<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
[X] Filed by the registrant
[_] Filed by a party other than the registrant
Check the appropriate box:
[X] Preliminary proxy statement
[_] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
GARDEN.COM, INC.
(Name of Registrant as Specified in Its Charter)
Registrant
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-
11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 per share
(2) Aggregate number of securities to which transaction applies:
17,739,845 (shares of Common Stock outstanding as of November 30,
2000).
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $1.39 (based on the net
tangible assets of the registrant as of September 30, 2000,
solely for purposes of calculating the filing fee)
(4) Proposed maximum aggregate value of transaction: $24,700,000
(based on the net tangible assets of the registrant as of
September 30, 2000, solely for purposes of calculating the filing
fee).
(5) Total fee paid: $4,940
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.
<PAGE>
Identify the previous filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
2
<PAGE>
GARDEN.COM, INC.
3301 STECK AVENUE
AUSTIN, TEXAS 78757
December 29, 2000
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Garden.com, Inc., to be held at the Company's headquarters located at 3301 Steck
Avenue, Austin, Texas 78757 on January 8, 2001, at 11:00 a.m., local time.
At the Annual Meeting, your will be asked to consider and vote on a
proposal to approve and adopt a Plan of Liquidation and Dissolution (the "Plan
of Liquidation") pursuant to which Garden.com's assets would be liquidated over
a maximum three-year period, known liabilities satisfied, reserves established
and remaining proceeds distributed to our stockholders.
On November 15, 2000, Garden.com announced that it would 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. Garden.com also announced that it would continue to
evaluate strategic alternatives for its technology assets. On December 1, 2000,
Garden.com shut-down its web site and ceased the operation of its commerce
business. Since that time, Garden.com has solicited bids for the sale of
various of its assets. The Board of Directors has approved the Plan of
Liquidation as the means to effect this wind down of Garden.com's business and
the sale of its assets, including its consumer business assets and its
technology assets. The Plan of Liquidation is described in the accompanying
Proxy Statement and is attached as Annex A to the Proxy Statement.
The Board of Directors has unanimously determined that the Plan of
Liquidation is advisable for, and in the best interests of, Garden.com and its
stockholders. Accordingly, the Board of Directors recommends that stockholders
vote "FOR" the proposal to approve and adopt the Plan of Liquidation.
At the annual meeting, you will also be asked to consider and vote on the
election of two directors, each to serve a three-year term, and to ratify the
appointment of the accounting firm of Ernst & Young LLP as independent auditors
of Garden.com for its fiscal year ending June 30, 2001. The Board of Directors
recommends that stockholders vote "FOR" each nominee for election to the Board
of Directors and "FOR" the ratification of the appointment of independent
auditors of the Company.
<PAGE>
Attached is a Notice of the Annual Meeting of Stockholders and a Proxy
Statement containing a discussion of the background of, reasons for, and terms
of the Plan of Liquidation. We urge you to read and carefully consider the
information presented in the accompanying Proxy Statement. Whether or not you
plan to attend the Annual Meeting in person and regardless of the number of
shares of Common Stock you own, please complete, sign, date and return the
enclosed proxy card promptly. If you attend the Annual Meeting, you may vote
your shares of Common Stock personally whether or not you have previously
submitted a proxy.
Very truly yours,
Clifford A. Sharples
President and Chief Executive Officer
<PAGE>
GARDEN.COM, INC.
3301 STECK AVENUE
AUSTIN, TEXAS 78757
Notice of Annual Meeting of Stockholders
to be held on January 8, 2001
The Annual Meeting of Stockholders of Garden.com, Inc., a Delaware
corporation (the "Company"), will be held at the Company's headquarters located
at 3301 Steck Avenue, Austin, Texas 78757 on January 8, 2001, at 11:00 a.m.,
local time, for the following purposes:
1. To approve and adopt a Plan of Liquidation and Dissolution pursuant to
which the Company's assets would be liquidated, known liabilities satisfied,
reserves established and remaining proceeds, if any, distributed to
stockholders.
2. To elect two directors, each to serve for a three-year term.
3. To ratify the appointment of Ernst & Young LLP, independent public
accountants, as auditors of the Company for its fiscal year ending June 30,
2001.
4. To take action with respect to any other matters that may be properly
brought before the meeting and that might be considered by the stockholders of a
Delaware corporation at their annual meeting.
By order of the Board of Directors
Austin, Texas
December 29, 2000
Jana D. Wilson,
Secretary
Stockholders of record at the close of business on December 22, 2000 are
entitled to vote at the meeting. Your vote is important to ensure that a
majority of the stock is represented. Please complete, sign and date the
enclosed proxy and return it promptly in the enclosed envelope whether or not
you plan to attend the meeting. If you later find that you may be present at the
meeting or for any other reason desire to revoke your proxy, you may do so at
any time before it is voted.
<PAGE>
GARDEN.COM, INC.
3301 STECK AVENUE
AUSTIN, TEXAS 78757
Proxy Statement for the Annual Meeting of Stockholders
to be Held on January 8, 2001
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Garden.com, Inc. ("Garden.com" or the "Company") of
proxies, in the accompanying form, to be used at the Annual Meeting of
Stockholders of the Company to be held at the Company's headquarters located at
3301 Steck Avenue, Austin, Texas 78757 on January 8, 2001, at 11:00 a.m., local
time, and any adjournments thereof. This Proxy Statement is being mailed on or
about December 29, 2000 to stockholders of record at the close of business on
December 22, 2000.
At the annual meeting, stockholders of the Company will consider a proposal
to approve and adopt a Plan of Liquidation and Dissolution (the "Plan of
Liquidation") pursuant to which the Company's assets would be liquidated over a
maximum three-year period, known liabilities satisfied, reserves established and
remaining proceeds distributed to the Company's stockholders. The Plan of
Liquidation is attached as Annex A to this Proxy Statement. A majority of the
outstanding shares of Common Stock must be voted in favor of the Plan of
Liquidation for the Plan of Liquidation to be approved.
The Board of Directors has unanimously determined that the Plan of
Liquidation is advisable for, and in the best interests of, Garden.com and its
stockholders. Accordingly, the Board of Directors recommends that stockholders
vote "FOR" the proposal to approve and adopt the Plan of Liquidation.
At the annual meeting, you will also be asked to consider and vote on the
election of two directors, each to serve a three-year term, and to ratify the
appointment of the accounting firm of Ernst & Young LLP as independent auditors
of Garden.com for its fiscal year ending June 30, 2001. The Board of Directors
recommends that stockholders vote "FOR" each nominee for election to the Board
of Directors and "FOR" the ratification of the appointment of independent
auditors of the Company.
The shares represented by each valid proxy received in time will be voted
at the meeting and, if a choice is specified in the proxy, it will be voted in
accordance with that specification. If no instructions are specified in a signed
proxy returned to the Company, the shares represented thereby will be voted (1)
in FAVOR of the proposal to approve and adopt the Plan of Liquidation, (2) in
FAVOR of the election of the directors listed in the enclosed proxy, and (3) in
FAVOR of the ratification of the appointment of Ernst & Young LLP as the
Company's auditors for fiscal 2001.
Only stockholders of record at the close of business on December 22, 2000
will be entitled to notice of and to vote at the annual meeting. On the record
date, the Company had
<PAGE>
outstanding _____________ shares of Common Stock, par value $0.01 per share (the
"Common Stock"), entitled to one vote per share.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................ 4
Cautionary Note on Forward-Looking Statements.......................................... 10
The Annual Meeting..................................................................... 11
The Plan of Liquidation and Dissolution................................................ 13
Selected Financial Data................................................................ 24
More Information About Garden.com...................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 27
Security Ownership..................................................................... 40
Election of Directors.................................................................. 43
Ratification of Appointment of Auditors................................................ 54
Annual Report to the Securities and Exchange Commission................................ 54
Stockholder Proposals.................................................................. 54
Other Matters.......................................................................... 55
Index to Financial Statements.......................................................... F-1
</TABLE>
Annex A - Plan of Liquidation and Dissolution
3
<PAGE>
SUMMARY
The following is a summary of some of the information in this Proxy
Statement. It is not meant to be comprehensive and does not contain all the
information that is important to you. We have included page references to direct
you to more complete information in this document. You should carefully read the
entire Proxy Statement to fully understand the Plan of Liquidation and its
consequences.
The Plan of Liquidation -- Pursuant to the Plan of Liquidation,
(See pages 13 to 23) Garden.com's Board of Directors would
have the authority to effect the
dissolution of Garden.com. If Garden.com
is dissolved, Garden.com's assets would
be liquidated over a maximum three-year
period, known liabilities satisfied,
reserves established and remaining
proceeds, if any, distributed to
Garden.com's stockholders.
Why the Board of -- Garden.com's board of directors
Directors Recommends that recommends that you vote in favor of
You Vote for the Plan of approval of the Plan of Liquidation. In
Liquidation (See page 17) the opinion of the board of directors,
the Plan of Liquidation is advisable for,
and in the best interests of, Garden.com
and its stockholders.
Vote Required to Approve -- The holders of a majority of the
the Plan of Liquidation outstanding shares of our common stock
(See pages 11 to 12) must vote to approval of the Plan of
Liquidation. The directors and executive
officers of Garden.com, who beneficially
own a total of approximately 44.2% of the
outstanding shares of our common stock as
of November 30, 2000, have indicated that
they intend to vote all such shares in
favor of the Plan of Liquidation. If you
do not vote your shares, the effect will
be a vote against approval of the Plan of
Liquidation. The board of directors
unanimously recommends voting "FOR" the
approval of the Plan of Liquidation.
4
<PAGE>
Garden.com (See pages 26 to 27) -- Garden.com has operated an online
destination integrating gardening and
gardening-related commerce, content and
community. Primarily through our flagship
Web site, www.garden.com, we have
--------------
provided consumers with an intuitive,
easy-to-use environment through which
they can access a wide variety of
gardening information and resources,
purchase a broad selection of products,
receive specific gardening advice and
other personalized services and interact
with an online gardening community. On
November 15, 2000, Garden.com announced
that it would 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. Garden.com also announced that
it would continue to evaluate strategic
alternatives for its technology assets.
Garden.com has substantially completed a
"going-out-of-business sale" of its
product inventory. On December 1, 2000,
Garden.com shut-down its web site and
ceased the operation of its commerce
business. Since that time, Garden.com has
solicited bids for the sale of various of
its assets. Pursuant to the proposed Plan
of Liquidation, Garden.com intends to
sell all of its assets, including its
consumer business assets and its
technology assets. Garden.com expects to
complete most of these sales within six
months.
5
<PAGE>
What You will Receive in -- If the Plan of Liquidation is approved
the Plan of Liquidation and the Board of Directors authorizes
(See pages 16 to 17) the filing of a Certificate of
Dissolution with the Secretary of State
of the State of Delaware, following the
sale of Garden.com's assets and
satisfaction by Garden.com, through
payment or establishment of reserves, of
all of its liabilities and obligations,
including the expenses of liquidation,
Garden.com will distribute to its
stockholders the balance of available
liquidation proceeds, if any, through one
or more liquidating distributions. It is
not possible at this time to predict the
amount or timing of any liquidating
distributions to stockholders, which
could be made over a substantial period
of time.
Purpose of the -- The purpose of the Plan of Liquidation is
Plan of Liquidation to provide for the liquidation of
(See pages 13 to 14) Garden.com's assets over a maximum three-
year period, the satisfaction of known
liabilities, the establishment of
reserves and the distribution of the
remaining proceeds, if any, to our
stockholders.
Completion of the Plan of -- If the Plan of Liquidation is approved
Liquidation at the annual meeting, Garden.com may
(See pages 14 to 15) effect, at such time as the Board of
Directors may determine in its sole
discretion, the dissolution and
liquidation by filing a Certificate of
Dissolution with the Secretary of State
of the State of Delaware. Pursuant to
the Plan of Liquidation, Garden.com's
Board of Directors has retained the
authority to abandon the proposed
liquidation without further action by
Garden.com's stockholders. If Garden.com
is dissolved, its existence will
automatically be continued for a term of
three years solely for the purpose of
winding up its business. If Garden.com
is dissolved, Garden.com will seek to
complete the liquidation as soon as
practicable, but can make no assurance
as to the timing of any distributions to
stockholders.
6
<PAGE>
Risks Related to the Liquidation -- Although Garden.com has determined that
(See Pages 17 to 20) it is not feasible to continue as a going
concern, you should consider the
following risks and uncertainties related
to the Plan of Liquidation:
. the risk that you may not receive any
meaningful cash distributions pursuant
to the Plan of Liquidation;
. the risk that you may be liable to
Garden.com's creditors up to the
amount of any liquidating
distributions paid to you if
Garden.com's contingency reserve is
inadequate to cover expenses and
liabilities;
. Garden.com does not intend to obtain
an appraisal or fairness opinion
regarding the value of its assets;
. sales of assets pursuant to the Plan
of Liquidation will not be subject to
further stockholder approval;
. Garden.com may not be able to retain
the services of key employees required
to complete its liquidation;
. our common stock will be delisted from
the Nasdaq National Market and
Garden.com may fix a final record date
pursuant to the Plan of Liquidation
after which no transfers of the common
stock will be permitted; and
. Garden.com intends to terminate its
registration under the Securities
Exchange Act of 1934, including all
regular reporting obligations.
Location, Date and Time of Annual -- The annual meeting with be held on
Meeting (See page 11) January 8, 2001, at 11:00 a.m. local
time, at the Company's headquarters
located at 3301 Steck Avenue, Austin,
Texas 78757. If the meeting is adjourned
for any reason, we will give you notice
of the new date and time.
7
<PAGE>
What to do now -- Please mark your vote on, sign, date and
mail your proxy card in the enclosed
return envelope as soon as possible, so
that your shares may be represented and
voted at the annual meeting.
You are not entitled to Dissenters' -- Under Delaware law, stockholders are not
Rights in connection with the Plan entitled to dissenters' rights with
of Liquidation respect to the Plan of Liquidation.
(See page 20)
Who may vote on the Plan of -- All stockholders of record as of the
Liquidation close of business on December 22, 2000
(See page 11) will be entitled to notice of, and to
vote at, the annual meeting.
Changing your Vote -- If you have signed and mailed back your
(See page 12) proxy card and want to change your vote,
you may either send a written revocation
or another signed proxy card with a
later date to Garden.com's transfer
agent, before the annual meeting or
simply attend the annual meeting and
vote in person.
8
<PAGE>
U.S. Federal Income Tax -- Any liquidating distributions will be
Consequences of the Plan of reported as distributions in complete
Liquidation liquidation of Garden.com for federal
(See pages 21 to 23) income tax purposes. To review the
federal income taxes in greater detail,
see pages 21 to 23.
Other Matters to be Voted on at -- At the annual meeting, you will also be
the Annual Meeting asked to vote on the election of two
(See page 11) directors, each to hold office for a
three-year term, and you will also be
asked to vote to ratify the appointment
of Ernst & Young LLP as independent
auditors for the fiscal year ending June
30, 2001.
Who Can Help Answer Other -- If you have more questions about the
Questions Plan of Liquidation or would like
additional copies of this Proxy
Statement, you should contact the
Corporate Secretary of Garden.com, Inc.,
3301 Steck Avenue, Austin, Texas 78757
(telephone (512) 532-4000).
9
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement constitute forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of invoking these safe harbor provisions. You can
identify these statements from our use of the words "may," "will," "should,"
"expect," "plan," "intend," "anticipate," "could," "believe," "estimate,"
"predict," "objective," "potential," "projection," "forecast," "goal,"
"project," "anticipate," "target" and similar expressions.
Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the Company's actual
results, performance or achievements, or industry results, to differ materially
from the Company's expectations of future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes that the expectations reflected in any forward-looking statements are
reasonable, it cannot guarantee future events or results. Except as may be
required under federal law, the Company undertakes no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur. In addition, the Company's past results
of operations do not necessarily indicate its future results. These and other
uncertainties are discussed in "Plan of Liquidation and Dissolution -Risks
Related to Liquidation."
10
<PAGE>
THE ANNUAL MEETING
Purpose
This Proxy Statement is being furnished to holders of shares of Common
Stock in connection with the solicitation of proxies by the Board of Directors
for use at the annual meeting. At the annual meeting, stockholders of the
Company will consider a proposal to approve and adopt the Plan of Liquidation.
The Plan of Liquidation is attached as Annex A to this Proxy Statement. In
addition, at the annual meeting, stockholders of the Company will be asked to
consider and vote on the election of two directors, each to serve a three-year
term, and to ratify the appointment of independent auditors of the Company.
The Board of Directors has approved the Plan of Liquidation, and has
determined that the Plan of Liquidation is advisable for, and in the best
interests of, the Company and its stockholders. The Board of Directors
recommends that the stockholders of the Company vote "FOR" the approval and
adoption of the Plan of Liquidation. In addition, the Board of Directors
recommends that stockholders of the Company vote "FOR" each nominee for election
to the Board of Directors and "FOR" ratification of the appointment of Ernst &
Young LLP as the Company's independent auditors.
Record Date; Voting Rights
Only holders of shares of Common Stock at the close of business on December
22, 2000 (the "Record Date") will be entitled to notice of, and to vote at, the
annual meeting. ______________ shares of Common Stock were outstanding on the
Record Date held by _________ holders of record. Each share of Common Stock
entitles the registered holder thereof to one vote.
Required Vote
The Delaware General Corporation Law requires that a majority of the issued
and outstanding shares of Common Stock must be voted in favor of the Plan of
Liquidation for the Plan of Liquidation to be approved.
The Company's By-Laws provide that a majority of the votes entitled to be
cast with respect to the election of members of the Board of Directors,
represented either in person or by proxy, shall constitute a quorum with respect
to such matter. If a quorum exists, the election of each nominee for director
requires the affirmative vote of a plurality of the votes represented at the
annual meeting.
The appointment of independent auditors is not required to be submitted to
a vote of stockholders; however, the Board of Directors believes it appropriate
as a matter of policy to request that stockholders ratify the appointment. If
stockholder ratification is not received, the Board of Directors will reconsider
the appointment. The ratification of independent auditors
11
<PAGE>
requires the affirmative vote of a majority of the votes represented at the
annual meeting at which a quorum is present.
Abstentions and broker non-votes (i.e., shares held by brokers in street
----
name, voting on certain matters due to discretionary authority or instructions
from the beneficial owners but not voting on other matters due to lack of
authority to vote on such matters without instructions from the beneficial
owner) will count toward the quorum requirement and will not count toward the
determination of whether the ratification of auditors is approved or directors
are elected. However, because the Plan of Liquidation must be approved by the
holders of a majority of the outstanding shares of Common Stock entitled to vote
thereon, abstentions and broker non-votes will act as a vote against the
proposed Plan of Liquidation. The Inspector of Election appointed by the Board
of Directors will count the votes and ballots.
Proxies
All shares of Common Stock represented by properly executed proxies that
are received in time for the annual meeting and which have not been revoked will
be voted in accordance with the instructions indicated in such proxies. If no
such instructions are indicated, such shares of Common Stock will be voted "FOR"
the approval and adoption of the Plan of Liquidation, "FOR" each nominee for
election to the Board of Directors and "FOR" ratification of the Company's
independent auditors. In addition, the persons designated in such proxies will
have the discretion to vote on matters incident to the conduct of the annual
meeting. If the Company proposes to adjourn the annual meeting, the persons
named in the enclosed proxy card will vote all shares of Common Stock for which
they have authority, other than those that have been voted against the approval
and adoption of the Plan of Liquidation, in favor of such adjournment.
The grant of a proxy on the enclosed proxy card does not preclude a
stockholder from voting in person at the annual meeting. A stockholder may
revoke a proxy at any time prior to its exercise by delivering to the Secretary
of the Company, prior to the annual meeting, a written notice of revocation
bearing a later date or time than the proxy, delivering to the Secretary of the
Company a duly executed proxy bearing a later date or time than the revoked
proxy or attending the annual meeting and voting in person. Attendance at the
annual meeting will not in and of itself constitute the revocation of a proxy.
The Company will bear the cost of solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of the Company and its subsidiaries may solicit proxies from
stockholders of the Company by telephone, telegram or in person. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of shares of Common Stock held of record by such persons, and the Company will
reimburse such custodians, nominees and fiduciaries for their reasonable out-of-
pocket expenses.
12
<PAGE>
PLAN OF LIQUIDATION AND DISSOLUTION
Background
The Company was originally formed in December 1995 as a result of a merger
with The Asbury Group, Inc., a Texas corporation formed in October 1995. The
Company began offering products for sale on its Web site in March 1996. On
September 21, 1999, the Company completed its initial public offering of
4,650,000 shares of its common stock, which raised net proceeds to the Company
of $49.8 million in the aggregate. The Company has incurred net losses since
inception, including 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.
On November 15, 2000, the Company announced that it would 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 also announced that it would continue to
evaluate strategic alternatives for its technology assets. Since the quarter
ended June 30, 2000, the Company had unsuccessfully sought to find strategic
alternatives for the Company's business through both financial investors and
strategic partnerships. The Company also took initiatives to reduce operating
expenses through restructuring efforts and refocused marketing programs to
extend the timeframe during which it could find and evaluate strategic
alternatives. The Company decided to begin a phased shut-down of its operations
after it became apparent that there were no companies or investors interested in
the Company as a full going concern. Garden.com has substantially completed a
"going-out-of-business sale" of its product inventory. On December 1, 2000,
Garden.com shut-down its web site and ceased the operation of its commerce
business. Since that time, Garden.com has solicited bids for the sale of various
of its assets.
On December 15, 2000, the Board of Directors of the Company unanimously
voted to approve and adopt the Plan of Liquidation. The Board of Directors
approved the Plan of Liquidation as the means to effect the wind down of
Garden.com's business and the sale of its assets, including its consumer
business assets and its technology assets.
Plan of Liquidation and Dissolution
In accordance with the requirements of the Delaware General Corporation
Law, the Company's Board of Directors has authorized the submission of the Plan
of Liquidation to the holders of the Common Stock. The affirmative vote of the
holders of a majority of the aggregate shares of the Common Stock issued and
outstanding on the Record Date is required for approval of the Plan of
Liquidation. Directors and officers of the Company who own or control shares of
Common Stock constituting approximately 44.2% of the outstanding shares of
Common Stock as of November 30, 2000, have indicated to the Company that they
intend to vote all such shares in favor of the Plan of Liquidation. The Board of
Directors believes that the Plan of Liquidation is advisable for, and in the
best interests of, the Company and its stockholders and recommends that
13
<PAGE>
stockholders vote FOR this proposal. See "-- Recommendation of the Board of
Directors" below.
Dissolution Under Delaware Law. Section 275 of the Delaware General
Corporation Law provides that a corporation may dissolve upon either (a) a
majority vote of the Board of Directors of the corporation followed by a
majority vote of its stockholders; or (b) a unanimous stockholder consent.
Following such approval, the dissolution is effected by filing a Certificate of
Dissolution with the Secretary of State of the State of Delaware. Once a
corporation is dissolved, its existence is automatically continued for a term of
three years, but solely for the purpose of winding up its business. The process
of winding up includes:
. the prosecution and defense of lawsuits, if any;
. the settling and closing of business;
. the disposition and conveyance of any property;
. the discharge of any liabilities; and
. the distribution of any remaining assets to the stockholders of the
corporation.
If any action, suit or proceeding is commenced by or against the
corporation before or within the winding up period, the corporation will
automatically continue to exist beyond the three-year period until any
judgments, orders or decrees are fully executed.
Description of the Plan of Liquidation. The following is a brief summary of
the Plan of Liquidation. It is qualified in its entirety by reference to the
full text of the Plan of Liquidation attached hereto as Annex A and incorporated
herein by reference. You should read the Plan of Liquidation carefully.
The Plan of Liquidation provides that, if it is approved by the holders of
at least a majority of the outstanding shares of Common Stock, the Company may
file a Certificate of Dissolution with Secretary of State of the State of
Delaware to effect the dissolution of the Company at such time as the Board of
Directors may determine in its sole discretion. If the Certificate of
Dissolution is filed, the Company will take such actions as are deemed necessary
or appropriate by the Board of Directors to wind up all of the Company's
business and affairs and to dispose of, by sale, all of the assets of the
Company. The Company's assets consist primarily of its product inventory, URLs,
content, photo library, its popular online gardening tools such as Landscape
Planner and Plant Finder, its technology assets, as well as other intellectual
property. The Company's other assets consist of cash and cash equivalents,
investments and other assets comprised primarily of certain computer hardware
and software.
The Plan of Liquidation provides that the Company's assets may be converted
into cash or other assets which may be conveniently distributed to stockholders.
If the Plan of Liquidation
14
<PAGE>
is approved by stockholders at the annual meeting, the Company will not obtain
any further approvals from its stockholders. The Company expects that all of its
assets will be sold for cash. Other than as set forth below under "-- Sale of
Assets Pursuant to the Plan of Liquidation --Solicitation of Offers to Acquire
the Company's Assets," no discussions have occurred and no negotiations have
been entered into with any prospective buyers with respect to the terms of any
liquidating sales. The Company may sell its assets to persons deemed to be
affiliates of the Company to the extent such persons submit the highest bids in
respect of such assets.
The Plan of Liquidation does not specify the manner in which the Company
would sell its assets. Such sales could take the form of individual sales of
assets, sales of groups of assets organized by business, type of asset or
otherwise, a single sale of all or substantially all of the Company's assets or
some combination of these. As part of the Plan of Liquidation, the Company
intends to satisfy its existing debts and obligations from existing cash
balances and the proceeds of the sale of the Company's assets. In addition, the
Company's Board of Directors may establish reserves, as it deems necessary, for
liabilities or expenses, contingent or otherwise, that may arise. The remaining
proceeds would be distributed to the Company's stockholders as full payment for
their capital stock. It is difficult to predict the timing of the sale of the
Company's assets and, consequently, the timing of liquidating distributions to
stockholders. See "-- Distributions to Stockholders" below.
If the Plan of Liquidation is approved by stockholders, and the Board of
Directors decides to effect the dissolution of the Company, the appropriate
officers of the Company, in accordance with the terms of the Plan of
Liquidation, will execute, acknowledge and file a Certificate of Dissolution
with the Secretary of State of the State of Delaware which will effect the
dissolution of the Company. The Company will be continued for the sole purpose
of disposing of its assets, settling and closing its business, discharging its
liabilities, making distributions to its stockholders and prosecuting and
defending claims. See "-- Dissolution Under Delaware Law" above. Under the Plan
of Liquidation, the Board of Directors has retained the authority to abandon the
dissolution without further action by the Company's stockholders.
The Company does not expect that any federal or state regulatory approvals
will be required to consummate the liquidation of the Company in accordance with
the Plan of Liquidation.
The Plan of Liquidation provides that, if it is approved and the Company is
dissolved, the sale and distribution of assets will be completed not more than
three years after the approval of the Plan of Liquidation by the holders of the
Common Stock. However, the Company anticipates that it will attempt to liquidate
within six months after approval of the Plan of Liquidation. See "-- Risks
Related to Liquidation -Uncertain Timing of Liquidation" below.
Appraisals. The Company does not intend to obtain an appraisal, fairness
opinion or any similar report or opinion in connection with the Plan of
Liquidation. See "-- Risks Related to Liquidation - Absence of Appraisal or
Fairness Opinion."
15
<PAGE>
Sale of Assets Pursuant to the Plan of Liquidation.
If the Plan of Liquidation is approved and the Certificate of Dissolution
is filed with the Secretary of State of the State of Delaware, the Company will
attempt to sell its assets at an aggregate purchase price that would yield the
greatest net proceeds to the stockholders. The assets could be sold to one or
more purchasers in one or more transactions over a period of time, in which case
the Company would continue to operate until all assets are sold.
It is impossible to determine with any precision the aggregate net proceeds
that may ultimately be available for distribution to the Company's stockholders
if the Plan of Liquidation is approved. That amount will depend upon a variety
of factors, including the timing of and the net proceeds realized from the sale
of the Company's assets, as well as the ultimate amounts of liquidation-related
expenses and other obligations and liabilities that must be satisfied out of the
Company's assets, as well as general and local economic conditions over the
period during which the liquidation is conducted. See "-- Risks Related to
Liquidation" below.
Satisfaction of Obligations. As part of the Plan of Liquidation, the
Company intends to satisfy its existing debts and obligations, and establish
reserves for liabilities or expenses as it deems necessary, before any
liquidating distributions may be made to stockholders. Currently, the Company's
obligations consist primarily of accounts payable and contractual obligations.
The Company also expects to make total severance payments of between $2.3
million and $2.7 million to its employees. The Company anticipates that other
obligations will arise during the liquidation process, including expenses
relating to the liquidation.
Solicitation of Offers to Purchase the Company's Assets. Since the Company
announced the phased shut-down of its retail operations on November 15, 2000,
the Company has been actively seeking potential purchasers of all or part of the
Company's consumer business assets. The Company has also started to solicit bids
to purchase the Company's technology assets. As of the date of this Proxy
Statement, the Company has solicited bids from approximately 100 potential
buyers and has not committed to any specific sales.
Distributions to Stockholders
If the Plan of Liquidation is approved and the Certificate of Dissolution
is filed with the Secretary of State of the State of Delaware, following the
sale of the Company's assets and satisfaction by the Company, through payment or
establishment of reserves, of all of its liabilities and obligations, including
the expenses of liquidation, the Company will distribute to its stockholders the
balance of available liquidation proceeds. The Company may make partial
liquidating distributions prior to the satisfaction of all of its liabilities
and obligations. It is not possible to predict the timing of the sale of the
Company's assets and the distributions to stockholders, which could be made over
a substantial period of time.
If the Plan of Liquidation is approved and the Certificate of Dissolution
is filed with the Secretary of State of the State of Delaware, the Company will
make distributions to stockholders at such times and upon such terms as are
determined by the Board of Directors. The Company
16
<PAGE>
will advise stockholders at the time of any such distribution as to the details
of the mechanics of distribution. If the Company transfers its assets to a
liquidating trust as discussed below, certificates for shares of Common Stock
will be deemed to represent a stockholder's interest in the liquidating trust.
The Company intends to close its stock transfer books and discontinue
recording transfers of Common Stock at the close of business on the final record
date to be fixed by the Board of Directors for filing the Certificate of
Dissolution after approval by the Company's stockholders. 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 Company anticipates that the shares of Common Stock will
be delisted from the Nasdaq National Market. See "-- Risks Related to
Liquidation - Delisting of Shares of Common Stock " below. The Company
anticipates that the current directors of the Company will continue to serve
following the filing of the Certificate of Dissolution. See "-- Risks Related to
Liquidation -- Risk of Loss of Personnel" below.
Under the Plan of Liquidation, the Board of Directors will have the
authority to transfer the assets of the Company to a liquidating trust
designated by the Board of Directors. The liquidating trust would be established
pursuant to a Liquidating Trust Agreement in such form as the Board of Directors
may approve. The Board of Directors would not expect to transfer assets to a
liquidating trust except (i) when such a transfer is required to avoid the
imposition of federal income taxes on the Company or (ii) to establish reserves
for liabilities and obligations of the Company (contingent or otherwise) out of
amounts which would otherwise be distributed to stockholders. See "-- Federal
Income Tax Consequences -- Liquidating Trust" below.
Recommendation of the Board of Directors
The Board of Directors believes the approval and adoption of the Plan of
Liquidation is advisable for, and in the best interests of, the Company and its
stockholders and recommends that stockholders vote "FOR" the Plan of
Liquidation. The Board of Directors has made this determination following the
phased shut-down of the Company's consumer business announced on November 15,
2000. As described above under "- Background," this announcement followed an
extensive consideration of strategic alternatives for the Company's business and
the implementation of initiatives to reduce operating expenses through
restructuring efforts and refocused marketing programs. Without a significant
financing or other strategic transaction, the Board of Directors determined that
the Company could not continue its operations as a full going concern. The Plan
of Liquidation provides the Company with the authority under the Delaware
General Corporation Law to liquidate the Company's assets, satisfy known
liabilities, establish reserves and distribute the remaining proceeds, if any,
to the Company's stockholders.
Risks Related to Liquidation
There are a number of factors that could affect the amount of net proceeds
payable to stockholders if the Plan of Liquidation is approved and the Company
is dissolved. In addition to the other information set forth in this Proxy
Statement, stockholders should carefully consider the following:
17
<PAGE>
Stockholders May Not Receive Any Distributions Pursuant to the Plan of
Liquidation. The Company may not be able to find qualified buyers for its
assets. Even if the Company is able to sell such assets, the Company may not
generate sufficient cash through the liquidation of its assets to satisfy its
current and future obligations. The liquidation of the Company's business assets
will 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, and may make incentive bonus payments to employees
relating to asset sales. 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.
Uncertain Timing of Liquidation. The Plan of Liquidation provides that,
if it is approved and the Board of Directors determines to dissolve the Company,
the sale and distribution of assets will be completed not more than three years
after the approval of the Plan of Liquidation by the holders of the Common
Stock. The Company anticipates that it will attempt to liquidate within six
months after approval of the Plan of Liquidation. However, the Company may not
be able to meet this timetable. For example, it may not be possible for the
Company to sell its assets at acceptable prices during such period. Also, under
the Plan of Liquidation, the Board of Directors has retained the authority to
abandon the dissolution of the Company without further action by the Company's
stockholders. Under the Plan of Liquidation, the Board of Directors would have
the authority to transfer the assets of the Company to a liquidating trust
designated by the Board of Directors. The Board of Directors would not expect to
transfer assets to a liquidating trust except (i) when such a transfer is
required to avoid the imposition of federal income taxes on the Company or (ii)
to establish reserves for liabilities and obligations of the Company (contingent
or otherwise) out of amounts which would otherwise be distributed to
stockholders. A distribution to a liquidating trust would be treated as a direct
distribution to the Company's stockholders. As a result, a stockholder would
recognize gain to the extent his share of the cash and the fair market value of
any assets received by the liquidating trust was greater than the stockholder's
basis in its stock, notwithstanding that the stockholder would not receive a
contemporaneous distribution of cash or any other assets with which to satisfy
the resulting tax liability. See "-- Federal Income Tax Consequences -
Liquidating Trust."
If the Company's Contingency Reserve is Inadequate to Cover Expenses and
Liabilities, Stockholders May be Liable to Creditors of the Company for Amounts
Received. If the Plan of Liquidation is approved by the stockholders, the Board
of Directors will have the authority to cause a Certificate of Dissolution to be
filed with the State of Delaware dissolving the Company. If the Company is
dissolved, pursuant to the Delaware General Corporation Law, the Company will
continue to exist for three years after the dissolution
18
<PAGE>
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
Delaware General Corporation Law, in the event the contingency reserve created
by the Company is inadequate 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. 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. 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 Company's wind down 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.
Absence of Appraisal or Fairness Opinion. The Company has commenced a
process to sell all or any part of its assets to potential buyers. The Company
does not intend to obtain any appraisal of the value of any of its assets or any
fairness opinion prior to any sales of the Company's assets. A liquidation of
the Company's 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.
The Company May Not be Able to Retain the Services of the Key Employees
Required to Complete its Liquidation. The success of the Company's liquidation
will depend in large part upon the Company's ability to retain the services of
certain of its current personnel and its directors or to attract qualified
replacements for them. The retention and attraction of qualified personnel is
particularly difficult under the Company's current circumstances.
The Company May Fix a Final Record Date on Which it Will Determine the
Proportionate Interest of each Stockholder and After Which it will be Unable to
Record Transfers of Common Stock on the Company's Books. The Company intends to
close its stock transfer books and discontinue recording transfers of Common
Stock at the close of business on the final record date to be fixed by the Board
of Directors for filing the Certificate of
19
<PAGE>
Dissolution after approval by the Company's stockholders. 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 will 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.
The Common Stock Will Be Delisted from the Nasdaq National Market. The
Company has received delisting notices from the Nasdaq Stock Market due to its
failure to maintain a minimum bid price of its Common Stock of at least $1.00
per share and its failure to maintain a minimum market value of public float of
at least $5.0 million. These notices provide that the Common Stock could be
delisted as early as February 9, 2001. 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, the 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 the Plan of Liquidation, 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. The
Company expects that Nasdaq will delist its common stock from Nasdaq National
Market by February 9, 2001, if not earlier. When Nasdaq delists the Common
Stock from the Nasdaq National Market, the ability of stockholders to buy and
sell shares may be materially impaired.
Sales of Assets Not Subject to Further Stockholder Approval. If
stockholders approve the Plan of Liquidation, the Board of Directors will have
the authority to sell all of the Company's assets on such terms as the Board of
Directors determines appropriate. The stockholders will have no subsequent
opportunity to vote on such matters and will, therefore, have no right to
approve or disapprove the terms of any such sale.
No Appraisal Rights. Under Delaware law and the Company's Restated
Certificate of Incorporation, stockholders who vote against the Plan of
Liquidation will not have any appraisal rights or similar dissenters' rights for
their shares of Common Stock.
The Company Expects to Terminate its Obligation to Continue to Comply with
Public Company Reporting Requirements. The Company may file to terminate its
reporting obligation under the Securities Exchange Act of 1934. The Company
qualifies for such termination because it has less than 300 stockholders of
record. Upon such filing, the Company's obligation to file regular reports
under the Exchange Act such as reports on Form 10-K, Form 10-Q and Form 8-K
would be suspended.
20
<PAGE>
Certain Federal Income Tax Consequences
The following discussion is a summary of the material federal income tax
consequences to stockholders relevant to the Company's adoption and
implementation of the Plan of Liquidation. The discussion does not deal with
all of the tax consequences of the Plan of Liquidation that may be relevant to
every stockholder of the Company. Stockholders should therefore consult their
own tax advisors as to the tax consequences associated with the implementation
of the Plan of Liquidation under applicable federal, state, local and foreign
tax laws. The discussion of tax consequences that follows is based upon the
provisions of the Internal Revenue Code of 1986 (the "Code"), existing
regulations promulgated thereunder, Internal Revenue Service rulings, and
judicial decisions in effect on the date of this Proxy Statement, all of which
are subject to change at any time; any such changes may be applied
retroactively.
Tax Consequences to Stockholders. The Company believes that the
distributions of proceeds of sales of assets, if any, to its stockholders
pursuant to the Plan of Liquidation would be treated as distributions in
complete liquidation of the Company. In such case, a stockholder would recognize
gain or loss with respect to each share of Company stock held by the
stockholder, measured by the difference between: (i) the total amount of cash
and fair market value of other property, if any, received by the stockholder
with respect to such share pursuant to the Plan of Liquidation; and (ii) the
stockholder's basis in that share. (See "--Liquidating Trust," below, for the
consequences to stockholders if the Company's assets are dispersed to a
liquidating trust.) If a stockholder holds more than one block of shares (groups
of shares acquired at different times or at different costs), each liquidating
distribution would be allocated ratably among the various blocks of shares, and
gain or loss would be computed separately with respect to each block of shares.
Gain or loss recognized by a stockholder would be capital gain or loss
provided the shares are held by the stockholder as capital assets. Capital gain
or loss would be long-term if the shares were held for more than 12 months.
If adopted, the Plan of Liquidation could result in more than one
liquidating distribution to the stockholders, which may affect the timing of the
gain or loss recognition to the stockholders.
21
<PAGE>
Liquidating Trust. In the event that the Company is unable to dispose of
all of its assets within three years after adoption of the Plan of Liquidation,
or if it is otherwise advantageous or appropriate to do so, the Company may
establish a liquidating trust to which the Company could distribute in kind its
unsold assets. In any event, even if all of the Company's assets were disposed
of within such period, it might be necessary to establish a liquidating trust to
retain cash reserves beyond such three-year period to meet contingent
liabilities of the Company. Under the Code, a trust will be treated as a
liquidating trust if it is organized for the primary purpose of liquidating and
distributing the assets transferred to it, and if its activities are all
reasonably necessary to and consistent with the accomplishment of that purpose.
However, if the liquidation is prolonged or if the liquidation purpose becomes
so obscured by business activities that the declared purpose of the liquidation
can be said to be lost or abandoned, it will no longer be considered a
liquidating trust.
An entity classified as a liquidating trust may receive assets, including
cash, from the liquidating entity without incurring any tax. It will be treated
as a grantor trust, and accordingly will also not be subject to tax on any
income or gain recognized by it. Instead, each beneficiary will be treated as
the owner of his or her pro rata portion of each asset, including cash, received
by and held by the liquidating trust. Accordingly, if the Plan of Liquidation
is adopted and if the Company ultimately employs a liquidating trust, each
stockholder of the Company would be treated as having received a liquidating
distribution equal to his or her share of the amount of cash and the fair market
value of any asset distributed to the liquidating trust and generally would
recognize gain to the extent such value was greater than such stockholder's
basis in his or her stock, notwithstanding that the stockholder may not
contemporaneously receive a distribution of cash or any other assets with which
to satisfy the resulting tax liability. In addition, each stockholder would be
required to take into account in computing such stockholder's own taxable income
his or her pro rata share of each item of income, gain and loss of the
liquidating trust. Since stockholders would be treated as owning their
respective shares of the trust's assets, they would be treated as directly
engaging in the operations of the trust.
22
<PAGE>
Backup Withholding. Liquidating distributions will not be subject to back-
up withholding.
Pending Legislation. Stockholders should be aware that a variety of tax-
related legislation is under consideration before Congress, some of which could
affect the tax treatment of transactions described in this Proxy Statement. The
Company is not able to predict whether any of these proposals will ultimately be
enacted or whether any enactments would have an adverse effect on the Company or
any stockholder. Stockholders are urged to contact their own tax advisors
regarding the effect any proposed changes may have on their own individual
situations.
The foregoing is a summary description of certain federal income tax
consequences of the Plan of Liquidation to stockholders without consideration of
the particular facts and circumstances of any holder of shares of Common
Stock. The discussion does not deal with all of the tax consequences of the Plan
of Liquidation that may be relevant to every stockholder of the Company.
Stockholders should therefore consult their own tax advisors as to the tax
consequences associated with the implementation of the Plan of Liquidation under
applicable federal, state, local and foreign tax laws. The Company can make no
assurance that the tax treatment described above will be obtained by the holders
of the Common Stock.
23
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended June 30, 2000,
1999, 1998 and 1997 and for the period from October 2, 1995 (inception) to June
30, 1996 and the balance sheet data as of June 30, 2000, 1999, 1998, 1997 and
1996 are derived from the Company's financial statements that have been audited
by Ernst & Young LLP, independent auditors. The statement of operations data for
the quarters ended September 30, 2000 and 1999 and the balance sheet data as of
September 30, 2000 and 1999 are derived from the Company's unaudited financial
statements. In the Company's opinion, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of results as of and
for the quarters ended September 30, 2000 and 1999 have been included. This
information should be read together with the Company's consolidated financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Proxy Statement. Results for past periods are not necessarily indicative of
results that may be expected for future periods, and results for the quarter
ended September 30, 2000 are not necessarily indicative of results that may be
expected for the entire year ending June 30, 2001.
<TABLE>
<CAPTION>
Quarter Ended Fiscal Year Ended Period from
September 30, June 30, October 2, 1995
------------- -----------------------------------------
(inception) to
2000 1999 2000 1999 1998 1997 June 30, 1996
-------- -------- -------- -------- ------ ------ -------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Products $ 2,209 $ 1,159 $ 13,564 $ 4,952 $ 1,283 $ 308 $ 8
Advertising 393 253 1,938 442 56 8 --
----------- --------- ----------- ---------- ---------- -------- --------
Total revenues 2,602 1,412 15,502 5,394 1,339 316 8
----------- --------- ----------- ---------- ---------- -------- --------
Cost of revenues:
Products 1,796 1,049 11,416 4,466 1,086 242 5
Advertising 47 44 205 74 22 4 --
----------- --------- ----------- ---------- ---------- -------- --------
Total cost of revenues 1,843 1,093 11,621 4,540 1,108 246 5
----------- --------- ----------- ---------- ---------- -------- --------
Gross Profit 759 319 3,881 854 231 70 3
Operating expenses:
Marketing and sales 3,841 2,699 26,654 13,305 2,411 927 189
Technology, content and 1,944 1,408 6,918 3,167 1,188 858 161
product development
General and administrative 1,629 1,308 7,052 2,941 1,218 668 311
Depreciation and amortization 838 347 2,107 610 219 97 29
Amortization of deferred 151 374 1,136 674 73 -- --
compensation
Restructuring and other -- -- 888 -- -- -- --
activities
Discontinued marketing
activities and severance
costs 2,578 -- -- -- -- -- --
----------- --------- ----------- ---------- ---------- -------- --------
Total operating expenses 10,981 6,136 44,755 20,697 5,109 2,550 690
----------- --------- ----------- ---------- ---------- -------- --------
Operating loss (10,222) (5,817) (40,874) (19,843) (4,878) (2,480) (687)
Other income and expense 302 249 2,151 784 194 40 22
----------- --------- ----------- ---------- ---------- -------- --------
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss $ (9,920) $ (5,568) $ (38,723) $ (19,059) $ (4,684) $ (2,440) $ (665)
=========== ========== =========== ========== ========== ======== ========
Beneficial conversion
feature and in substance
dividend -- -- -- (2,700) -- -- --
----------- ---------- ----------- ---------- ---------- -------- --------
Net loss application to
common stockholders $ (9,920) $ (5,568) $ (38,723) $ (21,759) $ (4,684) $ (2,440) $ (665)
=========== ========== =========== ========== ========== ======== ========
Basic net loss per share $ (0.56) $ (1.45) $ (2.74) $ (20.48) $ (4.68) $ (2.44) $ (1.19)
=========== ========== =========== ========== ========== ======== ========
Shares used to compute
basic net loss per share 17,739,042 3,827,552 14,149,167 1,062,696 1,000,820 999,993 558,908
Balance Sheet Data:
Cash and cash equivalents $ 390 $ 43,302 $ 9,047 $ 15,340 $ 19,042 $ 4,948 $ 114
Working capital 10,277 61,753 25,023 18,323 18,308 4,568 (10)
Total assets 30,662 70,978 42,495 25,222 20,489 5,423 323
Total liabilities and
deferred revenue 5,480 4,132 7,546 3,343 1,473 586 251
Total redeemable
convertible preferred
stock, warrants, and
stockholders' equity (deficit) 30,662 70,978 34,949 21,879 19,015 4,837 92
</TABLE>
25
<PAGE>
MORE INFORMATION ABOUT GARDEN.COM
General
Garden.com has operated an online destination integrating gardening and
gardening-related commerce, content and community. Primarily through its
flagship Web site, www.garden.com, Garden.com has provided consumers with an
--------------
intuitive, easy-to-use environment through which they can access a wide variety
of gardening information and resources, purchase a broad selection of products,
receive specific gardening advice and other personalized services and interact
with an online gardening community. During the quarter ended September 30, 2000,
the Company launched its TRELLIS technology services division and formed Green
Cheetah, Inc., to pursue software development activities.
On November 15, 2000, Garden.com announced that it would 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. Garden.com also announced that it would continue to
evaluate strategic alternatives for its technology assets. Garden.com has
substantially completed a "going-out-of-business sale" of its product inventory.
On December 1, 2000, Garden.com shut-down its web site and ceased the operation
of its commerce business. Since that time, Garden.com has solicited bids for the
sale of various of its assets. Pursuant to the proposed Plan of Liquidation,
Garden.com intends to sell all of its assets, including its consumer business
assets and its technology assets.
Employees
As of December 15, 2000, the Company employed 47 full-time equivalent
individuals. The Company anticipates that it will continue to experience
difficulties in retaining its employees during the process of liquidating the
Company's business. None of the Company's employees is represented by a labor
union.
Properties
The Company's headquarters are located in Austin, Texas at 3301 Steck
Avenue, Austin, Texas 78757. The Company also maintains an office in Des Moines,
Iowa, where it had operated its publishing office and maintained test gardens.
The Company leases all of its facilities, with the Austin lease comprising
approximately 32,500 square feet of office and warehouse space and the Iowa
lease comprising approximately 1,500 square feet of office space. The Company
will seek to renegotiate these leases as part of the process of liquidating the
Company's business.
Market for the Common Stock
The Common Stock is traded on the Nasdaq National Market under the symbol
"GDEN." The Company has received delisting notices from the Nasdaq Stock Market
due to its failure to maintain a minimum bid price of its Common Stock of at
least $1.00 per share and its failure to
26
<PAGE>
maintain a minimum market value of public float of at least $5.0 million. The
Company expects that it will be unable to satisfy the requirements for continued
listing of its Common Stock on the Nasdaq National Market. The following table
sets forth the high and low closing sale prices for the Common Stock as reported
by the Nasdaq National Market for the periods indicated.
Year Ended June 30, 2000
Quarter High Low
------- ---- ---
First (September 16, 1999-September 30, 1999) $20.813 $14.969
Second......................................... $19.000 $ 8.500
Third.......................................... $10.500 $ 6.750
Fourth......................................... $ 8.500 $ 2.375
Year Ending June 30, 2001
Quarter High Low
------- ---- ---
First.......................................... $ 2.938 $ 0.906
Second (through December 13, 2000)............. $ 0.719 $ 0.031
At December 5, 2000, there were approximately 191 holders of record of Common
Stock. The Company has not paid any cash dividends on its Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Financial
Statements and the related notes. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as the Company's plans, objectives, expectations and intentions. The
Company's actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. See "Cautionary Note on Forward-Looking Statements."
On November 15, 2000, the Company announced that it would 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. Garden.com also announced that it would continue to
evaluate strategic alternatives for its technology assets. Garden.com has
substantially completed a "going-out-of-business sale" of its product inventory.
On December 1, 2000, Garden.com shut down its website and ceased the operation
of its commerce business. Pursuant to the Plan of Liquidation, Garden.com
intends to sell all of its assets, including its consumer business assets and
its technology assets. As a result of these developments, the Company does not
believe that the historical financial information in this Proxy Statement
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 operations in a manner
27
<PAGE>
that generates meaningful cash, or any cash, for stockholders. See "Plan of
Liquidation and Dissolution - Risks Related to Dissolution" above.
Results of Operations
Comparison of Three Months Ended September 30, 2000 and September 30, 1999
Product Revenues
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Product revenues $2,209 $1,159 91%
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
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Advertising revenues $393 $253 55%
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.
28
<PAGE>
Gross Profit
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Gross profit $759 $319 138%
Gross margin 29% 23%
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.
During the quarter ending December 31, 2000, the Company initiated a "going out
of business sale" on selected products using promotional discounts that should
negatively affect gross margins.
Marketing and Sales
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Marketing and sales $3,841 $2,699 42%
Percentage of total revenues 148% 191%
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.
29
<PAGE>
Technology, Content and Product Development
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Technology, content and
product development $1,944 $1,408 38%
Percentage of total revenues 75% 100%
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
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
General and administrative $1,629 $1,308 25%
Percentage of total revenues 63% 93%
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.
30
<PAGE>
Depreciation and Amortization
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Depreciation and $838 $347 142%
amortization
Percentage of total revenues 32% 25%
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, including computer equipment, software, and database
servers.
Amortization of Deferred Compensation
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Amortization of $151 $374 (60)%
deferred
compensation
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 three fiscal years is
expected to be as follows:
Year ended Amount in thousands
June 30, 2001 $345
June 30, 2002 238
June 30, 2003 9
31
<PAGE>
Interest Income and Expense
Quarter Ended
-------------
September 30,
-------------
2000 1999 % Change
---- ---- --------
(In Thousands)
Interest income $302 $252 20%
Interest expense $ 0 $ 3 -
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.
Comparison of Fiscal Years Ended June 30, 2000 and June 30, 1999
Revenues
Products. Product revenues increased 174% to $13.6 million, or 87% of total
revenues, for the fiscal year ended June 30, 2000 from $5.0 million, or 92% of
total revenues, for the fiscal year ended June 30, 1999. Product revenues
increased primarily as a result of the 180% 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. Advertising revenues increased 338% to $1.9 million, or 13% of
total revenues, for the fiscal year ended June 30, 2000 from $442,000, or 8% of
total revenues, for the fiscal year ended June 30, 1999. Advertising revenues
increased primarily due to the focus of an internal advertising sales department
established in February 1999, and a 76% increase in page views on the Web sites
to 170.4 million for the fiscal year ended June 30, 2000 from 96.9 million for
the fiscal year ended June 30, 1999.
Gross Profit
Gross profit increased to $3.9 million for the fiscal year ended June 30,
2000 from $854,000 for the fiscal year ended June 30, 1999. Gross margin
increased to 25% of total
32
<PAGE>
revenues for the fiscal year ended June 30, 2000 from 16% of total revenues for
the fiscal year ended June 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 an increase in higher margin
advertising revenues, product management negotiating with suppliers that raised
contractual gross margins, and the elimination of a one-time promotional
activity, which totaled $79,000 in the fiscal year ended June 30, 1999.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased to $26.7
million, or 172% of total revenues, for the fiscal year ended June 30, 2000 from
$13.3 million, or 247% of total revenues, for the fiscal year ended June 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 significant increase in total revenues.
Technology, Content and Product Development. Technology, content and
product development expenses increased to $6.9 million, or 45% of total
revenues, for the fiscal year ended June 30, 2000 from $3.2 million, or 59% of
total revenues, for the fiscal year ended June 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. 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. General and administrative expenses increased
to $7.1 million, or 45% of revenues, for the fiscal year ended June 30, 2000
from $2.9 million, or 55% of revenues, for the fiscal year ended June 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.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $2.1 million, or 14% of total revenues, for the fiscal year ended
June 30, 2000 from $610,000, or 11% of total revenues, for the fiscal year ended
June 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, database servers, and build
out of new office space.
Amortization of Deferred Compensation. Amortization of deferred
compensation expense increased to $1.1 million for the fiscal year ended June
30, 2000 from $674,000 for the fiscal year ended June 30, 1999.
33
<PAGE>
Restructuring and other activities. In June 2000, the Company's management
initiated a restructuring effort that resulted in the Company incurring a
restructuring charge of $888,000. This charge includes asset write-offs on
discontinued Company initiatives, including prepaid costs for a landscaping
product test, severance related to an internal restructuring and a note
receivable from a European based internet gardening company.
Other Income and Expense
Other income and expense increased to $2.1 million for the fiscal year
ended June 30, 2000 from $784,000 for the fiscal year ended June 30, 1999 due to
nine full months of interest income on the proceeds of the Company's initial
public offering.
Comparison of Fiscal Years Ended June 30, 1999 and June 30, 1998
Revenues
Products. Product revenues increased 286% to $5.0 million, or 92% of total
revenues, for the fiscal year ended June 30, 1999 from $1.3 million, or 96% of
total revenues, for the fiscal year ended June 30, 1998. Product revenues
increased primarily as a result of the 293% 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
functionality of the garden.com Web site.
Advertising. Advertising revenues increased 689% to $442,000, or 8% of
total revenues, for the fiscal year ended June 30, 1999 from $56,000, or 4% of
total revenues, for the fiscal year ended June 30, 1998. Advertising revenues
increased primarily due to a 163% increase in page views on the Web sites to
96.9 million for the fiscal year ended June 30, 1999 from 36.9 million for the
fiscal year ended June 30, 1998.
Gross Profit
Gross profit increased to $854,000 for the fiscal year ended June 30, 1999
from $231,000 for the fiscal year ended June 30, 1998. Gross margin decreased to
16% of total revenues for the fiscal year ended June 30, 1999 from 17% of total
revenues for the fiscal year ended June 30, 1998 due primarily to a one-time
promotional activity in the latter period designed to attract first-time
customers, which was partially offset by an increase in higher margin
advertising revenues. This one-time promotional activity decreased gross profit
by $79,000 for the fiscal year ended June 30, 1999.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased to $13.3
million, or 247% of total revenues, for the fiscal year ended June 30, 1999 from
$2.4 million, or 180% of total revenues, for the fiscal year ended June 30,
1998. Marketing and sales expenses increased primarily due to increases in
expenses related to advertising to promote the Company's brand and
34
<PAGE>
to acquire new customers as well as increases in payroll and related costs used
to hire additional marketing, sales, and Customer Solutions personnel.
Technology, Content and Product Development. Technology, content and
product development expenses increased to $3.2 million, or 59% of total
revenues, for the fiscal year ended June 30, 1999 from $1.2 million, or 89% of
total revenues, for the fiscal year ended June 30, 1998. 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. As a percent of total revenues, content and product development expenses
decreased due to the increase in total revenues during the period.
General and Administrative. General and administrative expenses increased
to $2.9 million, or 55% of revenues, for the fiscal year ended June 30, 1999
from $1.2 million, or 91% of revenues, for the fiscal year ended June 30, 1998.
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.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $610,000, or 11% of total revenues, for the fiscal year ended June
30, 1999 from $219,000, or 16% of total revenues, for the fiscal year ended June
30, 1998. The increase in depreciation and amortization expense in absolute
dollars is primarily due to the increase in property and equipment to support
the growth of the Company, including computer equipment, software, database
servers, and build out of new office space.
Amortization of Deferred Compensation. In the fiscal years ended June 30,
1999 and 1998, the Company recorded total deferred stock compensation of
$2,739,000 and $314,000, respectively, in connection with stock options granted
during the period. Such amounts resulted in expenses of $674,000 and $73,000 for
the fiscal years ended June 30, 1999 and 1998.
Other Income and Expense
Other income increased to $784,000 for the fiscal year ended June 30, 1999
from $193,000 for the fiscal year ended June 30, 1998 as a result of interest
earned on the net proceeds from the sale of the Company's preferred stock in
June 1998, April 1999 and May 1999.
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.
35
<PAGE>
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.
Net cash used in operating activities increased to $32.8 million for
the fiscal year ended June 30, 2000 from $18.5 million for the fiscal year ended
June 30, 1999. The increase in net cash used in operating activities can be
substantially attributed to the increased net loss.
Net cash used in investing activities increased to $23.8 million for
the fiscal year ended June 30, 2000 from $6.3 million for the fiscal year ended
June 30, 1999. The increase in net cash used in investing activities resulted
primarily from the purchase of securities for investment purposes and from the
purchase of property and computer equipment. Cash available for investment
purposes increased substantially during the fiscal year ended June 30, 2000 as a
result of the proceeds from the issuance of common stock in the Company's
initial public offering.
Net cash provided by financing activities increased to $50.3 million
for the fiscal year ended June 30, 2000 from $21.1 million for the fiscal year
ended June 30, 1999. The increase in net cash provided by financing activities
resulted primarily from net proceeds from the issuance of common stock in the
Company's initial public offering.
On November 15, 2000, the Company announced that it would 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 would
continue to evaluate strategic alternatives for its technology assets, including
TRELLIS and Green Cheetah. The Company plans to liquidate all of its assets,
including its technology assets, pursuant to the Plan of Liquidation.
Selected Quarterly Results of Operations
The following table sets forth selected unaudited statement of income
data for the nine quarters ended September 30, 2000, both in dollar amounts and
as a percentage of total revenues. This data should be read in conjunction with
the financial statements and related notes included
36
<PAGE>
elsewhere in this Proxy Statement.
37
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sep. 30, June 30, March 31, Dec. 31, Sep. 30,
2000 2000 2000 1999 1999 1999 1999 1998 1998
-------- -------- -------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products................... $ 2,209 $ 6,489 $ 2,600 $ 3,317 $ 1,159 $ 2,637 $ 856 $ 1,125 $ 333
Advertising................ 393 838 556 291 253 247 83 87 25
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total revenues.......... 2,602 7,327 3,156 3,608 1,412 2,884 939 1,212 358
-------- -------- -------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Products................... 1,796 5,651 2,109 2,609 1,049 2,446 763 898 359
Advertising................ 47 49 90 21 44 20 8 32 13
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total cost of revenues.... 1,843 5,700 2,199 2,630 1,093 2,466 771 930 372
-------- -------- -------- ------- ------- ------- ------- ------- -------
Gross profit................ 759 1,627 957 978 319 418 168 282 (14)
Operating expenses:
Marketing and sales....... 3,841 10,616 8,435 4,904 2,699 6,239 3,686 1,246 2,133
Technology, content
and product
development............... 1,944 2,095 1,768 1,648 1,408 1,001 928 599 640
General and
administrative............ 1,629 2,075 2,002 1,667 1,308 1,061 803 572 504
Depreciation and
amortization............. 838 719 577 464 347 233 142 124 112
Amortization of deferred
compensation.............. 151 214 250 298 374 370 117 82 105
Restructuring and other
activities................ -- 888 -- -- -- -- -- -- --
Discontinued marketing
activities and severance
costs..................... 2,578 -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total operating
expenses.................. 10,981 16,607 13,032 8,981 6,136 8,904 5,676 2,623 3,494
-------- -------- -------- ------- ------- ------- ------- ------- -------
Operating loss.............. (10,222) (14,980) (12,075) (8,003) (5,817) (8,486) (5,508) (2,341) (3,508)
Other income and expense.... 302 475 636 791 249 220 124 192 248
-------- -------- -------- ------- ------- ------- ------- ------- -------
Net loss.................... $ (9,920) $(14,505) $(11,439) $(7,212) $(5,568) $(8,266) $(5,384) $(2,149) $(3,260)
======== ======== ======== ======= ======= ======= ======= ======= =======
Quarter Ended
----------------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sep. 30, June 30, March 31, Dec. 31, Sep. 30,
2000 2000 2000 1999 1999 1999 1999 1998 1998
-------- -------- -------- ------- ------- ------- ------- ------- -------
Revenues:
Products................... 85% 89% 82% 92% 82% 91% 91% 93% 93%
Advertising................ 15 11 18 8 18 9 9 7 7
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total revenues............ 100 100 100 100 100 100 100 100 100
-------- -------- -------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Products................... 69 77 67 72 74 85 81 74 100
Advertising................ 2 1 3 1 3 1 1 3 4
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total cost of revenues...... 71 78 70 73 77 86 82 77 104
-------- -------- -------- ------- ------- ------- ------- ------- -------
Gross profit................ 29 22 30 27 23 14 18 23 (4)
Operating expenses:
Marketing and sales........ 147 145 267 136 191 216 392 103 596
Technology, content
and product
development............... 75 28 56 46 100 35 99 50 179
General and
administrative............ 63 28 63 46 93 37 86 47 141
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization............. 32 10 18 13 25 8 15 10 31
Amortization of deferred
compensation............. 6 3 8 8 26 13 12 6 29
Restructuring and other
activities............... -- 12 -- -- -- -- -- -- --
Discontinued marketing
activities and severance
costs.................... 99 -- -- -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- ------- ------- -------
Total operating expenses... 422 226 412 249 435 309 604 216 976
-------- -------- -------- ------- ------- ------- ------- ------- -------
Operating loss............. (393) (204) (382) (222) (412) (295) (586) (193) (980)
Other income and expense... 12 6 20 22 18 8 13 16 69
-------- -------- -------- ------- ------- ------- ------- ------- -------
Net loss................... (381)% (198)% (362)% (200)% (394)% (287)% (573)% (177)% (911)%
======== ======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
SECURITY OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of shares of Common Stock as of November 30, 2000 by (i) each director
and named executive officer (as defined below), (ii) all directors and executive
officers as a group, and (iii) each person or other entity known by the Company
to beneficially own more than 5% of the outstanding Common Stock.
The Company has determined beneficial ownership in accordance with the rules
of the Securities and Exchange Commission. Unless otherwise indicated, the
persons and entities included in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable. Shares of Common Stock subject to options or warrants
that are either currently exercisable or exercisable within 60 days of November
30, 2000 are deemed to be outstanding and to be beneficially owned by the option
or warrant holder for the purpose of computing the percentage ownership of the
option or warrant holder. However, these shares are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Total Number
of Shares
Beneficially Percent of
Name of Beneficial Owner Owned Class
------------------------ ------------ -----
Douglas J. Stern............................. 2,690,154 14.9
Entities affiliated with The
E.W. Scripps Company (1)
Steven J. Dietz.............................. 1,600,998 9.0
Entities affiliated with Global Retail
Partners, L.P. (2)
John D. Thornton............................. 1,452,611 8.2
Entities affiliated with Austin
Ventures (3)
Gerald R. Gallagher.......................... 1,127,127 6.3
Entities affiliated with Oak Investment
Partners (4)
BT&T Focus 4 Fund Public Limited
Company and BT&T
Telekommunikations Und
Technologie AG (5)........................ 1,347,000 7.6
Entities affiliated with Patricof & Co.
Ventures, Inc. (6)........................ 909,090 5.1
Pequot Capital Management, Inc. (7).......... 1,261,277 7.1
Clifford A. Sharples (8)..................... 314,136 1.7
James N. O'Neill (9)......................... 304,718 1.7
Lisa W.A. Sharples (10)...................... 314,136 1.7
40
<PAGE>
<TABLE>
<CAPTION>
Total Number
of Shares
Beneficially Percent of
Name of Beneficial Owner Owned Class
------------------------ ------------ ----------
<S> <C> <C>
Andrew R. Martin (11)................................ 207,474 1.2
Joel P. Toner (12)................................... 17,068 *
All directors and executive officers as a
group (13 persons) (13).............................. 8,141,929 44.2
</TABLE>
______________
* Represents beneficial ownership of less than 1%.
(1) Represents (i) 1,990,854 shares held of record by Scripps Ventures, LLC,
including 275,862 shares issuable upon exercise of outstanding warrants,
and (ii) 699,300 shares held of record by Scripps Howard Broadcasting
Company d/b/a Home & Garden Television, Inc. Mr. Stern disclaims
beneficial ownership of these shares. The address for Mr. Stern and each
of these entities is 200 Madison Avenue, New York, New York 10016.
(2) Represents (i) 1,025,834 shares held of record by Global Retail Partners,
L.P., (ii) 306,677 shares held of record by DLJ Diversified Partners, L.P.,
(iii) 113,519 shares held of record by DLJ Diversified Partners-A, L.P.,
(iv) 66,687 shares held of record by GRP Partners, L.P., (v) 70,626 shares
held of record by Global Retail Partners Funding, Inc., and (vi) 17,655
shares held of record by DLJ ESC II, L.P. Mr. Dietz is a Principal of
Global Retail Partners, L.P. Each of the foregoing entities is an
affiliate of Global Retail Partners, L.P., whose parent company is AXA
Financial Inc. Mr. Dietz disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in such shares. The address
for Mr. Dietz and each of these entities is 2121 Avenue of the Stars, Suite
1630, Los Angeles, California 90067. The address for AXA Financial Inc. is
1290 Avenue of the Americas, New York, New York 10104.
(3) Represents (i) 468,886 shares held of record by Austin Ventures IV-A, L.P.,
including 7,420 shares issuable upon exercise of outstanding warrants, and
(ii) 983,725 shares held of record by Austin Ventures IV-B, L.P., including
15,568 shares issuable upon exercise of warrants. Mr. Thornton has shared
voting and investment power over all of these shares, and he disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in such shares. The address for Mr. Thornton and each of these
entities is 1300 Norwood Tower, 114 West Seventh Street, Austin, Texas
78701.
(4) Represents (i) 1,099,515 shares held of record by Oak Investment Partners
VII, Limited Partnership, including 134,552 shares issuable upon exercise
of outstanding warrants, and (ii) 27,612 shares held of record by Oak VII
Affiliates Fund, Limited Partnership, including 3,379 shares issuable upon
exercise of outstanding warrants. Mr. Gallagher has shared voting and
investment power over all of these shares, and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
such shares. The address for Mr. Gallagher and each of these entities is
4550 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402.
(5) BT&T Focus 4 Fund Public Limited Company, Grand Canal House, 1 Upper Grand
Canal Street, Dublin 4, Ireland, and BT&T Telekommunikations Und
Technologie AG, Roetelistrasse, Bufour Park 16, St. Gallen, Switzerland
9000, filed a Schedule 13G dated August 3, 2000, reporting that
41
<PAGE>
as of August 3, 2000 it was the beneficial owner of 1,347,000 shares of
Common Stock with shared voting and investment power as to all of such
shares.
(6) Patricof & Co. Ventures, Inc. and related entities (collectively,
"Patricof"), 445 Park Avenue, 11th Floor, New York, New York 10022, filed a
Schedule 13G dated February 4, 2000, reporting that as of February 4, 2000
it was the beneficial owner of 909,090 shares of Common Stock. The shares
of Common Stock beneficially owned by Patricof include (i) 746,181 shares
held of record by APA Excelsior V, L.P., with sole voting and investment
power as to all of such shares, (ii) 153,846 shares held of record by The
P/A Fund III, L.P., with sole voting and investment power as to all of such
shares, and (iii) 9,063 shares held of record by Patricof Private
Investment Club II, L.P., with sole voting and investment power as to all
of such shares. Alan Patricof may be deemed to have sole voting and
investment power as to all of the shares held by Patricof, and he disclaims
beneficial ownership of such shares.
(7) Pequot Capital Management, Inc., 500 Nyala Farm Road, Westport, Connecticut
06880, filed a Schedule 13G dated February 11, 2000, reporting that as of
February 11, 2000 it was the beneficial owner of 1,261,277 shares of Common
Stock, with sole voting and investment power as to all of such shares.
(8) Includes 39,220 shares subject to exercise of stock options held by Mr.
Sharples. Excludes (i) 274,916 shares held of record by Mr. Sharples'
spouse and (ii) 39,220 shares subject to exercise of stock options held by
Mr. Sharples' spouse.
(9) Includes 39,252 shares subject to exercise of stock options.
(10) Includes 39,220 shares subject to exercise of stock options held by Ms.
Sharples. Excludes (i) 274,916 shares held of record by Ms. Sharples'
spouse and (ii) 39,220 shares subject to exercise of stock options held by
Ms. Sharples' spouse.
(11) Includes 8,068 shares subject to exercise of stock options.
(12) Includes 16,068 shares subject to exercise of stock options.
(13) Includes 233,135 shares subject to exercise of stock options and 436,781
shares issuable upon exercise of outstanding warrants.
42
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three classes, with the
term of office of each class ending in successive years. Two directors are to
be elected at the annual meeting, each to serve for a term of three years
expiring in 2003, and five directors will continue to serve for the terms
designated in the following schedule. As indicated below, the individuals
nominated by the Board of Directors are both incumbent directors. The Company
anticipates that both nominees listed in this Proxy Statement will be candidates
when the election is held. However, if for any reason either nominee is not a
candidate at that time, proxies will be voted for a substitute nominee
designated by the Company (except where a proxy withholds authority with respect
to the election of directors).
<TABLE>
<CAPTION>
Director
Name, Principal Occupation for Past Five Years and Directorships Age Since
---------------------------------------------------------------- --- --------
Nominees for election at the Annual Meeting (Class of 2003):
<S> <C> <C>
GERALD R. GALLAGHER 59 1997
Mr. Gallagher has served as a general partner of Oak Investment Partners, a venture
capital investment firm, since 1987.
LISA W.A. SHARPLES 34 1995
Ms. Sharples is a founder of the Company and has served as its Chief Merchandising
and Marketing Officer since August 1998 and served as its Vice President of
Marketing from December 1995 to August 1998. Prior to founding the Company, she
served as Director of Marketing for pcOrder.com, Inc., an online computer merchant,
from May 1995 to August 1995. From October 1993 to May 1995, Ms. Sharples was
employed at Silicon Graphics, Inc., a computer workstation company, as a marketing
manager for the Channel Development Group. Ms. Sharples is the wife of Clifford A.
Sharples.
Incumbent Directors (Class of 2001):
STEVEN J. DIETZ 37 1998
Mr. Dietz is a principal of Global Retail Partners, L.P., a venture capital
investment firm, which he joined when it was established in 1996. Prior to 1996,
Mr. Dietz was an officer in the investment banking division of the Donaldson, Lufkin
& Jenrette Securities Company focusing on the retail industry.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Director
Name, Principal Occupation for Past Five Years and Directorships Age Since
---------------------------------------------------------------- --- --------
<S> <C> <C>
JAMES N. O'NEILL 38 1995
Mr. O'Neill is a founder of the Company and has served as its Chief Operating Officer
since April 1998, and served as its Vice President of Operations and Chief Financial
Officer from December 1995 to August 1998. Prior to founding the Company, Mr.
O'Neill was employed as a marketing manager by Trilogy Software, Inc., an enterprise
software company, from May 1995 to August 1995. From June 1993 to May 1995, Mr.
O'Neill served as an internal consultant for top management at W.W. Grainger, Inc.,
a nationwide distributor of maintenance, repair and operations products.
JOHN D. THORNTON 35 1995
Mr. Thornton is a general partner of Austin Ventures, a venture capital investment
firm, which he joined in 1991. Mr. Thornton currently serves on the Board of
Directors of Vignette Company, Metasolv Software, Inc. and Mission Critical
Software, Inc., which are all independent computer software companies.
Incumbent Directors (Class of 2002):
CLIFFORD A. SHARPLES 36 1995
Mr. Sharples is a founder of the Company and has served as Chief Executive Officer
and President of the Company since December 1995. Prior to founding the Company, he
served as Director of Business Development for pcOrder.com, Inc., an online computer
merchant, from May 1995 to August 1995. From December 1994 to April 1995, Mr.
Sharples worked as a consultant at Enterprise Integration Technologies, a research
and development company specializing in electronic commerce over the Internet. Mr.
Sharples is the husband of Lisa W.A. Sharples.
DOUGLAS R. STERN 51 1997
Mr. Stern has served as President and Chief Executive Officer of Scripps Ventures,
the venture capital operations of The E.W. Scripps Company, since June 1996. Mr.
Stern has also served as President and Chief Executive Officer of United Media, a
licensing and newspaper syndication company that is wholly owned by The E.W. Scripps
Company, since August 1993.
</TABLE>
Directors' Meetings and Committees
The Board of Directors has an Audit Committee and a Compensation Committee.
The Board of Directors held eight meetings during fiscal 2000, and all directors
attended at least 75% of the meetings of the Board and the committees thereof of
which they were a member.
The Board's Audit Committee is comprised of Messrs. Dietz and Thornton.
Among other functions, the Audit Committee makes recommendations to the Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of
44
<PAGE>
the audit and other services provided by the Company's independent auditors,
reviews the Company's balance sheet, statement of operations and cash flows and
reviews and evaluates its internal control functions. The Audit Committee met
three times during fiscal 2000.
The Board's Compensation Committee is comprised of Messrs. Gallagher and
Stern. The Compensation Committee reviews and approves the compensation and
benefits for the executive officers of the Company, administers the Company's
Stock Option Plan and its 1999 Employee Stock Purchase Plan and makes
recommendations to the Board of Directors regarding such matters. The
Compensation Committee met one time during fiscal 2000.
Report of the Audit Committee
The Audit Committee is comprised of two members of the Company's Board of
Directors. Each member of the Audit Committee is independent as defined in Rule
4200(a)(15) for the listing standards of the Nasdaq National Market. The duties
and responsibilities of the Audit Committee are set forth in the Audit Committee
Charter, which the Board of Directors adopted on January 5, 2000. A copy of the
Audit Committee Charter is attached as Annex B to this Proxy Statement. The
Audit Committee, among other things, recommends to the Board of Directors (i)
that the audited financial statements be included in the Company's Annual Report
on Form 10-K, and (ii) the selection of independent auditors to audit the books
and records of the Company.
The Audit Committee has:
. reviewed and discussed the Company's audited financial statements for
the fiscal year ended June 30, 2000, with the Company's management and
with the Company's independent auditors;
. discussed with the Company's independent auditors the matters required
to be discussed by SAS 61 (Codification for Statements on Auditing
Standards); and
. received and discussed the written disclosures and the letter from the
Company's independent auditors required by Independence Standards Board
Statement No. 1 (Independence discussions with Audit Committees).
Based on such review and discussions with management and the independent
auditors, the Audit Committee recommended that the audited financial statements
be included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000, for filing with the Securities and Exchange Commission.
45
<PAGE>
AUDIT COMMITTEE:
Steven J. Dietz
John D. Thornton
Compensation of Directors
Directors of the Company receive no compensation for services as members of
either the Board of Directors or committees thereof. Members of the Board of
Directors are eligible to receive discretionary option grants and stock
issuances under the Stock Option Plan.
Executive Officers
The following table sets forth, as of November 30, 2000, the name, age,
current position and principal occupation and employment during the past five
years of the executive officers of the Company who are not directors:
<TABLE>
<CAPTION>
Name Age Current Position Other Positions
---------------------- ------- ------------------------------------ -----------------------------------------------------
<S> <C> <C> <C>
Andrew R. Martin 37 Chief Technology Officer since Prior to joining the Company in January 1996, from
March 1996. April 1994 to December 1995, Dr. Martin was a chief
programmer in the DCE Client/Server division of the
Trilogy Software, Inc., an enterprise software
company.
Douglas A. Jimerson 49 Vice President of Publishing and Prior to April 1996, Mr. Jimerson worked for over 19
Editor-in-Chief since April 1996. years with Meredith Company, most recently as
Editor-in-Chief of Home Garden, a national gardening
publication, and prior to Home Garden, as Executive
Garden Editor of Better Homes and Gardens from 1977
to 1995.
Joel P. Toner 43 Vice President of Business Prior to joining the Company, from 1988 to September
Development since September 1999. 1999, Mr. Toner served as Group Publisher of
Primedia Inc., a publishing company.
Jana D. Wilson 35 Chief Financial Officer of the Ms. Wilson served as the Company's Controller from
Company since August 1998. February 1998 to August 1998. Prior to joining the
Company, from March 1994 to December 1997, Ms.
Wilson served as Controller of Gadzooks, Inc., a
specialty retailer of casual apparel for teenagers.
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C>
Bradley J. Clark 35 Vice President of Enterprise Mr. Clark served as the Company's Supply Chain
Development since February 1999. Manager from September 1998 to February 1999. Prior
to joining the Company, from February 1998 to
September 1998, Mr. Clark served as Pre-Sales
Software Consultant to i2 Technologies, a consultant
to electronic businesses. From August 1996 to
February 1998, Mr. Clark served as Consulting
Manager to Trilogy Software, Inc., an enterprise
software company. Mr. Clark served as Software
Consultant to Cap Gemini Sogeti, an enterprise
software company, from June 1993 to August 1996.
Dionn M. Schaffner 29 Vice President of Marketing since Prior to joining the Company, Ms. Shaffner served as
February 1999. Director of Operations for Comlink Information
Systems, Inc., a business management software
development company, from September 1997 to February
1999. From August 1996 to September 1997, Ms.
Shaffner served as a Senior Consultant of Deloitte &
Touche Consulting Group.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership on Form 3 and reports of
changes in beneficial ownership of the Company's equity securities on Form 4 or
5. The rules promulgated by the Commission under section 16(a) of the Exchange
Act require those persons to furnish the Company with copies of all reports
filed with the Commission pursuant to section 16(a). Based solely upon a review
of such forms actually furnished to the Company, and written representations of
certain of the Company's directors and executive officers that no forms were
required to be filed, all directors, executive officers and 10% stockholders
have filed with the Commission on a timely basis all reports required to be
filed under section 16(a) of the Exchange Act, except Mr. Toner reported on a
June 2000 Form 5 report a purchase that occurred in September 1999 and Mr.
Martin reported on a June 2000 Form 5 report stock option exercises that
occurred in October 1999, December 1999 and January 2000.
Performance Graph
The chart below shows a comparison of the cumulative return since September
16, 1999 had $100 been invested in each of the Common Stock, the Nasdaq
Composite Index (all issuers), and a peer group constructed by the Company
comprised of the following companies: 1-800-FLOWERS.COM, Inc., Amazon.com, Inc.,
Drugstore.com, Inc., eToys, Inc., Egghead.com, Inc., Homestore.com, Inc.,
Peapod, Inc., priceline.com Incorporated, barnesandnoble.com inc., and eBay Inc.
(the "Peer Group").
47
<PAGE>
CUMULATIVE TOTAL RETURN COMPARISON*
The Company versus Published Indices (Nasdaq Composite Index and the Peer Group)
(INSERT CHART HERE)
9/16/99 6/30/00
------- -------
Garden.com, Inc.**...................... 100 20
[_] Nasdaq Composite Index.................. 100 141
xThe Peer Group......................... 100 55
* Total return assumes reinvestment of dividends.
** The initial public offering price of
the Common Stock on September 16, 1999
was $12.00 and the closing price on
June 30, 2000 was $2.375.
Compensation Committee Report On Executive Compensation
The Company's Compensation Committee, which is comprised of two members of
the Board of Directors, is responsible for considering and approving
compensation arrangements for the Company's senior management, including
executive officers. The objectives of the Compensation Committee in establishing
compensation arrangements for senior management are to: (i) attract and retain
key executives who are important to the continued success of the Company; and
(ii) provide strong financial incentives, at reasonable cost to the
stockholders, for senior management to enhance stockholder value.
The primary components of the Company's executive compensation program are
(i) base salary and (ii) stock options.
Base Salaries. The base salaries of certain of the Company's executive
officers have been set by their respective employment agreements. During 2000,
each such executive officer received the approximately the minimum base salary
set forth in their respective employment agreements.
Although the Company's employment agreements with Clifford A. Sharples,
James N. O'Neill and Lisa W.A. Sharples provide for the payment of periodic
bonuses, the Company did not pay any bonuses to these executive officers during
fiscal 2000. The Company did pay a signing bonus of $60,000 to Joel P. Toner
during fiscal 2000 pursuant to Mr. Toner's employment agreement.
Stock Option Plan. The Stock Option Plan authorizes the Compensation
Committee to grant stock options to officers and other key employees. In
December 1999, the Compensation Committee granted options to purchase Common
Stock to the named executive officers as shown in the Summary Compensation
Table.
Compensation of the Chief Executive Officer. During fiscal 2000, Mr.
Sharples received approximately the minimum base salary as provided in his
employment agreement. With respect to the Stock Option Plan, Mr. Sharples'
awards for fiscal 2000
48
<PAGE>
were determined in the same manner as for all other participants of the Stock
Option Plan.
COMPENSATION COMMITTEE:
Gerald R. Gallagher
Douglas R. Stern
Executive Compensation
Summary Compensation Information. The following table sets forth certain
information for the years indicated below concerning compensation paid to,
earned by or awarded to the Company's Chief Executive Officer and the four other
most highly compensated executive officers in fiscal year 2000 (collectively,
the "named executive officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------------- ------------
Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options (#) Compensation ($)
--------------------------------------------- ----------- ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Clifford A. Sharples........................... 2000 130,100 -- 250 --
Chief Executive Officer and President 1999 113,670 -- 68,200 --
James N. O'Neill............................... 2000 130,100 -- 250 --
Chief Operating Officer 1999 113,670 -- 68,200 --
Lisa W.A. Sharples............................. 2000 130,100 -- 250 --
Chief Merchandising and 1999 113,670 -- 68,200 12,432 (2)
Marketing Officer
Andrew R. Martin............................... 2000 182,600 -- 25,250 156,110 (3)
Chief Technology Officer 1999 143,000 -- 40,200 68,150 (3)
Joel P. Toner.................................. 2000 143,857 60,000 (1) 250 --
Vice President of Business Development
</TABLE>
(1) Represents compensation received as a signing bonus.
(2) Represents payments for tax preparation.
(3) Represents compensation upon the exercise of a nonstatutory stock option.
49
<PAGE>
Option Grants. The following table provides certain information regarding stock
options granted to the named executive officers in fiscal year 2000.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
----------------------------------------------
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Number of Total Price Appreciation
Securities Options/SARs for Option Term ($) (4)
Underling Granted to Exercise ---------------------------
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% 10%
--------------------- ------------- ------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Clifford A. Sharples...... 250 (1) * 12.38 December 20, 2009 $ 1,946 $ 4,933
James N. O'Neill.......... 250 (1) * 12.38 December 20, 2009 1,946 4,933
Lisa W.A. Sharples........ 250 (1) * 12.38 December 20, 2009 1,946 4,933
Andrew R. Martin.......... 250 (1) * 12.38 December 20, 2009 1,946 4,933
25,000 (2) 2.2 6.81 February 15, 2010 107,069 271,335
Joel P. Toner............. 250 (1) * 12.38 December 20, 2009 1,946 4,933
80,000 (3) 7.1 12.00 September 14, 2009 603,739 1,529,993
</TABLE>
______________________________
(1) 25% of the option vests on December 20, 2000 and an additional 2.083%
vests monthly for the 36 months thereafter.
(2) 20% of the option vests on February 15 of each year from 2001 to 2005.
(3) 20% of the option vests on September 14 of each year from 2000 to 2004.
(4) The dollar amounts under these columns are the result of theoretical
calculations at 5% and 10% rates set by the Commission, and therefore are
not intended to forecast possible future appreciation, if any, in the
Common Stock.
Fiscal Year-End Option Values. The following table provides certain information
regarding options held by the named executive officers at June 30, 2000.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs Options/SARs at
at Fiscal Year-End (#) Fiscal Year End ($)(2)
-------------------------- -----------------------
Shares Acquired on Value
Name Exercise (#) Realized ($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- ------------------------ ---------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Clifford A. Sharples...... -- -- 27,528/70,842 39,292/67,867
James N. O'Neill.......... -- -- 27,560/70,890 39,362/67,971
Lisa W.A. Sharples........ -- -- 27,528/70,842 39,292/67,867
Andrew R. Martin.......... 26,120 275,693 8,000/88,850 --/56,739
Joel P. Toner............. -- -- --/80,250 --/--
</TABLE>
____________________________
(1) Value realized is equal to the fair market value of the purchased shares on
the date of exercise, less the exercise price paid for such shares.
(2) Calculated based on closing sale price of $2.375 per share on June 30, 2000.
50
<PAGE>
Employment Agreements
On July 12, 1999, the Company entered into separate employment agreements
with Clifford A. Sharples, James N. O'Neill and Lisa W.A. Sharples. Each of
these employment agreements has a term of three years and each provides for a
base salary of $130,000 per year. Each of Messrs. Sharples and O'Neill and Ms.
Sharples currently earn a base salary of $190,000 per year. The employment
agreements also provide that Messrs. Sharples and O'Neill and Ms. Sharples are
eligible to participate in a cash bonus program and in any other employee
benefit programs for which other senior executives of the Company are generally
eligible. Under the employment agreements, the Company may terminate the
executive officer's employment upon the executive officer's death or disability
or if the Board of Directors determines that termination is in the Company's
best interest. Each executive officer may resign at any time. If the Company
terminates employment without cause, or if there is a constructive termination,
the executive officer is entitled to receive payment of his or her base salary
and to continue to receive other employee benefits for 12 months from the date
of termination. If employment is terminated for any other reason, the executive
officer is not entitled to receive any base salary or other benefits for periods
after the termination date. If the Company experiences a change of control at
any time more than six months after the date of the employment agreement, all
options held by Messrs. Sharples or O'Neill or by Ms. Sharples will immediately
vest. Each of Clifford A. Sharples, James N. O'Neill and Lisa W.A. Sharples has
also entered into a nondisclosure agreement under which each executive officer
has agreed not to compete with the Company during employment and for a period of
two years following termination of employment and has agreed to maintain the
confidentiality of the Company's proprietary information and trade secrets.
On March 1, 1996, the Company entered into an employment agreement with
Andrew R. Martin. Mr. Martin currently earns a base salary of $185,000 per year.
This employment agreement may be terminated by either party for any reason with
30 days' prior written notice and provides for a base salary of $100,000 per
year. The employment agreement also provides that Mr. Martin is eligible to
receive an annual cash bonus of $20,000 and other benefits as are generally made
available to the Company's executive-level employees. Pursuant to the employment
agreement, Mr. Martin has agreed not to compete with the Company during
employment and for a period of two years following termination of employment and
has agreed to maintain the confidentiality of the Company's proprietary
information and trade secrets.
On September 14, 1999, the Company entered into an employment agreement
with Joel P. Toner. Mr. Toner currently earns a base salary of $220,000 per
year. The employment agreement may be terminated by either party for any reason
with 30 days' prior written notice and provides for a base salary of $200,000
per year. The employment agreement also provides that Mr. Toner is eligible to
receive other benefits as are generally made available to the Company's
employees. Under the employment agreement, the Company may terminate Mr. Toner's
employment upon Mr. Toner's death or disability or for cause. Mr. Toner may
resign at any time. If the Company terminates
51
<PAGE>
Mr. Toner's employment without cause, or if there is a constructive termination,
Mr. Toner is entitled to receive payment of his base salary and to continue to
receive other employee benefits for up to six months from the date of
termination. If employment is terminated for any other reason, Mr. Toner is not
entitled to receive any base salary or other benefits for periods after the
termination date. If the Company experiences a change of control at any time
more than six months after the date of the employment agreement, all options
held be Mr. Toner will immediately vest. Pursuant to the employment agreement,
Mr. Toner has agreed not to compete with the Company during employment and for a
period of two years following termination of employment and has agreed not to
maintain the confidentiality of the Company's proprietary information and trade
secrets.
Asset Liquidation Incentive Programs
The Company has implemented two separate bonus programs to provide
incentive to its employees to maximize the value of the Company's assets through
the process of winding down its business.
The Asset Liquidation Incentive Program creates a bonus pool available to
employees who have responsibility in connection with selling the Company's
assets and settling the Company's commitments. Under this bonus program, 15% of
all amounts received by the Company from asset sales in excess of $2.3 million
in the aggregate will be put into the bonus pool to be distributed among
eligible employees.
The second bonus program applies to sales of the technology assets relating
to the Company's TRELLIS division. Under this program, if the TRELLIS assets are
sold to certain purchasers, Bradley J. Clark, the Company's Vice President of
Enterprise Development, will be entitled to receive a bonus equal to (a) the
greater of 10% of the purchase price for the TRELLIS assets or the severance
payment to which Mr. Clark is entitled under the Company's severance policy if
the purchase price for such assets is less than $1.0 million, or (b) 12% of the
purchase price for the TRELLIS assets if such purchase price is $1.0 million or
more. Any bonus received by Mr. Clark pursuant to this program would be in lieu
of any bonus he may be entitled to under the Asset Liquidation Incentive
Program. The Company has also implemented a bonus pool for other personnel
involved in selling the TRELLIS assets equal to 5% of the purchase price of the
TRELLIS assets. Such bonus is payable only if the purchase price for the TRELLIS
assets exceeds $1.0 million and the employee remains with the acquiring company
for at least 90 days.
Certain Relationships and Related Transactions
The E.W. Scripps Company, through its wholly-owned subsidiaries,
Scripps Ventures LLC and Scripps Howard Broadcasting Company d/b/a Home & Garden
Television ("HGTV"), beneficially owns 14.9% of the outstanding Common Stock as
of November 30, 2000. Douglas R. Stern, a director of the Company, is the
President and
52
<PAGE>
Chief Executive Officer of United Media, a newspaper syndication company and
wholly-owned subsidiary of The E.W. Scripps Company.
On May 24, 1999, 699,300 shares of the Company's Series E Preferred
Stock were purchased by HGTV for a total purchase price of $5,000,000, or $7.15
per share. Approximately $1,500,000 of the purchase price was paid in the form
of an advertising credit, of which the Company has used approximately $1,243,000
as of June 30, 2000.
Kenneth Sharples, the brother of Clifford A. Sharples and brother-in-
law of Lisa W.A. Sharples, executive officers and directors of the Company, has
provided legal services to the Company. The Company incurred expenses of
$61,752 during the Company's fiscal year ended June 30, 2000 for these legal
services.
Green Cheetah, Inc. ("Green Cheetah") was formed in the first quarter
of fiscal 2001 to pursue software development opportunities. Green Cheetah is
currently proceeding with its first software application project, which involves
developing computer software designed to enhance database performance. The
Company owns 80% of the outstanding common stock of Green Cheetah. Green
Cheetah issued restricted stock to the following officers and/or directors of
the Company: Andrew R. Martin, Chief Technology Officer of the Company, was
issued 10% of Green Cheetah's outstanding common stock; Clifford A. Sharples,
Chief Executive Officer, President and a director of the Company, was issued
3.33% of Green Cheetah's outstanding common stock; Lisa W.A. Sharples, Chief
Merchandising and Marketing Officer and a director of the Company, was issued
3.33% of Green Cheetah's outstanding common stock; and James N. O'Neill, Chief
Operating Officer and a director of the Company, was issued 3.34% of Green
Cheetah's outstanding common stock. In the first quarter of fiscal 2001, Green
Cheetah borrowed $300,000 from the Company pursuant to a demand promissory note,
and in the second quarter of fiscal 2001, Green Cheetah borrowed $300,000 from
the Company pursuant to a second demand promissory note. The demand promissory
notes accrue interest at the rate of 8% per year. The $600,000 borrowed by
Green Cheetah was, in turn, paid to Mr. Martin pursuant to an agreement between
Green Cheetah and Mr. Martin in consideration of his services in developing the
FastSQL software for Green Cheetah. FastSQL is a general purpose performance
enhancement system for database centric, e-business systems, with a particular
emphasis on queries and caching. Green Cheetah has completed limited deployment
of its FastSQL software, and, to date, live deployments of the FastSQL software
on limited parts of Garden.com's e-commerce system have shown material
improvements in the performance of the application. Under Mr. Martin's
agreement with Green Cheetah, he is also entitled to receive 20% of Green
Cheetah's revenues attributable to the license of the FastSQL software to third
parties less expenses relating to such licensing activities up to a maximum
payout of $1.0 million.
The Company believes that all the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. Any future transactions, including loans,
between the Company and its
53
<PAGE>
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors, upon recommendation of the Audit Committee,
has selected Ernst & Young LLP to be the Company's auditors for the 2001 fiscal
year. Although this appointment is not required to be submitted to a vote of
stockholders, the Company believes it appropriate as a matter of policy to
request that the stockholders ratify the appointment. If stockholder
ratification is not received, the Board of Directors may reconsider the
appointment. It is expected that a representative of Ernst & Young LLP will be
present at the annual meeting and will have the opportunity to make a statement
if he desires to do so and will be available to respond to appropriate
questions.
The Board recommends a vote in FAVOR of the ratification of Ernst &
Young LLP as independent auditors for the purpose of auditing the financial
statements of the Company for fiscal 2001.
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K
The Company is required to file an annual report, called a Form 10-K,
with the Commission. A copy of Form 10-K for the fiscal year ended June 30,
2000 will be made available, without charge, to any person entitled to vote at
the annual meeting. Written requests should be directed to Jana D. Wilson,
Secretary, Garden.com, Inc., 3301 Steck Avenue, Austin, Texas 78757.
STOCKHOLDER PROPOSALS
Proposals which stockholders intend to present at the 2001 Annual
Meeting of Stockholders pursuant to Rule 14a-8 under the Exchange Act must be
received at the Company's principal offices in Austin, Texas no later than
August 31, 2001 for inclusion in the proxy material for that meeting. Proposals
submitted other than pursuant to Rule 14a-8 will be considered untimely if
received after August 31, 2001 and the Company will not be required to present
any such proposal at the 2001 Annual Meeting of Stockholders. If the Board of
Directors decides to present a proposal despite its untimeliness, the people
named in the proxies solicited by the Board of Directors for the 2001 Annual
Meeting of Stockholders will have the right to exercise discretionary voting
power with respect to such proposal.
54
<PAGE>
OTHER MATTERS
The Directors of the Company know of no other matters to be brought
before the meeting. If any other matters properly come before the meeting,
including any adjournment or adjournments thereof, it is intended that proxies
received in response to this solicitation will be voted on such matters in the
discretion of the person or persons named in the accompanying proxy form.
BY ORDER OF THE BOARD
OF DIRECTORS
GARDEN.COM, INC.
Jana D. Wilson, Secretary
Austin, Texas
December 29, 2000
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Financial Statements
Unaudited Balance Sheets as of September 30, 2000 and June 30, 2000... F-2
Unaudited Statements of Operations for the Quarters ended
September 30, 2000 and 1999......................................... F-3
Unaudited Statements of Cash Flows for the Quarters ended
September 30, 2000 and 1999......................................... F-4
Notes to Unaudited Financial Statements............................... F-5
Audited Financial Statements
Report of Independent Auditors........................................ F-8
Balance Sheets as of June 30, 2000 and 1999........................... F-9
Statements of Operations for the Years ended
June 30, 2000, 1999 and 1998........................................ F-11
Statements of Changes in Common Stock and Stockholders' Equity
(Deficit) for the Years ended June 30, 2000, 1999 and 1998.......... F-12
Statements of Cash Flows for the Years ended
June 30, 2000, 1999 and 1998........................................ F-13
Notes to Financial Statements......................................... F-14
F-1
<PAGE>
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.
F-2
<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.
F-3
<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.
F-4
<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.
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
F-5
<PAGE>
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.
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.
F-6
<PAGE>
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.
On December 1, 2000, the Company shut-down its web site and ceased the
operation of its commerce business. Additionally, the Company has initiated the
process of winding down its business and selling its assets, including its
consumer business assets and its technology assets.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Garden.com, Inc.
We have audited the accompanying balance sheets of Garden.com, Inc. as of
June 30, 2000 and 1999, and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garden.com, Inc. at June 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. (Management's plans in regard to these matters
are also described in Note 1.) The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
July 28, 2000, except the first three paragraphs
of Note 10 as to which the date is September 28, 2000,
and the third paragraph of Note 1 and the fourth
paragraph of Note 10, as to which the date is
December 1, 2000
Austin, Texas
October 13, 2000
/s/ Ernst & Young LLP
F-8
<PAGE>
<TABLE>
<CAPTION>
GARDEN.COM, INC.
BALANCE SHEETS
JUNE 30, 2000 AND 1999
(in Thousands)
--------------------------------------------------------------------------------------------------
ASSETS 2000 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,047 $15,340
Investments 18,612 3,710
Prepaid advertising 1,869 988
Other prepaid expenses and current assets 2,143 1,086
Inventory 898 522
------- -------
Total current assets 32,569 21,646
------- -------
PROPERTY AND EQUIPMENT:
Equipment 660 480
Leasehold improvements 779 456
Computers and software 9,537 2,111
Furniture and fixtures 867 440
------- -------
Total property and equipment 11,843 3,487
Accumulated depreciation (2,697) (828)
------- -------
Property and equipment, net 9,146 2,659
OTHER ASSETS:
Net of accumulated amortization of $333 and $110 as of
June 30, 2000 and 1999, respectively 780 917
------- -------
TOTAL ASSETS: $42,495 $25,222
======= =======
</TABLE>
See accompanying notes.
F-9
<PAGE>
GARDEN.COM, INC.
BALANCE SHEETS (CONTINUED)
JUNE 30, 2000 AND 1999
(in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
(DEFICIT) ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,282 $ 2,052
Accrued expenses and other liabilities 3,057 956
Unearned revenue 187 188
Current portion of long-term debt 20 127
-------- --------
Total current liabilities 7,546 3,323
-------- --------
Long-term debt, less current portion -- 20
Redeemable convertible preferred stock -- 48,215
Warrants to purchase redeemable convertible
preferred stock -- 24
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock--$.01 par value: 50,000 authorized, 17,737
and 1,157 actual shares issued and outstanding on June 30,
2000 and 1999, respectively 177 12
Additional paid-in capital 104,499 5,768
Deferred stock compensation (1,169) (2,305)
Retained deficit (68,558) (29,835)
-------- --------
Total stockholders' equity (deficit) 34,949 (26,360)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 42,495 $ 25,222
======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(in Thousands, except share and per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Products $ 13,564 $ 4,952 $ 1,283
Advertising 1,938 442 56
----------- ---------- ----------
Total revenues 15,502 5,394 1,339
----------- ---------- ----------
COST OF REVENUES:
Products 11,416 4,466 1,086
Advertising 205 74 22
----------- ---------- ----------
Total cost of revenues 11,621 4,540 1,108
----------- ---------- ----------
GROSS PROFIT: 3,881 854 231
----------- ---------- ----------
OPERATING EXPENSES:
Marketing and sales 26,654 13,305 2,411
Technology, content and product development 6,918 3,167 1,188
General and administrative 7,052 2,941 1,218
Depreciation and amortization 2,107 610 219
Amortization of deferred compensation 1,136 674 73
Restructuring and other activities 888 -- --
----------- ---------- ----------
Total operating expenses 44,755 20,697 5,109
----------- ---------- ----------
OPERATING LOSS: (40,874) (19,843) (4,878)
OTHER INCOME (EXPENSE):
Interest income 2,158 804 227
Interest expense (7) (20) (33)
----------- ---------- ----------
Net loss $ (38,723) $ (19,059) $ (4,684)
=========== ========== ==========
Less: Beneficial conversion feature and insubstance dividend -- (2,700) --
----------- ---------- ----------
Net loss applicable to common stockholders $ (38,723) $ (21,759) $ (4,684)
=========== ========== ==========
Basic net loss per share $ $(2.74) $ (20.48) $ (4.68)
=========== ========== ==========
Shares used in computing basic net loss per share 14,149,167 1,062,696 1,000,820
=========== ========== ==========
</TABLE>
See accompanying notes.
F-11
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CHANGES IN COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Redeemable
Convertible
Preferred
Deferred Stock
Redeemable Convertible Additional Stock and
Preferred Stock Common Stock Paid-in Compen- Retained Stockholders'
Shares Amount Warrants Shares Par Value Capital sation Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 10, 1997 4,158 7,879 23 1,160 12 29 -- (3,106) 4,837
Issuance of Series D
Redeemable Convertible
Preferred Stock and
warrants, net of issuance
costs of $1,177 4,255 18,823 1 -- -- -- -- -- 18,824
Dividends accrued for
Series A, B, C Preferred
Stock -- -- -- -- -- -- -- (286) (286)
Conversion of cumulative
dividend to Series D
Redeemable Convertible
Preferred Stock 58 273 -- -- -- -- -- -- 273
Repurchase of Common
Stock -- -- -- (160) (2) (26) -- -- (28)
Deferred stock compensation -- -- -- -- -- 313 (313) -- --
Amortization of deferred
compensation -- -- -- -- -- -- 72 -- 72
Exercise of stock options -- -- -- 7 0 6 -- -- 6
Net loss -- -- -- -- -- -- -- (4,684) (4,684)
------- ------- -------- ------ ---- -------- ------- -------- --------
Balance at June 30, 1998 8,471 26,975 24 1,007 10 322 (241) (8,076) 19,014
Issuance of Series E
Redeemable Convertible
Preferred Stock, net of
issuance costs of $1,398 3,166 21,240 -- -- -- -- -- -- 21,240
Beneficial conversion feature
and in substance dividend -- -- -- -- -- 2,700 -- (2,700) --
Deferred stock compensation -- -- -- -- -- 2,738 (2,738) -- --
Amortization of deferred
compensation -- -- -- -- -- -- 674 -- 674
Exercise of stock options -- -- -- 150 2 8 -- -- 10
Net loss -- -- -- -- -- -- -- (19,059) (19,059)
------- ------- -------- ------ ---- -------- ------- -------- --------
Balance at June 30, 1999 11,637 48,215 24 1,157 12 5,768 (2,305) (29,835) 21,879
======= ======= ======== ====== ==== ======== ======= ======== ========
Conversion of redeemable
convertible preferred
stock and warrants to
common stock (11,637) (48,215) (24) 11,637 116 48,123 -- -- --
Exercise of common stock
warrants -- -- -- 69 1 213 -- -- 214
Issuance of common stock,
net of issuance costs
of $2,071 -- -- -- 4,650 46 49,766 -- -- 49,812
Amortization of deferred
compensation -- -- -- -- -- -- 1,136 -- 1,136
Exercise of stock options -- -- -- 88 1 26 -- -- 27
Stock issued to Employee
Stock Purchase Plan -- -- -- 116 1 359 -- -- 360
Acquisition of catalog assets -- -- -- 20 0 206 -- -- 206
Common stock options
issued to charitable
organization -- -- -- -- -- 38 -- -- 38
Net Loss -- -- -- -- -- -- -- (38,723) (38,723)
Balance at June 30, 2000 -- -- -- 17,737 $177 $104,499 $(1,169) $(68,558) $ 34,949
======= ======= ======== ====== ==== ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE>
GARDEN.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(38,723) $(19,059) $(4,684)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 1,884 517 219
Amortization 223 93 --
Amortization of deferred stock compensation 1,136 674 73
Expense related to non-employee option issuance 38 -- --
Changes in operating assets and liabilities:
Prepaid advertising (881) (610) (374)
Other prepaid expenses and current assets (1,057) (1,039) 8
Inventory (376) (364) (134)
Other assets 662 (738) (7)
Accounts payable 2,230 1,141 675
Accrued expenses and other liabilities 2,101 819 47
Unearned revenue (1) 92 80
-------- -------- -------
Net cash used in operating activities (32,764) (18,474) (4,097)
-------- -------- -------
INVESTING ACTIVITIES:
Proceeds from sale of investments 31,065 11,083 --
Purchase of investments (45,967) (14,792) --
Purchase of property and equipment (8,349) (2,577) (422)
Purchase of other assets (564) (9) (262)
-------- -------- -------
Net cash used in investing activities (23,815) (6,295) (684)
-------- -------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt -- -- 200
Repayments of long-term debt (127) (182) (115)
Proceeds from issuance of common stock, net of issuance costs
of $2,071) 49,812 -- --
Repurchase of common stock -- -- (28)
Proceeds from issuance of Series D Redeemable Convertible
Preferred Stock and warrants, net of issuance costs of $1,177 -- -- 18,824
Proceeds from issuance of Series E Redeemable Convertible
Preferred Stock and warrants, net of issuance costs of $1,398 -- 21,240 --
Exercises of stock options 27 9 6
Proceeds from exercises of warrants 214 -- --
Proceeds from common stock issued to Employee Stock Purchase 360 -- --
Plan
Dividend paid on Series A, B and C Redeemable Convertible
Preferred Stock -- -- (12)
-------- -------- -------
Net cash provided by financing activities 50,286 21,067 18,875
-------- -------- -------
CHANGE IN CASH AND CASH EQUIVALENTS (6,293) (3,702) 14,094
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,340 19,042 4,948
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,047 $ 15,340 $19,042
======== ======== =======
SUPPLEMENTAL DISCLOSURES:
Cash interest paid $ 7 $ 22 $ 31
======== ======== =======
Beneficial conversion and insubstance dividend (see Note 6) -- $ 2,700 --
</TABLE>
See accompanying notes.
F-13
<PAGE>
GARDEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
1. ORGANIZATION
The Company was originally incorporated in Texas on October 2, 1995 as The
Asbury Group, Inc. On November 30, 1995, The Asbury Group, Inc. incorporated a
wholly-owned subsidiary, Garden Escape, Inc., in Delaware. Effective December
11, 1995, The Asbury Group, Inc. was merged into Garden Escape, Inc. in a
transaction accounted for at historical cost. In February 1999, the Company
changed its name to Garden.com, Inc. The Company is an online destination
integrating gardening and gardening-related commerce, content and community. All
of the Company's sales are conducted via its Web sites, garden.com and
virtualgarden.com.
The Company has incurred recurring operating losses and negative cash flows
from operations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. In regard to these matters, management
announced a corporate restructuring with the intent of lowering ongoing
operating expenses and reducing future capital requirements, reduced its
workforce on September 28, 2000 by 93 employees and terminated or materially
amended multiple marketing initiatives. Additionally, 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.
On December 1, 2000, the Company shut-down its web site and ceased the
operation of its commerce business. Additionally, the Company has initiated the
process of winding down its business and selling its assets, including its
consumer business assets and its technology assets.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Revenue Recognition
Revenues for products and shipping charges are recognized when the products
are shipped to the customer. Substantially all product sales are shipped
directly from various product suppliers to the customer. The Company takes title
to all goods and, accordingly, has the risks and rewards of ownership for such
shipments. Revenues are recorded net of promotional discounts and coupons.
Product returns are recorded as a reduction of revenues. The Company records
unearned revenue for customer orders received and paid for that have not been
shipped.
Advertising revenues consist of sponsorships, banners and print
advertising. Advertising revenues are recognized in proportion to the number of
impressions delivered under each contract or proportionately over the period of
time covered by a contract if impressions are not used. The Company has certain
contracts under which it generates a minimum number of click-throughs and has
historically met these guarantees.
F-14
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and marketable securities with
original maturities of three months or less. Cash and cash equivalents are
recorded at cost, which approximates fair value due to the short maturity of
these instruments.
Investments
Management determines the appropriate classification of investments at the
time of purchase and reevaluates such designation as of each balance sheet date.
Investments as of June 30, 2000 consisted of high-grade commercial paper,
corporate notes, and government securities, are classified as available-for-
sale, and are reported at cost, which approximates fair market value, using the
specific identification method, as of June 30, 2000. All of these securities
mature within one year.
Inventory
Inventory, which consists of finished goods, is stated at the lower of cost
or market, with cost determined using the average cost method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is based on the useful
lives of the assets, generally three to seven years, and is computed using the
straight-line method. Amortization of leasehold improvements is computed on the
straight-line method over estimated useful lives or lease terms if shorter.
Other Prepaid Assets and Other Assets
Other prepaid assets and other assets include certain prepaid assets, trade
accounts receivable, advertising trade accounts receivable, deposits, goodwill,
and the cost of a web site which are carried at cost less accumulated
amortization. Amortization of the intangible other assets is computed on the
straight-line method over their estimated useful lives of three to four years.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
Internal Use Software
In accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" the
Company has capitalized certain internal use software. The Company is
developing a number of new software applications,
F-15
<PAGE>
including a new commerce platform, and the Company's updated proprietary
supplier information system, TRELLIS. External direct costs of materials and
services and payroll related costs of employees working solely on development of
these applications are capitalized. Capitalized costs will be depreciated when
the applications are placed in service on the straight-line method over a three
year estimated useful life.
Advertising Costs
The cost of advertising is expensed as incurred. For the fiscal years ended
June 30, 2000, 1999 and 1998, the Company incurred advertising expenses of
$18,726,000, $10,763,000 and $1,364,000, respectively.
Content Licenses
The Company licenses certain content from third party providers and records
these expenditures as incurred.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Accounting for Stock-Based Compensation
The Company has elected to account for stock-based compensation expense under
APB No. 25, "Accounting for Stock Issued to Employees," and make the required
pro forma disclosures for compensation as required by SFAS No. 123. The Company
uses the intrinsic value method in accounting for its stock-based employee
compensation plans.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Shares associated with stock options and the redeemable convertible
preferred stock are not included because they are antidilutive. Effective upon
the closing of the Company's initial public offering on September 21, 1999, all
shares of the redeemable convertible preferred stock automatically converted
into Common Stock and are included in the calculation of weighted average number
of shares as of that date.
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.
Segments
The Company continues to consider its business activities as a single
segment.
F-16
<PAGE>
Risks and Uncertainties
For the year ended June 30, 2000, one supplier's products generated
approximately 12% of the Company's revenue.
Reclassifications
Certain amounts in previously issued financial statements have been
reclassified to conform to the fiscal year 2000 presentation.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") which addresses certain criteria for revenue recognition. SAB 101, as
amended by SAB 101A and SAB 101B, outlines the criteria that must be used to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 is not expected to have a material
impact on the consolidated financial position or results of operations.
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.
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30,
--------
2000 1999
---- ----
Line of credit term note payable to a bank
due October 14, 2000, payable in monthly
installments of $7 with interest at the
prime rate plus 1% (8.89% at June 30,
2000), collateralized by the assets of the
Company. $ 20 $ 107
Line of credit term note payable to a bank
due December 14, 1999, payable in
F-17
<PAGE>
monthly installments of $8 with interest at
the prime rate plus 1% (9.04% at June 30,
1999), collateralized by the assets of the
Company - 41
----- -----
Total long-term debt 20 148
Less current portion (20) (128)
----- -----
Long-term debt, net of current portion $ - $ 20
===== =====
As of June 30, 2000 and 1999, all of the Company's outstanding long-term debt
had a variable interest rate, and accordingly, the Company believes the carrying
value of the long-term debt approximates its fair value. No additional amounts
were available to be drawn under these lines of credit as of June 30, 2000.
4. INCOME TAXES
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $67,018,000 and research and development credit carryforwards of
approximately $105,000. The net operating loss carryforwards will begin to
expire in 2011, if not utilized. The research and development credit
carryforwards will begin to expire in 2012, if not utilized.
Utilization of the net operating loss and tax credit carryforwards will be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
June 30, June 30,
2000 1999
-------- -------
Deferred tax liabilities:
Depreciable assets $ 691 $ --
-------- -------
Prepaid expenses and other 806 $ 460
-------- -------
Total deferred tax liabilities 1,497 $ 460
-------- -------
Deferred tax assets:
Depreciable assets -- 70
--------
Accrued liabilities and other 268 53
--------
Tax carryforwards 24,901 10,035
-------- -------
Total deferred tax assets 25,169 10,158
-------- -------
Net deferred tax assets 23,672 9,698
-------- -------
Valuation allowance for net deferred tax assets (23,672) (9,698)
-------- -------
Net deferred taxes $ -- $ --
======== =======
F-18
<PAGE>
The Company has established a valuation allowance equal to the net
deferred tax asset due to uncertainties regarding the realization of deferred
tax assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $13,974,000 during the year ended June 30,
2000. Approximately $154,000 of the valuation allowance for deferred tax assets
relates to benefits for stock option deductions, which when realized, will be
allocated directly to contributed capital.
The Company's provision (benefit) for income taxes differs from the
expected tax expense (benefit) amount computed by applying the statutory federal
income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
Fiscal year ended
June 30,
-----------------------
2000 1999
------ ------
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State taxes, net of federal benefit (3.0) (3.0)
Change in valuation allowance 36.1 36.0
Other 0.9 1.0
------ ------
Effective tax rate 0.0% 0.0%
====== ======
</TABLE>
5. COMMITMENTS
Future minimum payments under all operating leases as of June 30, 2000, are
as follows:
<TABLE>
<CAPTION>
Fiscal year ended
June 30,
<S> <C>
2001 $269,516
2002 232,641
2003 7,560
--------
Total $509,717
========
</TABLE>
Rent expense for the three fiscal years ended June 30, 2000, 1999 and 1998
was approximately $280,000 (offset by sublease income of $108,000), $195,000 and
$114,000, respectively. Future minimum rental income from non-cancelable
subleases consists of approximately $41,000 for the year ended June 30, 2001.
In addition, the Company has entered into strategic relationships with
several Internet portals, including arrangements with iVillage and Excite. The
agreements with iVillage and Excite call for Garden.com to provide and sponsor
gardening content on the respective Web sites. Under terms of these agreements
the Company is required to make certain installment payments, which are expensed
as advertising expense as incurred.
Garden.com and Administaff Company Inc. are parties to a co-employment
agreement, as amended July 1, 1997, pursuant to which Administaff administers
some of the benefits plans of Garden.com. This arrangement is terminable by
either party upon 30 days prior written notice.
F-19
<PAGE>
6. CAPITAL STRUCTURE
Redeemable Convertible Preferred Stock
Upon the close of the Company's initial public offering on September 21,
1999 all shares of redeemable convertible preferred stock were converted to
common stock. The five series of redeemable convertible preferred stock
designated as of June 30, 1999, were as follows:
<TABLE>
<CAPTION>
Shares Issued Consideration per
and Share Received in
Par Value Shares Authorized Converted Issuance
------------------ -------------------- ------------------- -------------------------
Redeemable convertible
preferred stock
<S> <C> <C> <C> <C>
Series A $0.01 750,000 599,998 $1.25 cash
Series B 0.01 1,430,000 1,144,000 $1.75 cash
Series C 0.01 4,444,138 2,413,791 $2.18 cash
Series D 0.01 5,482,330 4,313,514 $4.70 cash
Series E 0.01 4,402,731 3,166,094 $7.15 cash and services
---------- ----------
16,509,199 11,637,397
========== ==========
</TABLE>
In connection with the issuance of Series B Redeemable Convertible Preferred
Stock, the Company issued 160,000 shares of common stock to certain holders of
the Series B Redeemable Convertible Preferred Stock. The agreement under which
they were issued stipulated that the Company could repurchase the common shares
from the holders at the issuance price ($1.75) if the Company completed a
qualified financing or sale prior to August 31, 1998. As the Company met this
requirement, the shares were repurchased.
Beginning on January 1, 1998, the Series A, B, and C Redeemable Convertible
Preferred Stock accrued annual dividends equal to 8% of the original purchase
price paid per share. In connection with the Series D financing, the
stockholders elected to terminate their right to receive future cumulative
dividends. Through a noncash financing transaction, $285,893 of accrued
dividends, approximately $0.05 per share, were converted into 58,211 shares of
Series D Preferred Stock based on the accrued amount through June 5, 1998. In
addition, cash dividends of $12,304 were paid based on the accrued amount from
June 5, 1998 through June 11, 1998, the date of the Series D issuance.
The 699,300 shares of Series E Preferred Stock that were sold to a related
party were accounted for as having a beneficial conversion feature which was
deemed to approximate $2.7 million. This amount was accounted for as an
increase in additional paid in capital and an insubstance dividend to the
related preferred shareholders.
Warrants
In connection with the prior issuances of redeemable convertible preferred
stock, the Company at various times issued warrants to purchase shares of
redeemable convertible preferred stock exercisable at prices equal to the
respective series' per share price. The warrants transferred to common stock
rights upon the close of the Company's initial public offering. Of the warrants,
rights to 29,370 and 39,774 shares were exercised during fiscal year 2000 at
$7.15 and $2.18 per share, respectively. The Company has reserved 515,323 shares
of Common Stock for issuance upon conversion of the remaining warrants. Of the
remaining common stock rights, 442,983 with an
F-20
<PAGE>
exercise price of $2.18 expire on May 7, 2002 and 72,340 with an exercise price
of $4.70 expire on December 31, 2002.
Stock Options
The Company has a stock option plan whereby options for the purchase of
shares of the Company's common stock may be granted to its employees. During
fiscal year ended June 30, 2000, the maximum number of options that may be
granted through the plan was increased from 1,360,000 to 2,500,000 effective
September 1999 and from 2,500,000 to 3,400,000 effective May 2000. The Company
has reserved 3,400,000 shares of common stock for issuance upon conversion of
the options as of June 30, 2000. The shares of common stock reserved for
issuance under the stock option plan automatically increase each year on the
first day of the Company's fiscal year beginning July 2000 in an amount equal to
the lesser of (i) 1,200,000 shares, (ii) 5% of the outstanding shares of common
stock on such date, and (iii) any lesser number of shares determined by the
Board of Directors.
The following represents a summary of the Company's stock option activity,
and related information:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Price Per Exercise Fair
Shares Share Price Value
-------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1997 343,600 0.01 to 0.11 0.08
Granted below fair value 211,600 0.01 to 0.94 0.25 1.69
Exercised (6,560) 0.01 to 0.21 0.06
Canceled (18,640) 0.01 to 0.21 0.13
--------- ------------------ -----
Outstanding at June 30, 1998 530,000 0.01 to 0.94 0.15
Granted below fair value 797,200 0.94 to 12.50 4.71 8.04
Exercised (150,200) 0.01 to 0.94 0.06
Canceled (19,120) 0.01 to 7.15 1.63
--------- ------------------ -----
Outstanding at June 30, 1999 1,157,880 0.01 to 12.50 $3.26
========= ================== =====
Granted 1,130,000 2.63 to 18.88 8.71 $4.78
Exercised (87,894) 0.01 to 3.75 0.33
Canceled (213,410) 0.01 to 13.00 6.95
--------- ------------------ -----
Outstanding at June 30, 2000 1,986,576 $ 0.01 to 18.88 $6.04
========= ================== =====
</TABLE>
The Company recorded deferred compensation for the fiscal years ended June
30, 2000 and 1999 of $0 and $2,738,777, respectively. The amount recorded
represents the difference between the option price and the deemed fair value of
the Company's Common Stock for shares subject to options granted. The
amortization of deferred compensation will be charged to operations over the
vesting period of the options, which is typically five years. Total
amortization recognized was $1,174,218, $673,990 and $72,730 for the fiscal
years ended June 30, 2000, 1999 and 1998, respectively.
F-21
<PAGE>
The following table summarizes outstanding options at June 30, 2000 by
price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------------------------------- ---------------------------------
Weighted- Weighted-Average Weighted-
Number of Range of Average Remaining Contractual Number of Average
Options Exercise Price Exercise Price Life of Options in Years Options Exercise Price
--------- -------------- -------------- ------------------------ --------- --------------
<S> <C> <C> <C> <C> <C>
110,120 $ 0.01 to 0.01 $ 0.01 6.1 70,680 $ 0.01
159,360 0.18 to 0.21 0.21 7.5 39,240 0.21
237,120 0.94 to 0.94 0.94 8.3 39,435 0.94
153,796 2.63 to 3.88 3.34 9.4 14,666 3.75
121,300 4.00 to 6.00 5.26 6.4 50,000 6.00
906,130 6.13 to 9.13 7.43 9.3 75,080 7.12
288,250 9.53 to 14.13 12.25 9.3 1,840 12.50
10,500 16.00 to 18.88 16.50 9.3 -- --
--------- -------------- ------ --- ------- ------
1,986,576 $ 0.01 to 18.88 $ 5.96 8.7 290,941 $ 3.30
========= ============== ====== === ======= ======
</TABLE>
Pro forma information regarding net income (loss) per share is required by
Statement No. 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
June 30, 1995 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following weighted-average assumptions for fiscal year
1999 and 1998: weighted-average risk free interest rate was 5.5%, a dividend
yield of 0%, a volatility factor of the expected market price of the Company's
common stock of near zero, and a weighted-average expected life of the option of
five years. For fiscal year 2000 the Black-Scholes method was used with the
following assumptions: weighted-average risk free interest rate of 6.21%, a
dividend yield of 0%, a volatility factor of .90 and a weighted-average expected
life of four years.
Had compensation cost for the Company's stock option plan been determined
consistent with the fair value method as required by SFAS 123, the Company's net
loss and net loss per share would have been $(39.9) million and $(2.82) per
share, respectively.
For pro forma disclosure purposes, the estimated fair value of the
Company's employee stock options is treated as if amortized to expense over the
options' vesting period, therefore the effects of applying SFAS 123 for pro
forma disclosures are not necessarily indicative of future amounts.
7. NET LOSS PER SHARE
The following table sets forth the computation of basic net loss per share
for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended,
June 30,
--------
(In thousands except share and per share data)
----------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss $ (38,723) $ (19,059) $ (4,684)
Less: Beneficial conversion feature and
in-substance dividend -- (2,700) --
----------- ---------- ----------
Net loss applicable to common shareholders $ (38,723) $ (21,759) $ (4,684)
=========== ========== ==========
Denominator:
Weighted average shares 14,149,167 1,062,696 1,152,468
Less: contingently issuable shares-issued with
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended,
June 30,
--------
(In thousands except share and per share data)
----------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Series B Preferred Stock and subject to -- -- (151,648)
repurchase ----------- ---------- ----------
Denominator for basic calculation 14,149,167 1,062,696 1,000,820
=========== ========== ==========
Net loss per share
Basic $ (2.74) $ (20.48) $ (4.68)
=========== ========== ==========
</TABLE>
8. RELATED PARTIES
The Company incurred expenses of $61,752, $32,343 and $27,552 for the
fiscal years ended June 30, 2000, 1999 and 1998, respectively, for legal
services to Kenneth Sharples, the brother of the Company's President. These
expenses were primarily for intellectual property legal issues. In addition, at
various dates prior to the fiscal year ended June 30, 1999 the Company issued to
Kenneth Sharples options to purchase 6,400 shares of common stock at a weighted-
average purchase price of $0.93 per share.
The E.W. Scripps Company, through its wholly owned subsidiaries, Scripps
Ventures LLC and Scripps Howard Broadcasting Company d/b/a Home & Garden
Television ("HGTV"), beneficially owns 13.6% of the outstanding common stock as
of August 31, 2000 of Garden.com. Douglas R. Stern, a director of Garden.com,
is the President and Chief Executive Officer of United Media, a newspaper
syndication company and wholly-owned subsidiary of The E.W. Scripps Company.
On May 24, 1999, 699,300 shares of the Company's Series E Preferred Stock
were purchased by HGTV for a total purchase price of $5,000,000, or $7.15 per
share. Approximately $1,500,000 of the purchase price was paid in the form of an
advertising credit, of which the Company has used approximately $1,243,000 as of
June 30, 2000.
Beginning in March 1998, the Company conducted a national marketing program
with United Media. The agreement with United Media was terminated during the
fiscal year ended June 30, 2000.
The Company made payments of approximately $2,500, $130,000 and $75,000 to
affiliates of The E.W. Scripps Company during the fiscal years ended June 30,
2000, 1999 and 1998, respectively for services related to marketing and sales
expenses and the third-party syndication of the Company's content offerings.
The Company maintains test gardens in Des Moines, Iowa on property owned by
Douglas A. Jimerson, Vice President of Publishing and Editor-in-Chief. The
Company pays for the plants grown in the gardens and for the maintenance of the
gardens. Other than these maintenance expenses, the Company does not pay Mr.
Jimerson rent for the use of the gardens.
9. RESTRUCTURING AND OTHER ACTIVITIES
On January 21, 2000 the Company acquired from a third party all owned
assets, including inventory, related to the production of a catalog. The assets
were purchased through both cash payments and the issuance of common stock. The
excess of the purchase price over inventory value was attributed to goodwill.
F-23
<PAGE>
In June 2000, the Company's management initiated a restructuring effort
that resulted in the Company incurring a restructuring charge of $888,000. This
charge includes asset write-offs on discontinued Company initiatives, including
prepaid costs for a landscaping product test, severance related to an internal
restructuring and a note receivable from a European based internet gardening
company.
10. SUBSEQUENT EVENTS
On July 21, 2000 the Company issued an employee stock grant of 1.4 million
shares as approved by the Company's Board of Directors. The options have an
exercise price equal to the closing price for the Company's publicly traded
common shares on the date of the option grant, or $1.75 per share. The options
have a vesting period of four years beginning on the date of the option grant.
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. It is expected that the Restructuring
Plan will cost the Company between $2.5 million and $2.8 million. 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.
Simultaneous with its announcement of the Restructuring Plan, 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.
On December 1, 2000, the Company shut-down its web site and ceased the
operation of its commerce business. Additionally, the Company has initiated the
process of winding down its business and selling its assets, including its
consumer business assets and its technology assets.
F-24
<PAGE>
ANNEX A
GARDEN.COM, INC.
PLAN OF LIQUIDATION AND DISSOLUTION
1. This Plan of Liquidation and Dissolution (the "Plan") of Garden.com,
Inc., a Delaware corporation (the "Company"), has been approved by the Company's
Board of Directors for purposes of submitting it to the stockholders for
approval and the Board of Directors has directed that the Plan be submitted to
the stockholders of the Company for their approval. The Plan shall be subject to
the approval of the holders of a majority of the outstanding shares of common
stock of the Company, $0.01 par value per share (the "Common Stock), entitled to
vote thereon.
2. Upon adoption of the Plan by the stockholders, the Board of Directors
of the Company shall have the authority to cause a certificate of dissolution
(the "Certificate of Dissolution") to be filed with the Office of the Secretary
of State of the State of Delaware in accordance with Section 275(d) of the
Delaware General Corporation Law at such time as the Board of Directors shall
determine in its sole discretion . At such time thereafter as the Board of
Directors of the Company shall determine, in its sole discretion, the Company
shall (i) provide notice of dissolution as required by Section 280 of the
Delaware General Corporation Law (the "Notice of Dissolution"), (ii) cause any
documentation required by federal or state tax authorities to be obtained,
prepared, executed and filed, and (iii) as required by Section 280 of the
Delaware General Corporation Law, after the filing of the Certificate of
Dissolution and the provision of notice to the Company's known creditors,
provide notice of the filing of the Certificate of Dissolution by publishing
such notice (A) at least once a week for two (2) consecutive weeks in a
newspaper of general circulation in the applicable jurisdiction, and (B) at
least once in all editions of a daily newspaper with a national circulation.
3. Notwithstanding the authorization of this Plan by the holders of the
Common Stock, the Board of Directors may abandon the proposed dissolution of the
Company pursuant to this Plan at any time in its sole discretion without any
further action by the stockholders of the Company.
4. On or after the date of filing the Certificate of Dissolution with the
Office of the Secretary of State of the State of Delaware (the "Effective
Date"), the Company shall be voluntarily liquidated and dissolved and there
shall be distributed to or for the benefit of the stockholders, within three (3)
years of the Effective Date and in accordance with the further provisions
hereof, in complete cancellation of all issued and outstanding shares of Common
Stock, all of the Company's assets, tangible and intangible, and all of its
property, real, personal and mixed.
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<PAGE>
5. The appropriate officers of the Company shall take such actions on such
terms as the Board of Directors determines to be necessary or appropriate in
order to marshal the assets of the Company and convert the same, in whole or in
parts, into such form as may be conveniently distributed to the stockholders.
6. After provision for all debts and other reserves as may be deemed
necessary or appropriate by the Board of Directors, the appropriate officers of
the Company shall distribute, by means of one or more distributions, all of the
assets of the Company to the stockholders and in connection therewith, such
officers shall execute all checks, instruments, notices and any and all other
documents necessary to effectuate such distribution.
7. Subject to section 6 hereof, the final distribution contemplated by
section 6 hereof shall be in complete liquidation of the Company and in complete
redemption and cancellation of all shares of Common Stock issued and
outstanding, and all certificates representing such issued and outstanding
shares of Common Stock shall thereupon be cancelled. The Board of Directors
shall make such provisions as it deems appropriate regarding the cancellation,
in connection with the making of distributions hereunder, of certificates
representing the shares of Common Stock (or certificates representing interests
in the Liquidating Trust as provided in section 8 hereof) outstanding.
8. In the event that it should not be feasible, in the opinion of the
Board of Directors, for the Company to pay, or adequately provide for, all debts
and liabilities of the Company (including costs and expenses incurred and
anticipated to be incurred in connection with the liquidation of the Company) at
the time the final liquidating distribution is made pursuant to section 6
hereof, or the latest applicable date to avoid payment by the Company of federal
income taxes, or the Board of Directors shall determine that it is not advisable
to distribute at such time any of the property then held by or for the account
of the Company because such property is not reasonably susceptible of
distribution to stockholders or otherwise, the Company shall transfer and
assign, at such time as is determined by the Board of Directors, to a
liquidating trust as designated by the Board of Directors (the "Liquidating
Trust") sufficient cash and property to pay, or adequately provide for, all such
debts and liabilities and such other property as it shall have determined is
appropriate. Upon such transfer and assignment, certificates for shares of
Common Stock will be deemed to represent certificates for interests in the
Liquidating Trust. The Liquidating Trust shall be constituted pursuant to a
Liquidating Trust Agreement in such form as the Board of Directors may approve,
it being intended that the transfer and assignment to the Liquidating Trust
pursuant hereto and the distribution to stockholders of the beneficial interest
therein shall constitute a part of the final liquidating distribution by the
Company to the stockholders of their pro rata interest in the remaining amount
of cash and other property held by or for the account of the Company. From and
after the date of the Company's transfer of cash and property to the Liquidating
Trust, the Company shall have no interest of any character in and to any such
A-2
<PAGE>
cash and property and all of such cash and property shall thereafter be held by
the Liquidating Trust solely for the benefit of and ultimate distribution to the
stockholders, subject to any unsatisfied debts, liabilities and expenses.
9. The Board of Directors of the Company, or the trustees of the
Liquidating Trust, and such officers of the Company as the Board of Directors
may direct, are hereby authorized to interpret the provisions of this Plan and
are hereby authorized and directed to take such further actions, to execute such
agreements, conveyances, assignments, transfers, certificates and other
documents, as may in their judgment be necessary or desirable in order to wind
up expeditiously the affairs of the Company and complete the liquidation
thereof, including without limitation, (i) the execution of any contracts,
deeds, assignments or other instruments necessary or appropriate to sell or
otherwise dispose of, any and all property of the Company whether real or
personal, tangible or intangible, (ii) the appointment of other persons to carry
out any aspect of this Plan, (iii) the temporary investment of funds in such
medium as the Board of Directors may deem appropriate and (iv) the modification
of this Plan as may be necessary to implement this Plan. The Board of Directors
may authorize such variations from or amendments to the provisions of the Plan
as may be necessary or appropriate to effectuate the complete liquidation,
dissolution and termination of existence of the Company, and the distribution of
its assets to the stockholders in accordance with the laws of the State of
Delaware. The death, resignation or other disability of any Director or officer
of the Company shall not impair the authority of the surviving or remaining
Directors or officers of the Company (or any person appointed as substitutes
therefor) to exercise any of the powers provided for in this Plan. Upon such
death, resignation or other disability, the surviving or remaining Directors
shall have the authority to fill the vacancy or vacancies so created, but the
failure to fill such vacancy or vacancies shall not impair the authority of the
surviving or remaining Directors or officers to exercise any of the powers
provided for in this Plan.
10. Without limiting the authority of the Board of Directors to authorize
the payment of the Company's expenses, the Board of Directors is authorized,
empowered and directed to pay any and all fees, costs and expenses incurred by
the Company in connection with the Plan and the sale of assets and liquidating
distributions contemplated hereunder, including, without limitation, general and
administrative expenses, compensation and other ongoing operating expenses,
severance compensation expenses and all legal, accounting, printing, appraisal,
brokerage, agency and other fees, costs and expenses of persons rendering
services to the Company.
11. After the Effective Date, the Company shall not engage in any
business activities, except to the extent necessary for preserving the value of
the Company's assets, winding-up its business and affairs, discharging and
paying all Company liabilities and distributing Company assets in accordance
with the Plan.
A-3
<PAGE>
12. After adoption of the Plan by the stockholders, the stockholders shall
have no right to approve or disapprove the terms of the sale of any Company
assets.
13. The Board of Directors, the officers of the Company or a liquidation
administrator shall pay, or shall make adequate provision for payment of, all
known liabilities of the Company which are attributable to the Company or its
personal or real property or other assets and which are not assumed by any buyer
thereof. After the time period for response to the Notice of Dissolution has
elapsed, the Board of Directors or the officers of the Company (or a liquidation
administrator), at the direction of the Board of Directors, shall establish a
reserve account for all claims which are contingent, conditional or unmatured
claims known to the Company, and all claims which are known to the Company but
for which the identity of the claimant is unknown. The Board of Directors may in
its discretion also reserve from distribution cash or other assets of the
Company in such additional amount as the Board of Directors determines to be
reasonably necessary for payment of unknown, unascertained liabilities or
expenses of the Company (all such amounts reserved are collectively referred to
as the "Contingency Reserve").
14. If any distribution to a stockholder cannot be made, whether because
the stockholder cannot be located, has not surrendered its certificates
evidencing its shares of Common Stock as required hereunder or for any other
reason, the distribution to which such stockholder is entitled shall (unless
transferred to a Liquidating Trust established pursuant hereto) be transferred
at such time as the final liquidating distribution is made by the Company to and
deposited with the state official authorized by the laws of the State of
Delaware to receive the proceeds of such distribution; such transfer shall
comply in all respects with the laws of the State of Delaware and the Delaware
General Corporation Law. The proceeds of such distribution shall thereafter be
held solely for the benefit of and for ultimate distribution to such stockholder
as the sole equitable owner thereof and shall escheat to the State of Delaware
or be treated as abandoned property in accordance with the laws of the State of
Delaware. In no event shall the proceeds of any such distribution revert to or
become the property of the Company.
15. The directors, officers and employees of the Corporation shall be
entitled to all indemnification rights provided to such persons pursuant to the
Corporation's Certificate of Incorporation, the Corporation's By-Laws or any
contract, agreement or other commitment between the Corporation and any such
person in connection with this Plan, any transactions contemplated hereby and
any Liquidating Trust formed pursuant hereto.
16. The Board of Directors shall have the power and authority after the
Effective Date to purchase and/or continue and maintain insurance as it deems
necessary to cover the Company's indemnification obligations, including
insurance which shall remain in effect subsequent to the dissolution of the
Company. The Company's obligation
A-4
<PAGE>
to provide such indemnification may be satisfied out of the Contingency Reserve
or any Liquidating Trust. All indemnification agreements to which the Company is
a party shall remain in full force and effect after the Effective Date.
A-5
<PAGE>
ANNEX B
CHARTER FOR THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF GARDEN.COM, INC.
PURPOSE:
--------
The Audit Committee will make such examinations as are necessary to monitor
the corporate financial reporting and the internal and external audits of
Garden.com, Inc. (the "Company"), to provide to the Board of Directors the
results of its examinations and recommendations derived therefrom, to outline
the Board improvements made, or to be made, in internal accounting controls, to
nominate independent auditors, to monitor the independence of the independent
auditors, and to provide to the Board such additional information and materials
as it may deem necessary to make the Board aware of significant financial
matters that require Board attention.
In addition, the Audit Committee will undertake those specific duties and
responsibilities listed below and such other duties as the Board of Directors
from time to time prescribe.
The function of the Audit Committee is oversight. The management of the
Company is responsible for the preparation, presentation and integrity of the
Company's financial statements. Management is responsible for maintaining
appropriate accounting and financial reporting principles and policies and
internal controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. The outside auditors are
responsible for planning and carrying out a proper audit and reviews, including
reviews of the Company's quarterly financial statements prior to the filing of
each quarterly report on Form 10-Q, and other procedures. In fulfilling their
responsibilities under this charter, it is recognized that members of the Audit
Committee are not full-time employees of the Company and are not, and do not
represent themselves to be, accountants or auditors by profession or experts in
the fields of accounting or auditing. As such, it is not the duty or
responsibility of the Audit Committee or its members to conduct auditing or
accounting reviews or procedures, and each member of the Audit Committee shall
be entitled to rely on (a) the integrity of those persons and organizations
within and outside the Company from whom it receives information and (b) the
accuracy of the financial and other information provided to the Audit Committee
by such persons or organizations.
The outside auditors for the Company are ultimately accountable to the
Audit Committee and the Board of Directors. The Board of Directors, with the
assistance of the Audit Committee, has the ultimate authority and responsibility
to select, evaluate and,
B-1
<PAGE>
where appropriate, replace the outside auditors (or to nominate the outside
auditors to be proposed for shareholder approval in the proxy statement).
MEMBERSHIP:
-----------
The Audit Committee will consist of at least three members, each of whom
shall not be an officer of the Company or its subsidiaries, shall not have any
relationship which, in the opinion of the Board of Directors, would interfere
with the exercise of independent judgment in carrying out the responsibilities
of a director and shall otherwise satisfy the applicable membership requirements
under the rules of the Nasdaq Stock Market.
RESPONSIBILITIES:
-----------------
The responsibilities of the Audit Committee shall include:
1. Reviewing on a continuing basis the adequacy of the Company's system
of internal controls.
2. Reviewing on a continuing basis the activities, organizational
structure and qualifications of the Company's internal audit function.
3. Reviewing the independent auditors' proposed audit scope and approach.
4. Conducting a post-audit review of the financial statements and audit
findings, including any significant suggestions for improvements
provided to management by the independent auditors and any serious
difficulties or disputes with management encountered during the course
of the audit.
5. Reviewing the performance of the independent auditors.
6. Recommending the appointment of independent auditors to the Board of
Directors.
7 Reviewing fee arrangements with the independent auditors.
8. Reviewing management's monitoring of compliance with the Company's
Standards of Business Conduct and with the Foreign Corrupt Practices
Act;
9. Reviewing, in conjunction with counsel, any legal matters that could
have a significant impact on the Company's financial statements;
B-2
<PAGE>
10. Ensuring that the outside auditors prepare and deliver annually a
Statement as to Independence (it being understood that the outside
auditors are responsible for the accuracy and completeness of this
Statement), and discussing with the outside auditors any relationships
or services disclosed in this Statement that may impact the
objectivity and independence of the Company's outside auditors and to
recommend that the Board of Directors take appropriate action in
response to this Statement to satisfy itself of the outside auditors'
independence
11. Providing oversight and review of the Company's asset management
policies, including an annual review of the Company's investment
policies and performance for cash and short-term investments;
12. If necessary, instituting special investigations and, if appropriate,
hiring special counsel or experts to assist;
13. Reviewing related party transactions for potential conflicts of
interest; and
14. Performing other oversight functions as requested by the full Board of
Directors.
15. Reviewing and updating the Audit Committee's charter annually.
16. Instructing the independent accountants that the independent
accountants are ultimately responsible to the Board of Directors and
the Audit Committee.
17. Preparing any report, including any report of the Audit Committee
required by the rules of the Securities and Exchange Commission to be
included in the proxy statement for the Company's annual meeting.
In addition to the above responsibilities, the Audit Committee will
undertake such other duties as the Board of Directors delegates to it, and will
report, at least annually, to the Board regarding the Committee's examinations
and recommendations.
MEETINGS:
---------
The Audit Committee will meet at least once each year. The Audit Committee
may establish its own schedule which it will provide to the Board of Directors
in advance.
The Audit Committee will meet separately with the Chief Executive Officer
and separately with the Chief Financial Officer of the Company at least annually
to review
B-3
<PAGE>
the financial affairs of the Company. The Audit Committee will meet with the
independent auditors of the Company, at such times as it deems appropriate, to
review the independent auditor's examination and management report.
REPORTS:
--------
The Audit Committee will record its summaries of recommendations to the
Board in written form which will be incorporated as a part of the minutes of the
Board of Directors at which those recommendations are presented.
MINUTES:
--------
The Audit Committee will maintain written minutes of its meetings, which
minutes will be filed with the minutes of the meetings of the Board of
Directors.
B-4
<PAGE>
PROXY
GARDEN.COM, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Clifford A. Sharples, James N. O'Neill and
Jana D. Wilson, or either one of them, each with full power of substitution and
resubstitution, as proxy or proxies of the undersigned to attend the Annual
Meeting of Stockholders of Garden.com, Inc. to be held on January 8, 2001 at
11:00 a.m., local time, at the Company's headquarters located at 3301 Steck
Avenue, Austin, Texas 78757, and at any adjournment thereof, there to vote all
shares of Common Stock which the undersigned would be entitled to vote if
personally present as specified upon the following matters and in their
discretion upon such other matters as may properly come before the meeting.
1. ELECTION OF DIRECTORS (terms expiring at the 2003 Annual Meeting)
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below) listed below
Nominees: (1) GERALD R. GALLAGHER and (2) LISA W.A. SHARPLES
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
the number of the nominee(s) on the space provided below.)
________________________________________________________________________
2. TO APPROVE AND ADOPT THE PLAN OF LIQUIDATION AND DISSOLUTION.
FOR [_] AGAINST [_] ABSTAIN [_]
3. TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS AUDITORS FOR GARDEN.COM,
INC. FOR THE YEAR ENDING JUNE 30, 2001.
FOR [_] AGAINST [_] ABSTAIN [_]
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
(continued on reverse side)
<PAGE>
PROXY NO. NO. OF SHARES
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders and accompanying Proxy Statement, ratifies all that said proxies
or their substitutes may lawfully do by virtue hereof, and revokes all former
proxies.
Please sign exactly as your name appears hereon, date and return this
Proxy. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO GRANT AUTHORITY
TO ELECT THE NOMINEES AS DIRECTORS, TO APPROVE AND ADOPT THE PLAN OF LIQUIDATION
AND DISSOLUTION AND TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS AUDITORS.
IF OTHER MATTERS COME BEFORE THE MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE
WITH THE BEST JUDGMENT OF THE PROXIES APPOINTED.
DATED: ___________________________
__________________________________
(SIGNATURE OF STOCKHOLDER)
__________________________________
(SIGNATURE IF JOINTLY HELD)
If signing as attorney, executor, administrator,
trustee or guardian, please add your full title as
such. If shares are held by two or more persons,
all holders must sign the Proxy.
2
