<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to______
Commission File Number 000 27037
MOTHERNATURE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2832064
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Concord Farms, 490 Virginia Road
Concord, Massachusetts 01742
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 929-2000
------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days: Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 2, 2000
----- -------------------------------
Common Stock, $0.01 par value 15,151,330
<PAGE>
MOTHERNATURE.COM, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. A) Balance Sheets at September 30, 2000 and
December 31, 1999 1
B) Statements of Operations for the Three and
Nine Months Ended September 30, 2000 and 1999 2
C) Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 3
D) Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MOTHERNATURE.COM, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $44,152 $25,114
Accounts receivable 183 313
Inventories 2,251 1,497
Prepaid advertising and other expenses 7,593 623
------- -------
Total current assets 54,179 27,547
Property and equipment, net 2,194 1,522
Intangible assets 14,908 10,065
Loan to Officer - 125
Other assets 93 81
------- -------
Total assets $71,374 $39,340
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 1,925 $ 690
Accrued expenses 3,018 2,447
Accrued compensation 364 1,812
Other current liabilities 29 77
Current portion of capital lease obligations 68 71
Current portion of notes payable 16 -
-------- --------
Total current liabilities 5,420 5,097
Long-term portion of capital lease obligations 226 173
Other liabilities 32 49
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value:
Authorized 93,300,000 shares; issued and
outstanding 15,118,198 and 15,151,330
shares at December 31, 1999
and September 30, 2000, respectively 151 152
Additional paid-in-capital 133,784 133,235
Deferred compensation (1,879) (940)
Accumulated deficit (66,360) (98,426)
-------- --------
Total shareholders' equity 65,696 34,021
-------- --------
Total liabilities and shareholders' equity $ 71,374 $ 39,340
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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MOTHERNATURE.COM,INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 1,634 $ 3,033 $ 2,589 $ 10,536
Cost of sales 1,419 2,120 2,264 7,421
-------- ------- -------- --------
Gross profit 215 913 325 3,115
-------- ------- -------- --------
Operating expenses
Selling and marketing 14,910 3,792 25,296 23,580
Product development 1,900 1,257 4,455 4,297
General and administrative 2,544 2,782 5,020 8,384
Restructuring costs - 359 - 359
-------- ------- -------- --------
Total operating expenses 19,354 8,190 34,771 36,620
Operating loss (19,139) (7,277) (34,446) (33,505)
-------- ------- -------- --------
Interest income 389 570 769 1,484
Interest expense (36) (9) (109) (44)
-------- ------- -------- --------
Net loss (18,786) (6,716) (33,786) (32,065)
======== ======= ======== ========
Basic and diluted net loss
per common share $ (17.96) $ (0.44) $ (39.89) $(2.12)
========= ======= ======== ======
Shares used to compute
basic and diluted net
loss per common
share 1,045,811 15,150,605 846,964 15,130,759
=========== ========== ======== ==========
Pro forma basic and
diluted net loss
per common share $(1.93) $(0.44) $(4.06) $(2.12)
======= ====== ====== ======
Shares used to compute pro forma
basic and diluted net loss per
common share 9,721,314 15,150,605 8,329,730 15,130,759
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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MOTHERNATURE.COM, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------
September 30, 1999 September 30, 2000
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(33,786) $(32,065)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 459 957
Loss on disposal of equipment 32 8
Compensation expense relating to common
stock options and warrants 267 34
Amortization of deferred compensation 504 397
Amortization of debt discount 5 2
Amortization of intangible assets 413 4,843
Changes in operating assets and liabilities-
Accounts receivable (102) (130)
Inventories (2,317) 754
Prepaid expenses (100) 6,970
Other assets (915) 12
Accounts payable 4,786 (1,235)
Accrued expenses 6,249 (571)
Accrued compensation 540 1,448
Other current liabilities (2) 48
Other liabilities - 17
------- --------
Net cash used in operating activities (23,967) (18,511)
INVESTING ACTIVITIES:
Purchases of property and equipment (2,253) (293)
Loan to Officer - (125)
------- --------
Net cash used in investing activities (2,253) (418)
FINANCING ACTIVITIES:
Repayments of capital lease obligations (11) (51)
Repayments of notes payable (16) (18)
Proceeds from Series B preferred stock offering,
net of issuance costs 1,579 -
Proceeds from Series C preferred stock offering,
net of issuance costs 41,004 -
Proceeds from initial public offering,
net of issuance costs - (55)
Proceeds from exercise of common stock options
and warrants 67 15
------- --------
Net cash provided by (used in)
financing activities 42,623 (109)
------- --------
Net increase (decrease) in cash $16,403 $(19,038)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $11,244 $ 44,152
CASH AND CASH EQUIVALENTS, END OF PERIOD $27,647 $ 25,114
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2 $ 23
======= ========
Cash paid during the year for taxes $ 38 $ 114
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MOTHERNATURE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(1) DESCRIPTION OF BUSINESS
MotherNature.com, Inc. ("MotherNature.com" or the "Company"), is an online
retail store and information site for vitamins, supplements, minerals and other
natural and healthy living products. The Company currently offers approximately
18,400 products on its site and can special order additional products through
its supplier relationships. MotherNature.com also provides educational and
authoritative news and information about its products and healthy living in
general.
The Company has built upon its retail business strengths, including its
knowledge of the natural products industry, memorable brand name, wealth of
content, broad product assortment and warehousing and customer service
capabilities, to expand its business strategy beyond the retail market.
Since its inception, the Company has incurred significant losses and as of
September 30, 2000 had an accumulated deficit of approximately $98.4 million.
The Company has incurred costs to develop and enhance its technology, to create,
introduce and enhance its Web site, to establish marketing and distribution
relationships and to build its administrative organization.
The Company has been funded principally from the issuance of preferred stock in
June/July 1998, December 1998/January 1999 and May 1999 (the Series A, B-1 and C
Preferred Financings) with gross proceeds of $7.2 million, $12.0 million and
$42.0 million, respectively. In addition, on December 10, 1999, the Company
completed its initial public offering with gross proceeds of $53.3 million (see
Note 7).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosures required for complete
financial statements are not included herein. It is recommended that these
financial statements be read in conjunction with the consolidated financial
statements and related notes of MotherNature.com, Inc. as reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position, results of operations, and cash flows at the dates and for the periods
presented have been included. The balance sheet presented as of December 31,
1999 has been derived from the financial statements that have been audited by
the Company's independent public accountants. The results of operations for the
quarter ended and year to date as of September 30, 2000 may not be indicative of
the results that may be expected for the year ended December 31, 2000, or any
other period.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and reported
amounts of net sales and expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive Income
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company had no material
comprehensive income in any of the periods presented.
Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
4
<PAGE>
The Company operates in a single business segment selling vitamins, supplements,
minerals and other natural and healthy living products online. International
sales were 4.9% and 9.6% of revenues for the third quarters of 1999 and 2000,
respectively. Respective year to date international sales at September 30, 1999
and 2000 are 7.4% and 7.2%
(3) PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effect of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock.
The weighted average common shares outstanding, including the dilutive effect of
outstanding options and warrants, and the pro forma weighted average number of
common shares outstanding for the years ended September 30, 1999 and 2000 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
Weighted average common
shares used in basic and
diluted EPS calculation 1,045,811 15,150,605 846,964 15,130,759
Weighted average convertible
preferred shares assumed to
convert to common shares 8,675,503 - 7,482,766 -
Weighted average number of
common shares used in pro forma
basic and diluted EPS calculation 9,721,314 15,150,605 8,329,730 15,130,759
Shares under option plans,
warrants and convertible preferred
stock excluded in computation of
diluted earnings per share
due to antidilutive effects 10,202,449 1,346,737 10,202,449 1,346,737
</TABLE>
(4) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively derivatives), and for hedging activities. As issued, SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999, with earlier application encouraged. In May 1999, the FASB delayed the
effective date of SFAS No. 133 for one year to fiscal years beginning after June
15, 2000. The Company does not currently nor does it intend in the future to
issue derivative instruments and, therefore, does not expect that the adoption
of SFAS No. 133 will have any impact on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. The SEC
deferred the effective date of this bulletin to the fourth quarter of 2000. SAB
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosure related to revenue recognition policies. The
Company believes that the impact of SAB 101 will not have a material effect on
our financial position or results of operations.
In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs". This consensus requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue. The Company already
classifies shipping charges to customers as revenue. The EITF did not reach a
consensus with respect to the classification of costs related to shipping and
handling incurred by the seller. The Company classifies inbound and outbound
shipping costs as cost of sales. The Company does not currently impose separate
handling charges on customers. It classifies costs incurred in operating and
staffing distribution and customer service centers (including costs attributable
to receiving, inspecting and warehousing inventories; picking, packaging and
preparing customers' orders for shipment; and responding to inquiries from
customers) as sales and marketing expenses along with the cost of tangible
supplies used to package product for shipment to customers. Credit card fees are
charged to general and administrative expense.
5
<PAGE>
(5) SIGNIFICANT SUPPLIERS
The Company purchases a majority of its product from two suppliers. These
suppliers accounted for approximately 53% and 30% of the Company's inventory
purchases in the third quarter of 1999 and 2000, respectively. The Company has
no long-term contracts or arrangements with any of its vendors that guarantee
the availability of merchandise, the continuation of particular payment terms or
the extension of credit limits. There can be no assurance that the Company's
current vendors will continue to sell merchandise to the Company on current
terms or that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable credit terms.
6
<PAGE>
(6) RELATED PARTY TRANSACTIONS
The Company has, in the past, purchased inventory from a vendor, which is owned
by a shareholder's relative. For the quarter and nine months ended September 30,
1999, the Company purchased $39,000 and $86,300, respectively, of inventory from
this vendor. The Company did not purchase inventory from this vendor during the
third quarter of 2000 and purchased less than $1,000 of inventory from this
vendor during the nine months ended September 30, 2000.
The Company has a Web site hosting agreement with Navisite, Inc. CMGI, Inc. owns
approximately 68.5% of Navisite's outstanding common stock. During the quarters
ended September 30, 1999 and 2000, the Company paid service fees to Navisite,
Inc. of $21,800 and $47,200, respectively. For the nine months ended September
30, 1999 and 2000, the Company paid service fees to Navisite, Inc. of $73,800
and $136,200, respectively.
On May 2, 2000, the Company loaned $125,000 to an officer, pursuant to a non-
recourse, promissory note that bears interest at the prime rate plus 2% per year
and is payable in full on April 14, 2003.
(7) INITIAL PUBLIC OFFERING
In July 1999, the Company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit the
Company to sell shares of its common stock to the public.
Also in July 1999, the Company filed an amendment to its certificate of
incorporation increasing the number of shares of common stock into which each
share of Series C Preferred would automatically convert in connection with a
public offering of its equity securities from approximately 0.13 shares of
common stock to approximately 0.14 shares of common stock, subject to certain
conditions related to the offering. At the same time, holders of the series A
shares, series B-1 shares and series C shares agreed to automatic conversion of
their series A shares, series B-1 shares and series C shares, respectively, into
shares of the Company's common stock.
In October 1999, the Company's Board of Directors approved, subject to
stockholder approval, an amendment to the Company's certificate of incorporation
increasing the number of shares of common stock into which each share of Series
C Preferred would automatically convert, in connection with a public offering of
its equity securities from approximately 0.14 shares of common stock to
approximately 0.15 shares of common stock, subject to certain conditions related
to the offering. This amendment to the Company's certificate of incorporation
also prevented any further adjustments to the number of shares of common stock
issuable upon conversion of the Series C Preferred.
Pursuant to antidilution adjustments, upon exercise of the warrant issued to an
investment bank for services provided in connection with the Series C Preferred
Financing, an additional 6,320 shares of common stock will be issuable. Upon
completion of the Company's initial public offering, the Series A, Series B-1
and Series C Preferred converted into 9,055,392 shares of common stock. Of the
shares, the Series C Preferred stockholders received 379,889 additional shares
of common stock which were issued as an inducement to convert their shares at
the consummation of the offering. The value of the shares, approximately $4.9
million based upon the initial public offering price of $13.00 per share, was
treated similarly to a special dividend to the preferred stockholders and
accounted for at the time of the offering within equity through the accumulated
deficit and additional paid-in capital accounts.
On December 9, 1999, the Company's registration statement on Form S-1 became
effective. The managing underwriters were Bear, Stearns & Co., Inc.; Hambrecht &
Quist; and Wit Capital Corporation. The offering consisted of 4,100,000 shares
of the Company's common stock. The aggregate gross proceeds from the shares
offered and sold was $53.3 million. After deducting approximately $3.7 million
in underwriting discounts and commissions and approximately $1.2 million in
other expenses, the Company received net proceeds of $48.4 million.
(8) STOCK COMPENSATION PLANS
On May 1, 2000, the Company's Board of Directors authorized a re-pricing of
certain outstanding stock options. As a result, the Company replaced 684,963
stock options granted at prices between $2.99 and $22.39, with 684,963 options
at an exercise price of $2.6875, the fair market value of the Company's common
stock at the date of the re-pricing. The vesting periods remained unchanged from
the original option grants. The Company will account for this re-pricing under
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25. The interpretation
states that the re-pricing results in variable plan accounting commencing at
July 1, 2000, the effective date of the interpretation. During each reporting
period, the Company will record compensation expense relating to the vested
portion of the repriced options to the extent that the fair market value of the
Company's common stock exceeds $2.6875 per share. During the three months ended
September 30, 2000, no compensation expense was recorded.
7
<PAGE>
At meetings held on August 11, 2000 and September 15, 2000, the Company's Board
of Directors authorized a re-pricing of certain outstanding stock options. As a
result, the Company exchanged 100,456 stock options granted to an executive
officer at an exercise price of $2.69 with 100,456 stock options at an exercise
price of $0.7188, the fair market value of the Company's common stock at the
date of the re-pricing. The vesting periods of these stock options remain
unchanged. The Company will account for this re-pricing under FASB
Interpretation No. 44. The interpretation states that the re-pricing results in
variable plan accounting commencing at the date of the repricing. At each
reporting date, the Company will record compensation expense relating to the
vested portion of the repriced options to the extent that the fair market value
of the Company's common stock exceeds $0.7188 per share. For the period ended
September 30, 2000, the Company recorded $2,000 in compensation expense related
to the repriced options .
(9) COMMITTMENTS AND CONTINGENCIES
In March 2000, the Company's Board of Directors authorized an employee retention
bonus plan. Pursuant to the plan, employees who were eligible on March 2, 2000
received retention bonus payments as of June 30, 2000 and September 30, 2000 if
they were employed by the Company on those dates. The September 30 bonus was
paid in early October 2000.
(10) SUBSEQUENT EVENTS
On October 20, 2000 the Company's Board of Directors unanimously adopted a
Complete Plan of Liquidation and Dissolution (the "Plan"), subject to
stockholder approval. In connection with the Plan and assuming stockholder
approval, the Company's Board of Directors voted to accelerate the vesting of
all outstanding stock options under the Company's 1998 Stock Plan.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an online retail store and information site for vitamins, supplements,
minerals and other natural and healthy living products. By offering
approximately 18,400 products on our site, we provide one-stop shopping for
customers, 24 hours a day, seven days a week. Our online store,
www.MotherNature.com, offers educational and authoritative information, broad
product selection, a high level of customer service, competitive pricing and
easy-to-use navigation and search capabilities. We have continued to focus on
building our organization, developing our technology infrastructure, further
developing and upgrading our Web site, driving profitable customer traffic,
expanding our product assortment, promoting our brand and enhancing our
fulfillment and customer service operations. During 1999 and the first quarter
of 2000, we invested in an aggressive, offline advertising campaign,
supplemented by online advertising, business incentive programs, direct
marketing and a public relations campaign, which we believe was successful in
increasing consumer awareness of our site, acquiring new customers, and
generating sales revenues.
Quarterly revenues increased from $1.6 million in the third quarter of 1999 to
$3.0 million in the third quarter of 2000. In order to manage the increase in
our site traffic and revenues, we expanded our site, order fulfillment
operations, distribution center management systems and organizational
infrastructure. This expansion included enhancing the features and functions on
our site, adding server and database capacity, building our internally developed
order fulfillment and logistics system, enhancing it with a warehouse management
system and moving our order fulfillment center to a 25,000 square foot facility
in Springfield, Massachusetts. The $391,000 decrease in revenue from the second
quarter of 2000 ($3.4 million) to the third quarter of 2000 ($3.0 million) is a
direct result of our decreased marketing and offline media expenses. Despite the
growth in our year over year revenues, we continue to incur significant net
losses.
We recognize revenue at the time of shipment. Cash is generally collected in
less than a week as substantially all of our sales are paid for by credit card.
Advertising expenditures are expensed as incurred.
DECISION TO LIQUIDATE
On October 20, 2000 the Board of Directors elected to adopt the Plan. It is
anticipated that if the requisite stockholder approval is received (such time of
approval is deemed the "Effective Date"), our officers and directors will
initiate the complete liquidation and subsequent dissolution of the Company.
After the Effective Date, we will not engage in any business activities except
for the purpose of preserving the value of our assets, prosecuting and defending
lawsuits by or against us or our subsidiaries, adjusting and winding up our
business and affairs, selling and liquidating our properties and assets,
including our intellectual property and other intangible assets, paying our
creditors and making distributions to stockholders, in accordance with the Plan.
In addition, after the Effective Date, we will file a Certificate of Dissolution
with the Secretary of State of the State of Delaware.
8
<PAGE>
A Proxy Statement for the shareholder meeting called to approve the Plan is
being mailed to the Company's stockholders on November 8, 2000 to all
stockholders of record of the Company as of October 30, 2000. As further
described in the Proxy Statement, the Company anticipates that it will be able
to distribute an aggregate amount of approximately $1.00 per share (subject to
certain amounts withheld to pay contingency reserves) pursuant to the Plan.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net Sales. Net sales consist of product sales to customers net of product
returns, promotional discounts and coupons, and include shipping and handling
charges. Net sales increased approximately 2 times to $ 3.0 million for the
three months ended September 30, 2000 from $1.6 million for the three months
ended September 30, 1999. The increase in net sales reflects an increase to
average order size, which increased during the third quarter of 2000 ($39)
compared to the same period of 1999 ($18). We added 58,000 new customers in the
third quarter of 2000, bringing the cumulative customer count to approximately
450,000 compared to 87,000 customers at the end of the third quarter in 1999.
We also raised our freight charges to more accurately reflect actual cost, which
minimizes the freight subsidy we incur.
Cost of Sales. Cost of sales consists primarily of the costs of merchandise,
including outbound shipping costs. Cost of sales does not include the cost of
products associated with promotional discounts and coupons used for new customer
purchases, which are included in selling and marketing expense. Cost of sales
includes the cost of shipments except for free shipping offered to first-time
customers which is also included in selling and marketing expense. Cost of sales
increased to $2.1 million for the quarter ended September 30, 2000 from $1.4
million for the quarter ended September 30, 1999, reflecting increased sales
volume. Our gross margin increased to 30% of net sales for the three months
ended September 30, 2000 from 13% of net sales for the three months ended
September 30, 1999. This increase was primarily due to the continued shift in
our mix of new to existing customers and increased freight revenue. With regard
to our customer mix, new customers accounted for only 32% of sales in the third
quarter of 2000, as compared to 60% in the third quarter of 1999. The lower
margin new customer sales exerted a significant downward pressure on margins in
the third quarter of 1999. The shift in the third quarter of 2000 toward higher
margin existing customer orders increased our merchandise margins to
approximately 32% from approximately 24%, in the third quarters of 2000 and
1999, respectively. We increased shipping charges and eliminated our free
freight promotion, which also resulted in a reduction in the freight subsidy
from $1.57 per order to $0.69 per order, respectively for the third quarter of
1999 compared to the corresponding period in 2000.
Selling and Marketing Expense. Selling and marketing expense consists primarily
of advertising and promotional expenditures, including the cost of products
associated with promotional discounts and coupons used for new customer
purchases, Web content expenditures, fulfillment facility and customer service
expenses, and payroll and related expenses for personnel engaged in marketing,
content, order fulfillment and customer service operations. Selling and
marketing expenses decreased to $3.8 million for the quarter ended September 30,
2000 from $14.9 million for the corresponding quarter in 1999. This decrease was
attributable primarily to a decrease in marketing personnel costs and a decrease
in the expenditures for offline and online advertising to promote brand
awareness. Customer acquisition costs, which include our costs of media,
marketing and promotional discounts and goods used to incent new customer
purchases, fell to approximately $24 per customer in the third quarter of 2000
from approximately $203 per customer in the third quarter of 1999, reflecting
the effectiveness of the Company's promotions and advertising campaigns. Content
development costs included $1.5 million of non-cash charges for amortization of
the intangible assets acquired in the Rodale alliance in September 1999.
Product Development Expense. Product development expense consists primarily of
payroll and related expenses for merchandising, Web site development, Web design
and information technology personnel and related infrastructure. Product
development expenses decreased to $1.3 million for the three months ended
September 30, 2000 from $1.9 million for the three months ended September 30,
1999. This decrease was attributable primarily to the decrease in scope and
number of infrastructure and development projects.
General and Administrative Expense. General and administrative expense consists
of payroll and related expenses for executive and administrative personnel,
recruiting, depreciation and other general corporate expenses. General and
administrative expenses increased to $2.8 million for the third quarter of 2000
from $2.5 million for the corresponding quarter in 1999. The increase is
primarily due to expenses associated with the Company's bonus retention program.
Restructuring Costs. In September 2000, the Company developed a plan to
restructure operations which was approved by the Board of Directors. The cost of
the plan is estimated at $359,000, which was accrued for and charged to expense
in the third quarter of 2000. The plan impacted all operating groups of the
Company. The Company's treatment of these costs is consistent with EITF Issue
94-3 guidelines.
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Interest Income. Interest income consists of income earned on our cash balances
in money market accounts. Interest income increased to $570,000 for the third
quarter of 2000 from $389,000 for the third quarter of 1999. This increase
reflects earnings on higher average cash and cash equivalent balances during the
third quarter of 2000 compared to the third quarter of 1999.
Interest Expense. Interest expense is attributable to capital lease
obligations, and original issue discount related to notes payable. Interest
expense decreased to $9,000 for the three months ended September 30, 2000 from
$36,000 for the corresponding period in 1999.
Provision for Income Taxes. We have had net operating losses for every period
through December 31, 1999. We may not be able to utilize all or any of these tax
loss carry-forwards as a result of our initial public offering and prior
financings. We have not recognized a provision for income taxes due to the
uncertainty surrounding the realization of the favorable tax attributes in
future tax returns and we have placed a valuation allowance against our net
deferred tax assets.
Net Loss. As a result of the foregoing factors, we incurred a net loss to common
shareholders of $6.72 million for the third quarter of 2000 compared to $18.8
million for the third quarter of 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Net sales consist of product sales to customers net of product
returns, promotional discounts and coupons. Net sales include shipping and
handling charges. Net sales increased more than 4 times to $10.5 million for the
nine months ended September 30, 2000 from $2.6 million for the nine months ended
September 30, 1999. This reflects the increase of orders received during the
nine months ended September 30, 2000, to approximately 330,000 as compared to
121,500 in the same period of 1999, and increased average order size and an
increase in our customer base. We added 171,000 new customers in the first nine
months of 2000, bringing the cumulative customer count to approximately 450,000
compared to 87,000 customers at the end of the third quarter in 1999.
Cost of Sales. Cost of sales consists primarily of the costs of merchandise,
including outbound shipping costs. Cost of sales does not include the cost of
products associated with promotional discounts and coupons used for new customer
purchases, which are included in selling and marketing expense, but does include
the cost of shipping. Cost of sales increased to $7.4 million for the nine
months ended September 30, 2000 from $2.3 million for the same period in 1999,
reflecting increased sales volume. For the nine months ended September 30, 2000
and 1999, respectively, our gross margin increased to 29.6% of net sales from
12.6% of net sales. This increase was due to a shift in our mix of new to
existing customers and changes to our shipping policy. With regard to our
customer mix, new customers accounted for 43% of sales in the first nine months
of 2000, as compared to 61% in the first nine months of 1999. The lower margin
new customer sales exerted a significant downward pressure on margins in the
first nine months of 1999. The shift in activity during the first nine months of
2000 toward higher margin existing customer orders increased our merchandise
margins to approximately 37% in the first nine months of 2000 from approximately
25% in the first nine months of 1999. In addition, the elimination of our free
freight promotion and introduction of other tactics to reduce freight subsidies
in the second quarter of 2000 also favorably improved margins.
Selling and Marketing Expense. Selling and marketing expense consists primarily
of advertising and promotional expenditures, including the cost of products
associated with promotional discounts and coupons used for new customer
purchases, Web content expenditures, fulfillment facility and customer service
expenses and payroll and related expenses for personnel engaged in marketing,
content, order fulfillment and customer service operations. Selling and
marketing expenses decreased to $23.6 million for the nine months ended
September 30, 2000 from $25.3 million for the corresponding period in 1999. This
decrease was attributable primarily to a decrease in marketing staff and
expenditures for offline and online advertising to promote brand awareness.
Customer acquisition costs, which include our costs of media, marketing and
promotional discounts and goods used to incent new customer purchases, fell to
approximately $63 per customer in the first nine months of 2000 from
approximately $224 per customer in the same period of 1999, reflecting the
effectiveness of the Company's promotions and advertising campaigns. Content
development costs included $4.8 million of non-cash charges for amortization of
the intangible assets acquired in the Rodale alliance in September 1999.
Product Development Expense. Product development expense consists primarily of
payroll and related expenses for merchandising, Web site development, Web design
and information technology personnel and related infrastructure. Product
development expenses decreased to $4.3 million for the nine months ended
September 30, 2000 from $4.5 million for the nine months ended September 30,
1999. This decrease was attributable primarily to a decrease in the scope and
number of development and infrastructure projects.
General and Administrative Expense. General and administrative expense consists
of payroll and related expenses for executive and administrative personnel,
recruiting, depreciation and other general corporate expenses. General and
administrative expenses increased to $8.4 million for the nine months ended
September 30, 2000 from $5.0 million for the corresponding period in 1999. The
increase reflects increased personnel costs, higher depreciation charges and
professional service costs as well as the reclassification of certain corporate
technology costs and allocation methodology of compensation charges associated
with employee stock options.
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Restructuring Costs. In September 2000, the Company developed a plan to
restructure operations, which was approved by the Board of Directors. The cost
of the plan is estimated at $359,000, which was accrued for and charged to
expense in the third quarter of 2000. The plan impacted all operating groups of
the Company. The Company's treatment of these costs is consistent with EITF
Issue 94-3 guidelines.
Interest Income. Interest income consists of income earned on our cash balances
in money market accounts. Interest income increased to $1.5 million for the nine
months ended September 30, 2000 from $769,000 for the same period of 1999. This
increase reflects earnings on higher average cash and cash equivalent balances
during this time frame.
Interest Expense. Interest expense is attributable to capital lease obligations
and original issue discount related to notes payable. Interest expense amounted
to $44,000 for the nine months ended September 30, 2000 compared to $109,000 for
the corresponding period in 1999.
Provision for Income Taxes. We have had net operating losses for every period
through December 31, 1999. We may not be able to utilize all or any of these tax
loss carry-forwards as a result of our initial public offering and prior
financings. We have not recognized a provision for income taxes due to the
uncertainty surrounding the realization of the favorable tax attributes in
future tax returns and we have placed a valuation allowance against our net
deferred tax assets.
Net Loss. As a result of the foregoing factors, we incurred a net loss to common
shareholders of $32.1 million and $33.8 million for the nine months ended
September 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
Net cash used in operating activities was $18.5 million for the nine months
ended September 30, 2000, as compared to $23.9 million for the same period of
1999. The reduction in cash was primarily driven by funding operating losses for
the nine months ended September 30, 2000. Additional cash was generated by a
$6.9 million reduction in our prepaid expenses, which represented amounts paid
in prior periods to secure offline media which ran during the first and second
quarters of 2000.
Net cash used in investing activities was $418,000 for the nine months ended
September 30, 2000 compared to $2.3 million for the nine months ended September
30, 1999. The activity during both periods relates to purchases of property and
equipment as well as a loan to an officer in 2000, noted in footnote 6 to the
financial statements.
Net cash used by financing activities was $109,200 for the nine months ended
September 30, 2000, as compared to net cash provided by financing activities of
$42.6 million for the corresponding nine months ended September 30, 1999. The
net proceeds included $1.6 million receivable from a Series B preferred stock
offering and $41 million from a Series C preferred stock offering, both in 1999.
As of September 30, 2000, we had $25.1 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under capital leases in the amount of $244,000.
In connection with the Plan, it is anticipated that the Company will distribute
approximately $1.00 per common share to shareholders of record as of the date of
filing of our Certificate of Dissolution.
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RISK FACTORS
From time to time, information we provide or statements we make may contain
"forward looking" information that involves risks and uncertainties. In
particular, statements contained in this Quarterly Report on Form 10-Q that are
not historical facts (including, but not limited to statements contained in
"Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations") and statements related to the Plan of Complete Liquidation and
Dissolution and its effect on the Company and its stockholders may constitute
forward looking statements and are made under the safe harbor provisions of The
Private Securities Litigation Reform Act of 1995. The following discussion of
our risk factors should be read in conjunction with the financial statements and
related notes thereto. Such factors, among others, may have a material adverse
effect upon our business, results of operations and financial condition.
RISKS RELATED TO OUR BUSINESS
The Company has faced the challenges, risks and uncertainties frequently
encountered by early-stage companies using new and unproven business models in
new and rapidly evolving markets. The challenges the Company has faced included
its ability to:
. execute on the Company's business model;
. increase brand recognition;
. manage growth in the Company's operations;
. expand the Company's customer base cost-effectively;
. retain customers;
. manage inventory levels effectively;
. upgrade and enhance the Company's Web site, transaction-processing systems,
order fulfillment capabilities and inventory management systems;
. access additional capital when required;
. develop and renew strategic relationships with companies in the vitamins,
supplements, minerals and natural and healthy living products industry,
such as suppliers and content providers; and
. attract and retain key personnel.
While the Company has been able to adequately address certain of these
challenges, the Company's Board of Directors, after extensive deliberations
and searches for alternatives, determined that it would not be advisable to
continue to operate the Company on an independent basis. Accordingly, on October
20, 2000 the Board of Directors unanimously approved a Plan of Complete
Liquidation and Dissolution on October 20, 2000 (the "Plan"), subject to
stockholder approval. On November 8, 2000, the Company filed a Proxy Statement
for the Special Meeting of Stockholders to be held on November 30, 2000 to
approve the Plan (the "Proxy Statement"). The Proxy Statement, among other
things, describes the Plan and the background and reasons for the Plan.
RISK OF STOCKHOLDER LIABILITY TO CREDITORS OF THE COMPANY
If the Plan is approved by the stockholders, a Certificate of Dissolution
will be filed with the State of Delaware dissolving the Company. Pursuant to the
Delaware General Corporation Law (the "DGCL"), the Company will continue to
exist for three
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years after the dissolution becomes effective or for such longer period as the
Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits against it and enabling the Company gradually to close its
business, to dispose of its property, to discharge its liabilities and to
distribute to its stockholders any remaining assets. The Company will establish
a contingency reserve for payment of its expenses and liabilities during this
three-year period. Under the DGCL, in the event the contingency reserve created
by the Company is inadquate for payment of its expenses and liabilities during
this three-year period, each stockholder could be held liable for payment to the
Company's creditors of such stockholder's pro rata share of amounts owed to
creditors in excess of the contingency reserve. The liability of any stockholder
would be limited to the amounts previously received by such stockholder from the
Company (and from any liquidating trust or trusts) as distributions.
Accordingly, in such event a stockholder could be required to return all such
distributions previously made to such stockholder. In such event, a stockholder
could receive nothing from the Company under the Plan. Moreover, in the event a
stockholder has paid taxes on amounts previously received, a repayment of all or
a portion of such amount could result in a stockholder incurring a net tax cost
if the stockholder's repayment of an amount previously distributed does not
cause a commensurate reduction in taxes payable. There can be no assurance that
the contingency reserve established by the Company will be adequate to cover any
expenses and liabilities.
PERSONNEL RISKS
The success of the Plan depends in large part upon the Company's ability to
retain the services of certain of its current personnel or to attract qualified
replacements for them. The retention and attraction of qualified personnel is
particularly difficult under the Company's current circumstances.
RESTRICTIONS ON TRANSFER OF SHARES; CLOSING OF STOCK TRANSFER BOOKS
The Company intends to close its stock transfer books and discontinue
recording transfers of Common Stock at the close of business on the record date
fixed by the Board for filing the Certificate of Dissolution (the "Final Record
Date"). Thereafter, certificates representing the Common Stock will not be
assignable or transferable on the books of the Company except by will, intestate
succession or operation of law. The proportionate interests of all of the
stockholders of the Company shall be fixed on the basis of their respective
stock holdings at the close of business on the Final Record Date, and, after the
Final Record Date, any distributions made by the Company shall be made solely to
the stockholders of record at the close of business on the Final Record Date,
except as may be necessary to reflect subsequent transfers recorded on the books
of the Company as a result of any assignments by will, intestate succession or
operation of law.
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RISK OF DELISTING OF THE COMPANY'S COMMON STOCK
The Company has received a delisting notice from the Nasdaq Stock Market
due to its low trading price per share. The delisting is scheduled to become
effective on November 20, 2000. The Company expects that it will be unable to
satisfy the requirements for continued listing of its Common Stock on the Nasdaq
National Market. Moreover, rules of the Nasdaq Stock Market require that
companies listed on the Nasdaq National Market continue to have an operating
business. If the Company completes its plans to conclude its business
activities, it will no longer have an operating business. In addition, as the
Company distributes cash to its stockholders, certain other listing criteria may
not be met. If Nasdaq delists the Company's Common Stock from the Nasdaq
National Market, the ability of stockholders to buy and sell shares may be
materially impaired.
LIQUIDATING DISTRIBUTIONS; NATURE; AMOUNT; TIMING
Although the Board of Directors has not established a firm timetable for
distributions to stockholders if the Plan is approved by the stockholders, the
Board of Directors intends, subject to contingencies inherent in winding up the
Company's business, to make such distributions as promptly as practicable. The
liquidation is expected to be concluded prior to the third anniversary of the
filing of the Certificate of Dissolution in Delaware by a final liquidating
distribution either directly to the stockholders or to a liquidating trust. As
promptly as practicable after the approval of the Plan by the stockholders, the
Company currently intends to distribute approximately $1.00 per share (based on
15,151,330 shares of Common Stock outstanding as of October 19, 2000 and the
anticipated exercise of 649,246 options and warrants outstanding at such date
with exercise price below $1.00 per share). The proportionate interests of all
of the stockholders of the Company shall be fixed on the basis of their
respective stock holdings at the close of business on the Final Record Date, and
after such date, any distributions made by the Company shall be made solely to
stockholders of record on the close of business on the Final Record Date, except
to reflect permitted transfers. The Board of Directors is, however, currently
unable to predict the precise nature, amount or timing of this distribution or
any other distributions pursuant to the Plan. The actual nature, amount and
timing of all distributions will be determined by the Board of Directors, in its
sole discretion, and will depend in part upon the Company's ability to convert
its remaining assets into cash.
Uncertainties as to the precise net value of the Company's non-cash assets
and the ultimate amount of its liabilities make it impracticable to predict the
aggregate net value ultimately distributable to stockholders. Claims,
liabilities and expenses from operations (including operating costs, salaries,
income taxes, payroll and local taxes, legal and accounting fees and
miscellaneous office expenses), although currently declining, will continue to
be incurred following approval of the Plan. These expenses will reduce the
amount of assets available for ultimate distribution to stockholders.
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However, no assurances can be given that available cash and amounts received on
the sale of assets will be adequate to provide for the Company's obligations,
liabilities, expenses and claims and to make cash distributions to stockholders.
If such available cash and amounts received on the sale of assets are not
adequate to provide for the Company's obligations, liabilities, expenses and
claims, distributions of cash and other assets to the Company's stockholders
will be reduced.
FACTORS TO BE CONSIDERED WITH RESPECT TO SALE OF THE COMPANY'S ASSETS
The sale by the Company of an appreciated asset will result in the
recognition of taxable gain by the Company to the extent the fair market value
of such asset exceeds the Company's tax basis in such asset. The Company's list
of customers is a significant asset. Our privacy policy clearly states that we
will not transfer, sell or assign our customers' information without consent.
Given our privacy policy, we must seek and receive the consent of each customer
whose information we wish to transfer or sell to a third party. We cannot
predict the number or percentage of our customers who will permit us to transfer
or sell their information. In addition, our agreement with Rodale, Inc., giving
us access to Rodale's customers, its healthy living content and certain of its
books, is another significant asset, which value, if any, to stockholders is
uncertain.
SALES OF THE COMPANY'S ASSETS
The Plan gives the Board of Directors the authority to sell all of the
assets of the Company. As of November 8, 2000, no sale of assets has been
effected pursuant to the Plan and no agreement to sell any of the assets of the
Company has been reached. However, agreements for the sale of assets may be
entered into prior to the Special Meeting and, if entered into, may be
contingent upon the approval of the Plan at the Special Meeting. Approval of the
Plan will constitute approval of any such agreements and sales. Sales of the
Company's assets will be made on such terms as are approved by the Board of
Directors and may be conducted by competitive bidding, public sales or privately
negotiated sales. The Company does not anticipate amending or supplementing the
Proxy Statement to reflect any such agreement or sale, unless required by
applicable law. The prices at which the Company will be able to sell its various
assets will depend largely on factors beyond the Company's control, including,
without limitation, the condition of financial markets, the availability of
financing to prospective purchasers of the assets, United States and foreign
regulatory approvals, public market perceptions, limitations on transferability
of certain assets, and the number of our customers who "opt in" or consent to
the transfer of their information. In addition, the Company may not
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obtain as high a price for a particular asset as it might secure if the Company
were not in liquidation.
CONDUCT OF THE COMPANY FOLLOWING ADOPTION OF THE PLAN
Since the adoption of the Plan by the Board of Directors, the Board of
Directors and management have taken steps to reduce the Company's operations,
and, upon approval of the Plan by the stockholders, terminate such operations.
Management and any other continuing employees will receive compensation for the
duties then being performed as determined by the Board of Directors. The Board
of Directors has not established specific guidelines for determination of the
compensation to be paid to management and continuing employees of the Company
following approval of the Plan by the stockholders. Such compensation will be
determined by evaluation of all relevant factors, including, without limitation,
the efforts of such individuals in successfully implementing the Plan and a
review of compensation payable to individuals exercising similar authority and
bearing similar responsibilities.
REPORTING REQUIREMENTS
Whether or not the Plan is approved, we have an obligation to continue to
comply with the applicable reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), even though compliance with such
reporting requirements is economically burdensome. If the Plan is approved and,
in order to curtail expenses, we will, after filing our Certificate of
Dissolution, seek relief from the Securities & Exchange Commission ("SEC") from
the reporting requirements under the Exchange Act. We anticipate that, if such
relief is granted, we would continue to file current reports on Form 8-K to
disclose material events relating to our liquidation and dissolution along with
any other reports that the SEC might require.
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CONTINGENT LIABILITIES; CONTINGENCY RESERVE
Under the DGCL, the Company is required, in connection with its
dissolution, to pay or provide for payment of all of its liabilities and
obligations. Following approval of the Plan by the Company's stockholders, the
Company will pay all expenses and fixed and other known liabilities, or set
aside as a Contingency Reserve cash and other assets which it believes to be
adequate for payment thereof. The Company is currently unable to estimate with
precision the amount of any Contingency Reserve which may be required, but any
such amount (in addition to any cash contributed to a liquidating trust, if one
is utilized) will be deducted before the determination of amounts available for
distribution to stockholders.
The actual amount of the Contingency Reserve will be based upon estimates
and opinions of management and the Board of Directors and derived from
consultations with outside experts and review of the Company's estimated
operating expenses and future estimated liabilities, including, without
limitation, anticipated compensation payments, estimated legal and accounting
fees, operating lease expenses, payroll and other taxes payable, miscellaneous
office expenses, expenses accrued in the Company's financial statements, and
reserves for litigation expenses. There can be no assurance that the Contingency
Reserve in fact will be sufficient. The Company has not made any specific
provision for an increase in the amount of the Contingency Reserve. Subsequent
to the establishment of the Contingency Reserve, the Company will distribute to
its stockholders any portions of the Contingency Reserve, which it deems no
longer to be required. After the liabilities, expenses and obligations for which
the Contingency Reserve had been established have been satisfied in full, the
Company will distribute to its stockholders any remaining portion of the
Contingency Reserve.
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Under the DGCL, in the event the Company fails to create an adequate
Contingency Reserve for payment of its expenses and liabilities, or should such
Contingency Reserve and the assets held by the Liquidating Trust or Trusts be
exceeded by the amount ultimately found payable in respect of expenses and
liabilities, each stockholder could be held liable for the
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payment to creditors of such stockholder's pro rata share of such excess,
limited to the amounts theretofore received by such stockholder from the Company
or from the Liquidating Trust or Trusts.
If the Company were held by a court to have failed to make adequate
provision for its expenses and liabilities or if the amount ultimately required
to be paid in respect of such liabilities exceeded the amount available from the
Contingency Reserve and the assets of the liquidating trust or trusts, a
creditor of the Company could seek an injunction against the making of
distributions under the Plan on the ground that the amounts to be distributed
were needed to provide for the payment of the Company's expenses and
liabilities. Any such action could delay or substantially diminish the cash
distributions to be made to stockholders and/or interest holders under the Plan.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At September 30, 2000, we did not participate in any derivative financial
instruments. The Company's financial instruments include cash and cash
equivalents, accounts receivable, notes payable, capital lease obligations, and
accounts payable, and are carried at cost or carrying value. These amounts were
not materially different from their fair values. The Company uses a discounted
cash flows methodology to calculate the fair value of the notes payable and
capital leases. We hold no investment securities that would require disclosure
of market risk.
Primary Market Risk Exposure.
Our primary market risk exposure is in the area of interest rate risk. Our
available cash balances are invested in short-term interest bearing securities.
We believe that our exposure to interest rate fluctuations will continue to be
modest.
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PART II
ITEM 1. Legal Proceedings.
On October 8, 1999, a civil complaint was filed as Joseph Reiners d/b/a
Mother Natures Vitamins v. MotherNature.com, Inc., in the United States District
Court for the District of Minnesota, Civil Action No. 99-CV-1531 DSD/JMM. The
parties have settled this matter as of September 26, 2000, and the plaintiff
dismissed the complaint with prejudice as of October 17, 2000.
On June 30, 1999, a civil complaint was filed as Ross A. Love v.
MotherNature.com, Inc., MotherNature's General Store, Inc. and Michael Barach,
individually, in the Superior Court of Suffolk County, Massachusetts, Case No.
99-3087C. An amended complaint was filed on August 19, 1999 as Ross A. Love v.
MotherNature.com, Inc. and Michael Barach., individually. In the lawsuit, the
plaintiff, a founder and former officer and director of the Company, alleges
causes of action including economic duress and breach of fiduciary duty. Mr.
Love, among other things, alleges that he was compelled under economic duress to
sign an agreement in connection with his termination of employment. In addition,
Mr. Love claims that we breached our fiduciary duty to him as a stockholder by
allegedly failing to provide him with certain information in connection with our
May 1999 preferred stock financing. On or about February 10, 2000, Mr. Love
stipulated to the dismissal without prejudice of all claims seeking damages
resulting from Mr. Love's lack of participation in the May 1999 preferred stock
financing and the dismissal without prejudice of certain claims asserted against
Michael Barach, individually. On or about April 7, 2000, the court entered
summary judgment in the Company's favor as to Mr. Love's economic duress claim.
Mr. Love seeks recovery of actual damages which he alleges to be in excess of
$100,000,000. We believe that the remaining claims made by Mr. Love are without
merit and intend to defend this lawsuit vigorously.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The Company
currently is not aware of any such legal proceedings or claims, other than those
described above, that it believes will have, individually or in the aggregate, a
material adverse effect on its business, prospects, financial condition and
operating results.
ITEM 2. Changes in Securities and Use of Proceeds.
Our registration statement on Form S-1 under the Securities Act of 1933, as
amended, for our initial public offering became effective on December 9, 1999.
The managing underwriters were Bear, Stearns & Co,. Inc., Hambrecht & Quist, and
Wit Capital Corporation. Of the 4,100,000 shares of common stock offered, all
shares were sold by us and no shares were included by selling security holders.
The initial public offering closed on December 15, 1999. The aggregate offering
amount of our initial public offering was approximately $53.3 million with
proceeds to us, after deducting offering expenses of $4.9 million, of $48.4
million. During the nine months ended September 30, 2000 we used approximately
$18.5 million of the net offering proceeds for operating activities of the
business, primarily working capital and offline advertising expenditures. During
the nine months ended September 30, 2000 we made capital investments of
$293,000, primarily for computer equipment and software. We also loaned $125,000
to an officer of the Company. Our financing activities included $69,000 of
capital lease payments and the repayment of our note payable. We also paid
approximately $55,000 for issuance costs of our initial public offering. We have
not used any of the net offering proceeds for construction of plant, building or
facilities, purchases of real estate, acquisition of other businesses. Except
for the officer's loan, none of the net offering proceeds were paid directly or
indirectly to our directors, officers or their associates, persons owning 10% or
more of any class of our securities or of our affiliates. The use of the
proceeds from the offering does not represent a material change in the use of
proceeds described in the registration statement.
ITEM 6.
A. Exhibits
Exhibit No. Description
10.1 Severance Agreement between the Company and Michael
L. Bayer, dated September 15, 2000.
27.1 Financial Data Schedule (filed herewith).
B. Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the quarterly period
ended September 30, 2000.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOTHERNATURE.COM, INC.
Date: November 8, 2000
By: /s/ Michael L. Bayer
----------------------
Michael L. Bayer
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
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