SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[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: 0-26265
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Garden.com, Inc.
-------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2765381
------------------------------- --------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3301 Steck Avenue, Austin, TX 78757
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 512-532-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 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
---- ----
On September 30, 2000, there were outstanding 17,739,272 shares of the
Registrant's $.01 par value common stock.
<PAGE>
GARDEN.COM, INC.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheets as of September 30, 2000 and
June 30, 2000 3
Statements of Operations for the Quarters Ended
September 30, 2000 and 1999 4
Statements of Cash Flows for the Quarters Ended
September 30, 2000 and 1999 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Garden.com, Inc.
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
-------------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 390 $ 9,047
Investments. . . . . . . . . . . . . . . . . . . 11,956 18,612
Prepaid advertising. . . . . . . . . . . . . . . 78 1,869
Other prepaid expenses and current assets. . . . 2,140 2,143
Inventory. . . . . . . . . . . . . . . . . . . . 1,193 898
-------------------- ---------------
Total current assets. . . . . . . . . . . . . 15,757 32,569
Property and equipment . . . . . . . . . . . . . . 17,658 11,843
Accumulated depreciation . . . . . . . . . . . . . (3,467) (2,697)
Property and equipment, net. . . . . . . . . . . . 14,191 9,146
Other assets, net. . . . . . . . . . . . . . . . . 714 780
-------------------- ---------------
Total assets. . . . . . . . . . . . . . . . . $ 30,662 $ 42,495
==================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 2,300 $ 4,282
Accrued expenses and other liabilities . . . . . 2,796 3,057
Unearned revenue . . . . . . . . . . . . . . . . 384 187
Current portion of long-term debt. . . . . . . . - 20
-------------------- ---------------
Total current liabilities . . . . . . . . . . 5,480 7,546
Stockholders' equity (deficit):
Common stock - $.01 par value; 50,000,000 shares
authorized, 17,739,272 shares issued and
outstanding on September 30, 2000; and
17,737,592 shares issued and outstanding on
June 30, 2000. . . . . . . . . . . . . . . . . 177 177
Additional paid-in-capital . . . . . . . . . . . 104,075 104,499
Deferred stock compensation. . . . . . . . . . . (592) (1,169)
Retained deficit . . . . . . . . . . . . . . . . (78,478) (68,558)
-------------------- ---------------
Total stockholders' equity. . . . . . . . . . 25,182 34,949
-------------------- ---------------
Total liabilities and stockholders' equity. . $ 30,662 $ 42,495
==================== ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Garden.com, Inc.
Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the quarter ended
September 30,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Products. . . . . . . . . . . . . . . . . . . . $ 2,209 $ 1,159
Advertising . . . . . . . . . . . . . . . . . . 393 253
------------ ------------
Total revenues . . . . . . . . . . . . . . . 2,602 1,412
COST OF REVENUES
Products. . . . . . . . . . . . . . . . . . . . 1,796 1,049
Advertising . . . . . . . . . . . . . . . . . . 47 44
------------ ------------
Total cost of revenues . . . . . . . . . . . 1,843 1,093
GROSS PROFIT. . . . . . . . . . . . . . . . . . . 759 319
OPERATING EXPENSES
Marketing and sales . . . . . . . . . . . . . . 3,841 2,699
Technology, content and product development . . 1,944 1,408
General and administrative. . . . . . . . . . . 1,629 1,308
Depreciation and amortization . . . . . . . . . 838 347
Amortization of deferred compensation . . . . . 151 374
Discontinued marketing activities and severance
costs. . . . . . . . . . . . . . . . . . . . 2,578 -
------------ ------------
Total operating expenses . . . . . . . . . . 10,981 6,136
OPERATING LOSS. . . . . . . . . . . . . . . . . . (10,222) (5,817)
Other income and expense. . . . . . . . . . . . . 302 249
------------ ------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . $ (9,920) $ (5,568)
============ ============
Basic net loss per share. . . . . . . . . . . . . $ (0.56) $ (1.45)
============ ============
Shares used in computing basic net loss per share 17,739,042 3,827,552
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Garden.com, Inc.
Statements of Cash Flows (Dollars in thousands)
<TABLE>
<CAPTION>
For the quarter ended
September 30,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (9,920) $ (5,568)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 838 347
Amortization of deferred compensation . . . . . . . . 151 374
Changes in operating assets and liabilities:
Prepaid advertising . . . . . . . . . . . . . . . . . 1,791 (541)
Other prepaid expenses and current assets . . . . . . 2 (530)
Inventory . . . . . . . . . . . . . . . . . . . . . . (296) (381)
Accounts payable. . . . . . . . . . . . . . . . . . . (1,982) (53)
Accrued expenses and other liabilities. . . . . . . . (260) 648
Unearned revenue. . . . . . . . . . . . . . . . . . . 197 238
------------ ------------
Net cash used in operating activities. . . . . . . . (9,479) (5,466)
Investing activities:
Proceeds from sale of investments . . . . . . . . . . 6,657 -
Purchase of investments . . . . . . . . . . . . . . . - (14,824)
Purchase of other assets. . . . . . . . . . . . . . . - (185)
Purchase of property and equipment. . . . . . . . . . (5,816) (1,679)
------------ ------------
Net cash provided by (used in) investing activities. 841 (16,688)
Financing activities:
Repayment of long-term debt . . . . . . . . . . . . . (20) (44)
Exercise of stock options . . . . . . . . . . . . . . 1 10
Exercise of warrants. . . . . . . . . . . . . . . . . - 210
Proceeds from issuance of common stock,
net of issuance costs of $1,954 . . . . . . . . . . - 49,940
------------ ------------
Net cash provided by (used in) financing activities (19) 50,116
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . (8,657) 27,962
Cash and cash equivalents, beginning of
period. . . . . . . . . . . . . . . . . . . . . . . . 9,047 15,340
------------ ------------
Cash and cash equivalents, end of period. . . . . . . . $ 390 $ 43,302
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GARDEN.COM, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of September 30, 2000 and 1999 have been
prepared by Garden.com, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals) necessary
to present fairly the results for the periods presented. The balance sheet at
June 30, 2000 has been derived from the audited financial statements at that
date. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such SEC rules and regulations.
Operating results for the quarter ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2001. These financial statements should be read in conjunction with the
audited financial statements and the accompanying notes included in the
Company's Form 10-K for the year ended June 30, 2000, filed with the SEC on
October 13, 2000, as amended on October 30, 2000.
Certain prior-period balances have been reclassified to conform to the
current-period presentation.
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, and such
differences could be material to the financial statements.
COMPREHENSIVE LOSS
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive loss
and its components in the financial statements. The Company does not have any
components of comprehensive income or loss.
RISKS AND UNCERTAINTIES
On October 26, 2000, the Company entered into a mutual termination
agreement with a supplier whose products represented approximately 12% of the
Company's product revenue during the quarter ended September 30, 2000. Two other
suppliers' products represented in excess of 10% of the Company's product
revenue during the quarter ended September 30, 2000, equaling 19% and 20%
respectively.
6
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
On March 31, 2000 the Financial "Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," (the "Interpretation"). The Interpretation provides guidance
related to the implementation of APB No. 25. The Interpretation is to be
applied prospectively to all new awards, modifications to outstanding awards and
changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998 to awards that affect exercise prices of the awards, the
Company must prospectively account for the impact of those changes. Management
does not believe the adoption of the Interpretation will have a material impact
on the Company's financial condition or results of operations.
In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities, Deferral of Effective Date of FASB Statement No. 133," was
issued which requires that Statement No. 133 be adopted in the Company's fiscal
year 2001. Management does not anticipate that the adoption of Statement No.
133 will have a material effect on the results of operations or financial
position because the Company's does not currently engage in or plan to engage in
derivative or hedging activities.
NOTE 2 - DISCONTINUED MARKETING ACTIVITIES AND SEVERANCE COSTS
On September 28, 2000, the Company announced a corporate restructuring (the
"Restructuring Plan") with the intent of lowering ongoing operating expenses and
reducing future capital requirements. The Restructuring Plan resulted in an
expense charge of $2.6 million for the quarter ended September 30, 2000.
Pursuant to the Restructuring Plan, the Company reduced its workforce on
September 28, 2000 by 93 employees. In addition, the Company terminated or
materially amended multiple marketing initiatives, including the Company's
relationships with iVillage, Excite and PRIMEDIA, resulting in both write-offs
of prepaid assets and cash payments to third parties to discontinue certain
contractual obligations.
NOTE 3 - BUSINESS CONDITIONS AND FUNDING ACTIVITIES
Simultaneous with the announcement of its Restructuring Plan on September
28, 2000, the Company also announced that it had engaged the investment bank of
Robertson Stephens to aid the Company in evaluating strategic alternatives and
to assist the Company with ongoing fund-raising efforts.
Although the Company has been attempting to raise additional equity
financing since the quarter ended June 30, 2000, the Company has not been able
to obtain financing as of November 15, 2000. On November 15, 2000, the Company
announced that it will begin a phased shut-down of its retail operations and
sale of its consumer business assets. See "Note 6 - Subsequent Events."
In addition, the Company has received a report from its independent
auditors for its fiscal year ended June 30, 2000 containing an explanatory
paragraph that describes the uncertainty regarding the Company's ability to
continue as a going concern due to the Company's historical negative cash flow
and because, as of the date they rendered their opinion, the Company did not
have access to sufficient committed capital to meet its projected operating
needs for at least the next 12 months.
7
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.
NOTE 5 - STOCKHOLDERS' EQUITY
On September 21, 1999, the Company completed its initial public offering of
4,650,000 shares of its common stock, which also included 550,000 shares sold by
the Company pursuant to the underwriters' overallotment option. Net proceeds to
the Company aggregated $49.9 million. As of the closing date of the offering,
all of the redeemable convertible preferred stock outstanding was converted into
an aggregate of 11,637,422 shares of common stock.
In August 1999, the Company's Board of Directors declared a stock split of
four shares for every five shares of Common Stock then outstanding. The stock
split was effective September 15, 1999, the date the Company's Form S-1
Registration Statement was declared effective. Accordingly, the accompanying
financial statements and footnotes have been restated to reflect the stock
split. The par value of the shares of common stock to be issued in connection
with the stock split was credited to common stock and a like amount charged to
additional paid-in capital.
BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding. Shares associated with stock options are not
included because they are antidilutive. The shares of redeemable convertible
preferred stock automatically converted into common stock effective upon the
closing of the Company's initial public offering are included in the calculation
of weighted average number of shares as of that date.
NOTE 6 - SUBSEQUENT EVENTS
In October 2000, Green Cheetah, Inc., the Company's 80% owned subsidiary,
filed two provisional patent applications with the U.S. Patent and Trademark
Office. The inventions covered by the patent applications relate to a method
for extending JDBC API calls without extending multiple drivers and a method for
enhancing database performance with a cache array system. In the second quarter
of fiscal 2001, Green Cheetah borrowed $300,000 from the Company pursuant to a
demand promissory note to fund the continued development of such software.
On November 15, 2000, the Company announced that it will begin a phased
shut-down of its retail operations and the sale of its consumer business assets,
including product inventory, URLs, content, photo library, its popular online
gardening tools such as Landscape Planner and Plant Finder, as well as other
intellectual property. The Company intends to layoff its consumer business
employee base on a phased basis in order to conduct a product inventory sale.
The Company also announced that it will continue to evaluate strategic
alternatives for its technology assets, including TRELLIS and Green Cheetah.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included elsewhere
herein. This Form 10-Q and the following "Management's Discussion and Analysis
of Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact the Company makes in this Form 10-Q are
forward-looking. In particular, the statements herein regarding industry
prospects and the Company's future results of operations, financial position or
financing requirements are forward-looking statements. Forward-looking
statements reflect the Company's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from the
Company's expectations. The section entitled "Additional Factors That May
Affect Future Results" describes some, but not all, of the factors that could
cause these differences.
On November 15, 2000, the Company announced that it will begin a phased
shut-down of its retail operations and the sale of its consumer business assets,
including product inventory, URLs, content, photo library, its popular online
gardening tools such as Landscape Planner and Plant Finder, as well as other
intellectual property. The Company intends to layoff its consumer business
employee base on a phased basis in order to conduct a product inventory sale.
The Company also announced that it will continue to evaluate strategic
alternatives for its technology assets, including TRELLIS and Green Cheetah. As
a result of these developments, the Company does not believe that the historical
financial information in this Form 10-Q provides a meaningful indication of the
Company's future financial condition or results of operations. The Company can
make no assurance that it will be able to complete the process of winding down
its retail operations in a manner that generates meaningful cash, or any cash,
for stockholders, or that the Company will be able to pursue viable strategic
alternatives for its technology assets. See "Additional Factors That May Affect
Future Results" below.
9
<PAGE>
RESULTS OF OPERATIONS
PRODUCT REVENUES
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------ ------ --------
(In Thousands)
<S> <C> <C> <C>
Product revenues. $2,209 $1,159 91%
</TABLE>
Product revenues consist of product sales to customers and charges to
customers for shipping. Revenues are recorded net of promotional discounts and
coupons. Product returns are recorded as a reduction of revenues. Product
revenues increased 91% to $2.2 million, or 85% of total revenues, for the
quarter ended September 30, 2000 from $1.2 million, or 82% of total revenues,
for the quarter ended September 30, 1999. Product revenues increased primarily
as a result of the 163% growth in the Company's customer base, which the Company
believes was primarily influenced by increased marketing activities, expanded
product offerings and enhancements to the features and functionally of the
garden.com Web site.
ADVERTISING REVENUES
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
----- ----- --------
(In Thousands)
<S> <C> <C> <C>
Advertising revenues. $ 393 $ 253 55%
</TABLE>
Advertising revenues increased 55% to $393,000, or 15% of total revenues,
for the quarter ended September 30, 2000 from $253,000, or 18% of total
revenues, for the quarter ended September 30, 1999. Advertising revenues
increased primarily due to a 34% increase in page views on the Company's Web
site to 32.0 million for the quarter ended September 30, 2000 from 23.9 million
for the quarter ended September 30, 1999.
10
<PAGE>
GROSS PROFIT
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------ ------ --------
(In Thousands)
<S> <C> <C> <C>
Gross profit . $ 759 $ 319 138%
Gross margin . 29% 23%
</TABLE>
Gross profit consists of total revenues minus cost of total revenues. Cost
of total revenues consists primarily of the cost of products sold to customers,
shipping and handling costs for product sales, and advertising sales commissions
paid to the Company's internal advertising sales department. Gross profit
increased to $759,000 for the quarter ended September 30, 2000 from $319,000 for
the quarter ended September 30, 1999. Gross margin increased to 29% of total
revenues for the quarter ended September 30, 2000 from 23% of total revenues for
the quarter ended September 30, 1999. The increase in gross profit in absolute
dollars is due in part to the Company's overall increased total revenues. Gross
margin percentage increased primarily due to ongoing negotiations with suppliers
that raised contractual gross margins and a reduction in shipping and handling
charges as a percentage of total revenues. The Company intends to initiate a
"going out of business sale" on selected products using promotional discounts
that should negatively affect gross margins.
MARKETING AND SALES
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Marketing and sales . . . . . $3,841 $2,699 42%
Percentage of total revenues. 148% 191%
</TABLE>
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, payroll and related expenses for personnel engaged in
marketing, Customer Solutions, advertising sales and distribution activities and
distribution expenses. Marketing and sales expenses increased to $3.8 million,
or 148% of total revenues, for the quarter ended September 30, 2000 from $2.7
million, or 191% of total revenues, for the quarter ended September 30, 1999.
Marketing and sales expenses increased in absolute dollars primarily due to an
increase in the Company's advertising and promotional expenditures, and
increases in payroll costs associated with its marketing and Customer Solutions
departments. Marketing and sales expenses decreased as a percentage of revenue
due to the increase in total revenues.
11
<PAGE>
TECHNOLOGY, CONTENT AND PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Technology, content and product development. $1,944 $1,408 38%
Percentage of total revenues . . . . . . . . . 75% 100%
</TABLE>
Technology, content and product development expenses consist of payroll and
related expenses for personnel involved in creating and publishing content,
product merchandising, and Web site development. During the quarter ended
September 30, 2000 technology, content and product development expenses also
included certain costs related to the Company's software division, TRELLIS.
Technology, content and product development expenses increased to $1.9 million,
or 75% of total revenues, for the quarter ended September 30, 2000 from $1.4
million, or 100% of total revenues, for the quarter ended September 30, 1999.
The increase in technology, content and product development expenses in absolute
dollars is primarily due to an increase in payroll and related costs used for
hiring additional personnel as well as associated costs related to enhancing the
products and features, editorial content and functionality of the Company's Web
site and branded catalogs. As a percent of total revenues, technology, content
and product development expenses decreased due to the increase in total revenues
during the period.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
General and administrative. . $1,629 $1,308 25%
Percentage of total revenues. 63% 93%
</TABLE>
General and administrative expenses consist of payroll and related expenses
for general corporate functions, including supplier operations support, finance,
facilities expenses, and professional services expenses. General and
administrative expenses increased to $1.6 million, or 63% of revenues, for the
quarter ended September 30, 2000 from $1.3 million, or 93% of revenues, for the
quarter ended September 30,1999. The increase in general and administrative
expenses in absolute dollars is primarily due to an increase in payroll and
related costs used for hiring additional personnel as well as associated
expenses necessary to support the growth of the Company's operations. As a
percent of total revenues, general and administrative expenses decreased due to
the increase in total revenues during the period.
12
<PAGE>
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
------ ------ --------
(In Thousands)
<S> <C> <C> <C>
Depreciation and amortization. $ 838 $ 347 142%
Percentage of total revenues . 32% 25%
</TABLE>
Depreciation of property and equipment and amortization of intangible other
assets are based on the useful lives of the assets or terms of the license
agreements, generally three to seven years, and is computed using the
straight-line method. Depreciation and amortization expenses increased to
$838,000, or 32% of total revenues, for the quarter ended September 30, 2000
from $347,000, or 25% of total revenues, for the quarter ended September 30,
1999. The increase in depreciation and amortization expense is primarily due to
the increase in property and equipment to support the growth of the Company,
including computer equipment, software, and database servers.
AMORTIZATION OF DEFERRED COMPENSATION
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
----- ----- --------
(In Thousands)
<S> <C> <C> <C>
Amortization of deferred compensation. $ 151 $ 374 (60)%
</TABLE>
Deferred stock compensation is amortized to expense over the vesting
periods of the applicable stock options. These amounts represent the difference
between the exercise price of stock option grants and the deemed fair value of
the Company's common stock at the time of such grants. Amortization of deferred
compensation expense decreased to $151,000 for the quarter ended September 30,
2000 from $374,000 for the quarter ended September 30, 1999. Amortization of
deferred compensation expense for each of the next four fiscal years is expected
to be as follows:
<TABLE>
<CAPTION>
Year ended Amount in thousands
------------- --------------------
<S> <C>
June 30, 2001 $ 345
June 30, 2002 238
June 30, 2003 9
</TABLE>
13
<PAGE>
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30,
--------------
2000 1999 % Change
----- ----- --------
(In Thousands)
<S> <C> <C> <C>
Interest income . $ 302 $ 252 20%
Interest expense. $ 0 $ 3 -
</TABLE>
Interest income increased for the quarter ended September 30, 2000 due to
three full months of interest income on the remaining proceeds of the Company's
initial public offering. Interest expense declined as the Company paid down all
of its outstanding debt.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. The Company has provided a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of preferred stock, its initial public offering and, to a
lesser extent, from revenues generated by operations. As of September 30, 2000,
the Company had approximately $390,000 in cash and cash equivalents and $12.0
million in short-term investments.
Net cash used in operating activities increased to $9.5 million for the
quarter ended September 30, 2000 from $5.5 million for the quarter ended
September 30, 1999. The increase in net cash used in operating activities can be
substantially attributed to the increased net loss.
Net cash provided by investing activities of $843,000 for the quarter ended
September 30, 2000 resulted primarily from the sale of investment securities
which was partially offset by the purchase of property and computer equipment.
Net cash used in investing activities of $16.7 million for the quarter ended
September 30, 1999 resulted primarily from the purchase of securities for
investment purposes and from the purchase of property and computer equipment.
Net cash used in financing activities of $19,000 for the quarter ended
September 30, 2000 resulted primarily from the repayment of the Company's
outstanding debt obligations. Net cash provided by financing activities of $50.1
million for the quarter ended September 30, 1999 resulted primarily from net
proceeds from the issuance of common stock in the Company's initial public
offering.
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On November 15, 2000, the Company announced that it will begin the phased
shut-down of its retail operations and the sale of its consumer business assets.
The Company believes that its current cash and marketable securities and
investments balances will be sufficient to proceed with this phased shut-down
through December 31, 2000. The Company also announced that it will continue to
evaluate strategic alternatives for its technology assets, including TRELLIS and
Green Cheetah. However, the Company will not be able to continue the
development of TRELLIS and Green Cheetah beyond December 31, 2000, unless the
Company completes a significant transaction, such as securing a major contract,
arranging a sale of its technology assets or completing a significant financing.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this report constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause the Company's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither the Company nor any other person assumes responsibility for the accuracy
and completeness of such statements. The Company is under no duty to update any
of the forward-looking statements after the date of this report to conform such
statements to actual results.
In addition to the factors discussed elsewhere in this report, the
following additional factors may affect the Company's future results.
THE COMPANY MAY NOT BE ABLE TO COMPLETE THE PHASED SHUT-DOWN OF ITS RETAIL
OPERATIONS AND THE SALE OF ITS CONSUMER BUSINESS ASSETS IN A MANNER THAT
PROVIDES ANY VALUE FOR STOCKHOLDERS.
The Company has announced that it will begin a phased shut-down of its
retail operations and the sale of its consumer business assets. The Company may
not be able to find qualified buyers for its consumer business assets. Even if
the Company is able to sell such assets, the Company may not generate sufficient
cash, through the liquidation of its assets or otherwise, to satisfy its current
and future obligations. A liquidation of the Company's consumer business assets
would likely involve a sale other than as a going concern which would adversely
affect the value the Company may realize for such assets. The Company also may
not be able to consummate the sale of its assets in time to generate meaningful
value. In addition, the Company may not be able to negotiate the orderly wind
down of its obligations to creditors. These include, without limitation, long
term contractual payment and performance obligations associated with the
Company's e-commerce platform building and facilities leases, business
agreements with third parties, and agreements with vendors. The Company also
expects to make total severance payments of between $2.3 million and $2.7
million to its employees. The amount of severance payments will depend on,
among other things, the timing of layoffs by the Company and the rate of
employee attrition. As a result of these and other factors, the Company may
not be able to generate meaningful cash, or any cash, which could be returned to
its stockholders, and the timing of any distribution is uncertain at this time.
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THE COMPANY MAY NOT BE ABLE TO DEVELOP, COMMERCIALIZE AND LICENSE OR SELL
TRELLIS OR ITS OTHER TECHNOLOGY ASSETS.
The Company launched its new TRELLIS division in September 2000. The
Company has no operating history or experience in providing technology and
services to businesses. The Company can make no assurance that it will be able
to commercialize TRELLIS and establish a successful revenue producing business.
The Company expects that it will face significant challenges in establishing
this business, including the need for financing to launch this new business,
intense competition in this market, possible reluctance by potential customers
to purchase software and support services from the Company in the face of
uncertainty in the Company's financial condition and the need to develop a new
brand by the Company. The Company may use a portion of its remaining capital
resources in its effort to develop TRELLIS and its other technology assets.
THE COMPANY WILL NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE ITS
TECHNOLOGY ASSETS IN THE ABSENCE OF A SIGNIFICANT TRANSACTION BY DECEMBER 31,
2000.
The Company is evaluating strategic alternatives for its technology assets,
including TRELLIS and Green Cheetah. However, the Company will not be able to
continue the development of its technology assets beyond December 31, 2000,
unless the Company completes a significant transaction, such as securing a major
contract, arranging a sale of its technology assets or completing a significant
financing. No assurance can be given that the Company will be able to complete
a significant transaction with respect to its technology assets, especially
given the Company's lack of experience in providing technology and services to
businesses, the Company's limited capital resources and the limited timeframe in
which the Company will need to complete a transaction.
THE COMPANY EXPECTS TO CONTINUE TO GENERATE LOSSES AS IT COMPLETES THE SHUT-DOWN
OF ITS RETAIL OPERATIONS AND TO THE EXTENT THE COMPANY CONTINUES THE DEVELOPMENT
OF ITS TECHNOLOGY ASSETS.
The Company incurred net losses of $19.1 million in fiscal 1999, $38.7
million in fiscal 2000 and $9.9 million in the first quarter of fiscal 2001. As
of September 30, 2000, the Company has incurred cumulative net losses of $75.5
million. The Company expects to experience operating losses and negative cash
flow as it completes the shut-down of its retail operations and to the extent
the Company continues the development of TRELLIS and its other technology
assets. The Company does not have sufficient cash to continue to sustain these
operating losses in fiscal 2001. In addition, the Company has received a
report from its independent auditors for its fiscal year ended June 30, 2000
containing an explanatory paragraph that describes the uncertainty regarding the
Company's ability to continue as a going concern due to the Company's historical
negative cash flow and because, as of the date they rendered their opinion, the
Company did not have access to sufficient committed capital to meet its
projected operating needs for at least the next 12 months.
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK HAS DECLINED SIGNIFICANTLY.
The Company has experienced a significant decline in the market price of
its Common Stock. The market price of the Company's common stock has declined
from $20.813 on September 21, 1999 to $0.0938 on November 16, 2000. The Company
believes it is unlikely that the market price of its Common Stock will increase
significantly in the future given the phased shut-down of the Company's retail
operations and the uncertainty with respect to the Company's TRELLIS division
and other technology assets.
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IF THE COMPANY SUCCESSFULLY COMMERCIALIZES ITS TECHNOLOGY ASSETS, THE COMPANY
WOULD FACE SIGNIFICANT COMPETITION FROM ESTABLISHED TECHNOLOGY PROVIDERS.
The Company believes that its TRELLIS division will face intense
competition as the Company attempts to commercialize internally developed
technology. Competitors to the TRELLIS division could include Yantra, Optum,
AtlasCommerce and Order Trust. The Company believes that its lack of experience
in commercializing technology and its limited resources may put the TRELLIS
division at a disadvantage as compared to its competitors.
THE COMPANY FACES SIGNIFICANT CHALLENGES IN CONTINUING TO RETAIN AND MOTIVATE
ITS EMPLOYEES.
The Company's ability to execute its strategy to complete a phased
shut-down of its retail operations and consider strategic alternatives for its
technology assets will depend on its continuing ability to retain and motivate a
sufficient number of its employees. Competition for personnel throughout the
Internet industry is intense. The Company has faced particular challenges
recently in light of its well publicized liquidity issues, its low stock price
which has fallen below the exercise price of many of the stock options granted
to employees and a very competitive labor market for high technology workers in
Austin, Texas, where the Company's headquarters are located. Recently, a
significant number of the Company's employees have been terminated in cost
cutting efforts or voluntarily departed to pursue other opportunities and the
Company has announced its intention to conduct a phased layoff of its remaining
consumer business employee base. As result, the Company may be unable to retain
a sufficient number of its employees to pursue the Company's strategy.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS LISTING ON THE NASDAQ NATIONAL
MARKET.
The Company's Common Stock is currently listed on the Nasdaq National
Market. The Company must satisfy a number of requirements to maintain its
listing on the Nasdaq National Market, including maintaining a minimum bid price
for the Common Stock of either $1.00 per share or $5.00 per share, depending on,
among other things, whether the net tangible assets of the Company is greater
than $4 million. As of September 30, 2000, the Company had net tangible assets
of $24.7 million. The amount of the Company's net tangible assets will continue
to decrease unless the Company achieves profitability or the Company is able to
complete a new equity financing. If the Company is unable to maintain net
tangible assets of at least $4 million, the Company could no longer use the
$1.00 minimum bid test. In addition, the bid price of the Common Stock has
closed below $1.00 per share since September 29, 2000. On November 10, 2000,
the Company received a letter from Nasdaq providing that the Common Stock would
be delisted from Nasdaq unless the bid price of the Common Stock is at least
$1.00 per share for a minimum of 10 consecutive trading days by February 8,
2001. If the Common Stock loses its Nasdaq National Market status, the Common
Stock would likely trade on the Over the Counter Bulletin Board, which is viewed
by most investors as a less desirable, less liquid marketplace.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not hold any significant market risk sensitive
instruments during the period covered by this report.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of its business, including employment related claims and
claims of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims 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.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of the Company
during the first quarter of fiscal 2001.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company. (Filed
as exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 (File No. 0-26265)
and incorporated herein by reference).
3.2 Amended and Restated By-Laws of the Company. (Filed as
exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 (File No. 0-26265) and
incorporated herein by reference).
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10.1* Settlement Agreement, dated September 18, 2000, between the
Company and iVillage Inc.
27 Financial Data Schedule
_____________________
*Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions of this exhibit have been
separately filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K: None in the first quarter of fiscal 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 20th day of November, 2000.
GARDEN.COM, INC.
By /s/ Clifford A. Sharples
-----------------------------
Clifford A. Sharples, President and
Chief Executive Officer
By /s/ Jana D. Wilson
-----------------------
Jana D. Wilson, Chief Financial Officer
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