<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27499
VITAMINSHOPPE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3659179
(State of incorporation) (I.R.S. Employer Identification No.)
444 MADISON AVENUE, SUITE 802, NEW YORK, NY 10022
(Address and zip code of principal executive offices)
(212) 308-6730
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
Number of shares of Common Stock outstanding as of August 1, 2000:
Class A common stock 7,277,574
Class B common stock 13,081,500
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds
ITEM 6: Exhibits and Reports on Form 8-K
Signatures
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
VITAMINSHOPPE.COM, INC.
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,019 $ 14,502
Accounts receivable 259 445
Inventory 35 43
Prepaid expenses and other current assets 4,663 1,889
--------- ---------
Total current assets 42,976 16,879
Property and equipment, net 6,184 9,966
--------- ---------
Total assets $ 49,160 $ 26,845
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,587 $ 5,419
Due to The Vitamin Shoppe 2,635 3,137
--------- ---------
Total current liabilities 13,222 8,556
Stockholders' Equity:
Series A convertible preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued or
outstanding at December 31, 1999 and June 30, 2000 - -
Class A common stock, $.01 par value; 30,000,000 shares
authorized; 7,277,574 shares outstanding at
December 31, 1999 and June 30, 2000 73 73
Class B common stock, $.01 par value; 15,000,000 shares
authorized; 13,081,500 shares outstanding at
December 31, 1999 and June 30, 2000 131 131
Additional paid in capital 64,242 62,637
Deferred stock-based compensation (2,732) (694)
Deficit (25,776) (43,858)
--------- ---------
Total stockholders' equity 35,938 18,289
--------- ---------
Total liabilities and stockholders' equity $ 49,160 $ 26,845
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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VITAMINSHOPPE.COM, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,390 $ 8,615 $ 4,303 $ 17,948
Cost of goods sold 1,168 5,603 2,104 11,519
----------- ----------- ----------- -----------
Gross profit 1,222 3,012 2,199 6,429
Operating expenses:
Marketing and sales expenses 2,535 6,026 4,367 15,352
Technology development expenses 202 2,627 719 4,254
General and administrative expenses 901 2,607 1,317 5,782
----------- ----------- ----------- -----------
Total operating expenses 3,638 11,260 6,403 25,388
----------- ----------- ----------- -----------
Loss from operations (2,416) (8,248) (4,204) (18,959)
Interest expense (income), net 123 (302) 221 (936)
----------- ----------- ----------- -----------
Loss before income tax provision (2,539) (7,946) (4,425) (18,023)
Income tax provision - 49 - 59
----------- ----------- ----------- -----------
Net loss $ (2,539) $ (7,995) $ (4,425) $ (18,082)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.19) $ (0.39) $ (0.34) $ (0.89)
=========== =========== =========== ===========
Shares outstanding used to compute pro forma
basic and diluted net loss per share 13,081,500 20,359,074 13,081,500 20,359,074
=========== =========== =========== ===========
</TABLE>
4
The accompanying notes are an integral part of these financial statements.
<PAGE>
VITAMINSHOPPE.COM, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 2000
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (4,425) $ (18,082)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 62 691
Amortization of deferred stock-based compensation 84 433
Bonus point promotion/other - 395
Changes in operating assets and liabilities:
Accounts receivable (15) (186)
Inventory - (8)
Prepaid expenses and other current assets 63 2,774
Accounts payable and accrued liabilities 2,323 (5,061)
-------- ---------
Net cash used in operating activities (1,908) (19,044)
-------- ---------
Cash flows from investing activities:
Capital expenditures (313) (4,473)
-------- ---------
Net cash used in investing activities (313) (4,473)
-------- ---------
Cash flows from financing activities
Increase in Due to The Vitamin Shoppe 2,220 -
Issuance of common stock 1 -
-------- ---------
Net cash provided by financing activities 2,221 -
-------- ---------
Net decrease in cash and cash equivalents - (23,517)
Cash and cash equivalents-beginning of period - 38,019
-------- ---------
Cash and cash equivalents-end of period $ - $ 14,502
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ -
======== =========
Income Taxes $ - $ 146
======== =========
</TABLE>
5
The accompanying notes are an integral part of these financial statements.
<PAGE>
VITAMINSHOPPE.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Series A
Convertible Class A Class B
Preferred Stock Common Stock Common Stock Additional Deferred
--------------- ---------------- ---------------- paid-in stock-based
Shares Amount Shares Amount Shares Amount capital compensation Deficit Total
------ ------ ------ ------ ------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 - $ - 7,277,574 $ 73 13,081,500 $ 131 $64,242 $ (2,732) $(25,776) $35,938
Amortization of deferred
stock-based compensation - - - - - - - 433 - 433
Elimination of deferred
stock-based compensation - - - - - - (1,605) 1,605 - -
Net loss (1/1/00-6/30/00) - - - - - - - - (18,082) (18,082)
------ ------ --------- ------ ---------- ------ ------- -------- -------- -------
Balance, June 30, 2000 - $ - 7,277,574 $ 73 13,081,500 $ 131 $62,637 $ (694) $(43,858) $18,289
====== ====== ========= ====== ========== ====== ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Description of Business
VitaminShoppe.com, Inc. (the "Company" or "VitaminShoppe.com") is an online
provider of products and content related to vitamins, nutritional supplements
and minerals. Until July 1999, the Company was wholly owned by Vitamin Shoppe
Industries Inc. ("The Vitamin Shoppe"). The Company commenced operations
effective October 1, 1997 as a division of The Vitamin Shoppe and operated in
the development stage until April 1998, when it began sales through its Web
site. The Company was incorporated in Delaware in May 1999 and capitalized by
The Vitamin Shoppe in June 1999.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying condensed balance sheet as of December 31, 1999, which has been
derived from audited financial statements, and the accompanying unaudited
condensed financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. Although the Company believes
that the disclosures made are adequate to ensure that the information presented
is not misleading, it is suggested that these condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999 filed
with the Securities and Exchange Commission.
The preparation of condensed financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of any contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Management's estimates and assumptions are reflective of, among other
things, prevailing market conditions, expected market conditions based on
published economic forecasts, current operating strategies and the availability
of capital, which are all subject to change. Changes to the aforementioned or
other conditions could in turn cause changes to such estimates and assumptions,
and as a result actual results could differ from the original estimates. Results
of operations for the interim period are not necessarily indicative of the
results to be expected for the year.
In the opinion of the Company's management, the accompanying condensed financial
statements contain all adjustments, which were normal and recurring adjustments,
necessary to present fairly the Company's financial position as of June 30, 2000
and December 31, 1999 and its results of operations for the three and six month
periods ended June 30, 2000 and 1999, cash flows for the six month periods ended
June 30, 2000 and 1999 and changes in shareholders' equity for the six month
period ended June 30, 2000.
Basis of Presentation
For all periods prior to July 1, 1999, the financial statements have been
prepared as if the Company operated as a stand-alone entity since inception.
Thus, the financial information related to those periods may not necessarily
reflect the financial position, results of operations or cash flows of the
Company in the future or what the balance sheets, results of operations or cash
flows of the Company would have been if it had actually been a separate,
stand-alone entity.
For the periods prior to July 1, 1999, the financial statements include
allocations of expenses incurred by The Vitamin Shoppe in support of the
Company. These allocations took into consideration personnel, business volume
and other appropriate factors and generally included costs related to
fulfillment, marketing, administrative, general management and other services
provided to the Company by The Vitamin Shoppe. Such allocated charges were $.40
and $.79 million for the three and six months ended June 30, 1999. Allocations
of expenses were estimates based on The Vitamin Shoppe management's best
assessment of actual expenses incurred on behalf of the Company. It is
management's opinion that the expenses charged to the Company were
7
<PAGE>
reasonable. In addition to these allocations, The Vitamin Shoppe supplied the
Company with inventory on an exclusive basis at a charge of 100 percent of cost.
Effective July 1, 1999 the Company and The Vitamin Shoppe entered into several
intercompany agreements which replaced the expense allocations covering
inventory supply, fulfillment, marketing and administration that were in effect
prior to July 1, 1999 and which cover additional rights and obligations
regarding trademark licenses, co-marketing and databases. Under the intercompany
agreements for inventory supply and fulfillment, The Vitamin Shoppe supplies
inventory to the Company at a cost equal to 105 percent of The Vitamin Shoppe's
product cost and fulfills customer orders at a cost equal to 105 percent of The
Vitamin Shoppe's actual average unit cost per package, plus actual shipping
costs not paid directly by the Company. Both of these services were provided at
100 percent of cost under the allocation approach used prior to July 1, 1999.
The rights and obligations which were added when the intercompany agreements
became effective July 1, 1999 include trademark licenses and co-marketing. The
trademark license agreement provides the Company with the exclusive right to use
The Vitamin Shoppe's trademarks in connection with its marketing and sale of
products and services in online commerce. Under this agreement, the Company pays
The Vitamin Shoppe an annual royalty fee equal to $1 million plus a percentage
(which ranges from 5 percent to 1 percent depending upon volume) of the
Company's net sales of The Vitamin Shoppe brand products, and other products
identified by or branded with The Vitamin Shoppe's trademarks. Under the
co-marketing agreements, The Vitamin Shoppe and the Company provide certain
advertising and promotional references to each other in their respective
catalogue, retail store and Web businesses for mutually agreed upon fees.
For the three and six months ended June 30, 2000, charges for services provided
to the Company by The Vitamin Shoppe were in accordance with the intercompany
agreements and totaled $1.3 million and $2.7 million, as shown in the chart
below. Accounts payable and accrued expenses on the accompanying balance sheets
at December 31, 1999 and June 30, 2000 include amounts due to The Vitamin Shoppe
related to these services in the amount of $1.1 million and $ .8 million,
respectively.
Three months ended Six months ended
June 30, 2000 June 30, 2000
(in thousands) (in thousands)
------------------ ----------------
Trademark license $ 389 $ 818
Co-marketing 250 600
Administrative 165 330
Supply and fulfillment 350 722
Merchandising 120 260
------- -------
Total Expense $ 1,274 $ 2,730
======= =======
All merchandise purchases are made from The Vitamin Shoppe. Such purchases
aggregated $5.69 million and $12.00 million for the three and six months ended
June 30, 2000. Accounts payable and accrued expenses on the accompanying balance
sheet at December 31, 1999 and June 30, 2000 include amounts due to The Vitamin
Shoppe related to these merchandise purchases in the amount of $1.5 million and
$2.3 million, respectively.
By implementing the intercompany agreements, new charges were created that were
not provided for in the historical financial statements prior to July 1, 1999.
On a pro forma basis, had the trademark license and the supply and fulfillment
agreements been in place for all periods presented, the net loss would have been
$5.19 million for the six months ended June 30, 1999. Since July 1, 1999, the
charges related to these intercompany agreements are included in the results of
operations.
8
<PAGE>
Computation of Basic and Diluted Net Loss Per Share
Net loss per share has been calculated under SFAS No. 128, Earnings per Share.
SFAS No. 128 requires companies to compute earnings per share under two
different methods (basic and diluted). Basic net loss per share is calculated by
dividing the net loss by the weighted average shares of common stock outstanding
during the period. Shares used for this computation consist of 13,081,500 shares
of Class B common stock issued in connection with the Company's initial
capitalization in June 1999 as if all shares were outstanding for all periods
presented. For the three and six months ended June 30, 2000, diluted net loss
per share is equal to basic net loss per share since potential common shares
from the exercise of the stock options and warrants are antidilutive.
3. Income Taxes
The Company's operating results through June 30, 1999 were included in the
consolidated income tax returns of The Vitamin Shoppe. Through June 30, 1999,
The Vitamin Shoppe did not allocate to the Company its share of income tax
liabilities or benefits attributable to the Company's proportionate share of
operating results. Since July 1, 1999, the Company is no longer included in the
consolidated income tax return of The Vitamin Shoppe and, therefore, the
Company's income tax provisions have been calculated on a separate return basis.
Since the capitalization of the Company on July 1, 1999, when the Company ceased
to be part of The Vitamin Shoppe's consolidated group, losses generated are
available to offset any future taxable income for 20 years. Deferred tax assets
normally recorded to reflect the future benefit may or may not be shown as
realizable, depending on the Company's ability to demonstrate the likelihood of
future profitability.
As of June 30, 2000, the Company has a net operating loss carry forward that, if
utilized, provides a future tax benefit of approximately $17.5 million at an
effective tax rate of 40 percent. Due to the uncertainty of the realization of
this net operating loss carry forward in the future, the Company has provided a
valuation allowance to offset this deferred tax asset.
Included in the statement of operations for the six months ended June 30, 2000
is an income tax provision of $59,000 for state and local taxes.
4. Significant Transactions
In January 2000, the president and CEO and the chief marketing officer resigned
their positions with the Company. In connection with these resignations, the
Company recorded approximately $855,000 of severance expense during the first
quarter 2000 representing approximately $620,000 of cash compensation in
accordance with their employment agreements, and approximately $235,000 of
non-cash compensation due to the accelerated vesting of stock options.
Additionally, with respect to forfeited stock options the Company eliminated
approximately $1.6 million of unamortized deferred stock based compensation that
was previously recorded as additional paid in capital.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As used in this document, "we," "our," "us" and the "Company" means
VitaminShoppe.com, Inc.
Except for the historical information contained in this report, some statements
made herein are "Forward-Looking Statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These Forward-Looking
Statements reflect our expectations regarding our future growth, results of
operations, performance and business prospects and opportunities. Words such as
"anticipates," "believes," "plans," "expects," "estimates," and similar
expressions have been used to identify these Forward-Looking Statements, but are
not the exclusive means of identifying these statements. These statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual growth, results,
performance and business prospects and liquidity to differ from those expressed
in, or implied by, these Forward-Looking Statements. These risks, uncertainties
and other factors are described in our Registration Statement on Form S-1, as
amended (File No. 333-83849), under the caption "Risk Factors". We are not
obligated to update or revise these Forward-Looking Statements to reflect new
events or circumstances.
OVERVIEW
We began development of our online operations in October 1997 and launched our
Web site on April 7, 1998. For the period from our inception through the launch
of the Web site, our primary activities consisted of:
o developing the business model;
o developing strategic relationships;
o designing and developing our Web site;
o recruiting and training employees;
o negotiating advertising contracts with several major Web portals; and
o developing the VitaminShoppe.com brand.
Since the launch of the Web site, these operating activities have continued. We
have also focused on acquiring new customers, building sales momentum, promoting
the brand, enhancing the search and transactional features of our Web site,
expanding customer service operations, increasing the information content
available to our customers and building the infrastructure of the business. In
June 2000, we launched our new state of the art Web site to accommodate our
rapidly growing customer base. The site offers personalization and customization
features and faster access to our 18,000 products and 400 brands.
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the risks,
expenses and difficulties encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets such as
online commerce. In view of these factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indication
of future performance.
We have incurred net losses of $52.1 million from inception through June 30,
2000. We believe that net losses will continue for the foreseeable future.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 ("SECOND QUARTER 2000") COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1999 ("SECOND QUARTER 1999")
Net Sales. Net sales consist of product sales net of allowances for product
returns. Revenues are recognized when the related product is shipped. The level
of our sales depends on many factors, including:
o the number of customers that we are able to attract;
o the frequency of customers' purchases;
o the quantity and mix of products that customers purchase;
o the price that we charge for our products; and
o the level of customer returns that we experience.
Net sales for the second quarter 2000 totaled $8.62 million, an increase of
$6.23 million or 261 percent from net sales of $2.39 million during the second
quarter 1999. Orders increased 83,000 or 259 percent to 115,000 in the second
quarter 2000 from 32,000 in the second quarter 1999, more than 34,000 new
customers were added, nearly three times the 13,000 in second quarter 1999. We
increased our advertising, marketing and promotional expenditures in the second
quarter 2000 as compared to the second quarter 1999. In addition, we made
enhancements to our Web site to improve navigation and the overall user
experience. We believe that both of these factors have contributed to increased
net sales. Sales have also increased due to the cumulative growth in our
customer base and strong repeat buying patterns.
Cost of Goods Sold. Cost of goods sold consists primarily of the costs of
products sold to customers. Vitamin Shoppe Industries Inc. ("The Vitamin
Shoppe") supplies inventory to us on an exclusive basis. Under our supply and
fulfillment agreement with The Vitamin Shoppe which began on July 1, 1999, we
pay The Vitamin Shoppe an amount equal to 105% of The Vitamin Shoppe's product
cost. Prior to that time, inventory was provided to us by The Vitamin Shoppe at
100% of its product cost. As a result, cost of goods sold as a percentage of
sales is higher in the second quarter 2000 than in the second quarter 1999.
Cost of goods sold for the second quarter 2000 was $5.60 million or 65 percent
of net sales versus $1.17 million or 49 percent of net sales for the second
quarter 1999. The increase in cost of sales as a percent of net sales is mainly
attributable to increased promotional discounting during the second quarter
2000. In addition, in the second quarter 2000, we sold a lower proportion of
higher margin Vitamin Shoppe(R) branded products versus other brands as a
percent of total sales. Management believes that as the customer base matures
the mix will readjust to a higher proportion of Vitamin Shoppe(R) brand sales.
The supply and fulfillment agreements with The Vitamin Shoppe which add 5
percent to product cost and are in effect in second quarter 2000 were not in
place in second quarter 1999.
In the future, we may alter our pricing structures and policies to increase our
gross margins. In addition to pricing strategy, our gross margins will fluctuate
based on other factors, including:
o the cost of our products, including the extent of purchase volume
discounts that The Vitamin Shoppe is able to obtain from suppliers;
o promotions or special offers that we offer to attract new customers;
o the mix of The Vitamin Shoppe(R) brand products versus other branded
products that our customers purchase; and
o the mix of products within each brand category that our customers
purchase.
Marketing and Sales Expenses. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, merchandising, distribution expenses,
including order processing and fulfillment charges, net
11
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shipping costs, equipment and supplies and payroll and related expenses for
personnel engaged in these activities. Some of these expenses represent charges
for services provided by The Vitamin Shoppe which prior to July 1, 1999 were in
the form of allocations based on The Vitamin Shoppe's best estimate of actual
expenses. As of July 1, 1999 various intercompany agreements were put in place
to cover these expenses. Under these agreements The Vitamin Shoppe provides
warehousing and fulfillment services for customer orders on an exclusive basis.
We pay The Vitamin Shoppe for fulfillment services an amount equal to 105
percent of The Vitamin Shoppe's actual average unit cost per package, multiplied
by the number of packages shipped to our customers, plus actual shipping costs
that we do not pay directly. While this amount is higher than the actual cost of
these services to us as charged under the historical allocation method, we
believe that the increase will not have a material effect on our results of
operations because our fulfillment costs have historically been less than 4
percent of our net sales. Under the trademark license agreement with The Vitamin
Shoppe which provides us with the exclusive right to use The Vitamin Shoppe's
trademarks, including the logo and name, in connection with the marketing and
sale of products and services in online commerce, we pay an annual royalty fee
equal to $1 million plus an amount based on a percentage of net sales volume of
The Vitamin Shoppe(R) branded product. Prior to July 1, 1999, there was no
royalty fee charged by The Vitamin Shoppe.
For the second quarter 2000, marketing and sales expenses decreased as a
percentage of net sales but increased by $3.49 million in absolute dollars to
$6.03 million or 70 percent of net sales from the second quarter level of $2.54
million or 106 percent of net sales. The increase is largely attributable to our
offline media campaign, selling expenses associated with the higher sales level
in second quarter 2000 and the addition of intercompany trademark and
co-marketing charges. During the second quarter 2000, our contractual Web portal
relationships with InteliHealth and Time Inc. terminated. In addition, our
presence on AOL Web sites has been discontinued pending resolution of a dispute
over performance. We are pursuing a targeted and direct marketing approach with
the goal of effectively lowering customer acquisition cost.
Technology Development Expenses. Technology development expenses consist
primarily of consulting fees and payroll and related expenses for applications
development and information technology personnel, licensing and service
agreements, Web site hosting and communications charges and some of the Web site
content development and design expenses. For the second quarter 2000 technology
development expenses increased by $2.43 million to $2.63 million from $.20
million for the second quarter 1999. As a percentage of second quarter net
sales, these expenses were 30 percent in 2000 and 8 percent in 1999. Expenses
increased in the areas of technology development personnel and use of
third-party service providers, consultants and contract labor. The increase in
expense and in our overall investment in technology reflects our commitment to
providing a superior Web commerce experience to our customers. We believe that
our new Web site which launched in June, its ongoing technology-based
enhancements and the infrastructure supporting the site will contribute
significantly to customer satisfaction and retention.
General and Administrative Expenses. General and administrative expenses consist
primarily of payroll and related expenses for executive, business and content
development and administrative personnel, corporate facility expenses,
depreciation, professional services expenses, travel, deferred stock-based
compensation and other general corporate expenses. For the second quarter 2000,
general and administrative expenses decreased as a percent of net sales but
increased by $1.71 million in absolute dollars to $2.61 million or 30 percent of
net sales from the second quarter level of $.90 million or 38 percent of net
sales. This increase was primarily due to the addition of personnel,
depreciation, professional fees and other expenses associated with building our
infrastructure.
Interest expense (income), net. Interest expense (income), net consists of
interest charges allocated from The Vitamin Shoppe and interest income earned on
cash and cash equivalents. In the second quarter 1999, interest expense was
charged to us at the rate of 8.75 percent on the note due to The Vitamin Shoppe
and advances which totaled $123,000. Since the note due to The Vitamin Shoppe
was repaid in November 1999, the Company had no interest expense in the second
quarter 2000. Interest income has been earned since the sale of Series A
12
<PAGE>
convertible preferred stock on July 27, 1999 and our initial public offering on
October 8, 1999, and amounted to $302,000 in the second quarter 2000.
Amortization of stock-based compensation. Amortization of deferred stock-based
compensation expense, included in general and administrative expenses, was
$79,000 in the second quarter 2000 as compared to zero in the second quarter
1999.
Intercompany agreements. In summary, the intercompany agreements cover rights
and obligations regarding trademark licenses, inventory supply and fulfillment,
promotional and co-marketing activities, databases and administrative services.
We incurred a total of $5.69 million of merchandise purchases and $1.27 million
of other expenses under the intercompany agreements with The Vitamin Shoppe
during the second quarter 2000. The intercompany agreements were not in place
during the second quarter 1999. During the second quarter 1999, allocations were
made by The Vitamin Shoppe for services provided to us. These allocations did
not include charges for the trademark license or co-marketing activities.
Further, inventory and fulfillment charges were allocated at the rate of 100% of
cost rather than the 105% as provided in the intercompany agreements. Had the
intercompany agreements been in place during the second quarter 1999, our net
loss would have been increased to $2.94 million.
Income taxes. Our operating results through June 30, 1999 were included in the
consolidated income tax returns of The Vitamin Shoppe, and accordingly, The
Vitamin Shoppe did not allocate to us its share of income tax liabilities or
benefits attributable to our proportionate share of operating results. Since
July 1, 1999, we are no longer included in the consolidated income tax return of
The Vitamin Shoppe and, therefore, our income tax provisions have been
calculated on a separate return basis.
Since our capitalization on July 1, 1999, when we ceased to be part of The
Vitamin Shoppe's consolidated group, losses generated are available to offset
any future taxable income for 20 years. Deferred tax assets normally recorded to
reflect the future benefit may or may not be shown as realizable, depending on
our ability to demonstrate the likelihood of future profitability.
As of June 30, 2000, we had a net operating loss carry forward that, if
utilized, provides a future tax benefit of approximately $17.5 million at an
effective tax rate of 40 percent. Due to the uncertainty of the realization of
this net operating loss carry forward in the future, we have provided a
valuation allowance to offset this deferred tax asset.
SIX MONTHS ENDED JUNE 30, 2000 ("THE FIRST TWO QUARTERS 2000") COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1999 ("THE FIRST TWO QUARTERS 1999")
Net sales. For the first two quarters ended June 30, 2000, net sales totaled
$17.95 million, an increase of $13.65 million or 317 percent from net sales of
$4.30 million during the first two quarters 1999. Orders increased 201,000 or
341 percent to 260,000 in the first two quarters 2000 from 59,000 in the first
two quarters 1999; 93,000 new customers were added, nearly four times the 25,000
in the first two quarters 1999. We significantly increased our advertising,
marketing and promotional expenditures in the first two quarters 2000 as
compared to the same period in 1999. In addition, we made enhancements to our
Web site to improve navigation and the overall user experience. We believe that
both of these factors have contributed to increased net sales. Sales have also
increased due to the cumulative growth in our customer base and strong repeat
buying patterns.
Cost of Goods Sold. Cost of goods sold for the first two quarters 2000 was
$11.52 million or 65 percent of net sales versus $2.10 million or 49 percent of
net sales for the first two quarters 1999. The increase in cost of sales as a
percent of net sales is mainly attributable to increased promotional discounting
during the first two quarters 2000 and the implementation of our supply and
fulfillment agreement with The Vitamin Shoppe. In addition, we sold a somewhat
lower proportion of higher margin Vitamin Shoppe(R) branded products versus
other brands as a percent of total sales in the first two quarters 2000 as
compared to the first two quarters 1999.
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In the future, we may alter our pricing structures and policies to increase our
gross margins. In addition to pricing strategy, our gross margins will fluctuate
based on other factors, including:
o the cost of our products, including the extent of purchase volume
discounts that The Vitamin Shoppe is able to obtain from suppliers;
o promotions or special offers that we offer to attract new customers;
o the mix of The Vitamin Shoppe(R) brand products versus other branded
products that our customers purchase; and
o the mix of products within each brand category that our customers
purchase.
Marketing and Sales Expenses. For the six months ended June 30, 2000, marketing
and sales expenses decreased as a percentage of net sales but increased by
$10.99 million in absolute dollars to $15.35 million or 86 percent of net sales
from the six months ended June 30, 1999 level of $4.37 million or 102 percent of
net sales. The increase is largely attributable to our offline marketing
campaign, selling expenses associated with higher sales and the intercompany
trademark and co-marketing charges. Marketing expenses trended down from first
to second quarter 2000.
Technology Development Expenses. For the first two quarters 2000 technology
development expenses increased by $3.54 million to $4.25 million from $.7
million for the first two quarters 1999. As a percentage of the first two
quarter net sales, these expenses were 24 percent in 2000 and 16 percent in
1999. Expenses increased in the areas of technology development personnel and
use of third-party service providers, consultants and contract labor. The
increase in expense and in our overall investment in technology reflects our
commitment to providing a superior Web commerce experience to our customers. We
believe that our new Web site, its ongoing technology-based enhancements and the
infrastructure supporting the site will contribute significantly to customer
satisfaction and retention.
General and Administrative Expenses. General and administrative expenses consist
primarily of payroll and related expenses for executive, business and content
development and administrative personnel, severance, corporate facility
expenses, depreciation, professional services expenses, travel, deferred
stock-based compensation and other general corporate expenses. General and
administrative expenses increased by $4.47 million to $5.78 million or 32
percent of net sales for the first two quarters 2000 from $1.32 million or 31
percent of net sales for the first two quarters 1999. This increase was
primarily due to the addition of personnel, severance, depreciation,
professional fees and other expenses associated with building our infrastructure
and the addition of deferred stock-based compensation.
Interest expense (income), net. Interest expense (income), net consists of
interest charges allocated from The Vitamin Shoppe and interest income earned on
cash and cash equivalents. In the first two quarters 1999, interest expense was
charged to us at the rate of 8.75 percent on the note due to The Vitamin Shoppe
and advances which totaled $221,000. Since the note due to The Vitamin Shoppe
was repaid in November 1999, the Company had no interest expense in the second
quarter 2000. Interest income was earned since the sale of Series A convertible
preferred stock on July 27, 1999 and our initial public offering on October 8,
1999 and amounted to $936,000 in the first two quarters 2000.
Amortization of stock-based compensation. Amortization of deferred stock-based
compensation expense, included in general and administrative expenses, was
$433,000 in the first two quarters 2000 as compared to zero in the first two
quarters 1999.
Intercompany agreements. In summary, the intercompany agreements cover rights
and obligations regarding trademark licenses, inventory supply and fulfillment,
promotional and co-marketing activities, databases and administrative services.
We incurred a total of $12.00 million of merchandise purchases and $2.73 million
of
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other expenses under the intercompany agreements with The Vitamin Shoppe during
the first two quarters 2000. The intercompany agreements were not in place
during the first two quarters 1999. During the first two quarters 1999,
allocations were made by The Vitamin Shoppe for services provided to us. These
allocations did not include charges for the trademark license or co-marketing
activities. Further, inventory and fulfillment charges were allocated at the
rate of 100% of cost rather than the 105% as provided in the intercompany
agreements. Had the intercompany agreements been in place during the first two
quarters 1999, our net loss would have been increased to $5.19 million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our operations have not generated sufficient cash flow to
satisfy our current obligations. The Vitamin Shoppe funded these obligations
through June 1999. On June 30, 1999, we issued a promissory note to The Vitamin
Shoppe for approximately $5.8 million payable upon demand by The Vitamin Shoppe.
This amount represented funds advanced to us by The Vitamin Shoppe for operating
losses and working capital requirements through June 30, 1999 and was repaid in
full in October 1999.
On July 9, 1999, we issued promissory notes of $10 million in aggregate
principal amount due in June 2000. These notes were held by stockholders of The
Vitamin Shoppe or affiliates of these stockholders. Later in July 1999, these
notes were converted into Series A convertible preferred stock and approximately
$13.6 million of additional Series A convertible preferred stock was issued.
Together, these shares of Series A convertible preferred stock were converted
into an aggregate of 2,732,119 shares of Class A common stock.
On October 8, 1999, we sold 4,545,455 shares of our Class A common stock in an
initial public offering at a price of $11.00 per share. The gross proceeds from
this offering were $50 million. The net proceeds were approximately $45 million
after deducting underwriting discounts and commissions of $3.5 million and other
offering expenses of $1.5 million.
As of December 31, 1999, the Company had $38 million in cash and cash
equivalents as compared to $14.5 million at June 30, 2000. During the first and
second quarters of 2000, net cash used in operating activities was $10.2 million
and $8.9 million, respectively. As of June 30, 2000, we had accounts payable and
accrued liabilities of $5.42 million and amounts payable to The Vitamin Shoppe
under the intercompany agreements of $3.14 million. At this date, our principal
fixed commitment going forward consists of a sublease agreement for our office
space aggregating $1.51 million through November 2003.
We expect that cash flows from operating activities will continue to be
negative, although losses should decrease from those levels experienced during
the first two quarters of 2000. In the second quarter, we have reduced our
discretionary advertising expenses to mitigate the impact on our available cash.
In addition, our contractual Web portal relationships with InteliHealth and
Time, Inc. terminated, and our presence on AOL Web sites has been discontinued
pending resolution of a dispute over performance. Once resolved, we expect to
continue our presence on AOL and are discussing with them a revised carriage
arrangement. We will continue to employ targeted and direct marketing strategies
consistent with our approach in second quarter 2000 with a goal of achieving the
lowest possible customer acquisition cost. We continue to closely monitor all of
our other variable expense categories as well.
Net cash used in investing activities during the first and second quarters of
2000 was approximately $2.6 million and $1.9 million, respectively, principally
to fund expenditures for development of our new robust and enhanced Web site
which was launched in June 2000. We may delay some further Web site enhancements
during the second half of 2000 to mitigate the impact on our available cash.
While a reduction in advertising spending or Web site enhancement may negatively
impact sales, we believe, as our second quarter 2000 results indicate, that we
can generate sufficient sales and cash flow to fund our operations through
December 31, 2000. We cannot however, assure you that our expected growth or
expenditures will take place as planned.
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Based upon our current projection of sales and cash flows, and without
additional financing through other sources, we expect our available cash to be
depleted in the first quarter 2001. We continue to evaluate our alternatives to
increase liquidity through financing or strategic transactions. There can be no
assurance that any financing or strategic transaction will be completed or that,
if completed, it will be on terms favorable to the Company or its shareholders.
YEAR 2000 COMPLIANCE
We have not experienced any disruptions in our operations associated with issues
related to the year 2000. We incurred no costs with respect to the year 2000
issue in the first or second quarters 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires recognition of all
derivatives on the balance sheet at fair value. We have determined that the
adoption of this new standard will not have a material effect on our financial
statements or disclosures for all periods presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that inflation has not had a material impact on our results of
operations since inception for each of our second quarters ended June 30, 1999
and 2000. However, there can be no assurance that future inflation would not
have an adverse impact on our operating results and financial condition.
We are not subject to currency fluctuations since we do not have any
international operations. We have limited market risk exposure since we do not
have any outstanding variable rate debt or derivative financial and commodity
instruments as of August 1, 2000.
As of August 1, 2000, we have no outstanding long-term debt instruments.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 7, 1999, the Securities and Exchange Commission declared effective a
registration statement on Form S-1 (File No. 333-83849) with respect to our
Class A common stock. Pursuant to the registration statement, we offered and
sold 4,545,455 shares of Class A common stock at $11.00 per share to an
underwriting syndicate. The managing underwriters of this syndicate were Thomas
Weisel Partners LLC, William Blair & Company and PaineWebber Incorporated. The
offering terminated because all shares offered were sold.
The gross proceeds from the offering were $50.0 million. Total expenses that we
incurred in connection with the issuance and distribution of the Class A common
stock from the date that the offer commenced to June 30, 2000 were $5.0 million.
No discounts, commissions or other offering expenses were paid to directors,
officers or general partners of VitaminShoppe.com, our associates or persons
owning 10% or more of any class of our equity securities. Payments to
underwriters, printers, accountants and legal counsel were made directly to
those parties. After deducting these expenses and the write-off of prepaid
offering costs, the net proceeds of the offering were approximately $45.0
million. Prior to the second quarter 2000 we used approximately $29.4 million of
such proceeds for various issues, including capital expenditures, advertising
and marketing and the repayment of a note due to The Vitamin Shoppe.
During the first two quarters 2000, we used $3.94 million of the net proceeds
for enhancements to our Web site and other capital expenditures, and $8.90
million for advertising and marketing activities. Other than principal
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and accrued interest paid to our principal stockholder in 1999, none of these
payments were made to directors, officers or general partners of the Company or
our associates or to persons owning 10% or more of any class of our equity
securities. The remainder of the proceeds of the offering has been invested in
short-term, investment-grade, interest-bearing obligations and we expect that
they will be used for general corporate purposes, including working capital,
capital expenditures and advertising and marketing activities. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current agreements or
commitments with respect to such an acquisition. The amounts actually expended
by us for such purposes may vary significantly and will depend upon a number of
factors, including our future revenue and cash generated by operations.
Accordingly, we retain broad discretion in the allocation of the net proceeds of
the offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 22, 2000, the Company held its annual meeting of stockholders, at which
there were 85,370,301 votes represented in person or by proxy, which constituted
a quorum. At the annual meeting, the following matters were approved by more
than the requisite number of stockholders.
All of the persons nominated to become directors of the Company were elected.
The number of votes cast for and withheld for each director were as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Barbara S. Feigin 85,322,467 47,834
David S. Gellman 85,322,367 47,934
The remaining directors of the Company are:
Martin L. Edelman
M. Anthony Fisher
Jeffrey J. Horowitz
Woodson C. Merrell, M.D.
Stephen P. Murray
Paul R. Vigano
A proposal to ratify the appointment of Deloitte & Touche LLP as auditors of the
Company for the fiscal year ending December 31, 2000 was approved, with
85,355,370 voted for, 9,656 voted against, 5,275 abstained and 396,273 not
voted.
A proposal to approve the VitaminShoppe.com, Inc. Amended and Restated Stock
Option Plan for Employees was approved, with 81,544,768 voted for, 125,233 voted
against, 7,930 abstained and 4,088,643 not voted.
A proposal to approve the VitaminShoppe.com, Inc. Amended and Restated Stock
Option Plan for Non-Employee Directors was approved, with 81,560,241 voted for,
110,240 voted against, 7,450 abstained and 4,088,643 not voted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit 27.1: Financial Data Schedule (EDGAR version only)
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(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VITAMINSHOPPE.COM, INC.
(Registrant)
Date: August 14, 2000 /s/ Jeffrey J. Horowitz
-----------------------------------
Jeffrey J. Horowitz, President and
Chief Executive Officer
/s/ Ann M. Sardini
-----------------------------------
Ann M. Sardini, Chief Financial Officer,
Treasurer and Secretary
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