cash used in investing activities --
---------
Net increase in cash and cash equivalents --
Cash and cash equivalents at beginning of period --
---------
Cash and cash equivalents at end of period $ --
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Company expenses paid personally by shareholders $ 50,906
=========
Common stock issued in accordance with the AHN/FIT Internet, LLC agreement $ 10
=========
</TABLE>
See accompanying notes.
F-54
<PAGE> 98
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
WeRPets.com, Inc. (the Company) was incorporated July 2, 1999 and is based in
Nashville, Tennessee. For financial reporting purposes, the Company is
considered to be a development stage enterprise because planned principal
operations have not commenced. The Company is a pioneering Internet company that
plans to be a leading destination website and portal community for pet owners
and pet professionals. The Company plans to offer a broad range of pet products
in addition to developing communities and providing information on pet
ownership, health, nutrition, education, and entertainment.
The Company is establishing relationships with pet professionals in order to
build trust with the consumer and drive traffic through this professional
endorsement. The Company plans to provide pet professionals with value-added
services and fulfill their value proposition by offering Internet access to
clinical reference materials, continuing education, communication services, and
web pages. The Company plans to be a leading provider of value-added services to
veterinarians and other related professionals.
The Company plans to build its customer base by providing superior customer
service, convenience, product value, and comprehensive information. The Company
envisions being a leading provider of online pet products and animal content,
leading the market in its migration to a virtual pet superstore and pet
information and community center. The Company plans to differentiate itself
through its close relationships with veterinary and other professionals, a
strong global presence with World Telehealth, leveraging the media contacts and
notoriety of veterinary relationships, and the Company's exclusive portal
position with Galaxy.com.
FISCAL YEAR
The Company's fiscal year ends on June 30 of each year.
F-55
<PAGE> 99
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method of accounting for federal and state income
taxes as provided by SFAS No. 109. Under the liability method, the deferred tax
liability or asset is based on temporary differences between the financial
statement and income tax basis of assets and liabilities, measured at tax rates
that will be in effect when the differences reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ materially from these estimates.
2. COMMON STOCK
At its inception the Company was authorized to issue up to ten shares of $.01
par value Common Stock, all 10 of which were issued at inception. On March 9,
2000, the Company's charter was amended to authorize issuance of up to ten
thousand shares of Common Stock. On April 7, 2000, the Board of Directors caused
the issuance of 8,990 shares of Common Stock to founders and certain other
persons whom the Board of Directors had intended to become shareholders at or
near the Company's inception in July, 1999. Consistent with the stated intent of
the Board of Directors, the financial statements reflect the 10,000 share
authorization and issuance of 8,990 shares. An additional 1,000 shares were
issued in connection with the agreement discussed in Note 3.
All shares of Common Stock are one and the same class and when issued, will have
equal rights of participation in dividends and assets of the Company and will be
non-assessable. Each outstanding share of Common Stock will be entitled to one
vote on such matters requiring the vote of the shareholders.
3. AHN/FIT INTERNET, LLC ("AHN/FIT") CONTRACT
On July 23, 1999, the Company entered into an exclusive sponsorship, licensing
and promotion agreement ("Agreement") with AHN/FIT. AHN/FIT owns and operates a
web portal site located at Galaxy.com (the "Portal"). The initial term of the
Agreement is for thirty-six months commencing on the Launch Date. The Launch
Date is defined as the date on which the WeRPets.com logo becomes publicly
available for viewing on the pet vertical community of the Portal. The Launch
Date occurred on March 10, 2000.
The Agreement provides the Company with three distinct benefits. First, the
Company has a worldwide, exclusive, non-transferable license to access,
download, and use selected AHN/FIT pet and veterinary related content in the
operations of the WeRPets.com web site with certain restrictions. Second,
AHN/FIT agreed to sponsor the hosting and operation of the pet vertical
F-56
<PAGE> 100
3. AHN/FIT INTERNET, LLC ("AHN/FIT") CONTRACT (CONTINUED)
community devoted to the subjects of pets and will locate the AHN/FIT content in
this vertical community, and the Company was granted the exclusive right to be
the sole pet-related sponsor and retailer within this pet vertical. In addition,
the Company has the exclusive right to sell advertising within the pet vertical,
and AHN/FIT will prominently feature WeRPets.com and its products throughout the
Portal and in the pet vertical community. Third, AHN/FIT will provide
promotions, web links and advertisements online at AHN/FIT's website and the
Portal.
The Company and AHN/FIT have mutually agreed to allow royalty-free,
non-exclusive, non-transferable, worldwide license to use the others' respective
trademarks, service marks, tradenames, logos, designs, graphics, audio and
related marks that may arise.
Under this Agreement the Company is required to pay AHN/FIT an annual fee of
$110,000 for the licensing of the AHN/FIT content, payable in quarterly
installments following the Launch Date. On the Launch Date, the Company was
required to issue 1,000 shares of Common Stock to AHN/FIT representing ten
percent of the equity ownership as of the Launch Date. In addition, the Company
must pay to AHN/FIT 6% in the first year of the Agreement and 4% in all
subsequent years of the Net Advertising Revenue resulting from the Company's
sales of advertising on the Company's website. Net Advertising Revenue is
defined as all monetary consideration actually received by the Company for all
advertisements sold by the Company less agency discounts and third party
adverting sales representative commissions.
F-57
<PAGE> 101
4. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Federal State Total
------- ------ ------
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred -- -- --
------ ------ ------
Total $ -- $ -- $ --
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at March 31, 2000 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Capitalized start-up and organizational costs for tax purposes $ 37,456
--------
Total gross deferred tax assets 37,456
Less--valuation allowance (37,456)
--------
Net deferred tax assets $ --
========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The Company has established a valuation allowance
of $34,743 as of March 31, 2000 for such deferred tax assets to the extent such
amounts are not considered likely to be utilized to offset existing deferred tax
liabilities reversing in the same period.
The income tax expense (benefit) differs from the amount computed by applying
the federal statutory rate to income before income taxes for the year ended
March 31, 2000 as follows:
<TABLE>
<S> <C> <C>
Tax at U.S. statutory rates $(34,067) 34%
State income taxes, net of federal (4,007) 4
Change in valuation allowance 37,456 (37)
Other 618 (1)
-------- --------
$ -- -%
======== ========
</TABLE>
F-58
<PAGE> 102
5. STRATEGIC PARTNERSHIP
On March 19, 2000, the Company received a Memorandum of Understanding ("MOU")
from World Telehealth indicating its intent to enter into a strategic
partnership with the Company. The MOU gives the Company a preferred supplier
agreement whereby the Company will have the first right of refusal for one year
on any opportunity deemed within the final scope of a signed agreement. The
Company would be expected to provide e-commerce products and educational
information services for animal and pet healthcare. The Company would be
required to compensate World Telehealth with up to a 20% commission, depending
on product margin structure, on all sales of animal health and pet products that
would be identified as a result of the strategic partnership's marketing
efforts, principally within the G-77 community. As of the date of these
financial statements, a definitive agreement has not been signed. The
transaction is expected to close on or around April 30, 2000.
6. SUBSEQUENT EVENTS
On April 7, 2000, the Company entered into an agreement to sell all of the
Company's outstanding Common Stock to Pet Quarters, Inc. in exchange for 703,316
shares of Pet Quarters common stock, valued at $3.50 per share, and Pet
Quarters, Inc., assumption of all outstanding liabilities at March 31, 2000 and
$20,000 in legal fees, which are contingent on the transaction closing. The
transaction is expected to close in April 2000.
F-59
<PAGE> 103
ALLPETS.COM, INC.
FINANCIAL STATEMENTS
PERIOD FROM JANUARY 4, 1999 (INCEPTION)
TO DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report...............................................F-61
Financial Statements:
Balance Sheet...........................................................F-62
Statement of Operations.................................................F-63
Statement of Stockholders' Equity.......................................F-64
Statement of Cash Flows.................................................F-65
Notes to Financial Statements...........................................F-66
</TABLE>
F-60
<PAGE> 104
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
allpets.com, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of allpets.com, Inc., as of
December 31, 1999, and the related statements of operations, stockholders'
equity and cash flows for the period from January 4, 1999 (inception) to
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of allpets.com, Inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
period from January 4, 1999 (inception) to December 31, 1999 in conformity with
generally accepted accounting principles.
Clumeck, Stern, Phillips & Schenkelberg
CLUMECK, STERN, PHILLIPS & SCHENKELBERG
Certified Public Accountants
Encino, California
May 1, 2000
F-61
<PAGE> 105
ALLPETS.COM, INC.
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 724,484
Inventories 13,917
Prepaid expenses and other current assets 7,368
-----------
TOTAL CURRENT ASSETS 745,769
FIXED ASSETS, net of accumulated depreciation of $4,916 49,046
CAPITALIZED WEBSITE COST, net of accumulated
amortization of $22,902 389,326
INTANGIBLE ASSETS, net of accumulated amortization of $9,900 39,600
-----------
TOTAL ASSETS $ 1,223,741
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 353,354
Accrued expenses 24,039
Notes payable to stockholders 228,000
Income taxes payable 800
-----------
TOTAL CURRENT LIABILITIES 606,193
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Series A convertible preferred stock,
$.001 par value: authorized shares - 1,500,000;
issued and outstanding shares - 1,387,560 (aggregate
liquidation preference $1,450,000) 1,388
Common stock, $.001 par value: authorized shares -
10,000,000; issued shares - 3,660,290 3,660
Additional paid-in capital 1,525,478
Accumulated deficit (881,854)
Stock subscription receivable (31,026)
Detachable stock warrants 2
Treasury stock, 1,001,320 shares, at cost (100)
-----------
Total Stockholders' Equity 617,548
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,223,741
===========
</TABLE>
(See Notes to Financial Statements)
F-62
<PAGE> 106
ALLPETS.COM, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
SALES, net of allowances and discounts $ 15,314
COST OF SALES 6,223
---------
GROSS MARGIN 9,091
---------
OPERATING EXPENSES
Marketing and sales 284,931
General and administrative 632,404
---------
TOTAL OPERATING EXPENSES 917,335
---------
LOSS FROM OPERATIONS (908,244)
INTEREST INCOME 27,190
---------
LOSS BEFORE INCOME TAXES (881,054)
INCOME TAX EXPENSE 800
---------
NET LOSS $(881,854)
=========
</TABLE>
(See Notes to Financial Statements)
F-63
<PAGE> 107
ALLPETS.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock
------------------------- ------------------------- Additional
# of # of paid-in Accumulated
shares Amount shares Amount capital deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial issuance of
shares to founders
in exchange for
intangible assets -- -- 225,000 $ 225 $ 49,275 --
Issuance of Series A
convertible preferred
stock 1,387,560 $ 1,388 -- -- 1,448,612 --
Issuance of restricted
shares to consultant
for services -- -- 11,842 12 2,593 --
Issuance of restricted
stock to officers -- -- 129,187 129 28,292 --
Ten-for-one stock
split -- -- 3,294,261 3,294 (3,294) --
Purchase of treasury
stock -- -- -- -- -- --
Issuance of detachable
Stock warrants
Net loss for the period
January 4, 1999 (inception)
to December 31, 1999 -- -- -- -- -- $ (881,854)
----------- ----------- ----------- ----------- ----------- -----------
1,387,560 $ 1,388 3,660,290 $ 3,660 $ 1,525,478 $ (881,854)
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Stock Detachable --------------------------
subscription Stock # of
receivable Warrants shares Amount Total
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial issuance of
shares to founders
in exchange for
intangible assets -- -- -- $ 49,500
Issuance of Series A
convertible preferred
stock -- -- -- 1,450,000
Issuance of restricted
shares to consultant
for services $ (2,605) -- -- --
Issuance of restricted
stock to officers $ (28,421) -- -- --
Ten-for-one stock
split -- -- -- --
Purchase of treasury
stock -- (1,001,320) $ (100) (100)
Issuance of detachable
Stock warrants 2 2
Net loss for the period
January 4, 1999 (inception)
to December 31, 1999 -- -- -- -- (881,854)
----------- ----------- ----------- ----------- -----------
$ (31,026) $ 2 (1,001,320) $ (100) $ 617,548
=========== =========== =========== =========== ===========
</TABLE>
(See Notes to Financial Statements)
F-64
<PAGE> 108
ALLPETS.COM, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (881,854)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization 37,718
Changes in operating assets and
liabilities:
Inventories (13,917)
Prepaid expenses and other current assets (7,368)
Accounts payable, accrued expenses
and other payables 377,195
-----------
NET CASH USED IN OPERATING ACTIVITIES (488,226)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (53,962)
Purchase of website (412,228)
-----------
NET CASH USED IN INVESTING ACTIVITIES (466,190)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock (100)
Net proceeds from issuances of
Series A preferred stock 1,450,000
Proceeds from short-term borrowings 229,000
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,678,900
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 724,484
CASH AND EQUIVALENTS - Beginning of period --
-----------
CASH AND EQUIVALENTS - End of period $ 724,484
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for notes receivable $ 31,026
===========
Common stock issued for intangible assets $ 49,500
===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for -
Interest $ --
===========
Income taxes $ --
===========
</TABLE>
(See Notes to Financial Statements)
F-65
<PAGE> 109
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
allpets.com, Inc. (the "Company") was incorporated in the state of
Delaware on January 4, 1999. The Company is engaged in the sale over
the Internet of pet products, services, and information primarily in
the United States.
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 amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
Revenue Recognition
Revenues on product sales, net of discounts, coupons and allowances,
are recognized upon shipment of the related goods. Outbound shipping
and handling fees are included in net sales upon shipment. The Company
provides for an estimated allowance for sales returns in the period of
sale.
Capitalization of Website Development Cost
The Company has elected to capitalize website development cost under
SOP 98-1 issued by the Accounting Standards Executive Committee. Under
the SOP, qualifying computer software costs are required to be
capitalized and amortized over the software's estimated useful life.
The Company has elected to use a 36 month estimated life, and as of
December 31, 1999 had amortized approximately $22,900.
Marketing Agreements
The Company enters into various advertising, marketing and
co-marketing agreements which provide for certain advertising,
reciprocal advertising, promotional and customer acquisition
activities for terms generally not in excess of twelve months. See
Note 7 for discussion of long-term joint marketing agreement.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
The Company's cash equivalents consist mainly of money market funds.
F-66
<PAGE> 110
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. Inventory at December 31, 1999 consists of pet supplies
purchased for retail sales.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided using the straight-line method over the estimated useful lives
of the related assets, which range from five to seven years.
Fulfillment Expenses
The Company includes fulfillment expenses in marketing and sales in the
accompanying statement of operations.
Intangible Assets
Intangible assets, consisting primarily of copyrights, trademarks and
customer lists acquired, are recorded at cost. Amortization is provided
using the straight-line method over the estimated useful lives of the
related intangible assets of five years. The amortization expense for the
year ended December 31, 1999 is $9,900.
Sale of Stock
The Company has sold common and preferred stock in offerings that were
exempt from registration with the Securities and Exchange Commission.
Long-Lived Assets
The Company accounts for any impairment of its long-lived assets using
"SFAS" No. 121. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable. Recoverability of assets is measured by comparison of
the carrying amount of the asset to net future cash flows expected to be
generated from the asset. No impairment has been recognized in the
accompanying financial statements.
Concentration of Credit Risk
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized. The Company may maintain
deposits in excess of federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any credit risk on cash or cash equivalents.
F-67
<PAGE> 111
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, short-term debt and accounts
payable approximates carrying value due to the short-term nature of such
instruments. The fair value of the stockholders' notes receivable cannot be
determined as no market exists for such instruments.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation costs for stock-based employee compensation at fair
value. The Company has chosen to account for stock-based compensation
granted to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly,
compensation costs for stock options granted to employees is measured as
the excess, if any, of the fair value of the Company's stock at the date of
the grant over the amount that must be paid to acquire the stock.
Stock-based compensation issued to non-employees is measured and recorded
using the fair value method prescribed in SFAS No. 123. SFAS No. 123
requires companies that continue to follow APB No. 25 to provide a pro
forma disclosure of the impact of applying the fair value method of SFAS
No. 123 (see Note 7).
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to be recovered. Valuation
allowances are established, when necessary, to reduce deferred tax assets
to the amounts expected to be realized.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising
expenses of approximately $142,000 were incurred for the year ended
December 31, 1999.
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
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 were no items of other comprehensive income in 1999.
F-68
<PAGE> 112
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 2 - FIXED ASSETS
Fixed assets at December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Computer equipment $ 37,654
Office equipment 16,308
----------
53,962
Less accumulated depreciation 4,916
----------
$ 49,046
==========
</TABLE>
NOTE 3 - NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders at December 31, 1999 consist of unsecured
notes. The notes bear interest at 9% per year and mature in December 2000.
If the Company enters into an equity offering prior to the maturity date of
the notes, the stockholder has the option of converting the outstanding
principal and interest into common stock according to the terms and
conditions of the offering. The holders of the notes purchased warrants for
one dollar each entitling them to purchase Series A preferred stock at
$1.045 per share not to exceed 50% of the original notes payable. The
warrants are exercisable through December 17, 2004, and must be exercised
in the event of a public offering of at least $50,000,000.
NOTE 4 - INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes.
The components of the deferred tax assets and related valuation allowance
at December 31, 1999, are as follows:
<TABLE>
<S> <C> <C>
Fed CA
------------ ------------
Tax benefit of net operating loss carryforwards $ 299,169 $ 77,784
Valuation allowance (299,169) (77,784)
------------ ------------
-- --
============ ============
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed
a valuation allowance against its otherwise recognizable deferred tax
assets.
The Company has net operating losses for both federal and state tax
purposes of approximately $880,000 expiring in the years 2019 for federal
and 2007 for state. The net operating losses can be carried forward to
offset future taxable income. Utilization of the above carryforwards may be
subject to utilization limitations, which may inhibit the Company's ability
to use carryforwards in the future.
F-69
<PAGE> 113
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 5 - COMMITMENTS
Leases
The Company leases its office and warehouse facilities under noncancellable
operating leases, which call for fixed rental payments through July, 2000
and November, 2000, respectively. For the period ended December 31, 1999,
total rent expense incurred related to these leases amounted to $26,941.
At December 31, 1999, future lease commitments under these agreements were
as follows:
<TABLE>
<S> <C>
2000 $ 45,904
========
</TABLE>
Employment Agreements
The Company has employment contracts with executive officers which will
expire in March 2002. The agreements provide for minimum salary levels plus
annual bonuses at the sole discretion of the Board of Directors. The
aggregate commitment for future salaries at December 31, 1999 is
approximately $581,000.
NOTE 6 - STOCKHOLDERS' EQUITY
Convertible Preferred Stock
In April 1999, the Company issued 956,940 shares of Series A preferred
stock in a private placement offering in exchange for cash proceeds of
$1,000,000. In connection with the issuance of the Series A preferred
stock, the Articles of Incorporation were amended to increase the total
authorized number of common shares from the original 1,000,000 to
10,000,000, and to authorize the increase of Series A of preferred stock to
1,500,000 shares.
In June 1999, the Company issued 430,620 shares of Series A preferred stock
in a private placement offering in exchange for cash proceeds of $450,000.
Each share of the Company's Series A preferred stock is convertible into
one share of common stock at the option of the holder, subject to certain
antidilution adjustments, in accordance with the conversion formula
provided in the Company's Articles (currently on a 1:1 ratio). Outstanding
preferred shares convert into common stock at the option of the holder and
upon the closing of an initial public offering of the Company's common
stock in which the aggregate public offering price equals or exceeds
$6,000,000. Holders of each share of preferred stock are entitled to the
number of votes per share that would be equivalent to the number of shares
of common stock into which a share of preferred stock is convertible and
are entitled to dividends in preference to common stock, if and when
declared by the Board of Directors. The Company also granted the preferred
stockholders certain registration rights and agreed not to carry out
certain actions without prior approval of the holders of not less than
two-thirds of the outstanding preferred shares, voting together as a single
class.
F-70
<PAGE> 114
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series A preferred
stock are entitled to receive preference to the common stock holders to any
distribution of any assets of the Company in an initial amount per share
equal to $1.045 per share plus all declared but unpaid dividends. After the
initial distribution of assets, the holders of the Series A preferred stock
are entitled to participate with the holders of the common stock on a pro
rata basis until the holders of the Series A preferred stock have received
an aggregate of $5.22 (as adjusted for any stock splits, stock dividends,
recapitalizations, or the like).
Common Stock
On January 4, 1999, the Company issued 225,000 shares to the founders of
the Company in exchange for certain intangible assets including copyrights,
trademarks, the domain name www.allpets.com and customer lists. Intangible
assets totalling $49,500 were recorded based on management's estimate of
the fair value of the stock issued.
On April 1, 1999, the Company entered into an agreement whereby the Company
had an option to repurchase upon the occurrence of $1,000,000 of equity
financing, 1,001,320 shares of common stock held by an officer of the
Company. The Company exercised this option on April 23, 1999 at a cost of
$100. The repurchased shares are reserved for the 1999 Equity Participation
Plan (see Note 7).
On April 21, 1999, the Board of Directors declared a ten-for-one forward
stock split to holders of record on April 23, 1999. The effect of the stock
split has been retroactively applied.
Stockholders' Notes Receivable
In March 1999, the Board of Directors approved the issuance of 129,187
shares of common stock to key officers and 11,842 shares to an outside
consultant in exchange for notes receivable in the amount of $31,026. The
notes receivable have been recorded as a reduction of stockholders' equity
in the balance sheet at December 31, 1999. The notes bear interest at 5.0%
and are due with all accrued interest in March 2004 or upon transfer of any
of the purchased shares.
NOTE 7 - STOCK OPTIONS
In March 1999, the Board of Directors adopted the 1999 Equity Participation
Plan (the "Plan"). Under the terms of the Plan, the Board of Directors may
grant incentive and nonqualified stock options to employees, officers,
directors, consultants, and advisors of the Company. In connection with the
introduction of the Plan, 64,593 shares of common stock were reserved for
future issuance. During 1999, the Company increased the number of shares
reserved for issuance under such plan to 1,645,580 shares.
F-71
<PAGE> 115
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 7 - STOCK OPTIONS (CONTINUED)
The exercise price of the nonqualified stock options must be at least 85%
of the fair market value at the date of grant (110% in the case of a holder
of more than 10% of the Company's voting stock) and, in the case of
incentive stock options, at least 100% of the fair market value at the date
of grant (110% in the case of a holder of more than 10% of the Company's
voting stock.) Options generally vest over a four-year period and expire
ten years from the date of grant. Options granted to officers, directors or
consultants may become fully exercisable, subject to reasonable conditions
such as continued employment, at any time or during any period established
by the Company.
The plan also permits the granting of stock appreciation rights (SARs) to
holders of options. Such rights permit the optionee to surrender an
exercisable option, in whole or in part, on any date that the fair market
value of the Company's common stock exceeds the option price for the stock
and receive payment in cash, or, if the Board of Directors approves, in
common stock or any combination of cash and common stock. Such payment
would be equal to the excess of the fair market value of the shares under
the surrendered option over the option price for such shares. No SARs have
been granted or issued through December 31, 1999.
In October 1999, the Company entered into a joint marketing agreement under
which they receive joint advertising and marketing benefits through October
2002. In connection with this agreement, the Company granted 220,000
options to the co-marketer. The options have an exercise price of $1.045
and expire in October 2003. Marketing expense in the amount of $4,583 was
recorded during the period ended December 31, 1999 based on management's
estimate of the fair value of the stock options granted.
The following summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Number Exercise
of shares price Exercise date
--------- -------- --------------------
<S> <C> <C> <C>
Options outstanding at
January 4, 1999 --
Options granted 733,720 $ .10 Through April 2004
Options granted 220,000 $ 1.045 Through October 2003
Options exercised --
---------
Options outstanding at
December 31, 1999 953,720
=========
Weighted-average fair value of
options granted during the period $ .32
</TABLE>
Pro forma information regarding results of operations is required by SFAS
123, which also requires that the information be determined as if the
Company had accounted for its employee stock options under the fair value
method of SFAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted
average assumptions: a risk-free interest rate of 6.0% for the year ended
December 31, 1999, no dividend yield or volatility factors with respect to
the expected market price of the Company's common stock, and a weighted
average expected life of the options of five years.
F-72
<PAGE> 116
ALLPETS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 4, 1999 (INCEPTION) TO DECEMBER 31, 1999
NOTE 7 - STOCK OPTIONS (CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under the
plan calculated using the minimal value method of SFAS 123, the Company's
net loss would have been increased to $ 892,379 as of December 31, 1999.
NOTE 8 - RELATED PARTY TRANSACTIONS
A corporation owned by a stockholder rendered marketing and public relation
services to the Company in the amount of $30,180 for the period ended
December 31, 1999.
The Company leased office space on a month-to-month basis from April, 1999
through July, 1999 from a stockholder. Rent paid to the stockholder
amounted to $2,000 for the period ended December 31, 1999.
F-73
<PAGE> 117
PART II
ALL CAPITALIZED TERMS USED AND NOT DEFINED IN PART
II OF THIS REGISTRATION STATEMENT SHALL HAVE THE
MEANINGS ASSIGNED TO THEM
IN THE PROSPECTUS WHICH FORMS A PART OF THIS REGISTRATION STATEMENT
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in this Registration Statement, exclusive of those expenses to be
borne by the Selling Stockholders. All of such amounts (except the SEC
Registration Fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee $ 6,214
Accounting Fees and Expenses 50,000
Legal Fees and Expenses 75,000
Printing and Engraving Costs 25,000
Miscellaneous 10,000
---------
Total $ 166,214
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of our Articles of Incorporation provides that, under specified
circumstances, PetQuarters shall indemnify its directors, officers, employees,
or agents against expenses (including attorney's fees), judgments, fines, and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit, or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees, or
agents if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action (i.e., one by or in the right of the
corporation), indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees, or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article VII of our Articles of Incorporation provides that the Company's
directors will not be personally liable to PetQuarters or its stockholders for
monetary damages resulting from breaches of their fiduciary duty as directors
except (a) for any breach of the duty of loyalty to PetQuarters or our
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Arkansas Code
Annotated Section 4-27-833, which makes directors liable for unlawful dividends
or unlawful stock repurchases or redemptions, (d) for transactions from which
directors derive improper personal benefit, or (e) for liability to any third
party other than PetQuarters or its stockholders based upon an act, omission,
transaction, or breach of duty.
II-1
<PAGE> 118
Our directors and officers are also covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
1. The Company was founded by Matthew Hoff and Michael Parnell in May of 1997.
Mr. Hoff contributed $4,100 for 4,100,000 shares of the Company's $.001 par
value common stock. Mr. Parnell contributed $2,000 for 2,000,000 shares of
common stock.
2. During June and July of 1997, the Company conducted a private offering of
securities pursuant to Rule 504 of Regulation D. In the course of this
offering, the Company raised $105,000 in proceeds from the sale of
1,050,000 shares of common stock at $.10 per share. The offering was made
to twenty-one persons, including public investors not affiliated with the
Company. The Company offered its securities through its officers and
directors on a best efforts basis. Consequently, there were no underwriting
discounts or commissions.
3. In August of 1997, the Company conducted a second private offering of
securities pursuant to Rule 504 of Regulation D. In this offering, common
stock was sold at $.50 per share to fifty-two persons, many of whom were
current shareholders, raising an additional $828,433. This offering was
extended to persons who were affiliates with the Company or some private
investors. The Company offered its securities through its officers and
directors on a best efforts basis. Consequently, there were no underwriting
discounts or commissions.
4. In November of 1997, the Company issued 1,777,500 shares of its common
stock to acquire land and a building from Ammonia Hold, Inc ("Ammonia
Hold"). The stock had a fair market value of $888,750 and Ammonia Hold has
a substantial ownership interest in PetQuarters.
5. During the fiscal year ended on June 30, 1999, the Company issued 180,000
shares of its common stock to employee. These shares were issued to retain
the service of top management personnel. On September 9, 1999, the Company
issued 95,000 shares of common stock to Humboldt Industries employees to
retain them in management. An additional 1,146,417 shares were issued to
acquire Humboldt Industries and 153,334 were issued as part of the
financing for the Humboldt Industries acquisition. A total of 60,195 shares
were issued to three (3) vendors of the Company in order to secure their
service during fiscal year 1999. Each of the above transactions were
private transactions which did not involve a public offering. The
transactions were exempted pursuant to Section 4(2) and other provisions of
the Securities Act of 1933, as amended.
6. In October and December 1999, the Company issued 42,601 and 136,363 shares
of common stock, respectively, to accredited investors for total
consideration of $256,501. The shares were issued pursuant to exemptions
from registration under Section 4(2) of the Securities Act of 1933. The
proceeds from these sales were used for working capital purposes.
7. In November 1999, the Company issued 275,000 shares of its common stock to
the Sun Valley Trust in consideration for an extension of the maturity date
of the Bridge Loan. The value of
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<PAGE> 119
these shares on the date of issuance was approximately $483,001. The shares
were issued pursuant to an exemption from registration under Section 4(2)
of the Securities Act of 1933.
8. In January 2000, the Company issued 204,723 shares of common stock to each
of Michael Parnell and the Matthew J. Hoff Trust pursuant to conversion of
convertible notes. Each convertible note had a principal balance on the
date of conversion of $102,361.50. These shares were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of
1933.
9. The Company acquired all of the issued and outstanding shares of stock of
Wellstone Acquisition Corporation ("Wellstone") as of March 6, 2000, in
exchange for $225,000 in cash and 130,208 shares of the Company's $0.001
par value common stock. Wellstone was a wholly-owned subsidiary of TPG
Capital Corporation ("TPG"). The acquisition from TPG was a private
transaction pursuant to Section 4(2) of the Securities Act of 1933.
10. Between January 26 and March 1, 2000, the Company raised an additional
$1,471,102 through sales of its common stock pursuant to a private
placement. The Company sold 700,525 shares of its $0.001 par value common
stock to eighteen accredited investors at a price of $2.10 per share. These
transactions were exempt pursuant to Section 4(2) of the Securities Act of
1933. These shares were sold at $2.10 per share. Approximately One Million
Dollars ($1,000,000) of the funds raised pursuant to this offering were
utilized to make the February 3, 2000, principal payment on the Bridge
Loan. The remainder of the proceeds were used to pay general operating
expenses, web site development expenses and trade creditors of the Company.
11. On February 23, 2000, the Company entered into an agreement with AMRO
International ("AMRO") and Markham Holdings Limited ("Markham") whereby
AMRO purchased 380,952 shares and Markham purchased 95,238 shares of common
stock of the Company for $2.10 per share. AMRO also agreed to purchase an
additional 238,095 shares of common stock of the Company for $2.10 per
share as soon as the registration statement is declared effective by the
SEC. Pursuant to this agreement, AMRO and Markham also received,
collectively, warrants to purchase an additional 150,000 shares of common
stock of the Company for $4.6575 per share.
12. Upon effectiveness of the registration statement, AMRO and Markham can
reprice their shares if the price of the Company's common stock is less
than $2.10 per share. This repricing would result in a maximum of 714,286
additional shares being issued if the price of the Company's stock were
$1.05 per share or lower on the effective date of the registration
statement. For example, if the price of the Company's stock on the date the
registration statement is declared effective is $1.50 (i.e., $0.60 or less
than the $2.10 paid for the stock) , the repricing formula would divide
that number $.60 by 1.05 (a constant in the formula) to yield .57. This
number is then multiplied by the total number of shares originally
purchased (.57 x 714,286) to yield 407,143. AMRO and Markham would then be
entitled to receive a total of 407,143 additional shares of common stock.
In short, the formula works to give both AMRO and Markham the number of
shares that would be purchased on the effective date of the Form
registration statement that each could have purchased on that date had
their investment of occurred on the effective date of the registration
statement.
13. On March 15, 2000, PetQuarters entered into an equity line of credit
agreement with Splendid Rock Holdings, Ltd., a corporation organized under
the laws of the British Virgins Islands. Pursuant to this line of credit
agreement and subject to the satisfaction of certain conditions,
PetQuarters may sell and issue, from time to time, up to an aggregate of
$25,000,000 of its common stock. Splendid Rock is an accredited investor
and received warrants for participating in
II-3
<PAGE> 120
the transaction. The transaction was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) of that Act.
14. On April 27, 2000, the Company acquired all of the issued and outstanding
shares of WeRPets for $38,394 cash and 703,316 shares of our common stock.
The stock was issued to ten accredited investors who owned all of the
issued and outstanding shares of WeRPets. The cash payment must be made
within ninety days of April 27, 2000. The stock was issued pursuant to the
private placement exemption from registration in Section 4(2) of the
Securities Act of 1933.
15. Effective May 1, 2000, we acquired all of the outstanding equity securities
of Chartendure, Ltd., a company organized under the laws of the United
Kingdom, in exchange for 400,000 shares of PetQuarters common stock. The
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
16. On May 8, 2000, the Company sold 34,642 shares of its Series A Convertible
Preferred Stock to a total of thirty-two accredited investors. The
preferred stock was sold at a price of one hundred dollars ($100) per
share. Each share is convertible, into 100/1.3816 or 72.38 shares of common
stock. The common stock conversion ratio (i.e., the 1.3816 denominator)
reflects a 10-day average price of the Company's stock ending three days
prior to closing. That average was multiplied by 75% to yield the 1.3816
conversion price. The shares were sold pursuant to an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933. Keane
Securities Co., Inc., on a best-efforts basis, acted as a broker in this
transaction and received a warrant to purchase 3,464 preferred shares,
exercisable at $120 per share, and a commission of $316,626.
17. On May 30, 2000, the Company acquired all of the issued and outstanding
shares of AllPets.com from the eleven accredited investors who owned the
stock of AllPets. The purchase price was 3,652,785 shares of common stock.
An additional 594,732 shares will be issued if the closing bid on the
Company's common stock is at least $6.71875 per share for ten (10)
consecutive trading days prior to one year after the effective date of the
registration statement. An additional 594,747 shares will be issued upon
obtaining a listing on the Nasdaq Small Cap or Nasdaq National Market. This
exchange was made pursuant to the private placement exemption found in
Section 4(2) of the Securities Act of 1933.
Each of these transactions was completed without registration of the
respective securities under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transactions did not involve a
public offering. The purchasers were sophisticated with access to the kind of
information registration would provide and such purchasers acquired such
securities without a view toward the distribution thereof.
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<PAGE> 121
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit No. Description
----------- -----------
2.1 - Agreement of Purchase and Sale of Stock, dated as of
August 5, 1999, by and among Pet Quarters, Inc.,
Humboldt Industries, Inc., and the other parties
named therein.1
2.2 - Agreement of Purchase and Sale of Stock, dated as of
July 2, 1999, by and among Pet Quarters, Inc.,
Chartendure Limited, and the other parties named
therein. 1
2.3 - Agreement of Purchase and Sale of Stock, dated as of
April 14, 2000, by and among Pet Quarters, Inc.,
Chartendure Limited, and the other parties named
therein.*
2.4 - Agreement and Plan of Reorganization, dated as of
March 6, 2000, by and among Pet Quarters, Inc., and
Wellstone Acquisition Corporation.2
2.5 - Agreement of Purchase and Sale of Stock, dated as of
April 14, 2000, by and among Pet Quarters, Inc., and
the shareholders named therein.3
2.6 - Agreement and Plan of Merger, dated as of May 30,
2000, by and among Pet Quarters, Inc., and
Allpets.com, Inc.*
3.1 - Articles of Incorporation, as amended, of Pet
Quarters, Inc. 1
3.2 - Articles of Amendment of Pet Quarters, Inc., dated
May 8, 2000, designating the Series A Convertible
Preferred Stock.*
3.3 - Bylaws of Pet Quarters, Inc. 1
5.1 - Opinion of Wright, Lindsey & Jennings LLP
10.1 - Agreement of Lease, dated as of August 5, 1999, by
and among Jack and Helene Rosezweig and Humboldt
Industries Incorporated.*
10.2 - Option Agreement, dated as of August 5, 1999, by and
among Jack and Helene Rosenzweig and Humnoldt
Industries Incorporated.*
10.3 - Agreement between B-III Capital, LLC and Pet
Quarters, Inc., dated as of November 8, 1999.*
10.4 - First Amendment to Services Agreement between B-III
Capital, LLC and Pet Quarters, Inc., dated as of
March 21, 2000.*
10.5 - Letter Agreement between Pet Quarters, Inc. and
Ladenburg Thalmann & Co., Inc., dated February 7,
2000.*
10.6 - Letter Agreement between Pet Quarters, Inc. and
Ladenburg Thalmann & Co., Inc., dated February 7,
2000.*
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<PAGE> 122
10.7 - Private Equity Line of Credit Agreement, between
Splendid Rock Holdings, Ltd. and Pet Quarters, Inc.,
dated as of March 15, 2000, as amended.*
10.8 - Loan Agreement, dated May 2, 2000, between Pet
Quarters, Inc. and AMRO International, S.A., as
amended.*
10.9 - Sponsorship, Licensing, and Promotion Agreement,
dated as of July 23, 1999, by and between
WeRPets.com, Inc. and AHN/FIT Internet, LLC.*
10.10 - Amendment No. 1 to Sponsorship, Licensing, and
Promotion Agreement, dated as of March 1, 2000, by
and between WeRPets.com, Inc. and AHN/FIT Internet,
LLC.*
10.11 - Employment Agreement with Steven B. Dempsey.*
10.12 - Employment Agreement with Gregg Rollins.*
10.13 - Employment Agreement with Niloo Howe.*
10.14 - Employment Agreement with Jack Rosenzweig.*
10.15 - Employment Agreement with Helene Rosenzweig.*
10.16 - Employment Agreement with Melanie Rosenzweig.*
10.17 - Employment Agreement with Mike Kelly.*
10.18 - Employment Agreement with Judith Patterson.*
10.19 - Professional Services Agreement, dated June 6, 2000,
between Pet Quarters, Inc. and Dino Moshova.*
10.20 - Professional Services Agreement, dated May 1, 2000,
between Pet Quarters, Inc. and Patric Judge.*
11.1 - Statement re Computation of Earnings Per Share
21.1 - List of Subsidiaries.*
23.1 - Consent of Ernst & Young LLP.
23.2 - Consent of Crouch, Bierwolf & Chisholm.
23.3 - Consent of Kronick Kalada Berdy & Co., P.C.
23.4 - Consent of Clumeck, Stern, Phillips & Schenkelberg.
23.5 - Consent of Wright, Lindsey & Jennings LLP. (included
in Exhibit 5.1)
24.1 - Power of Attorney. (included on signature page
hereto)
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<PAGE> 123
27.1 - Financial Data Schedule.
27.2 - Financial Data Schedule.
------------------------------
* Previously filed.
1 Incorporated by reference from the registrant's Form 10SB-12g,
filed on December 10, 1999.
2 Incorporated by reference from the registrant's Form 8-K,
filed on March 7, 2000.
3 Incorporated by reference from the registrant's Form 8-K,
filed on May 12, 2000.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
II-7
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Little
Rock, State of Arkansas, as of July 6, 2000.
PET QUARTERS, INC.
By: /s/ Steven Dempsey
-----------------------------------------
Steven Dempsey, Chairman and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Steve
Dempsey and Gregg Rollins, and each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, and any and all instruments or
documents filed as part of or in connection with this Registration Statement or
the amendments thereto and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his substitutes, shall do
or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------------ --------------------------------------- ----------------------
<S> <C> <C>
/s/ Steven Dempsey Chairman of the Board and Chief July 6, 2000
------------------------------------ Executive Officer
Steven Dempsey (Principal Executive Officer)
/s/ Gregg Rollins Chief Financial Officer July 6, 2000
------------------------------------ (Principal Financial and Accounting
Gregg Rollins Officer)
/s/ Dino Moshova* Director July 6, 2000
------------------------------------
Dino Moshova
/s/ Robert Brown, III* Director July 6, 2000
------------------------------------
Robert Brown, III
By: /s/ Steven Dempsey
---------------------------------
Steven Dempsey, as Attorney-
in-Fact pursuant to power of
attorney contained in the
Company's Registration Statement
on Form S-1 (No. 333-38872) as
filed on June 8, 2000.
</TABLE>
II-8
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C> <C>
2.1 - Agreement of Purchase and Sale of Stock, dated as of
August 5, 1999, by and among Pet Quarters, Inc.,
Humboldt Industries, Inc., and the other parties
named therein.1
2.2 - Agreement of Purchase and Sale of Stock, dated as of
July 2, 1999, by and among Pet Quarters, Inc.,
Chartendure Limited, and the other parties named
therein. 1
2.3 - Agreement of Purchase and Sale of Stock, dated as of
April 14, 2000, by and among Pet Quarters, Inc.,
Chartendure Limited, and the other parties named
therein.*
2.4 - Agreement and Plan of Reorganization, dated as of
March 6, 2000, by and among Pet Quarters, Inc., and
Wellstone Acquisition Corporation.2
2.5 - Agreement of Purchase and Sale of Stock, dated as of
April 14, 2000, by and among Pet Quarters, Inc., and
the shareholders named therein.3
2.6 - Agreement and Plan of Merger, dated as of May 30,
2000, by and among Pet Quarters, Inc., and
Allpets.com, Inc.*
3.1 - Articles of Incorporation, as amended, of Pet
Quarters, Inc. 1
3.2 - Articles of Amendment of Pet Quarters, Inc., dated
May 8, 2000, designating the Series A Convertible
Preferred Stock.*
3.3 - Bylaws of Pet Quarters, Inc. 1
5.1 - Opinion of Wright, Lindsey & Jennings LLP
10.1 - Agreement of Lease, dated as of August 5, 1999, by
and among Jack and Helene Rosezweig and Humboldt
Industries Incorporated.*
10.2 - Option Agreement, dated as of August 5, 1999, by and
among Jack and Helene Rosenzweig and Humnoldt
Industries Incorporated.*
10.3 - Agreement between B-III Capital, LLC and Pet
Quarters, Inc., dated as of September 24, 1999.*
10.4 - First Amendment to Services Agreement between B-III
Capital, LLC and Pet Quarters, Inc., dated as of
October 25, 1999.*
10.5 - Letter Agreement between Pet Quarters, Inc. and
Ladenburg Thalmann & Co., Inc., dated February 7,
2000.*
10.6 - Letter Agreement between Pet Quarters, Inc. and
Ladenburg Thalmann & Co., Inc., dated February 7,
2000.*
</TABLE>
II-9
<PAGE> 126
<TABLE>
<S> <C> <C> <C>
10.7 - Private Equity Line of Credit Agreement, between
Splendid Rock Holdings, Ltd. and Pet Quarters, Inc.,
dated as of March 15, 2000, as amended.*
10.8 - Loan Agreement, dated May 2, 2000, between Pet
Quarters, Inc. and AMRO International, S.A., as
amended.*
10.9 - Sponsorship, Licensing, and Promotion Agreement,
dated as of July 23, 1999, by and between
WeRPets.com, Inc. and AHN/FIT Internet, LLC.*
10.10 - Amendment No. 1 to Sponsorship, Licensing, and
Promotion Agreement, dated as of March 1, 2000, by
and between WeRPets.com, Inc. and AHN/FIT Internet,
LLC.*
10.11 - Employment Agreement with Steven B. Dempsey.*
10.12 - Employment Agreement with Gregg Rollins.*
10.13 - Employment Agreement with Niloo Howe.*
10.14 - Employment Agreement with Jack Rosenzweig.*
10.15 - Employment Agreement with Helene Rosenzweig.*
10.16 - Employment Agreement with Melanie Rosenzweig.*
10.17 - Employment Agreement with Mike Kelly.*
10.18 - Employment Agreement with Judith Patterson.*
10.19 - Professional Services Agreement, dated June 6, 2000,
between Pet Quarters, Inc. and Dino Moshova.*
10.20 - Professional Services Agreement, dated May 1, 2000,
between Pet Quarters, Inc. and Patric Judge.*
11.1 - Statement re Computation of Earnings Per Share
21.1 - List of Subsidiaries.*
23.1 - Consent of Ernst & Young LLP.
23.2 - Consent of Crouch, Bierwolf & Chisholm.
23.3 - Consent of Kronick Kalada Berdy & Co., P.C.
23.4 - Consent of Clumeck, Stern, Phillips & Schenkelberg.
23.5 - Consent of Wright, Lindsey & Jennings LLP. (included
in Exhibit 5.1)
24.1 - Power of Attorney. (included on signature page
hereto)
27.1 - Financial Data Schedule.
27.2 - Financial Data Schedule.
----------
* Previously filed.
1 Incorporated by reference from the registrant's Form 10SB-12g,
filed on December 10, 1999.
2 Incorporated by reference from the registrant's Form 8-K,
filed on March 7, 2000.
3 Incorporated by reference from the registrant's Form 8-K,
filed on May 12, 2000.
</TABLE>
