<PAGE>
As filed with the Securities and Exchange Commission on March 13, 2000
Registration No. 333-30190
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
MORE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5912 94-3300529
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)
</TABLE>
520 Third Street
Second Floor
San Francisco, California 94107
(415) 979-9597
(Address and telephone number of principal executive offices and principal
place of business)
--------------
Donald M. Kendall, Jr.
Chief Executive Officer
more.com, Inc.
520 Third Street
Second Floor
San Francisco, California 94107
(415) 979-9597
(Name, address, and telephone number of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Gavin B. Grover, Esq. Steven L. Berson, Esq.
Matthew Burns, Esq. Michael S. Russell, Esq.
Jaclyn Liu, Esq. Michael A. DeAngelis, Esq.
Donald C. Hunt, Esq. Wilson Sonsini Goodrich & Rosati
Morrison & Foerster LLP Professional Corporation
425 Market Street 650 Page Mill Road
San Francisco, California 94105 Palo Alto, CA 94304-1050
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated March 13, 2000
PROSPECTUS
Shares
more.com, Inc.
Common Stock
-----------
This is more.com, Inc.'s initial public offering. more.com is selling all
of the shares.
We expect the public offering price to be between $ and $ per share.
Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will trade on the Nasdaq National Market
under the symbol "MORE."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 5 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................. $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to more.com, Inc........... $ $
</TABLE>
The underwriters may also purchase up to an additional shares at the
public offering price, less the underwriting discount, within 30 days from the
date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch & Co.
Lehman Brothers
U.S. Bancorp Piper Jaffray
-----------
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover
------------------
[Art depicting more.com's virtual operating model]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 34
Management............................................................... 51
Related Party Transactions............................................... 63
Principal Stockholders................................................... 66
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 73
Underwriting............................................................. 75
Legal Matters............................................................ 78
Experts.................................................................. 78
Change in Principal Accountants.......................................... 78
Where You Can Find More Information...................................... 78
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
---------------
more.com(TM), Acumin(TM), Acumin Corporation Custom Formulated
Nutritional Supplements(TM), Acumin Custom Formula(TM), Acumin Personal
Nutrition Program(TM), Acumins(TM), QuickShop(TM) and SmartSelect(TM) are
trademarks of more.com. GreenTree SM, greentree.com SM and GreenTree
Nutrition SM are service marks of more.com. This prospectus also includes
trademarks and service marks of entities other than more.com.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements,
before making an investment decision.
more.com, Inc.
more.com is a leading online health superstore that currently offers its
customers more than 45,000 stock keeping units, or SKUs, in a variety of health
product categories at everyday low prices. Our online health superstore
contains over-the-counter medicine products, health and beauty aids, vision
care products, nutritional supplements, baby products, prescription medications
and other health products. Through our relationship with our third-party
distribution and fulfillment providers, we have the opportunity to access over
300,000 health product SKUs that we could make available to our customers. In
an effort to further enhance our customers' shopping experience, we have also
created five customized specialty stores that are built around specific product
categories and are closely integrated with our broader more.com superstore.
These specialty stores include Acumins for personalized vitamins, GreenTree for
natural health and beauty products, Clearly Contacts for vision products,
Comfort Living for baby, back and healthy home products and Pharmacy for
prescription drugs. In addition, we plan on increasing the number of specialty
stores on our Web site over the next few years.
To ensure that our customers can quickly find and purchase the health
products they need, we have designed our Web site, www.more.com, with
navigation tools that provide our customers with an intuitive, easy-to-use
shopping interface. For example, we have developed proprietary solutions, such
as our QuickShop(TM) technology, that dramatically reduce the amount of time
necessary for customers to find and purchase products in our online health
superstore.
We use a business model that involves outsourcing the majority of our
operating infrastructure including distribution and fulfillment, credit card
processing and the hosting of our system infrastructure and database servers.
We believe that these outsourcing arrangements provide us with a variety of
benefits, including capital and cost efficiencies, operating flexibility and
enhanced scalability. By taking advantage of these benefits, we believe we are
able to offer a broader selection of products at lower prices and operate with
significantly lower operating expenses than many of our competitors.
Additionally, this operating model allows us to easily add new product
categories and specialty stores, minimizes the cost of carrying inventory and
enables us to focus on maintaining a superior customer experience, which is
critical to building customer loyalty.
As of December 31, 1999, we have sold our products to more than 57,000
customers, of which more than 46,000 were added during the fourth quarter of
1999. During January 2000, approximately 45.8% of our total revenue came from
repeat customers. Media Metrix estimates that approximately 584,000 unique
visitors came to our site in December 1999, representing a 10.6% increase over
the estimated 528,000 unique visitors to our site in November 1999. "Unique
visitor" is an industry term used to describe an individual that has visited a
particular Internet site once or more during a specific period of time. We
believe that the increase in visitor traffic to our Web site and relatively
high levels of repeat purchases demonstrate our customers' growing satisfaction
with our shopping experience and value proposition.
Our objective is to become the world's leading online health superstore,
offering a broad selection of products and services at everyday low prices,
backed by superior customer service. We plan to expand our product offerings
and specialty stores through both internal growth and acquisitions.
Additionally, we intend to continue to work with our distribution and
fulfillment providers to obtain more timely and accurate product information,
shipping and fulfillment.
1
<PAGE>
Our business strategy focuses on offering our customers low prices, and
we intend to offer the lowest prices online for the most frequently purchased
health products. Initially, however, we offered a broad range of products at
very low prices and pursued aggressive marketing campaigns, such as free
shipping for life, $1.00-for-life and fixed prices-for-life product promotions
as part of our charter customer promotion, to drive traffic to our Web site. As
customer loyalty and recognition of our brand name have increased, we have
recently begun to modify our pricing and merchandising strategy to improve our
overall gross margins without experiencing a decline in the growth of overall
sales volumes or customer levels. Additionally, the creation of our specialty
stores on our Web site has promoted cross-selling opportunities that enable us
to migrate our customers to higher margin products. We intend to further refine
this pricing strategy over time.
In early February 2000, we acquired Comfort Living, Inc., an Internet
retailer specializing in personal care and comfort products, back care and pain
reduction products, baby care and maternity products and allergy control
products. Under the terms of the agreement, the stockholders of Comfort Living
received $2.5 million in cash and 1,500,000 shares of our common stock. Comfort
Living's net revenues were $4.6 million for the year ended December 31, 1999.
In early February 2000 we also completed the private placement of our Series E
convertible preferred stock to a group of investors led by Bain Capital and its
affiliates for $25.5 million.
more.com was formed as a California limited liability company in January
1998 under the name Nutrition Direct, LLC and was incorporated in Delaware as
GreenTree Nutrition, Inc. in May 1998. In July 1999, we changed our name to
more.com. Our executive offices are located at 520 Third Street, Suite 245, San
Francisco, California 94107, and our telephone number is (415) 979-9597. Our
primary Web site is located at www.more.com. Information on our Web site does
not constitute part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered................................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... We estimate that our net proceeds from
this offering without exercise of the
over-allotment option will be
approximately $ million. We intend to
use the net proceeds to build out our Web
site and our specialty stores within our
Web site, acquire and develop
complementary businesses, technologies
and strategic relationships and for
general corporate purposes, including
working capital and capital expenditures.
Pending these uses, the net proceeds of
this offering will be invested in short-
term, investment grade, interest-bearing
instruments.
Risk factors........................................ See "Risk Factors" and other information
included in this prospectus for a
discussion of factors you should
carefully consider before deciding to
invest in shares of our common stock.
Proposed Nasdaq National Market symbol.............. MORE
</TABLE>
---------------
Unless otherwise noted, all information in this prospectus assumes that:
. the underwriters will not exercise their option to purchase additional
shares of common stock to cover over-allotments, if any; and
. all outstanding shares of our preferred stock will convert into shares
of common stock upon the completion of this offering.
3
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year Ended
December 31, 1998 December 31, 1999
------------------ -------------------
(in thousands, except per share data)
<S> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 99 $ 2,923
Gross profit (loss)..... (44) (830)
Operating loss.......... (5,236) (34,812)
Net loss................ (5,169) (34,685)
Accretion of discount on
mandatorily redeemable
convertible
preferred stock........ (101) (1,597)
Net loss available to
common stockholders.... (5,270) (36,282)
Basic and diluted net
loss per share......... $ (5.90) $ (15.74)
Shares used in computing
basic and diluted net
loss per share......... 893 2,305
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (2.68)
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 13,556
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------
Actual As Adjusted
------------- ------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 24,655 $
Working capital.................................. 17,576
Total assets..................................... 40,161
Borrowings under lines of credit, less current
portion......................................... 1,376 1,376
Mandatorily redeemable convertible preferred
stock........................................... 58,064 --
Total stockholders' equity (deficit)............. (27,765)
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Quarterly Consolidated
Statement of Operations Data:
Net revenues.................. $ 162 $ 260 $ 666 $ 1,835
Gross profit (loss)........... (44) (63) (90) (633)
Operating loss................ (2,533) (4,285) (9,759) (18,235)
Net loss...................... (2,458) (4,240) (9,907) (18,080)
</TABLE>
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this
prospectus, including our consolidated financial statements and the related
notes, before you purchase any shares of our common stock. Additional risks and
uncertainties, including those generally affecting the market in which we
operate or that we currently deem immaterial, may also impair our business.
Risks Relating to more.com
We have a limited operating history upon which to evaluate our business
prospects and may face difficulties encountered by early stage companies.
From our inception in January 1998 through May 1998, we had no sales and
our operating activities related primarily to the planning and development of
our original Web site. Beginning in May 1998, we had some sales as GreenTree
Nutrition but the majority of our sales did not occur until the launch of the
more.com Web site in August 1999. Accordingly, we have a limited operating
history upon which to base an evaluation of our business and prospects. In
assessing our prospects, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly companies in the e-commerce market. These risks include
our ability to:
. establish and increase awareness of the more.com brand and strengthen
customer loyalty;
. attract and retain customers at a reasonable cost;
. process transactions quickly, accurately and securely;
. ensure the dependability of a limited number of inventory and order
processing suppliers;
. continue to offer products that appeal to our customers;
. manage rapidly changing and expanding operations;
. maintain our current, and develop new, strategic relationships;
. implement and successfully execute our business and marketing
strategy;
. provide superior customer service; and
. continue to develop and enhance our technology and systems.
Because of our limited operating history and the early stage of
development of our market, we have limited insight into trends that may emerge
and affect our business. We cannot assure you that our business strategy will
be successful or that we will successfully address the above challenges.
We have incurred substantial losses and expect to continue to incur losses for
the foreseeable future.
We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future. We incurred net losses of
approximately $5.2 million for the period from January 9, 1998 (our inception)
through December 31, 1998 and net losses of $34.7 million for the year ended
December 31, 1999. We expect the rate at which we incur these losses will
increase significantly from current levels. In the future, we will need to
generate significant revenues to achieve profitability.
Although our revenues have grown substantially in recent quarters, we
cannot assure you that we will achieve sufficient revenues for profitability.
To attract customers to our Web site, we sell a substantial portion of our
products at very competitive prices, resulting in low and sometimes negative
gross margins on our product sales. Our ability to become profitable depends
on, among other things:
. our ability to generate and sustain substantially higher net sales
with improved gross margins while maintaining reasonable operating
expense levels;
5
<PAGE>
. our ability to generate significant advertising revenue; and
. our ability to sell other higher margin products and services.
In addition, we will incur expenses related to product shipping that we
may decide not to fully pass on to customers. We expect that it will take
several years to build a critical mass of customers. We cannot assure you that
we will obtain enough customer traffic or a high enough volume of purchases to
achieve profitability. If revenues grow more slowly than we anticipate, or if
operating expenses exceed our expectations or cannot be adjusted accordingly,
our business will be materially and adversely affected.
We depend almost exclusively on Bergen Brunswig to supply and distribute our
health products, and its failure to adequately supply and distribute our health
products could reduce our revenues and harm our business.
We depend on Bergen Brunswig Drug Company to provide the majority of our
health products and to fulfill our customers' orders. Since August 1999, a
substantial majority of our product sales revenues were derived from products
supplied by Bergen Brunswig. We cannot guarantee that Bergen Brunswig will
continue to supply a sufficient quantity of inventory on a timely basis to
satisfy our customers' order requirements. If Bergen Brunswig were to terminate
or refuse to renew our distribution arrangement with them, we would have to
purchase our health products from other distributors. Bergen Brunswig's
termination or failure to renew our contract could cause significant delays in
our ability to fulfill our customers' orders, and we may not be able to locate
another distributor that can provide comparable fulfillment, processing and
shipping services in a timely manner or on acceptable commercial terms. Our
distribution agreement with Bergen Brunswig expires in July 2009. However,
either party may terminate the agreement after each year under specific
occurrences, including failure to perform material obligations under the
agreement, entering into a bankruptcy, receivership or similar proceedings and
adverse regulatory changes.
We are also subject to risks associated with Bergen Brunswig's ability to
replenish its inventory in a timely manner. Our contract with Bergen Brunswig
does not guarantee the availability of merchandise, establish guaranteed prices
or provide for the continuation of particular pricing practices. Although
alternative sources of supply for certain of the products we offer exist, we
have not established alternative sources for our products. Our contract with
Bergen Brunswig does not restrict it from selling products to other retailers,
including online drugstores, which could limit our ability to supply the
quantity of products requested by our customers. Our distribution agreement
with Bergen Brunswig does not require them to set aside any amount of inventory
to fulfill our orders or to give our orders priority over other resellers to
whom they sell. If we are unable to supply products to our customers due to
Bergen Brunswig's delay or inability to fulfill our orders, our business would
be substantially harmed.
Our future success also depends on our ability to provide timely and
accurate order fulfillment. We rely on Bergen Brunswig to fulfill our orders,
maintain and track inventory and provide us with financial data and related
fulfillment and distribution information. In addition, our order fulfillment
and distribution process requires us to cooperate extensively with Bergen
Brunswig with respect to the coordination of separate information technology
systems. However, we have limited control over their shipping and processing
procedures. If our customers become dissatisfied with Bergen Brunswig's
fulfillment practices, our reputation and the more.com brand could suffer.
We rely exclusively on Medi-Mail for the fulfillment of pharmaceutical products
that we sell, and our prescription drug business would be significantly
disrupted if this relationship is terminated.
We currently rely exclusively on Medi-Mail, a wholly owned subsidiary of
Bergen Brunswig, for fulfillment and delivery of pharmaceutical products for
our online pharmacy. If Medi-Mail were unable or unwilling for any reason to
provide these products, our ability to continue delivery of pharmaceutical
products would be negatively impacted. We cannot assure you that we will
succeed in finding additional providers of pharmaceutical products on
reasonable terms, if at all.
6
<PAGE>
We are dependent on several third-party providers to whom we outsource a
majority of our operating infrastructure. If these parties are unwilling or
unable to continue providing services, our business could be seriously harmed.
We outsource the majority of our operating infrastructure to third-party
providers. For example, we use Airborne Express, United Parcel Service and the
U.S. Post Office to deliver the majority of our customer orders. In addition,
we rely on Lens Express to fulfill our customers' orders for vision products.
We depend on CyberSource Corporation for most of our credit card processing.
Due to our dependence on these third parties, we are subject to various risks
associated with their operations, which are largely outside our control. If the
services of any of these third parties become unsatisfactory, our customers may
experience lengthy delays in receiving their orders. We may not be able to find
a suitable replacement on a timely basis or on commercially reasonable terms.
Failure to deliver products to our customers in a timely and accurate manner
would harm our reputation, the more.com brand and our business.
In addition, if we establish new relationships with third-party
providers, we cannot assure you that we will be able to integrate our
respective information systems on a timely basis. If our logistics providers'
systems fail or are unable to scale or adapt to our changing needs, we may not
have adequate, accurate or timely inventory or financial information. Our
failure to have adequate, accurate or timely inventory and financial
information would harm our ability to manage our business effectively.
Our ability to provide our customers with a broad and deep selection of
products depends in large part on the vendors who supply inventory to Bergen
Brunswig and our other fulfillment providers. These vendors may decide, for
reasons outside our control, not to allow their products to be offered for sale
on the Internet. These vendors may also cause our fulfillment providers not to
sell products to us. If our fulfillment providers are prevented from securing
sufficient inventory to meet the demands of our customers, our business would
be severely harmed.
We currently rely exclusively on Bergen Brunswig to provide promotional
advertisements on our Web site for all health products for which it acts as our
fulfillment provider, and our revenues and future profitability would be
negatively impacted by its failure to adequately perform these services.
We currently rely on Bergen Brunswig as our exclusive sales
representative for the marketing and sale of advertisements on our Web site for
all health products for which it acts as our fulfillment provider. Bergen
Brunswig may terminate this contractual relationship anytime prior to August 1,
2000, and we may terminate the exclusivity of our arrangement with Bergen
Brunswig after August 1, 2000 if it fails to generate a specified amount of
advertising revenue. Further, on February 1, 2001, our management and Bergen
Brunswig will evaluate the feasibility of an ongoing exclusive arrangement. If
Bergen Brunswig terminates its relationship with us earlier or if it is unable
or unwilling for any reason to provide its services for the duration of the
contractual term, our ability to generate advertising revenues would be
negatively impacted. We cannot assure you that we will succeed in internally
generating advertising revenue with similar returns or finding additional sales
representatives on favorable terms, if at all.
If there is not a widespread acceptance of purchasing health products online,
our revenue growth and future profitability will be negatively impacted.
If we do not attract and retain a high volume of customers to our online
health superstore at a reasonable cost, our business and operating results will
be negatively affected. We may not be able to convert a large number of
customers from traditional shopping methods to online shopping for health
products. Specific factors that could prevent widespread customer acceptance of
our online health superstore include:
. shipping charges, which do not apply when shopping at traditional
brick and mortar stores;
. delivery time associated with Internet orders, as compared to the
immediate receipt of products at traditional brick and mortar stores;
7
<PAGE>
. pricing that does not meet customer expectations;
. product damage from shipping or shipments of wrong or expired
products;
. customer concerns about the security of online transactions and the
privacy of their personal health information;
. delays in responses to customer inquiries; and
. difficulties experienced by our customers in returning or exchanging
orders.
If we fail to establish and strengthen the more.com brand, our revenue from
operations may not grow or may grow at a lower rate than expected.
We believe that achieving widespread acceptance of the more.com brand is
critical to our business, particularly because of the early stage and
competitive nature of the online market for health products. In particular, if
we do not establish the more.com brand quickly, we may lose the opportunity to
build a critical mass of customers. Moreover, if we are unsuccessful in our
branding efforts, advertisers may not view our Web site as an effective
marketing and sales channel for their merchandise, resulting in decreased
advertising revenues. Promoting and positioning the more.com brand will depend
largely on:
. the success of our and Bergen Brunswig's advertising and promotional
efforts;
. our ability to provide our customers with a broad selection of health
products at competitive prices; and
. attracting and training customer service personnel to provide our
customers with high-quality customer service.
We intend to pursue an aggressive promotional strategy to build the
more.com brand. These initiatives will involve significant expenditures. We
cannot assure you that these marketing and brand promotion activities will
yield increased revenues or that revenues will be sufficient to offset the
expenses incurred in building our brand.
We may not successfully expand the breadth and depth of our product offerings.
We intend to expand the breadth and depth of our product offerings by
selling a broader assortment of health products on our Web site. Expansion of
our offerings in this manner will require significant additional expenditures
and could strain our management, financial and operational resources. For
example, we may need to incur significant expenses, develop relationships with
new fulfillment providers or manufacturers, or comply with new regulations,
specifically those in the prescription drug and pharmaceutical areas. We cannot
assure you that we will be able to expand our product and service offerings in
a cost-effective or timely manner. Furthermore, any new product offerings or
sales formats that are not favorably received by consumers could damage our
reputation and the more.com brand. The lack of market acceptance of these
efforts or the inability to generate satisfactory revenues to offset the cost
of expanded product offerings could harm our business.
While our continued reliance on aggressive price-based promotions may prevent
us from achieving profitability, the elimination of these promotions may have a
negative impact on our product sales and customer base.
We established a charter customer promotion beginning with the launch of
the more.com Web site on August 17, 1999 that ran until January 26, 2000. The
purpose of the promotion was to attract and retain customers. At the end of the
promotion, approximately 85,000 customers were charter customers. The program
allowed charter customers to lock-in the prices for all product SKUs that they
purchased during the promotion period, for the life of the product SKU. The
program also allowed charter customers to receive free shipping with future
purchases, as long as the purchase includes at least one product SKU purchased
during the charter customer promotion period.
8
<PAGE>
We recorded a liability of $1.7 million for estimated future losses
attributable to the charter customer promotion through December 31, 1999. We
also deferred revenue of $120,000 in 1999, which represents the estimated value
of this promotion to charter customers. We will continue to assess our exposure
to loss for these products and adjust our reserves as necessary. A significant
change in actual consumer purchasing patterns, inflation or product life cycles
could have a material effect on the amount of the required reserve and our
results of operations.
On November 8, 1999, we also instituted a $1.00 days promotional campaign
in an effort to drive consumers to our online health superstore and build the
more.com brand. Currently, this $1.00 days promotion allows customers to
purchase various product SKUs for $1.00 on our Web site and receive free
shipping if the customer's total order exceeds $20.00. Our continued reliance
on these types of aggressive price-based promotional activities would make it
very difficult for us to ever achieve profitability. As a result, we have
recently terminated the charter customer program and intend to eventually end
our $1.00 days promotion. The elimination of these and similar promotions may
result in a decline in product revenues and a reduced customer base if current
or prospective purchasers shop elsewhere for lower-priced products.
Furthermore, we may be unable to attract new online customers, many of whom use
the Web to shop for bargains. The occurrence of any of these events would have
a negative impact on our financial condition.
Our quarterly revenues and operating results may fluctuate and therefore they
are not indicative of future performance.
Our revenues and operating results have varied in the past and will
continue to fluctuate significantly from quarter to quarter due to a number of
factors, many of which are outside of our control. Some important factors
affecting our revenues and operating results include:
. demand for our products;
. our ability to attract visitors to our Web site and convert those
visitors into customers;
. frequency of repeat purchases by customers;
. the announcement or introduction of new or enhanced sites, services
and products by us or our competitors;
. changes in the growth rate of Internet usage;
. average order size and the mix of products sold;
. our ability to scale technology and upgrade order processing
capabilities;
. the amount and timing of the incurrence of operating costs relating
to the expansion of our business, operations and infrastructure and
the integration costs of potential acquisitions;
. our ability and the ability of our fulfillment providers to ensure
sufficient product supply;
. changes in pricing policies by us or our competitors; and
. changes in government regulation.
We currently expect that substantially all of our revenues for the
foreseeable future will come from orders of health products on our Web site.
The volume and timing of these orders are difficult to predict because the
online market for health products is in its infancy. Our operating expenses are
largely based on anticipated revenue trends and a high percentage of our
expenses are fixed in the short term. As a result, a delay in generating or
recognizing revenue for any reason could cause significant variations in our
operating results from quarter to quarter and could result in substantial
additional operating losses.
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Historical trends and quarter-to-quarter comparisons of our operating
results are not good indicators of our future performance. In some future
quarter or quarters, our operating results may be below the expectations of
public market analysts or investors. In that event, the market price of our
common stock may decline significantly.
Because we depend on third parties to provide content, reliable software,
systems and related services, our business would be disrupted if any one of
them terminates its relationship with us.
We intend to continue to strategically license content for our Web site
from third parties, including content that is integrated with internally
developed content and used on our Web site to provide key services. These
third-party content licenses may not be available to us on commercially
reasonable terms in the future, and we may be unable to integrate third-party
content with our own content. The inability to obtain any third-party content
licenses could result in delays in site development or services until
equivalent content can be identified, licensed and integrated. Any delays in
site development or services could negatively impact our business and operating
results.
We currently license technologies and information incorporated into our
Web site from third parties. As we continue to introduce new services, we may
be required to license additional technology and information from others. We
cannot assure you that these third-party technology and information licenses
will continue to be available to us on commercially reasonable terms, if at
all. Any failure to obtain any of these technology and information licenses
could result in delays or reductions in the introduction of new features,
functions or services and could negatively affect the performance of our
existing services.
We have also contracted with Oracle Corporation to assist in the
integration and customization of our enterprise resource planning applications
and provide other consulting services and have contracted with Level 3
Communications to host our system hardware. The failure of these third parties
to provide these services could negatively affect the performance of our
existing services until another third party that can provide similar services
can be identified.
Several of the third parties upon whom we depend for software, systems
and related services have a limited operating history, have relatively immature
technology and are themselves dependent on reliable delivery of services from
others. As a result, our ability to deliver various services to our customers
may be adversely affected by the failure of these third parties to provide
reliable software, systems and related services to us.
We may not be able to compete successfully against current and future
competitors.
We compete in a market that is highly competitive and expect competition
to intensify in the future. We currently or potentially compete with a variety
of companies in several broad categories, including:
. chain drugstores such as CVS, Eckerd's, Rite Aid and Walgreen's;
. mass market retailers such as K Mart, Target and Wal-Mart;
. supermarkets such as Albertson's, Kroger, Safeway and Whole Foods
Market;
. warehouse clubs such as Costco Wholesale;
. online retailers of health products such as drugstore.com,
MotherNature.com and PlanetRX.com;
. mail-order pharmacies such as Rx America;
. prescription benefits managers such as Express Scripts and Merck;
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. Internet portals and online service providers that feature shopping
services such as America Online, Excite, Lycos and Yahoo!; and
. cosmetics departments at major department stores such as
Bloomingdale's, Macy's and Nordstrom.
Many of our competitors have existed for a longer period, have greater
financial and technical resources, have more established marketing
relationships with leading manufacturers and advertisers or have secured a
greater presence in distribution channels than we have. Some of these companies
may also commence or expand their presence on the Internet. If we fail to
attract and retain a large customer base and our competitors establish a more
prominent market position relative to ours, our ability to grow will be
inhibited. We also believe we may face a significant competitive challenge from
alliances formed among our competitors. Some of these companies already have
entered into strategic relationships with one another. The combined resources
of these partnerships could pose a significant competitive challenge to us.
We believe the principal factors that will draw customers to an online
store include brand availability, selection, personalized services,
confidentiality, convenience, price, accessibility, customer service, quality
of search tools, quality of content and reliability and speed of fulfillment
for products ordered. We will have no control over how successful our
competitors are in addressing these factors. In addition, our online
competitors can duplicate many of the products, services and content offered on
our Web site. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share.
Limited insurance reimbursement coverage may reduce our ability to sell
pharmacy products online, which would reduce our revenues.
To obtain reimbursement on behalf of our customers for the prescription
products that they purchased on our Web site, we need to enter into contracts
with numerous insurance companies and pharmacy benefit managers, or PBMs. We
currently only offer reimbursements through our alliance with PlusCare. Our
ability to enter into contracts with insurance companies and PBMs is uncertain.
Many of these companies are in the early stages of evaluating the impact
of the Internet and online pharmacies on their businesses. These companies may
delay their decisions to contract with online pharmacies or may decide to
develop their own Internet capabilities that may compete with us. Additionally,
many insurance companies have existing contracts with chain drugstores and PBMs
that have announced their intentions to establish online pharmacies. Some
insurance companies and PBMs will likely contract with only one or a limited
number of online pharmacies. If our online competitors obtain these contracts
and we do not, we would be at a competitive disadvantage.
In addition, we must process each insurance application individually,
which may raise the costs of processing prescription orders and delay our order
processing time. If customers do not accept our online insurance coverage
procedure, our business could be adversely affected.
Any errors in the filling or packaging of the prescription drugs we dispense
may expose us to liability and negative publicity.
Pharmacy errors relating to prescriptions, dosage and other aspects of
the medication dispensing process can produce liability for us that our
insurance may not cover. Because our prescription drug fulfillment provider,
Medi-Mail, distributes pharmaceutical products directly to the consumer, this
service is a very visible part of the medication distribution chain and may
create risks of liability claims for us.
Pharmacists are required by law to offer counseling, without additional
charge, to our customers about medication, dosage, delivery systems, common
side effects and other information deemed significant by the
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pharmacists. Medi-Mail's pharmacists have a duty to warn customers regarding
any potential adverse effects of a prescription drug if the warning could
reduce or negate these effects. This counseling is in part accomplished through
Medi-Mail's e-mail system and inserts that are included with the prescription,
which may increase the risk of miscommunication because the customer is not
personally present or may not have provided all relevant information. We also
post product information on our Web site. Providing information on
pharmaceutical and other products creates the potential for claims to be made
against us for negligence, personal injury, wrongful death, product liability,
malpractice, invasion of privacy or other legal theories based on our product
or service offerings. Our general liability insurance, which includes coverage
for product liability and professional liability, may not cover potential
claims of this type or may not be adequate to protect us from all liability
that may be imposed.
We may be unable to protect our Internet domain names, which are essential to
our business.
We currently hold the Internet domain name more.com, as well as various
other related names. If we are unable to protect these domain names, our
competitors could capitalize on our brand recognition. The acquisition and
maintenance of domain names generally are regulated by governmental agencies
and their designees. The regulation of domain names has changed and is subject
to further change in the near future. As a result, we may be unable to acquire
or maintain relevant domain names. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we could be unable to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other proprietary rights. Also, third parties may
be able to prevent us from continuing to use one or more of our domain names.
If we do not protect our intellectual property rights, unauthorized use and
misappropriation of our technology could occur.
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. The legal protections upon which we rely
afford only limited protection for our intellectual property and trade secrets.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our sales formats or obtain and use information that
we regard as proprietary. Moreover, our means of protecting our proprietary
rights may be inadequate, and our competitors could independently develop
similar technology.
We also cannot be certain that our technology does not or will not
infringe upon valid patents, copyrights or other intellectual property rights
held by third parties. We may be subject to legal proceedings and claims from
time to time relating to the intellectual property of others in the ordinary
course of our business. We may incur substantial expenses in defending against
these third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt the conduct of our business.
In July 1999, we filed an application for a U.S. trademark registration
of more.com. We may be unable to secure this registration. It is also possible
that our competitors or others will adopt service names similar to ours,
thereby impeding our ability to build brand identity and possibly leading to
customer confusion. In addition, there could be potential trade name or
trademark infringement claims brought by owners of other registered trademarks
or trademarks that incorporate variations of the term more.com. Any claim or
customer confusion related to our trademark, or our failure to obtain trademark
registration, would negatively affect our business.
We are a defendant in a lawsuit commenced by More Online alleging, among
other things, that our name more.com is confusingly similar to More Online's
name. With this lawsuit, More Online is seeking to prevent us from using the
name more and the URL www.more.com. Although we are vigorously defending this
litigation, we cannot be certain that our defense will be successful. If we do
not prevail in this litigation, we could be prevented from using the more.com
name and be liable for monetary damages.
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Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain names and determine
the validity and scope of our and others' proprietary rights. If third parties
prepare and file applications in the United States that claim trademarks used
or registered by us, we may oppose those applications and be required to
participate in proceedings before the United States Patent and Trademark Office
to determine priority of rights to the trademark. Any litigation or adverse
priority proceeding could result in substantial costs and diversion of
resources and could seriously harm our business and operating results. Finally,
we may in the future sell our products internationally, and the laws of many
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Many countries have a first-to-file trademark
registration system. As a result, we may be prevented from registering or using
our trademarks in some countries if third parties have previously filed
applications to register or have registered the same or similar trademarks.
We are exposed to risks associated with credit card fraud, which may reduce
collections and discourage online transactions.
Under current industry practices, we are liable for fraudulent credit
card transactions because we do not obtain a cardholder's signature. To date,
we have suffered minor losses as a result of orders placed with fraudulent
credit card data. As we expand our online store to introduce higher priced,
high margin products on our Web site, fraudulent credit card transactions
involving these products could have a greater impact on our financial results,
and we may incur more significant losses resulting from fraudulent activities.
We do not carry insurance against this risk. If we fail to adequately control
fraudulent credit card transactions, we may be subject to liability claims and
our revenues and results of operations would be harmed.
We may be held liable if third parties misappropriate our users' personal
information.
If third parties were able to penetrate our network security or otherwise
misappropriate our customers' personal information or credit card information,
we could be subject to liability for:
. unauthorized purchases with credit card information;
. impersonation or other similar fraud claims; and
. misuse of personal information such as for unauthorized marketing
purposes.
These types of claims could result in litigation. In addition, the
Federal Trade Commission and state agencies have been investigating various
Internet companies regarding their use of personal information. We could incur
additional expenses if new regulations regarding the use of personal
information are introduced or if our privacy practices are investigated.
Information and products displayed on, retrieved from or linked by our Web site
may subject us to potential liability.
Because we post product information and other content on our Web site, we
face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we post. Similar claims have been brought, sometimes
successfully, against Internet content distributors. In addition, we could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties' proprietary technology. Also, we could face
potential liability for product liability claims for products sold through our
Web site. Although we maintain general liability insurance, our insurance may
not cover claims of this type or may be insufficient to indemnify us for all
liability that may be imposed. Any liability that is not covered by insurance
or is in excess of insurance coverage could harm our business. We could also be
subject to claims based upon the content accessible through links from our Web
site to other Web sites.
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We are exposed to potential liability associated with pricing errors of our
products.
We use a computerized process to determine the prices posted on our Web
site of our health products as well as to implement any pricing changes. This
computerized method may result in pricing errors that may subject us to
significant litigation and costs in the future. We cannot assure you that a
pricing error will not occur in the future. If a pricing error occurs in the
future or if we fail to fulfill any orders resulting from the pricing error, we
may be exposed to liability associated with the error. These types of claims
have been brought against Internet retailers in the past. Any imposition of
liability that is not covered by our insurance or is in excess of our insurance
coverage could negatively impact our results of operations during the period in
which the liability is incurred.
We are experiencing a period of significant growth, which places a substantial
strain on our resources.
We have experienced and may continue to experience rapid growth. From
inception through December 31, 1999, we grew from 2 to 122 full-time employees.
This growth has placed, and could continue to place, a significant strain on
our managerial, financial and operational resources. To manage this growth, we
will have to implement new operational and financial systems, procedures and
controls. We will also need to train new employees and maintain close
coordination among our product development, marketing and sales, and general
and administrative organizations. These processes are time consuming and
expensive, will increase management responsibility and will divert our
management's attention. If we are unable to manage our growth effectively, our
business could be adversely affected.
Our business operations could be disrupted if we are unable to hire, integrate
or retain qualified personnel.
We depend to a significant extent on the continued services of our senior
management and other key individuals, particularly Donald M. Kendall, Jr., our
Chief Executive Officer, Bradford S. Oberwager, our Chief Operating Officer,
Laureen De Buono, our Chief Financial Officer and Clarence A. Felong, our Vice
President of Technology. We have no employment or consulting agreements with
these individuals, nor do we maintain key person life insurance for these
individuals, other than with Mr. Oberwager. The loss of the services of any of
these individuals or other key employees would likely have a significant
detrimental effect on our business.
In addition, our business depends in part on our ability to maintain
superior customer service. If we are unable to attract and train adequate
numbers of customer service personnel, our efforts to establish our brand may
be harmed and our business results may be impaired. We will need to commit
significant additional financial resources to attract and train customer
service personnel in order to provide our customers with high quality customer
service.
Our future success depends on our continued ability to attract, retain
and motivate highly skilled employees. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications. In addition, there is significant competition for qualified
employees in the Internet industry. As a result, we expect to incur increased
salaries, benefits and recruiting expenses during 2000. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected.
If we are unable to successfully integrate acquisitions, our revenue growth and
future profitability may be negatively impacted.
If appropriate opportunities present themselves, we may attempt to
acquire businesses, technologies, services or products that we believe are a
strategic fit with our business. For example, we recently acquired Comfort
Living, Inc. and are working to integrate its Web site, financial systems and
distribution network with ours. This process of integrating an acquired
business, technology, service or product may result in unforeseen
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operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for ongoing development of our
business. Moreover, we cannot assure you that the anticipated benefits of any
acquisition will be realized. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill.
Our business may be harmed if we are unable to obtain additional funding to
expand our business.
Various elements of our business and growth strategies, including our
plans to broaden existing product lines, introduce new products and invest in
infrastructure, will require additional capital. Our future liquidity and
capital requirements will depend on numerous factors, including timing and
amount of funds required for, or generated by, operations and success and
duration of our expansion program.
We cannot assure you that funds will be available on terms satisfactory
to us when needed, if at all. If adequate funds are unavailable, we may be
unable to develop or enhance our business or respond to competitive pressures
or unanticipated events, any of which could have a material adverse effect on
our business.
Systems failure or delay may cause interruption and disruption of our services.
The performance of our server and networking hardware and software
infrastructure is critical to our business, reputation and ability to attract
users, advertisers and commerce providers to our Web site. Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins and similar
events could damage these systems. Computer viruses, electronic break-ins and
attacks or other similar disruptive problems could also adversely affect our
Web site. Our business could be adversely affected if our systems were affected
by any of these occurrences. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or
interruptions in our systems.
Our Web site and transaction processing systems must accommodate a high
volume of traffic and deliver frequently updated information. Our Web site has
in the past experienced slower response times, decreased traffic and service
interruptions. While these occurrences have not had a material impact on our
business, if system failures or slowdowns were sustained or repeated, our
revenues and our reputation could be impaired. In addition, because we depend
on Internet service providers and other online service providers to provide
consumers with access to our Web site, we are limited in our ability to prevent
system failures in the future. Many of these service providers have sustained
significant outages unrelated to our systems in the past and may experience
similar failures in the future, resulting in less traffic to our Web site,
which could in turn impair our revenues.
If we do not successfully introduce and achieve market acceptance of new
products and services, our revenue growth and future profitability would be
negatively impacted.
Our market is characterized by rapidly changing technologies, frequent
new product and service introductions and evolving industry standards. The
recent growth of the Internet and intense competition in our industry
exacerbate these market characteristics. To achieve our goals, we need to
effectively integrate software programs and tools required to enhance and
improve our product and service offerings and manage our business. Our future
success will depend on our ability to adapt to rapidly changing technologies by
continually improving the performance features and reliability of our services.
We may experience difficulties that could delay or prevent the successful
development, introduction or marketing of new products and services. In
addition, these new products and services must meet the requirements of our
current and prospective users and must achieve significant market acceptance.
We could also incur substantial costs if we need to modify our services or
infrastructures to adapt to these changes.
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Unanticipated year 2000 problems with our computer systems or the computer
systems of our third-party providers could adversely affect our business.
We have tested our current computer systems, and we believe, based on
those tests, that our systems are year 2000 compliant. Our significant third-
party providers have reported that their computer systems are also year 2000
compliant. However, we believe that it is not possible to determine with
complete certainty that all year 2000 problems affecting us or our third-party
providers have been identified or corrected. We cannot assure you that we or
our third-party providers will not experience latent problems relating to
computer systems processing dates after January 1, 2000. We have not developed
nor have we surveyed our third-party providers to assess whether they have
developed any specific contingency plan to deal with latent year 2000 problems
after January 1, 2000. We cannot assure you that we or our third-party
providers will be able to resolve any latent year 2000 problem before
significant losses are incurred.
Risks Relating to Our Industry
Governmental regulation of our business could require significant expenses, and
failure to comply with certain regulations could result in civil and criminal
penalties.
Our business is subject to extensive federal, state and local
regulations, many of which are specific to pharmacies and the sale of over-the-
counter drugs. Violations of these regulations could result in various civil
and criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory or monetary fines, any of which could
adversely affect our operations.
Our prescription drug fulfillment provider, Medi-Mail, is responsible for
complying with federal and state laws relating to the licensing and regulation
of the sale of prescription drugs, including controlled substances. Although we
believe Medi-Mail has fulfilled those requirements for the jurisdictions in
which we do business, these laws are complex and at times ambiguous, and there
remains a risk that one or more jurisdictions could impose additional
requirements on our operations.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing. We believe that any regulations resulting from the investigations
will likely result in increased reporting and monitoring requirements, which
could increase our expenses. Other legislation and regulations currently being
considered at the federal and state level could affect our business, including
legislation or regulations relating to confidentiality of patient records,
electronic access and storage, as well as the inclusion of prescription drugs
as a Medicare benefit. Compliance with new laws or regulations could increase
our expenses.
The Health Insurance Portability and Accountability Act of 1996 mandated
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are currently designing our applications to comply with
the proposed regulations. Until these regulations become final, however,
possible changes in these regulations could cause us to use additional
resources and lead to delays as we revise our Web site and operations.
The federal anti-kickback law prohibits the knowing and willful
solicitation, offer, payment or receipt of any remuneration in return for
referring an individual for healthcare services or supplies for which payment
may be made under any federally funded health care program. Similar rules exist
at the state level. The reach of these laws is very broad, and we could
inadvertently violate these statutes. To the extent we or Medi-Mail engage in
this type of activity, we or Medi-Mail may be subject to penalties for
violation of these laws.
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If a regulatory body alleges that we have engaged in the practice of medicine
or pharmacy, we may be subject to significant liabilities.
The practice of medicine requires licensing under applicable state law.
We do not intend to practice medicine, and we have attempted to structure our
Web site and our business to avoid violation of state medical licensing
requirements. However, a state regulatory authority could at some time allege
that some portion of our business violates these statutes. An allegation that
we practice medicine could result in significant liabilities. Further, any
liability based on a determination that we engaged in the unlawful practice of
medicine may be excluded from coverage under the terms of our general liability
insurance policy.
The practice of pharmacy also involves professional licensing and
compliance with related requirements. Our prescription drug fulfillment
provider, Medi-Mail, is licensed in the jurisdictions in which we do business,
and is responsible under our fulfillment agreement for conducting all pharmacy
services, including processing incoming prescriptions, providing patient
counseling and shipping prescription drug orders to our consumers.
Nevertheless, a regulatory authority could at some future time allege that some
portion of our activity violates licensing or other pharmacy requirements, and
a determination that we violated these requirements could result in substantial
liabilities or a need to restrict our pharmacy operations.
Government regulation and legal uncertainties could add costs to doing business
on the Internet.
Currently, few laws or regulations specifically regulate communications
or commerce on the Internet. However, laws and regulations may be adopted in
the future that address issues such as user privacy, product pricing and the
characteristics and quality of products and services. Any new laws or
regulations relating to the Internet could adversely affect our business. For
example, the Telecommunications Act sought to prohibit transmitting various
types of information and content over the Internet. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on those companies.
This could increase the cost of transmitting data over the Internet. It may
take years to determine the extent to which existing laws relating to issues
such as property ownership, libel and personal privacy are applicable to the
Internet.
The Federal Trade Commission is considering the adoption of regulations
regarding the collection and use of personal identifying information obtained
from individuals, including children, when accessing Web sites. These
developments could have an adverse affect on our ability to target product
offerings and attract advertisers and would have a material adverse effect on
our business and results of operations. We may become subject to a Federal
Trade Commission investigation, and the Federal Trade Commission's regulatory
and enforcement efforts may adversely affect our ability to collect demographic
and personal information from users.
Our revenue from operations could suffer if we are required to collect
additional sales and other taxes in the future.
We do not currently collect sales or other similar taxes for shipments of
goods into states other than California and Pennsylvania. However, one or more
additional states into which our products are sold may seek to impose sales tax
collection obligations. In addition, any ongoing presence in states outside
California or Pennsylvania could subject shipments into these states to state
sales taxes under current or future laws. If one or more states successfully
assert that we should collect sales or other taxes on the sale of merchandise,
our business operating results could be negatively impacted.
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We are dependent on the continued growth in the use of the Internet as a medium
for commerce.
Our business would be adversely affected if Internet usage does not
continue to grow as a medium for commerce, particularly for purchases of health
products. A number of factors may inhibit the development of Internet and
commercial online services into a viable commercial marketplace, including:
. inadequate network infrastructure;
. security and privacy concerns;
. inconsistent quality of services and products;
. lack of availability of cost-effective, high-speed service;
. difficulties in delivery, exchange or return of products; and
. government regulation.
If Internet usage continues to grow, the existing Internet infrastructure
may not be able to support the demands placed on it by this growth, which may
result in declining performance and reliability. In addition, Web sites have
experienced interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well as
the usage of our Web site, could grow more slowly or decline.
Increased e-commerce activities may be hindered by Internet security concerns,
which could inhibit the growth of our business.
The need to securely transmit confidential information over the Internet
has been a significant barrier to e-commerce and communications over the
Internet. Anyone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our
operations. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by these breaches. To the
extent that our activities or the activities of third-party contractors involve
the storage and transmission of proprietary information, security breaches
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. Our security measures may not prevent security breaches and
any failure to prevent security breaches may seriously harm our business and
results of operations. We rely on encryption and authentication technology to
provide the security and authentication necessary for secure transmission of
confidential information. Advances in computer capabilities, new discoveries in
the field of cryptography or other events or developments may result in a
compromise or breach of the algorithms we use to protect customer transaction
data. Any compromise of our security could seriously harm our reputation, as
well as our business and results of operations.
Concerns over the security of the Internet and other online transactions
and the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the Web in particular, especially as a means of
conducting commercial transactions. Any compromise of our security could deter
people from using the Internet or using it to conduct transactions that involve
transmitting confidential information.
Risks Relating to This Offering
An active trading market for our common stock may not develop and the trading
price of our common stock may decline below the initial offering price.
There is currently no public market for our common stock. The initial
public offering price of our stock will be determined through negotiations
between us and representatives of the underwriters, and may not reflect the
price that will prevail in the open market. We cannot assure you that an active
trading market for our common shares will develop or be sustained following the
completion of this offering. Further, you may not be able to resell your shares
at or above the initial public offering price.
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The price of our common stock may be volatile, which may lead to losses by
investors and subject us to securities litigation claims.
The market price for our common stock could be highly volatile and could
be subject to wide fluctuations in response to a number of factors, including:
. quarterly variations in operating results;
. investor perception about us and the e-commerce market in general;
. announcements of technological innovations;
. announcements of new products or services by us or our competitors;
. changes in financial estimates by securities analysts; and
. general economic and e-commerce market conditions.
The common stock of many e-commerce companies has experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. In the past, following periods of market
volatility, security holders of these companies have instituted class action
litigation. Class action litigation by security holders could be costly and
divert management's attention, which could harm our business and results of
operations. Declines in the trading price of our common stock could also harm
employee morale and retention, our access to capital and other aspects of our
business.
We have broad discretion in how we use the proceeds of this offering, and we
may not use the proceeds effectively.
Our management has broad discretion over the use of proceeds of this
offering. In addition, our management has not designated a specific use for a
substantial portion of the proceeds of this offering. Accordingly, it is
possible that our management may allocate the proceeds differently than
investors in this offering would have preferred, or that we fail to maximize
our return on the proceeds.
The substantial number of shares that will be eligible for sale in the near
future may adversely affect the market price of our common stock, even if our
business is doing well.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. Our common stock sold in this offering will be eligible for
immediate resale in the public market without restrictions. Shares of our
common stock held by our existing stockholders may also be sold in the public
market in the future pursuant to, and subject to the restrictions contained in
Rule 144 under the Securities Act. After the offering, shares of our common
stock will become available for resale in the public market as shown on the
chart below.
<TABLE>
<CAPTION>
Approximate Number
Days after the Date of of Shares Eligible for
this Prospectus Future Sale Comment
---------------------- ---------------------- -------------------------------------------------------
<C> <C> <S>
Upon effectiveness.. Freely tradable shares sold in this offering
180 days............ Lock-up released; shares saleable under Rule 144,
144(k) or 701
</TABLE>
19
<PAGE>
Provisions of our certificate of incorporation, bylaws and Delaware law could
deter potential acquisition bids that a stockholder may believe are desirable,
and the market price of our common stock may be lower as a result.
Provisions of our certificate of incorporation, bylaws and other existing
agreements may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions include:
. authorizing our board of directors to issue additional preferred
stock;
. limiting the persons who can call special meetings of stockholders;
. prohibiting stockholder actions by written consent;
. prohibiting cumulative voting by stockholders;
. creating a classified board of directors pursuant to which our
directors areelected for staggered three-year terms;
. establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings; and
. limiting the ability of stockholders to remove directors without
cause.
Provisions of Delaware law may also discourage, delay or prevent someone
from acquiring or merging with us. Further, some of our existing contracts may
require a notice of assignment or give other parties the right to terminate the
contract or take other action that could harm our business as a result of a
change of ownership of our company.
20
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control. These
forward-looking statements include statements about our:
. business strategy;
. expectations for future expansion of our Web site;
. anticipated growth in revenues from our various product offerings;
. uncertainty regarding our future operating results;
. anticipated sources of funds, including the proceeds from this
offering, to fund our operations for the 12 months following the date
of this prospectus; and
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
All statements, other than statements of historical facts included in
this prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will," "believe," "anticipate," "intend," "estimate," "expect,"
"project" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. All forward-looking statements speak only as of the date of
this prospectus. You should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by the forward-looking statements we make in this
prospectus are reasonable, we cannot assure you that these plans, intentions or
expectations will be achieved. We disclose important factors that could cause
our actual results to differ materially from our expectations under "Risk
Factors" and elsewhere in this prospectus. These cautionary statements qualify
all forward-looking statements attributable to us or persons acting on our
behalf. We undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information or future events.
21
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $ from the sale of
the shares of common stock in this offering, assuming an initial public
offering price of $ per share and after deducting the underwriting discounts
and estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, our net proceeds will be approximately $ .
At this time, the principal purposes of this offering are to obtain
additional capital and increase our financial flexibility. We presently intend
to use the net proceeds of this offering as follows:
. An estimated $35.0 million to $45.0 million may be used for marketing
and sales activities, particularly advertising campaigns and
promotions, to increase our brand recognition.
. The remainder of the net proceeds will be used to fund operating
losses, for additional working capital and for general corporate
purposes including the introduction of new product categories, the
expansion of existing product categories and the launch of new
specialty stores within the more.com superstore.
As of the date of this prospectus, we have not allocated any specific
amount of the proceeds for the purposes listed above. The amounts actually
expended for the purposes listed above will depend on a number of factors
including the growth of our sales and customer base, the type of efforts we
make to build our brand and competitive developments in e-commerce. As a
result, we cannot specify with certainty the amounts that may be allocated to
the particular uses of the net proceeds of this offering, and the amounts we
actually spend could be outside of the ranges set forth above. Our management
will have significant flexibility and discretion in applying the net proceeds
of this offering. Pending any use, the net proceeds of this offering will be
invested generally in short-term, investment grade, interest bearing
securities.
We may also use a portion of the net proceeds of this offering to invest
in or acquire complementary businesses, services or technologies, or to enter
into strategic marketing relationships with third parties. From time to time,
in the ordinary course of business, we expect to evaluate potential
acquisitions of these businesses, services or technologies and strategic
relationships. At this time, however, we do not have any present
understandings, commitments or agreements with respect to any material
acquisition.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We currently intend to retain any future earnings for future growth and
do not anticipate paying any cash dividends in the foreseeable future.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual, pro forma and pro forma as adjusted basis.
The actual column reflects our capitalization as of December 31, 1999,
without any adjustment to reflect subsequent events or anticipated events.
The pro forma column gives effect to:
. the conversion of all outstanding shares of preferred stock as of
December 31, 1999 into 18,734,474 shares of common stock;
. the issuance in January 2000 of 1,037,345 shares of Series D
mandatorily redeemable convertible preferred stock for $5.0 million
to Phar-Mor.com, Inc. and the conversion of those shares into the
same number of shares of common stock;
. the issuance of 3,399,991 shares of Series E mandatorily redeemable
convertible preferred stock for $25.5 million issued in February 2000
and the conversion of those shares into the same number of shares of
common stock; and
. the issuance in February 2000 of 1,500,000 shares of common stock as
part of the consideration for the acquisition of Comfort Living.
The pro forma as adjusted column gives effect to the application of the
estimated net proceeds from the sale of shares of common stock in this
offering, after deducting the underwriting discount and estimated offering
expenses.
This table should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(amounts in thousands,
except share and per share data)
<S> <C> <C> <C>
Long-term obligations, less current portion.. $ 1,376 $ 1,376 $ 1,376
-------- -------- -------
Mandatorily redeemable convertible preferred
stock, issuable in series, $0.001 par value;
19,287,638 shares authorized, 17,373,310
shares issued and outstanding, actual;
23,287,638 shares authorized, no shares
issued and outstanding, pro forma and pro
forma as adjusted........................... 58,064 -- --
-------- -------- -------
Stockholders' equity (deficit): Series A
convertible preferred stock: $0.001 par
value; 418,840 shares authorized, 398,109
shares issued and outstanding, actual; no
shares issued and outstanding, pro forma
and pro forma as adjusted ................ 10 -- --
Common stock: $0.001 par value; 30,000,000
shares authorized; 5,065,698 shares issued
and outstanding, actual; 42,000,000 shares
authorized; 29,737,508 shares issued and
outstanding, pro forma; 42,000,000 shares
authorized; shares issued and
outstanding, pro forma as adjusted (1).... 5 30
Additional paid-in capital................. 16,698 120,147
Deferred stock-based compensation.......... (4,624) (4,624) (4,624)
Accumulated deficit........................ (39,854) (39,854) (39,854)
-------- -------- -------
Total stockholders' equity (deficit)..... (27,765) 75,699
-------- -------- -------
Total capitalization................... $ 31,675 $ 77,075 $
======== ======== =======
</TABLE>
See next page for footnote.
23
<PAGE>
- --------
(1) Excludes:
. 3,261,345 shares issuable upon the exercise of options outstanding under
our amended and restated 1998 stock option plan as of December 31, 1999
at a weighted average exercise price of $1.40 per share;
. 4,000,000 shares of common stock reserved for issuance under our 2000
stock incentive plan and the 2000 non-employee director option program,
which will become effective upon the effectiveness of this offering;
. 2,000,000 shares of common stock available for issuance under our
employee stock purchase plan, which will become effective upon the
effectiveness of this offering;
. warrants to purchase 20,731 shares of Series A convertible preferred
stock at an exercise price of $1.64 per share. Adjusted for the 3-for-2
common stock split effected August 11, 1998, these warrants are
convertible into 31,097 shares of our common stock at an exercise price
of $1.09 per share; and
. warrants to purchase 48,192 shares of Series C mandatorily redeemable
convertible preferred stock at $1.66 per share that are convertible into
48,192 shares of our common stock.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $22.7 million, or approximately $0.96 per share of common stock.
Pro forma net tangible book value per share represents the amount of tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock
in this offering and the pro forma net tangible book value per share of our
common stock immediately after the offering. After giving effect to our sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and after deduction of the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of December 31, 1999 would have
been approximately $ million, or per share. This represents an
immediate increase in pro forma net tangible book value of per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of per share to purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share before offering...... $0.96
Increase per share attributable to new investors.................
-----
Pro forma net tangible book value per share after the offering.....
-----
Net tangible book value dilution per share to new investors........ $
=====
</TABLE>
The following table sets forth on a pro forma basis as of December 31,
1999 the total consideration paid and the average price per share paid by our
existing stockholders and by new investors, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us at an assumed initial public offering price of per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 23,800,172 % $65,390,683 % $2.75
Series D preferred
stockholders............ 1,037,345 5,000,000 4.82
Series E preferred
stockholders............ 3,399,991 25,499,933 7.50
Common stock issued in
acquisition............. 1,500,000 14,850,000 9.90
New investors............
---------- ----- ----------- ----- -----
Total.................. 100.0% $ 100.0%
========== ===== =========== ===== =====
</TABLE>
Simultaneous with the close of this offering, we will convert an
additional 1,037,345 shares of Series D preferred stock that were issued
subsequent to December 31, 1999. We will also convert 3,399,991 shares of
Series E preferred stock that were also issued subsequent to December 31, 1999.
These preferred shares will convert to common shares on a one for one basis.
The above table reflects the issuance in February 2000 of 1,500,000
shares of common stock as part of the consideration for the acquisition of
Comfort Living, Inc.
This table assumes that no options or warrants were exercised after
December 31, 1999. As of December 31, 1999, there were outstanding options to
purchase a total of 3,261,345 shares of common stock at a weighted average
exercise price of approximately $1.40 per share, 119,740 shares of common stock
reserved for issuance under our amended and restated 1998 stock option plan and
79,289 shares of common stock on an as converted basis issuable upon exercise
of outstanding warrants at a weighted average exercise price of $1.44 per
share.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes to the
consolidated financial statements appearing elsewhere in this prospectus. The
balance sheet data as of December 31, 1998 and 1999 and the statements of
operations for the period from January 9, 1998 (inception) through December 31,
1998 and for the year ended December 31, 1999 are derived from our audited
consolidated financial statements included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- --------------
(in thousands, except per
share data)
<S> <C> <C>
Net revenues.................................... $ 99 $ 2,923
Cost of net revenues(1)......................... 143 3,753
-------- --------
Gross profit (loss)........................... (44) (830)
-------- --------
Operating expenses:
Marketing and sales(2)........................ 2,613 20,480
Product development(3)........................ 1,387 3,254
General and administrative(4)................. 788 5,187
Amortization of deferred stock-based
compensation................................. 404 5,061
-------- --------
Total operating expenses........................ 5,192 33,982
-------- --------
Operating loss.................................. (5,236) (34,812)
Other income (expense):
Interest income............................... 107 482
Interest expense.............................. (40) (355)
-------- --------
Net loss........................................ $ (5,169) $(34,685)
======== ========
Accretion of discount on mandatorily redeemable
convertible preferred stock.................... (101) (1,597)
-------- --------
Net loss available to common stockholders....... $ (5,270) $(36,282)
======== ========
Basic and diluted net loss per share............ $ (5.90) $ (15.74)
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (2.68)
Weighted average shares outstanding used to
compute basic and diluted net loss per share... 893 2,305
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share (unaudited).......................... 13,556
<CAPTION>
December 31, 1999
------------------------------
Actual As Adjusted
--------------- --------------
(unaudited)
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $ 24,655 $
Working capital................................. 17,576
Total assets.................................... 40,161
Borrowings under lines of credit, less current
portion........................................ 1,376 1,376
Mandatorily redeemable convertible preferred
stock.......................................... 58,064 --
Total stockholders' equity (deficit)............ (27,765)
</TABLE>
- --------
(1) Excludes stock-based compensation charges of $11 in 1998 and $31 in 1999.
(2) Excludes stock-based compensation charges of $93 in 1998 and $1,619 in
1999.
(3) Excludes stock-based compensation charges of $39 in 1998 and $1,986 in
1999.
(4) Excludes stock-based compensation charges of $261 in 1998 and $1,425 in
1999.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our selected consolidated financial
data and the consolidated financial statements and related notes included
elsewhere in this prospectus.
Overview
more.com is a leading online health superstore that currently offers its
customers more than 45,000 SKUs in a variety of health product categories at
everyday low prices. Our online health superstore contains over-the-counter
medicine products, health and beauty aids, vision care products, nutritional
supplements, baby products, prescription medications and other health products.
We were formed as a California limited liability company in January 1998 under
the name Nutrition Direct, LLC. We changed our name to GreenTree Nutrition, LLC
in March 1998, and we incorporated in Delaware as GreenTree Nutrition, Inc. in
May 1998. In June 1999, we changed our name to more.com, Inc. From our
inception in January 1998 through May 1998, we had no sales and our operating
activities related primarily to the planning and development of our original
Web site, www.greentree.com, which offered vitamins and nutritional
supplements. Since the opening of our more.com store in August 1999, we have
expanded our infrastructure and focused on expanding distributor and vendor
relationships, attracting customers to our Web site, building our brand and
establishing customer service operations.
In November 1998, we acquired the assets of Acumin Corporation, a
manufacturer and online retailer of personalized vitamins. In addition, in
December 1999, we acquired Clearly Contacts Lenses, Inc., an online store
selling contact lenses. In February 2000, we acquired Comfort Living, Inc., an
online store specializing in products for personal care and comfort, back care
and pain reduction, baby care and maternity and allergy control.
We derive revenues principally from the sale of products and, to a lesser
extent, from paid advertisements on our Web site. We recognize product revenue
upon shipment of products. Product revenues are net of discounts, coupon
redemptions, estimated sales returns and bad debts. Shipping charges are
included in product revenues. We recognize revenue from advertising sales
ratably over the term of the advertising campaigns.
We have employed a business model that includes outsourcing the majority
of our infrastructure to third-party distribution and fulfillment providers.
Through this model, we capitalize on the cost efficiencies achieved by these
third-party providers and minimize our infrastructure and operating expenses,
enabling us to pass significant savings on to our customers. Additionally, by
aligning with third-party providers for distribution and fulfillment, we can
use their significant inventories and distribution capabilities to offer a
broader selection of products at lower costs than traditional brick and mortar
retailers. For all product sales transactions with our customers, we act as a
principal, take title to all products sold upon shipment, bear credit risk and
bear inventory risk of loss for returned products that are not eligible to be
returned to suppliers. These risks are mitigated somewhat through arrangements
with credit card processors and shippers.
For the year ended December 31, 1999, our product sales, including
shipping, accounted for 86.2% of our net revenues. The remainder of our net
revenues for the year ended December 31, 1999, were derived primarily from
advertising. For the period ended December 31, 1998, all of our net revenues
came from product sales.
From the launch of the more.com Web site on August 17, 1999 to January
26, 2000, we engaged in a charter customer promotion in which we offered seven
different product SKUs for $1.00 each along with guaranteed prices and free
shipping during future purchases. The promotion allows charter customers to
27
<PAGE>
purchase those product SKUs that they purchased during the promotion period
forever, at the prices that prevailed during the promotion period, as long as
they purchase each product SKU at least once per year and subject to various
other terms and conditions. The promotion also allows charter customers to
receive free shipping with future purchases, as long as each purchase includes
at least one product SKU that was purchased during the promotion period. The
purpose of the promotion was to drive traffic to our Web site, encourage
frequent repeat purchases and retain customers. As of December 31, 1999, there
were more than 57,000 charter customers as a result of this promotion. Net
revenues from the purchase of the $1.00 promotional items during the year ended
December 31, 1999 were $48,000, with an aggregate negative gross profit of
($226,000). The negative gross profit includes both the cost of goods sold as
well as the associated shipping costs.
Although we experienced increases in product revenues, total number of
orders and customer accounts as a result of the charter member promotion and
the $1.00 days promotion, our average order size, including $1.00 promotion
items, declined from $30.88 in October 1999 to $10.91 in December 1999, and the
average number of products purchased per order decreased from 6.0 to 3.9 during
the same period. However, excluding $1.00 promotion items, in December 1999 our
average order size was $31.42 and the average number of products purchased per
order increased to 6.8.
We have recorded a liability of $1.7 million for estimated future losses
attributable to the charter customer promotion through December 31, 1999. We
also deferred revenue of $120,000 during the year ended December 31, 1999,
which represents the estimated value of this promotion to charter customers.
The deferred revenue will be amortized into revenue over an estimated life of
the benefit to the customer of five years. These amounts were determined based
on our historical records of charter customer transactions, third party
industry data on comparable product life cycles, third party industry data on
consumer purchasing patterns for products sold by us, estimated inflation rates
and the terms and conditions of the charter customer promotion. We will
continue to assess our exposure to loss from this program and adjust our
reserves as necessary.
We have incurred significant losses since our inception and our cost of
sales and operating expenses have increased dramatically. This trend reflects
the costs associated with our formation as a company, as well as our increased
efforts to promote the more.com brand, build market awareness, attract new
customers, recruit personnel, build operating infrastructure and develop and
expand our Web site and related transaction-processing systems. We intend to
continue to invest heavily in building out our Web site and our specialty
stores within our Web site and acquiring and developing complementary
businesses, technologies and strategic alliances. We believe that we will
continue to incur substantial operating losses for the foreseeable future.
Although we have experienced significant revenue growth in recent periods, this
growth may not be sustainable, and we may never achieve profitability.
Results of Operations
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our
operating results, including our negative gross margin and operating expenses
as a percentage of our net revenues, should not be relied upon as an indication
of our future performance.
Period from January 9, 1998 (inception) through December 31, 1998 and the Year
Ended December 31, 1999
Net Revenues
Net revenues consist of product sales, which are net of discounts, coupon
redemptions, estimated sales returns and bad debts, advertising revenue and
customer shipping charges. During 1999, the majority of our net revenues were
derived from product sales. Net revenues increased from $99,000 for the period
ended December 31, 1998 to $2.9 million for the year ended December 31, 1999.
This increase was predominantly
28
<PAGE>
driven by increased product sales that resulted from a broader product
selection, significant growth in our customer base, repeat purchases from our
existing customers and $400,000 in advertising revenue. This increase in
product sales also resulted from the expansion of our Web site and the addition
of our Acumins specialty store in November 1998. The acquisition of our Clearly
Contacts specialty store in December 1999 did not have a significant impact on
1999 results. Sales returns and bad debts for the period ended December 31,
1998 and the year ended December 31, 1999 were insignificant.
Cost of Net Revenues
Cost of net revenues consists primarily of the cost of products sold and
related shipping cost. Cost of net revenues increased from $143,000 for the
period ended December 31, 1998 to $3.8 million for the year ended December 31,
1999 as a result of the significant increase in our net revenues. Gross profit
margin improved from (44.4)% for the period ended December 31, 1998 to (28.4)%
for the year ended December 31, 1999. The improvement in gross profit margin
resulted from changes in our cost structure for shipping functions and
increased sales volume. This improvement was also the result of gross profit
derived from higher margin advertising revenue. While we plan to increase gross
margin in the future by employing more selective pricing and merchandising
strategies, increasing advertising revenues and emphasizing the sale of higher
margin products, we may not be able to improve our profit margins.
Marketing and Sales Expenses
Marketing and sales expenses consist primarily of advertising and
promotional expenses, as well as fulfillment fees, credit card processing fees,
outsourced customer service fees, affiliate commissions and payroll associated
with our advertising, marketing and customer service personnel. Marketing and
sales expenses increased from $2.6 million for the period ended December 31,
1998 to $20.5 million for the year ended December 31, 1999. This increase was
primarily attributable to increased fulfillment expenses due to increased sales
volume, credit card processing fees associated with increased product sales,
the provision for estimated losses associated with the charter customer
promotion and the expansion of our online and offline advertising campaigns. In
addition, beginning with the launch of our Web site in August 1999, we
experienced higher customer service costs as a result of an increase in the
overall number of customers. The increase in our marketing and sales expense
was also due, to a lesser extent, to increased personnel and related expenses
required to implement our marketing strategy as well as the amortization of
deferred fulfillment costs associated with the issuance of common stock to
Bergen Brunswig Drug Company, one of our fulfillment providers. We intend to
continue to pursue an aggressive branding and marketing campaign and,
therefore, expect marketing and sales expenses to continue to increase
significantly in future periods.
Product Development Expenses
Product development expenses consist primarily of personnel and other
expenses associated with maintaining our Web site. They also consist of related
facilities costs and depreciation and amortization of capitalized Web site
development and enhancement costs, purchased software and computer equipment.
Product development expenses increased from $1.4 million for the period ended
December 31, 1998 to $3.3 million for the year ended December 31, 1999. This
increase was primarily attributable to increased staffing in our information
systems, product management, Web site maintenance and content groups. The
increase was also attributable to the increased depreciation of capitalized
costs related to developing and enhancing the features and functionality of our
online health superstore and transaction-processing systems and
telecommunications infrastructure. Maintenance of information technology and
telecommunications infrastructure is expensed as incurred.
29
<PAGE>
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional fees, amortization of intangible assets and other
general corporate expenses. General and administrative expenses increased from
$788,000 for the period ended December 31, 1998 to $5.2 million for the year
ended December 31, 1999. This increase was primarily attributable to additional
administrative personnel, increased professional fees, increased amortization
of intangible assets associated with the acquisitions of Acumin Corporation and
Clearly Contacts, expanded facilities and increased general corporate expenses
attributable to the growth in our business. We expect general and
administrative expenses to continue to increase as we expand our sales,
increase our staff and incur additional costs related to the growth of our
business and our operations as a public company.
Amortization of Deferred Stock-Based Compensation
Deferred stock-based compensation represents the difference between the
exercise price of stock option grants and the deemed fair value of our stock at
the time of the grants. These amounts are amortized over the vesting period for
the grants, which is typically four years. Amortization of deferred stock-based
compensation increased from $404,000 for the period ended December 31, 1998 to
$5.1 million for the year ended December 31, 1999. This increase was
attributable to the grant of stock options to new employees as well as the
increase in the difference between the grant price and the deemed fair market
value of our common stock. At December 31, 1999, we had approximately $4.6
million in deferred stock-based compensation that will be amortized through
December 2003.
We expect to record additional deferred stock-based compensation for the
first quarter ended March 31, 2000 and future quarters related to stock grants,
the actual amount of which will depend on the number of options granted during
such quarter and their exercise prices.
From the period from January 9, 1998 (inception) to December 31, 1998,
approximately $11,000 of stock-based compensation charges are excluded from the
cost of net revenues, approximately $93,000 of stock-based compensation charges
are excluded from marketing and sales expenses, approximately $39,000 of stock-
based compensation charges are excluded from product development expenses and
approximately $261,000 of stock-based compensation charges are excluded from
general and administrative expenses.
For the year ended December 31, 1999, approximately $31,000 of stock-
based compensation charges are excluded from the cost of net revenues,
approximately $1.6 million of stock-based compensation charges are excluded
from marketing and sales expenses, approximately $2.0 million of stock-based
compensation charges are excluded form product development expenses and
approximately $1.4 million of stock-based compensation charges are excluded
from general and administrative expenses.
Interest Income (Expense)
Net interest income (expense) increased from $67,000 for the period ended
December 31, 1998 to $127,000 for the year ended December 31, 1999. This
increase was largely due to a higher average investment balance due to
issuances of preferred stock in October 1998 and October 1999.
Net Loss
Our net loss increased from $5.2 million for the period ended December
31, 1998 to $34.7 million for the year ended December 31, 1999. This increase
in net loss was due to increased losses on product sales, increased operating
expenses, including an increase in amortization of goodwill, and deferred
stock-based compensation.
30
<PAGE>
Quarterly Results of Operations
The following table presents unaudited quarterly results of operations in
dollars, for the year ended December 31, 1999. This information has been
derived from and prepared by us on a basis consistent with our audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, which management considers necessary for a
fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
(unaudited)
(amounts in thousands)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues............................ $ 162 $ 260 $ 666 $ 1,835
Cost of net revenues.................... 206 323 756 2,468
-------- -------- ------- --------
Gross profit (loss)................... (44) (63) (90) (633)
-------- -------- ------- --------
Operating expenses:
Marketing and sales................... 1,030 1,888 7,724 9,838
Product development................... 620 1,010 101 1,523
General and administrative............ 752 866 1,284 2,285
Amortization of deferred stock-based
compensation......................... 87 458 560 3,956
-------- -------- ------- --------
Total operating expenses............ 2,489 4,222 9,669 17,602
-------- -------- ------- --------
Operating loss.......................... (2,533) (4,285) (9,759) (18,235)
Interest income....................... 89 57 34 302
Interest expense...................... (14) (12) (182) (147)
-------- -------- ------- --------
Net loss................................ $ (2,458) $ (4,240) $(9,907) $(18,080)
======== ======== ======= ========
</TABLE>
Our quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future based on a number of factors, not all of
which are in our control.
Liquidity and Capital Resources
Due to our business model, we have generally operated with limited
working capital. Most of our customers pay for their purchases by credit cards
over the Internet, and as a result, we typically receive payment for shipments
within one to four business days of product shipment. Additionally, we rely on
our distribution and fulfillment providers to manage inventory. We typically
pay our distributors within seven days after the products have been shipped. As
a result of these factors, our business does not experience the level of
capital requirements faced by traditional brick and mortar retailers who must
maintain large inventories.
Since our inception, we have financed our operations primarily through
private sales of our equity securities, and to a lesser extent, debt from
financial institutions and vendors. Cash used in operating activities was $4.0
million for the period ended December 31, 1998 and $22.0 million for the year
ended December 31, 1999. Cash used in operating activities in 1998 and 1999 was
primarily attributable to the development and launch of our Web site, the
expansion of our infrastructure, our marketing campaigns and operations. Cash
used in investing activities was $2.1 million for the period ended December 31,
1998 and $5.5 million for the year ended December 31, 1999. Cash used in
investing activities was primarily attributable to purchases of fixed assets
and to a lesser extent, the acquisition of Clearly Contacts, the purchase of
customer lists from VitaSave and the purchase of the more.com domain name. Cash
provided by financing activities was $14.6 million for the period ended
December 31, 1998 and $43.6 million for the year ended December 31, 1999. We
anticipate that we will have negative cash flows for the foreseeable future. We
also currently anticipate that we will invest
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approximately $6.0 to $8.0 million in capital expenditures over the next 12
months to expand our infrastructure. These expenditures will include computer
hardware and enhancements to our Web site to improve functionality and
navigation, incorporating features that are intended to improve the customer
shopping experience and the scalability and performance of our Web site. We
expect to fund most of these expenditures with debt financing. Currently, we
are negotiating with a financial institution for a $6.0 million term loan to be
collateralized by future equipment purchases.
In January 2000, we entered into a strategic marketing arrangement and
issued 1,037,345 shares of Series D mandatorily redeemable convertible
preferred stock at $4.82 per share resulting in net cash proceeds of $5.0
million. Given the timing between this issuance and our public offering, the
difference between the value of our common stock and the issuance price of
$4.82 per share represents a deemed discount on the mandatorily redeemable
convertible preferred stock that will be accounted for as deferred marketing
costs and amortized to marketing and sales over the five year term of the
arrangement.
Upon the closing of this offering, all outstanding shares of Series E
mandatorily redeemable convertible preferred stock will be converted on a one-
for-one basis into shares of our common stock. For the quarter ending March 31,
2000, we will record a non-cash preferred stock dividend to reflect the
beneficial conversion feature as a result of the difference between the
issuance price of the Series E mandatorily redeemable convertible preferred
stock and the midpoint of the assumed initial price range of the common stock
in this offering.
In February 2000 we acquired Comfort Living, Inc. for $2.5 million cash
and 1,500,000 shares of our common stock.
We believe that the net proceeds from this offering, along with the
proceeds of our Series D and Series E convertible preferred stock financings,
will be sufficient to satisfy our working capital requirements through the next
12 months. Even if additional funds are not required, we may seek additional
equity or debt financing. We may not be able to obtain additional funds on
acceptable terms, if at all.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires all costs related to the development of internal use software other
than those incurred during the application development stage to be expensed as
incurred. Costs incurred during the application development stage are required
to be capitalized and amortized over the estimated useful life of the software.
We adopted SOP 98-1 on January 1, 1999. Adoption did not have a material effect
on our consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. We adopted SOP 98-5 on January
1, 1999. Adoption did not have a material effect on our consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, or FAS 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 133, as amended by FAS 137,
is effective for fiscal years beginning after June 15, 2000. FAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. We do not expect that adoption of FAS 133 will have
a material impact on our consolidated financial position or results of
operations as we do not currently hold any derivative financial instruments.
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Year 2000 Compliance
We are aware of year 2000 compliance issues and problems relating to
hardware and software systems incorrectly distinguishing 21st century dates
from 20th century dates. Year 2000 issues could affect both our products and
services as well as the hardware and software systems used, operated or
maintained by us. To date, we have not experienced any year 2000 problems
relating to our hardware or software systems or operations.
We have completed our year 2000 compliance review. We conducted a full
review of our systems and infrastructure and believe that our internal
infrastructure, including our non-information technology systems, is year 2000
compliant. We obtained assurances from our primary vendors from whom we
purchase hardware and software products, as well as from our distributors and
fulfillment providers who provide and distribute the health products we sell on
our Web site, that they are year 2000 compliant. Based on our internal tests
and the representations of our primary vendors, distributors and fulfillment
providers, we do not believe we will incur material losses relating to the
upgrade or replacement of our or their systems and infrastructure.
To date, our expenses in connection with identifying and addressing year
2000 compliance issues have been approximately $17,000. These expenses were
generally related to the operation costs associated with time spent by our
employees in the evaluation process and year 2000 compliance in general. We
cannot assure you that our total costs will be limited to these amounts. We
could incur additional costs in addressing any latent year 2000 issues, which
could have a material adverse affect on our business.
We believe we have identified and resolved all year 2000 problems that
could materially adversely affect our business. We do not anticipate material
year 2000 compliance costs in the future. However, we believe that it is not
possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected, and we cannot accurately
predict the extent to which latent year 2000 problem-related failures may
affect us. In the event we discover latent year 2000 problems in our hardware
and software systems or those of our primary vendors, distributors and
fulfillment providers, we will attempt to resolve these problems by making
appropriate modifications on a timely basis. However, we have no other
contingency plan nor have we surveyed our primary vendors, distributors and
fulfillment providers to assess whether they have developed any specific
contingency plan to address the effect of any latent year 2000 problems. We
cannot assure you that we or our primary vendors, distributors and fulfillment
providers will be able to resolve any latent year 2000 problem before
significant losses are incurred.
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BUSINESS
Overview
more.com is a leading online health superstore that currently offers its
customers more than 45,000 SKUs in a variety of health product categories at
everyday low prices. In addition to a large selection of the most popular
health products, we also offer additional products through our specialty
stores, or stores within the more.com superstore, including Acumins for
nutritional supplements, GreenTree for natural products, Clearly Contacts for
vision products, Comfort Living for baby, back and healthy home products and
Pharmacy for prescription drugs. We designed our Web site with an intuitive,
easy-to-use shopping interface that enables our customers to quickly find and
purchase the products they need in our online health superstore. To offer this
wide selection of products at everyday low prices while minimizing our
operating costs, we have adopted a business model in which we outsource the
majority of our operating infrastructure so that we can focus on our customers'
shopping experience and easily add new products and specialty stores. Through
our distribution and fulfillment providers, we will have the opportunity to
offer more than 300,000 SKUs. As of December 31, 1999, we have sold our health
products to more than 57,000 customers.
Industry Background
The Growth of the Internet and E-Commerce
The Internet has emerged as a significant interactive medium for
worldwide communication, instant access to information and e-commerce.
International Data Corporation estimates that the number of Internet users
worldwide will increase from more than 212 million at the end of 1999 to more
than 510 million by the end of 2003. The unique characteristics of the Internet
have created a number of advantages for online retailers and have dramatically
affected the manner in which companies market and sell goods and services. In
contrast to traditional brick and mortar retailers, the Internet allows online
retailers to offer a broad and evolving selection of merchandise to consumers
worldwide, while enabling consumers to shop at their convenience without
leaving their homes or offices.
Increasing numbers of consumers are engaging in e-commerce as online
retailers take advantage of technological improvements associated with the
Internet that allow the integration of product information, intelligent product
recommendations and near real-time customer service. This integration enables
online consumers to easily search for product information and make informed
purchase decisions. International Data Corporation estimates that the number of
customers making purchases on the Internet will grow from 48 million in 1999 to
183 million in 2003. As a result, International Data Corporation predicts the
total value of goods and services purchased annually by consumers from
businesses over the Internet will increase from approximately $31.0 billion in
1999 to approximately $177.7 billion in 2003.
The Internet has also become a compelling medium for advertisers. Online
retailers can obtain demographic and behavioral data about customers in real
time, increasing opportunities for targeted marketing and personalized services
that improve the conversion of shoppers to buyers at the point of sale. The
Internet allows advertisers to cost effectively interact with specific customer
groups to determine the effectiveness of targeted advertising campaigns. These
methods generally are not economically viable using traditional media.
Forrester Research estimates that the amount of Internet advertising worldwide
will grow from approximately $3.3 billion in 1999 to approximately $33.1
billion by 2004.
The Health Product Market
Healthcare is one of the largest sectors of the U.S. economy,
representing approximately 14% of the gross domestic product or over $1.0
trillion in annual spending. Furthermore, the purchase of health products is
typically less sensitive to fluctuations in the economy because people place a
high priority on their health and well being. This sector is expected to become
even more important to the U.S. economy as people live longer
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and healthier lives. The U.S. Bureau of Census expects the population over the
age of 45 to increase from 94 million in 1999 to 118 million by 2010. As a
result, the market for health products is expected to grow dramatically.
Forrester estimates that e-commerce transactions over the Internet for health
products will grow from $440 million in 1999 to $11.0 billion in 2003. Health
product categories in the consumer health product market include the following:
. Medicine chest--over-the-counter medicine products such as allergy
and sinus products, cough and cold remedies, digestive aids, pain and
fever relief products, sleep aids and stimulants and smoking
cessation products;
. Face and body care--health and beauty aids such as bath and skin care
products, eye and ear care, feminine hygiene, foot care, hair care,
oral care, sex and contraception products, shaving products and
deodorants;
. Vision care--contact lenses, contact lens products and prescription
and non-prescription eyewear;
. Nutrition and wellness--supplements used to promote health and well
being such as vitamins, minerals, herbs, homeopathic remedies and
wellness teas;
. Baby--consumable and durable baby products such as diapers, wipes,
infant formulas, strollers, car seats and nursing supplies;
. Healthy environment--products used primarily in the home to improve
air quality, comfort or the overall environment such as products for
allergy sufferers, air purifiers and humidifiers, water filters and
ergonomic supplies and furniture;
. Home healthcare--typically special-use or hard-to-find products
designed for use in the home by people with particular assisted
living and healthcare needs such as crutches, wheelchairs, shower
rails, convalescent bathroom aids, walkers, canes, electric scooters
and ergonomic supports;
. Cosmetics--products that promote personal beauty such as makeup,
fragrances and other high-end beauty products;
. Diet and fitness--weight loss and weight management products, sports
nutrition products, personal fitness equipment and accessories of all
kinds, as well as products people consume to promote their overall
health;
. Medical supplies--medical diagnostic kits such as home pregnancy
tests and HIV tests, and medical supplies such as glucose strips for
diabetics; and
. Pharmacy--prescription medications for both chronic and acute
conditions.
The Online Health Superstore Market Opportunity
Health products are ideally suited for e-commerce, and consumers can
enjoy numerous benefits by purchasing these products over the Internet. Those
particular attributes of health products and the health product market that
make the Internet an ideal mechanism for their purchase include:
Wide Variety of Products for a Wide Variety of Health Needs. Due to shelf
space limitations, traditional health product retailers typically carry only a
small fraction of these products. In contrast, online retailers do not face
these same space limitations. The addition of new products to an online store
and to the online retailer's distribution network is much less costly than it
is for traditional brick and mortar retailers. As a result, consumers are more
likely to find the products they need in stock at an online store.
Recurring Product Purchases. Many health products are consumable
necessities that require frequent repurchase by customers. Online health
product retailers can use technology to track a customer's frequent and
recurring purchases of consumable items and can customize product offerings to
support the repeat purchasing habits of customers.
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Rapidly Changing Product Requirements. Health product needs of consumers
may vary for many reasons and can fluctuate by season or geography. Health
product manufacturers continuously seek new ways to gain an advantage over
their competitors to meet these needs. Traditional brick and mortar health
product retailers are typically less able to change the format of their stores
to meet changes in supply and demand, and due to geographic limitations they
cannot easily span large geographic areas. The limited space available in a
traditional brick and mortar retail store constrains merchandising flexibility.
In addition, traditional brick and mortar retailers must make significant
investments in inventory that may become outdated. Online health product
retailers can easily overcome these limitations by providing a single location
where customers can purchase all their health products and changing their Web
sites to meet the evolving demands of customers and manufacturers.
Information Intensive Nature of Health Products. Health products
generally are information intensive, as the government and consumers require a
great deal of information regarding each product's use, potential side effects
and ingredients. Historically, healthcare information has been tightly
controlled or difficult to access or locate. More recently, consumers and
healthcare professionals have begun to openly debate the attributes and
benefits of different health products, placing more information demands on
health product retailers. Traditional brick and mortar retailers face
challenges in hiring, training and maintaining knowledgeable sales staff. The
Internet has enabled consumers to gain more control over their own care by
providing easier access to health product information and improving
communication between people with similar health issues and interests. Online
health product retailers have the ability to provide consumers with a trusted
source for healthcare information and can personalize this information to each
customer's unique interests. In addition, online health product retailers'
sales staffs can more easily communicate with a larger number of customers
using the Internet.
Consumer Privacy Requirements. Many health product purchases can make a
customer uncomfortable because they can reveal very personal information about
the purchaser. Customers may be unwilling to ask store employees questions
regarding these products to avoid embarrassment. As a result, the customer may
purchase the incorrect product or avoid purchasing the product altogether. The
Internet allows Web users to shop privately for personal products and ask
questions about these products without embarrassment.
While some online retailers offer health products, we believe that none
has fully met the broad needs of consumers. In particular, we believe that
consumers are seeking a single, trusted online store where they can find all
the health products they need, including hard to find or specialized health
products. We believe consumers want a health superstore that is electronically
personalized to their unique health product needs and that enables them to
quickly make recurring health product purchases.
The more.com Solution
more.com is a leading online health superstore that currently offers its
customers more than 45,000 SKUs in a variety of health product categories at
everyday low prices. Our online health superstore contains over-the-counter
medicine products, health and beauty aids, vision care products, nutritional
supplements, baby products, prescription medications and other health products.
Customers want to reduce their shopping time and increase the likelihood of
finding exactly what they want, no matter how specialized their need. We
satisfy this desire by providing a convenient, easy-to-use Internet shopping
experience that simplifies the purchase of health products and access to expert
information. For those customers with special health needs, we currently offer
five distinct specialty stores that are built around product categories,
including Acumins, GreenTree, Clearly Contacts, Comfort Living and Pharmacy. As
a result, our customers can shop for their daily necessities more efficiently,
conveniently and economically than traditional brick and mortar retailers. We
can provide these shopping advantages while maintaining competitive prices
because we operate based on a business model in which we outsource the majority
of our operating infrastructure, such as distribution and fulfillment of
product orders, to third-party providers. The key elements of our solution
include:
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Broad product selection. In terms of both product breadth and depth, we
believe we offer the largest selection of health products for sale directly to
consumers. We currently offer more than 45,000 SKUs and have access to over
300,000 health product SKUs through alliances with third-party providers. We
believe this is significantly more than the selection of traditional brick and
mortar drugstores. Because we outsource the majority of our operating
infrastructure, we can make adjustments quickly within existing product lines
and add new product categories or specialty stores easily and rapidly without
significant capital investment.
Superior convenience. Our online health superstore provides customers
with an intuitive, easy-to-use shopping interface that is available 24 hours a
day, seven days a week and may be reached anywhere that customers can access
the Internet. Our customers can quickly and privately find the products they
are looking for using our fast, intuitive search technology and proprietary
QuickShop(TM) process, which allows customers to choose from more than 2,000 of
the most popular SKUs in the 50 most popular product categories sold in our
store. Additionally, we allow customers to search for and compare products
based on attributes they find important such as price or significant features,
and personalize their experience in our online health superstore by creating
shopping lists to simplify the process of making recurring purchases. We
believe that the enhanced functionality of our Web site greatly improves the
overall customer experience and encourages repeat purchases.
Competitive pricing. We attempt to offer the lowest prices among online
retailers for the most commonly purchased items in our online health
superstore. For the remainder of products we sell, we offer our customers
value-based pricing. To ensure that we offer low prices in comparison with
other online stores, we frequently review ACNielsen reports that rank the top
selling health products. We then use specialized third-party software to track
the online prices for those products each week and set our prices at or below
those of online competitors. Additionally, we strive to set our prices 20%
below those of traditional brick and mortar retailers by consistently
monitoring pricing data supplied by our distribution and fulfillment providers.
Information focused on the customer purchase decision. We provide our
customers with information focused on enabling them to make informed product
purchasing decisions. Customers can use the Resource Center portion of our Web
site to find products related to specific health conditions or concerns. In
doing so, we give our customers the ability to rapidly access an extensive list
of health products that may meet their specific health needs. Within the
Resource Center, we also offer customers Buying Guides comprised of brand-
agnostic, detailed product information regarding product ingredients, efficacy
and use to assist in the purchase of health products. We currently provide
information on more than 100 health conditions through our in-house team of
health editors, an independent network of contributing editors and third-party
content licenses. We have a sixteen-member health advisory board, comprised of
physicians, nutritionists and other practitioners and academics, that guides
our use of health information.
World-class customer service. To build customer loyalty, we seek to
provide superior customer service throughout the shopping experience. We are
committed to customer satisfaction and regularly upgrade our services to ensure
total customer care. Every page of our Web site contains a customer service
link, "May We Help," which outlines store policies, provides answers to
frequently asked questions and gives our customers a direct online link to our
customer service agents. We provide free pre- and post-sales support via e-
mail, toll-free telephone service and instant chat during extended business
hours. We believe we are the only online health store that offers real-time
Web-based customer support incorporating full browser-synchronization
capability. This technology allows our customer service agents to control a
customer's Web browser and assist the customer in quickly finding products or
information to make a purchase decision.
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The more.com Strategy
Our objective is to be the world's leading online health superstore. Key
elements of our strategy to achieve this objective include:
Offer the World's Largest Selection of Health Products. Selection is a
key driver of commerce of all kinds, and to become the leading online health
superstore, we intend to offer the world's largest selection of consumer health
products. Unlike traditional brick and mortar retailers, the number of health
products we offer is not limited by shelf space or store size. As a result of
our business model, the incremental cost to us of offering new products is
small. As part of our strategy for offering the largest selection of health
products, we intend to open new specialty stores frequently over the next few
years. These specialty stores are dedicated to providing products to customers
with special interests or conditions. For example, we intend to offer contact
lenses and other vision products through our Vision Center and baby products in
our Baby Center.
Maximize Customer Value through Low Prices and Shopping Convenience. We
intend to maximize the value our customers recognize from purchasing products
through our online health superstore. In pursuit of this goal, we attempt to
offer our products at prices lower than our online and traditional brick and
mortar competitors. We believe that by continuing to use new technologies that
simplify our customers' recurring purchases, we can maximize value to our
customers. We enable customers to quickly reorder their favorite products
through the use of shopping lists and our proprietary QuickShop technology. We
believe our existing and future technology will continue to improve our
customers' shopping experience, increasing customer loyalty to our Web site and
resulting in more frequent and larger purchases by our customers.
Pursue a Business Model that Minimizes Operating Costs. Our business
model allows us to focus on the customer shopping experience and add new
products and specialty stores while minimizing our operating costs. Our
fulfillment providers are responsible for supply chain management, inventory
management and product shipping. We closely integrate our information systems
with those of our fulfillment providers giving us real-time insight into
product availability, customer order status, product costs and other purchasing
and accounting information. By eliminating a large portion of the normal
logistics of the typical health product retailer, we have substantially lowered
our overall operating costs.
Build Brand Recognition to Drive New Customer Acquisition. Our top
marketing objective is to make the more.com brand synonymous with the best
place to purchase health products. We attempt to drive new customers to our Web
site through the use of both traditional media, including radio and television
advertising, and online media. Our marketing programs place special emphasis on
cities that have the highest concentration of Internet users as well as on
particular demographic markets that are important to building our brand,
including a focus on serving the health needs of women. This demographic
segment represents an increasingly significant and fast-growing segment of
Internet users and health-conscious consumers. According to Jupiter
Communications, women are expected to represent the majority of U.S. Internet
users by the end of 2003. Jupiter Communications also estimates that women are
responsible for over 80% of healthcare decisions and over 60% of healthcare
purchases. We believe that women between the ages of 18 and 49 represent over
70% of our customer base. Additionally, over one-third of our customers are
female purchasers with families.
Continuously Improve Our Customer Shopping Experience. We actively seek
customer feedback regarding the shopping experience customers' have when using
our superstore. We poll more than 1,000 customers on a monthly basis to
determine overall customer satisfaction, identify problem areas for improvement
and opportunities for store expansion and enhancement. Similarly, we provide a
feedback card with every product shipment to encourage customer feedback. In
addition, we have developed a proprietary, scalable architecture designed to
support fast, secure and reliable online shopping. This architecture enables us
to personalize every customer's experience in our health superstore based on
their interests, product needs and past purchases.
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Expand Key Alliances and Pursue Selected Acquisitions. We intend to
expand our alliances with leading online health sites and health product
manufacturers. These relationships are contractual in nature. Our alliances
with leading online health sites, such as Dr. Koop at Go.com and drDrew.com,
have resulted in numerous co-promotion, content sharing and revenue sharing
arrangements. In addition, we offer an affiliate program to third-party Web
sites. This affiliate program enables these Web sites to send customers to our
site and in return receive a portion of the revenues those customers generate.
We currently have more than 13,000 members in the more.com affiliate program
and we intend to rapidly expand this program. Our alliances with leading health
product manufacturers such as Durex, Johnson & Johnson, Procter & Gamble and
Revlon have resulted in product sampling programs, media advertising and inbox
promotions. We also intend to pursue selected acquisitions of additional
businesses, products or technologies that we believe will complement our
current or future business, such as the Comfort Living acquisition.
Shopping at more.com
We have combined our commitment to providing enormous product selection
with easy-to-use Web site navigation capabilities that allow our customers to
quickly specify and find the particular product or health solution for which
they are shopping. Shoppers at our Web site are greeted by a home page that is
designed to anticipate the way people shop for various types and categories of
health products. Customers can choose between browsing our entire selection of
health products in our online health superstore or entering one of our five
distinct specialty stores that are built around specific product categories.
Specialty Stores. We currently have integrated the following five
specialty stores within the more.com superstore. These stores offer an
extensive selection of products for specific health interests or conditions.
. Acumins--our specialty store that contains our proprietary line of
nutritional supplement products. The Acumins SmartSelect(TM) process
enables each customer to create a customized mix of vitamins,
minerals and herbs. The process reduces the number of pills that need
to be taken daily to receive the same nutritional benefits. Acumins
is priced to be an attractive value when compared to purchasing the
combined ingredients separately. Acumins nutritional supplements are
the first in a series of personalized health products to be offered
in our Acumins store.
. GreenTree--our specialty store that contains 23 natural product
categories that would typically be found in natural products
supermarkets and supplements specialty stores. These products include
vitamins, nutritional supplements and homeopathic remedies.
. Clearly Contacts--our specialty store that currently offers a full
spectrum of all brand-name contact lenses and associated accessories
and products. We plan to expand the current offering to include
designer sunglasses and prescription eyeglasses as we continue to
build out our Vision Center.
. Comfort Living--our specialty store that offers higher priced, high
margin products that attempt to make customers feel better, safer and
more comfortable. This store currently offers products for such
categories as baby and maternity, back care and healthy home.
. Pharmacy--our specialty store that combines the flexibility of an
online pharmacy with the convenience of 2,000 Good Neighbor
Pharmacies that offer same day pickup and, where available, home or
office delivery. This delivery flexibility enables our customers to
either receive their prescription drugs through our current
distribution network for chronic conditions or through a Good
Neighbor Pharmacy for immediate pharmaceutical needs. Our pharmacy
provider and all of the Good Neighbor Pharmacy stores are included in
Bergen Brunswig's PlusCare Managed Care Network through which we have
access to 80 million individuals covered by 70 healthcare payors.
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Web Site Navigation. We strive to improve our customers' shopping
experience by designing our Web site navigation to enable customers to easily
and quickly make informed purchases among the broad selection of health
products we offer. We have the following inter-related navigation tools and
information features on our Web site:
. QuickShop--our proprietary QuickShop technology that allows customers
to choose from more than 2,000 of the most popular SKUs in the 50
most popular product categories sold in our online store. Unlike
shopping for books or computers online, customers shopping for health
products may want to purchase an entire basket of goods in one visit.
Using QuickShop, customers can screen products based on both brands
and unique product attributes to create a customized basket of their
most frequently ordered items in just four simple steps. Once a
customer has used QuickShop and saved the purchase history in the
shopping list, the customer can easily return to QuickShop the next
time the customer wishes to purchase that item.
. Shopping Lists--a tool that enables customers to retrieve a list, or
multiple lists, of their previous purchases made at our Web site.
Customers can personalize their shopping lists by editing and adding
products, and they can re-order previously purchased items or add a
particular item to their shopping cart in a single click.
. Shortcuts--a list of the most popular health product categories that
allows the customer to go immediately to the specific product page.
. Search--a shopping friendly tool, with links to related products and
related topics, as opposed to a research tool. Our search tool
differs from many others on the Web in that if no exact product match
is found, our search tool relays a related answer and avoids a "no
products found" result.
. My Account--the personal shopping information of individual customers
is securely stored in My Account. The information required to
checkout is an e-mail address, a password, a billing and shipping
address and a valid credit card number. All of this information is
maintained in a secure format and remains available for a customer's
future access. Customers are given the option to indicate the name by
which they would like to be greeted, their shipping options and their
desire to receive occasional promotional information and health
newsletters.
. Shopping Cart--a section of every page on the site that contains a
summary shopping cart, where the customer can see the number of items
selected, the total amount and the total savings of all the items
currently in the shopping cart. Customers can either check-out from
this shopping cart or get more detailed information about the items.
. Product Packaging Information--a section of our Web site that
contains information on almost every product available on our site
that can be viewed in an expanded format where package information,
including directions and warnings, can be read next to an enlarged
photograph of the product.
The Resource Center. Customers can use our Resource Center to access
information that enables them to make a more informed purchase decision. The
Resource Center allows customers to navigate the site from a conditions or
health concerns perspective, which is usually unavailable in traditional brick
and mortar stores. The Resource Center contains:
. Health Centers--centers that organize products and information
together around particular conditions or demographics and
. Buying Guides--links to category-based articles that offer brand-
agnostic, in-depth consumer information regarding product
ingredients, efficacy and use to support purchase decisions.
Customers can add products to their shopping cart directly from the
Buying Guides or click on a link to the appropriate product page.
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Content Services. We offer a variety of content services free to anyone
who visits our Web site. This content includes alphabetical listings of various
medical conditions, herbs and vitamins with links to related products offered
on our Web site. We also offer a daily newsletter, Health Headline News, which
contains major news stories related to health and well being. Additionally, our
Web site offers question and answer columns addressing our customers' nutrition
and skin care needs.
In addition to in-store content, we offer a twice-monthly health
newsletter that is available to all our customers. The newsletter contains news
stories and product information that we believe to be of particular interest to
the customer. We are able to provide this content through our in-house team of
health editors, a freelance network of contributing editors and an active
content licensing effort.
Health Advisory Board. We have a 16-member health advisory board
comprised of physicians, nutritionists and other practitioners and academics in
the healthcare field. We consult with our health advisory board on our
programs, strategies, content and overall store development.
Distribution Network
We use a business model in which we outsource the distribution and
fulfillment of a vast majority of our products, which is fundamental to our
efficiency and long-term profitability goals. Our current third-party
fulfillment providers include Bergen Brunswig Drug Company for health products,
Lens Express for contact lenses and Medi-Mail for prescription drugs. These
fulfillment providers maintain product inventory and pick, pack and ship our
customers' orders. We believe this business model enables us to cost-
effectively deliver the largest selection of products to our customers
nationwide. For example, Bergen Brunswig, which currently carries a catalog of
more than 300,000 SKUs, constructed an Internet direct-to-consumer fulfillment
center adjacent to its Louisville, Kentucky distribution center. This facility
is located less than one mile from a major United Parcel Service package
distribution hub. This allows us to minimize shipping costs and reduces the
time needed to deliver products to our customers.
Orders placed by our customers are transmitted directly to the
appropriate fulfillment provider through integrated and secured electronic
connections to each of our fulfillment providers. These orders are
automatically fed into the fulfillment provider's system where they are
processed and sent to a warehouse to be picked, packed and shipped. We strive
to process, pack and ship our customers' orders within 24 hours from the time
these orders are placed on our Web site. This connection with each of our
fulfillment providers also provides us with data on inventory quantities,
inventory location, shipping status, shipper tracking numbers and the estimated
time of arrival for back-ordered products. We offer a variety of shipping
options, including next-day delivery for orders received during the business
week, through Airborne Express, United Parcel Service and the U.S. Postal
Service. We have established various quality assurance programs at Bergen
Brunswig, Lens Express and Medi-Mail facilities to monitor quality control and
order fulfillment.
Bergen Brunswig Drug Company
Beginning in March 1999, we established a strategic alliance with Bergen
Brunswig Drug Company, a wholly owned subsidiary of Bergen Brunswig
Corporation, with the intent that Bergen Brunswig would act as our primary
fulfillment provider for the health products we offer on our online health
superstore. With $17.0 billion in annual revenues, Bergen Brunswig Corporation
is one of the nation's leading supply-chain management companies, providing
consumer health products, pharmaceuticals, medical-surgical supplies, home
healthcare specialty products, as well as information management solutions and
outsourcing services to retail pharmacies, managed care organizations and other
institutions across the United States.
In July 1999, we entered into an Internet fulfillment services agreement
with Bergen Brunswig through which it agreed to source, stock, pick, pack and
ship directly to our customers the health product orders placed on our Web
site. We are subject to a flexible pricing schedule for the products purchased
from Bergen
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Brunswig based on the cost of the product and the volume purchased. We are
responsible for the collection of payment for placed orders. This agreement
expires in July 2009, however, either party may terminate each successive year
upon the occurrence of specified events, including failure to perform material
obligations under the agreement, entering into a bankruptcy, receivership or
similar proceedings and adverse regulatory changes.
In August 1999, we entered into a service mark license and access
agreement with Bergen Brunswig through which Bergen Brunswig agreed to extend
to our customers the ability to pick up their pharmacy orders at a network of
over 2,000 retail stores nationwide through its affiliate, the Good Neighbor
Pharmacy network. Our customers may also participate in PlusCare, a provider
network maintained for the reimbursement of non-cash prescriptions with over 70
health plans. This agreement expires upon the expiration of the Internet
fulfillment services agreement with Bergen Brunswig.
In September 1999, we entered into an advertising representative
agreement with Bergen Brunswig through which it was appointed as our exclusive
sales representative for the marketing and sales of advertisements on our Web
site for all health products for which it acts as our fulfillment provider. We
may independently seek additional advertising revenue for products not
fulfilled by Bergen Brunswig. Bergen Brunswig may terminate this contractual
relationship anytime prior to August 1, 2000, and we may terminate the
exclusivity of our arrangement with Bergen Brunswig after August 1, 2000 if it
fails to generate a specified amount of advertising revenues. Further, on
February 1, 2001, Bergen Brunswig and our management will reconsider the
feasibility of our exclusive arrangement. We will pay Bergen Brunswig a
commission if it guarantees a specified amount of advertising revenue within a
specified time period. This agreement expires in September 2009, subject to
extension upon mutual agreement.
Lens Express
In January 2000, we entered into a database license and supply and
purchase agreement with Lens Express through which they agreed, on a
nonexclusive basis, to source, stock, pick, pack and ship directly to our
customers all contact lens orders placed on our Web site. With revenues of
$46.9 million for the year ended December 31, 1999, Lens Express is the second
largest national mail-order fulfillment contact lens operation and a direct
marketer of replacement contact lenses, eye care solutions and designer
sunglasses. Under the terms of this agreement, we have access to Lens Express's
entire product catalog of currently 250,000 contact lens products. We
negotiated a flexible pricing schedule for the products purchased from Lens
Express based on the retail price of the product and the volume purchased. We
are responsible for the collection of payment for placed orders. If Lens
Express provides an online retailer any contact lens products at lower prices
or under more favorable terms or conditions, it has agreed to provide the same
benefit to us. This agreement expires in December 2002. Either party may
terminate the agreement earlier upon the other party's material breach of any
representation, warranty or obligations under the agreement or upon adverse
regulatory changes.
Medi-Mail
In August 1999, we entered into a prescription pharmaceuticals Internet
fulfillment services agreement with Medi-Mail, a subsidiary of Bergen Brunswig
Corporation, located in Las Vegas, Nevada. Under this agreement, Medi-Mail will
fill, pack and ship directly to our customers the orders for prescription
pharmaceutical drugs placed on our Web site, as well as provide related
pharmacist counseling and customer service. Our cost for fulfillment of
prescription drugs is based on industry pricing guides and is subject to
adjustment based on whether we use Medi-Mail as our exclusive prescription
fulfillment provider. An additional dispensing fee scaled for volume incentives
is charged. We are responsible for the collection of payment from our customers
for that portion of the order that is not covered by any health insurance
provider. Medi-Mail is initially responsible for the collection of the insured
portion. This agreement expires in June 2009 but is subject to automatic one
year renewal periods. We may terminate this agreement earlier, subject to our
payment of a termination fee.
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In-House Fulfillment
In addition to our third-party fulfillment providers, our Acumin division
manufactures customized vitamins, minerals and herbs for our customers from our
facility in Philadelphia, Pennsylvania. We maintain minimal inventory of
products manufactured by Acumin relative to its total sales. The finished
product is typically shipped within 24 hours of its manufacture. Comfort Living
currently manages its own inventory and distributes and fulfills its own
orders. As part of the integration of Comfort Living, we intend to outsource
the distribution and fulfillment of these products through a third party.
Merchandising Strategies
We believe that our strong brand name and the breadth and depth of our
product selection in our online health superstore enable us to pursue unique
merchandising and pricing strategies. Because we are not restricted by physical
capacity limitations, we have a significant amount of flexibility with regard
to the presentation and organization of our product categories and the product
selection within each of those categories.
To date, our merchandising and pricing efforts have focused on offering
popular health products with high brand awareness at low prices to drive
traffic to our site. As customer loyalty and recognition of our brand name has
increased, we have begun cross-marketing higher margin products to our
customers once they are on our Web site. By operating specialty stores that
feature a broad range of product categories, we can promote higher margin
products, including accessories and other products that are complementary to
the customers' initial purchases, as well as popular point-of-purchase impulse
buys. In addition, we have begun to refine our pricing strategy and increase
gross margins by raising prices on selected products. We believe we can
continue to improve our pricing strategy by identifying products that are
characterized by lower degrees of price sensitivity, which will provide the
opportunity to raise margins through targeted price increases that do not
diminish overall sales volumes.
Within each specialty store, we offer an extensive selection of products
for specific health interests or conditions. For example, Acumin contains our
proprietary line of nutritional supplement products and Clearly Contacts offers
a full spectrum of all brand-name contact lenses and associated accessories and
products. The broad selection of product categories in our specialty stores is
also enhanced by our fast, intuitive search technology and the design of our
Web site navigation, which enable our customers to easily and quickly make
informed purchases.
Marketing and Business Development
Our marketing objective is to make the more.com brand synonymous with the
best place to purchase health products. Our major marketing strategies are to
build brand recognition, drive customer traffic to our Web site, stimulate
purchases, generate customer loyalty and maximize the lifetime value of the
customer by continued targeted marketing to existing customers.
Advertising and Promotion
We have engaged in a highly coordinated national advertising and public
relations effort since August 1999. Representative ad media include television,
radio, outdoor and various promotional vehicles. Public relations efforts
target the business and consumer press and media. As a result of our public
relations efforts to date and unsolicited inquiries, we have been featured in
Fortune, Newsweek, USA Today and the Wall Street Journal and other high profile
media, including broadcast outlets such as CNBC and CNN. Further, our Web site
has received widespread industry recognition, including being acknowledged in
1999 as the top online drugstore by eHealthcare World, receipt of a gold medal
for top online drugstore at the WWW Health Awards and ranking by Information
Week as one of the top 100 e-Business Innovators for 1999.
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Our broad-based demographic and geographic brand-building programs target
this customer demographic, among others, through the use of programming
vehicles that include:
. use of syndicated national radio programming featuring hosts such as
Dr. Joy Browne, Dr. Ronald Hoffman and Dr. Laura Schlessinger;
. prime-time TV shows such as Ally McBeal, ER and Friends; and
. highly targeted women's interest magazines such as Martha Stewart
Living, Good Housekeeping, Parents and Working Mother.
We place advertisements on Internet Web sites to optimize access to our
target audience. These currently include Alta Vista/Shopping.com, Ask Jeeves,
Go.com, Intellihealth, LifeMinders, Lycos, My Simon, Planet Out and uBid. The
majority of our online advertising consists of placements that encourage,
usually by trial offers, click-throughs directly to our Web site.
Session information is obtained from our Web site and combined with data
from our business systems and fed into a data warehouse. This allows us to
obtain and extrapolate information for business reporting and planning and
marketing activities. Experience to date has demonstrated the power of one-to-
one marketing to efficiently acquire new customers and activate shopping
interest among current customers. Currently, over 90% of our customers
subscribe to our promotional newsletter, which is sent to them twice monthly
with new product and promotional news. Our goal is to continue to build our
customer understanding and use database marketing as a key tool in driving
customer lifetime value.
Marketing Alliances
We have engaged in extensive alliance building efforts since our
inception in order to quickly build market share, acquire customers, create
brand presence and provide more integrated services to our customers. Strategic
alliances involve a combination of online and offline co-promotion, content
sharing, and revenue sharing or payments based on actual customers acquired.
Our alliance building efforts can be grouped into the following categories:
Phar-Mor.com. We entered into a Web site affiliate agreement with Phar-
Mor.com, a chain of discount retail drugstores, in January 2000. Under the
terms of this agreement, we will collaborate with Phar-Mor.com to create a URL
through which Phar-Mor.com's customers may access our Web site. This URL will
be linked to our Web site either directly or through an intermediate,
transition Web page hosted by us. Phar-Mor.com will prominently promote this
URL in its marketing materials, on its Web sites and in its stores.
Furthermore, we will become the exclusive online provider of health products
for Phar-Mor.com. As part of this exclusivity arrangement, Phar-Mor.com agreed
not to sell any products on its Web sites that are sold on our Web site. Phar-
Mor.com also will not display any advertisements of, link its Web sites to or
refer its customers to any third-party Web site that sells the same health
products that we sell. On each home page of Phar-Mor.com's Web sites, it will
identify more.com as its exclusive online provider of health products as well
as display a hyperlinked button labeled "Shop more.com." Phar-Mor.com will
receive a sales commission for each product sold to a customer who reached our
Web site via the collaborative URL.
Under the agreement, Phar-Mor.com also agreed to purchase at least $1.0
million but no more than $2.0 million of advertising annually from us during
the five-year term of the agreement. Also, our customers will be able to pick
up prescription drugs purchased on our Web site at participating Phar-Mor
stores. We believe this alliance will drive customer traffic to our Web site
and will represent a cost-efficient source of customer acquisition.
Sponsorships. Our alliances have offered us exclusive sponsorship
opportunities and premier access to efficient marketing vehicles such as e-mail
newsletters. An example of one of our sponsorships is an
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agreement that we have entered into with drDrew.com. Under the terms of this
agreement, drDrew.com prominently promotes more.com on the drDrew.com Web site
and in its marketing and promotional materials as its exclusive online
drugstore e-commerce partner. In addition, drDrew.com's weekly e-mail
newsletters will regularly contain a credit indicating that they are sponsored
by more.com. Other examples of our sponsorship agreements include a premier
sponsorship of Dr. Koop at Go.com, Gold merchant status in Go.com's shopping
channel, as well as similar arrangements with AccentHealth, e-Diets,
Perks@Work, Physicians Online, snap! and women.com.
Affiliate Programs. Leveraging the reach of complementary third-party
sites is a significant revenue driver for us. The more.com affiliate program
has over 13,000 members. These affiliates provide one of our most cost-
efficient sources of customer acquisition and have consistently contributed
over 15% of our aggregate sales. Under the terms of our standard affiliate
agreement, affiliate program applicants that we accept select a more.com icon
to feature on their Web site. Each icon contains an electronic link to our Web
site. When a customer follows a link from an affiliate's Web site to our Web
site and makes a purchase, the affiliate is credited with a referral fee based
on the sale price of the product purchased. Affiliates do not earn referral
fees for prescription items or contact lenses. We have outsourced the
management of our affiliate program to LinkShare to aggressively pursue
affiliate acquisition and build new partnerships.
Co-Marketing Ventures. We have engaged in co-marketing ventures and
sampling programs with manufacturers of health products, including Durex,
Johnson & Johnson, Procter & Gamble and Revlon. Our goal is to rapidly deepen
and broaden marketing partnerships with these and other manufacturers to
generate incremental product sales for all parties. In addition, we have
initiated an advertising sales program that will be managed by Bergen Brunswig
to assist manufacturers in accessing online health shoppers via paid
advertising and merchandising placements on the more.com site.
We plan to continue building important strategic alliances by positioning
ourselves as the e-commerce partner of choice for health portals, new
distribution channels, important health-related networks and healthcare
provider networks, both online and offline. Additionally, we will focus on
similar initiatives among important channels that reach primary target markets,
such as women, online shoppers and college students.
Customer Service
We believe that superior customer service and support are critical to
retain and expand our customer base. Our goal is to further facilitate the
customer experience, while at the same time providing the hands-on support and
interaction that currently is lacking in most e-commerce shopping experiences.
We anticipate that our customer support technology will also increase our
conversion of visitors into buyers.
Our customer service agents handle questions about orders and how to use
our Web site, assist customers in finding desired products and resolve
problems. Our customer service agents are a valuable source of feedback and
identifiers of opportunity for improvement regarding customer satisfaction.
Thus, in addition to traditional call center and help desk roles, our customer
service agents handle all products returned by customers. Customer returns
provide us with a valuable source of information for continuous improvement.
Our customer service offerings include:
. Help screen--our customers can browse help screens on our Web site.
These screens reflect the most common questions posed by our
customers and the most up to date answers we provided to them;
. E-mail--customers can send an e-mail to our customer service center;
. Toll-free telephone service--if a customer would prefer to speak to a
live person about their shopping experience at more.com, the customer
can call our toll-free telephone number. We staff
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our call center so that we can quickly respond to customer concerns.
We strive to answer 90% of the phone calls within 30 seconds. When
customers call, they are greeted by a live person to answer their
question instead of an automated list of options; and
. Live chat--because most of our customers are accessing our Web site
via a modem and may not want to use the telephone, we have provided
access to a live chat line where the customer can speak with a
customer service agent. Live chat allows our customer service agents
to push pages to the customer, which is a process in which the
customer's screen is moved to a page by the agent.
Technology and Infrastructure
We have designed and implemented a next generation health superstore
with complete supply chain and cash management integration. Our design is
based upon a three-tier architecture that can support extremely high volumes
of traffic with quick response and page display times. Our architecture
integrates our customer service applications with our Web site and business
solutions. This architecture is designed to allow use of thin browser and java
based clients that enable us to use customer service agents regardless of
their physical location. We have integrated multiple fulfillment providers
using industry standard data interchange methods such as EDI and XML.
We have employed a variety of scalable and reliable software and
hardware systems for transaction processing, administration, searching,
customer support, fulfillment and order tracking. These services and systems
use a combination of our own proprietary technologies and commercially
available licensed technologies. Our transaction processing systems are
integrated with our accounting and financial systems. We focus our internal
development efforts on creating and enhancing proprietary software that is
unique to our business. Session information is obtained from our Web site and
combined with data from our business systems and fed into a data warehouse.
This allows us to obtain and extrapolate information for business reporting
and planning and marketing activities.
Our systems are based on industry standard architectures and have been
designed to reduce downtime in the event of outages or catastrophic
occurrences. We use Sun Microsystem's UltraSPARC-based servers and Solaris
operating system. Front-end and back-end software systems use Oracle's DBMS.
Our system hardware is hosted at a Level 3 Communications facility in San
Francisco, California, which provides high-speed, redundant communications
lines, emergency power backup and continuous systems monitoring. We have
implemented load balancing systems and our own redundant servers to provide
for fault tolerance. We have implemented a variety of scalable and reliable
software and hardware systems for transaction processing, administration,
searching, customer support, fulfillment and order tracking. These services
and systems use a combination of our own proprietary technologies and
commercially available, licensed technologies. Our transaction-processing
systems are integrated with our accounting and financial systems. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business.
We use an encryption technology that works with most common Internet
browsers and makes it extremely difficult for unauthorized parties to read
information sent by our customers. We outsource a majority of our credit card
authorization and settlement to CyberSource through secure Internet
connections.
Competition
The e-commerce market is new, rapidly evolving and highly competitive.
In particular, the online health market is intensely competitive and highly
fragmented, with no clear dominant leader in any of our product segments. Our
competitors can be divided into several broad categories, including:
. chain drugstores;
. mass market retailers;
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. supermarkets;
. warehouse clubs;
. online retailers;
. mail-order pharmacies;
. prescription benefits managers;
. Internet-portals and online service providers that feature shopping
services; and
. cosmetics departments at major department stores.
Each of these competitors operate within one or more of the health,
wellness, beauty, personal care or pharmacy product categories. In addition,
nearly all our competitors have, or have announced their intention to have, the
capability to accept orders for products online.
We believe that the following are principal competitive factors in our
market:
. selection;
. convenience;
. price;
. Web site performance and accessibility;
. customer service;
. quality of information services;
. reliability and speed of order fulfillment; and
. brand recognition.
We believe that our ability to compete depends in large part on our
ability to maintain a broad product selection, value and convenience.
Some of our competitors may be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
brick and mortar retailers also enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional brick and mortar
retailers can also sell products to address immediate, acute care needs, which
we and other online sites cannot do.
Intellectual Property
Our performance and ability to compete are dependent in part on our
proprietary and licensed technology. We rely on a combination of patent,
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect our technology. All key employees have signed
confidentiality and invention assignment agreements and we intend to require
newly hired employees to execute similar agreements. We cannot be certain that
these contractual arrangements or other steps taken will be adequate to prevent
the misappropriation of our proprietary rights or technology. In addition, our
competitors may independently develop technologies that are substantially
equivalent or superior to our technology.
We have certain common law rights in the service marks and trademarks
used in our business and have applications pending to register several service
marks and trademarks used in our business. There can be no assurance that we
will be able to secure significant protection for all our service marks or
trademarks, or that are applications will be successful. Competitors of ours or
others could adopt product or service marks similar to our marks, or try to
prevent us from using our marks, thereby impeding our ability to build brand
identity and possibly leading to customer confusion.
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We do not currently have any issued patents or registered copyrights. Our
two patent applications were filed on February 24, 1999 and August 5, 1999. We
have been assigned the rights to patent applications claiming a number of the
technologies underlying our products and services. There can be no assurance
that the applications will result in the issuance of patents or that, if
issued, such patents would adequately protect us against competitive technology
or that they would be held valid and enforceable against a challenge. In
addition, it is possible that our competitors may be able to design around any
such patents. Also, our competitors may obtain patents that we would need to
license or circumvent in order to make, use, sell or offer for sale the
technology.
We believe that we do not infringe upon the proprietary rights of any
third party, and no third party has asserted a patent infringement claim
against us. It is possible, however, that such a claim might be asserted
successfully against us in the future. Our ability to make, use, sell or offer
for sale our products and services depends on our freedom to operate. That is,
we must ensure that we do not infringe upon the proprietary rights of others or
have licensed all such rights.
We rely on a variety of technology, primarily software, that we license
from third parties. There can be no assurances that the third-party technology
licenses that we do have will continue to be available to us on commercially
reasonable terms or at all. Also, the loss or inability to maintain or obtain
upgrades to any of these technology licenses could result in delays or
breakdowns in our ability to continue developing and providing our products and
services or to enhance and upgrade our products and services.
Government Regulation
Various aspects of our business are subject to extensive federal, state
and local regulations, many of which are specific to the practice of pharmacy.
For example, distributors of controlled substances are subject to requirements
established under the Controlled Substances Act, as well as related state and
local laws and regulations. These laws and regulations relate to pharmacy
operations, including registration, security, record keeping and reporting
requirements related to the purchase, storage and dispensing of controlled
substances, prescription drugs and some over-the-counter drugs. Our contract
with Medi-Mail, our prescription drug fulfillment provider, is structured to
ensure that only Medi-Mail is subject to federal, state and local licensing and
registration regulations with respect to prescription drug sales and pharmacy
operations.
Although the law surrounding internet sales is still developing, the Food
and Drug Administration, or FDA, currently asserts jurisdiction over Web site
claims based upon the agency's view that claims included on a Web site
constitute product labeling. The FDA also regulates the advertising of
prescription drug products, and the agency currently asserts jurisdiction over
prescription drug Web site claims based upon the agency's view that such claims
constitute product advertising. The Federal Trade Commission, or FTC, regulates
the advertising of over-the-counter drugs, conventional foods, dietary
supplements, cosmetics and medical devices. Most states have laws similar or
identical to the laws applied by the FDA and FTC with regard to the products we
distribute. The Consumer Product Safety Commission regulates consumer products
not regulated by the FDA.
The FDA and FTC are currently reviewing Web site formats for ordering
products subject to their jurisdiction. In the future, one or both agencies may
establish a formal policy, or apply an informal policy, regarding the format of
these Web sites with regard to content and disclosures. We may need to modify
the format of our Web site in the future to comply with FDA and FTC
requirements. We could also conceivably be found liable at present based upon
the format and content of our Web site.
The practice of medicine requires licensing under applicable state law.
It is not our intent to practice medicine, and we have tried to structure our
Web site and customer interactions to avoid practicing medicine. However, a
regulatory authority could at some time allege that some portion of our
business violates these statutes and, any liability based on a determination
that we engaged in the unlawful practice of medicine may be excluded from
coverage under the terms of our general liability insurance policy.
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The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, placing particular focus on those who prescribe drugs online and
on pharmacies that fill invalid prescriptions, including those that are written
online. Because Medi-Mail makes every effort only to fulfill valid
prescriptions and we do not prescribe drugs, we believe that our business will
not be negatively affected by any regulations that result from the
investigations. However, we believe that any regulations resulting from the
investigations will likely result in increased reporting and monitoring
requirements.
The Clinton Administration recently announced a new initiative to protect
consumers who purchase prescription drugs over the Internet. The initiative is
intended to prevent rogue online prescription drug companies who unlawfully
prescribe drug products over the Internet and are not licensed to engage in the
practice of pharmacy or medicine. The initiative would establish new federal
requirements for all Internet pharmacies to ensure that they comply with
federal and state law. Based upon our contract with Medi-Mail, we believe we
are in compliance with the new initiative. Nevertheless, the final contours of
the initiative have not yet been established, and depending upon the content of
the initiative, compliance may cause delays or unexpected complications.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, has developed a program, the Verified Internet Pharmacy
Practice Sites, as a model for self-regulation for online pharmacies. We have
applied to the National Association of Boards of Pharmacy for certification by
its Verified Internet Pharmacy Practice Sites program and intend to comply with
its criteria for certification.
We are also subject to extensive regulation relating to the
confidentiality and release of patient records and the transmission of Medicare
eligibility information over the Internet. Additional legislation governing the
distribution of medical records exists or has been proposed at both the state
and federal level. Our business is also subject to rules, such as anti-kickback
laws, prohibiting certain practices that could result in overutilization of
healthcare services and supplies.
Legal Proceedings
We are a defendant in a lawsuit brought by More Online alleging, among
other things, that our name, more.com, is confusingly similar to More Online's
name. With this lawsuit, More Online is seeking to prevent us from using the
name more and the URL www.more.com. We believe we have strong defenses to these
allegations and are vigorously defending this litigation. We cannot be certain
that our defense will be successful. If we do not prevail in this litigation,
we could be prevented from using the more.com name and be liable from monetary
damages.
Other than the More Online litigation, we are not currently party to any
material legal proceedings. We may in the future be party to litigation arising
in the ordinary course of business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
Employees
As of December 31, 1999, we had 122 full-time employees. Of our
employees, 44 were primarily involved in the development and production of our
Web site, 30 in our marketing and sales department, 16 in our customer service
department, 11 in our manufacturing department and 21 in our general and
administrative department. We believe that our relationship with our employees
is good.
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Facilities
Our principal executive and administrative offices are located at 520
Third Street, Second Floor, San Francisco, California 94107, where we lease
approximately 15,000 square feet, under a lease that expires in July 2000. We
also lease approximately 1,900 square feet at 485 Third Street, San Francisco,
California 94107, and approximately 2,125 square feet at 495 Third Street, San
Francisco, California 94107; both leases expire in November 2002. Our
manufacturing facility for the production of Acumin products, where we lease
approximately 2,440 square feet, is located at 3401 Market Street,
Philadelphia, Pennsylvania 19104, under a year-to-year lease that started on
May 31, 1999. We will likely require additional space before the end of 2000.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions, as of
February 5, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Donald M. Kendall, Jr... 32 Chairman of the Board
Frank A. Newman......... 51 President, Chief Executive Officer and Director
Bradford S. Oberwager... 30 Chief Operating Officer
Laureen De Buono........ 42 Chief Financial Officer and Secretary
Eric Budin.............. 31 Vice President of Corporate Development
Clarence A. Felong...... 46 Vice President of Engineering
Bruce S. Mowery......... 55 Vice President of Marketing and Business Development
Samuel J. Salkin........ 49 Vice President of Merchandising and Operations
Mark Leschly............ 31 Director
Thomas A. Penn.......... 53 Director
Perk Perkins............ 46 Director
Donald R. Roden......... 53 Director
E. Scott Russell........ 39 Director
John Sculley III........ 60 Director
John Neil Weintraut..... 41 Director
</TABLE>
Donald M. Kendall, Jr., co-founder of more.com, has served as our Chief
Executive Officer and a member of our board of directors since our inception.
On April 1, 2000, Mr. Kendall will resign as Chief Executive Officer and will
become our Chairman of the Board. From 1992 until January 1998, Mr. Kendall was
the co-founder and president of American Retail Systems, which operates 85
Pizza Hut and Kentucky Fried Chicken restaurants in the Republic of Poland and
the Czech Republic, with annual sales of $100 million and 5,000 employees. From
1990 to 1992, Mr. Kendall was a management consultant for McKinsey & Co. in the
consumer industries group. Mr. Kendall earned a B.A. in U.S. History from
Stanford University.
Francis A. Newman will join us on April 1, 2000 and will serve as our
President, Chief Executive Officer and as a member of our board of directors.
From February 1997 to March 2000, Mr. Newman was the president, chief executive
officer and chairman of the board of Eckerd Corporation, a drug store chain and
a wholly owned subsidiary of J.C. Penney Company, Inc. In February 1996, Mr.
Newman became the chief executive officer of Eckerd until Eckerd was acquired
by J.C. Penney's in February 1997. Prior to being named the chief executive
officer, Mr. Newman had served as the president, chief operating officer and as
a member of the board of directors of Eckerd since July 1993. From 1986 to
1993, Mr. Newman served as president, chief executive officer and as a member
of the board of directors of F&M Distributors, Inc., a drug store chain. F&M
filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in
December 1994. Mr. Newman is a member of the boards of directors of AmSouth
Bancorporation, Jabil Circuit, Inc., All Children's Hospital, the University of
Florida School of Business, the University of Texas at Austin College of
Pharmacy and the United Way of Pinellas County. In April 1999, he was elected
chairman of the board of the National Association of Chain Drug Stores.
Bradford S. Oberwager has served as our Chief Operating Officer since
November 1998. From January 1997 to November 1998, Mr. Oberwager was the
founder and president of Acumin Corporation, a manufacturer and Internet
retailer of customized vitamins, which has been incorporated as a division of
more.com. Before founding Acumin, from 1992 to 1995, Mr. Oberwager worked in
the investment banking divisions of Smith Barney and Bear Stearns. Mr.
Oberwager is a member of the board of advisors of various private companies.
Mr. Oberwager earned a B.S. in Finance from Georgetown University and an M.B.A.
from the Wharton School of Business.
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<PAGE>
Laureen De Buono has served as our Chief Financial Officer since November
1999 and our Secretary since January 2000. From June 1998 until October 1999,
Ms. De Buono was the chief operating officer and chief financial officer of
Resound Corporation, a public hearing device and communications company. From
1992 to 1998, Ms. De Buono was an executive vice president at Nellcor Puritan
Bennett, a public respiratory products company, where she led the legal,
mergers and acquisitions, human resources and communications groups. Ms. De
Buono was corporate counsel at The Clorox Company from 1987 to 1992. Ms. De
Buono is a member of the board of directors of Invivo Corporation and a member
of the Board of Visitors of the Institute of Public Policy at Duke University.
She earned a B.A. in Economics, Political Science and History from Duke
University, an M.A. in Economics and Political Science from Stanford University
and a J.D. from New York University School of Law.
Eric Budin, co-founder of more.com, has served as our Vice President of
Corporate Development since May 1998, and previously served as a member of our
board of directors from May 1998 to October 1999 and our President from January
1998 to May 1998. From March 1996 to July 1997, Mr. Budin was a senior product
manager in charge of product management for client applications at OnLive!
Technologies, a company that pioneered real-time group communications over the
Internet. From August 1994 to February 1996, Mr. Budin
was a director of product development and marketing at Worlds, Inc., a provider
of three dimensional multi-user spaces over the Internet. Mr. Budin worked as a
management consultant for McKinsey & Co. from 1990 to 1992. Mr. Budin holds a
B.A. in economics and psychology from the University of Michigan and an M.B.A.
from Stanford Graduate School of Business.
Clarence A. Felong has served as our Vice President of Engineering since
March 1999. From April 1996 to March 1999, Mr. Felong was a vice president at
Oracle's Internet applications division, where he managed the e-commerce,
messaging and document management groups, as well as a joint effort between CNN
and Oracle to produce a personalized news Web site. From June 1988 to March
1996, Mr. Felong held various positions at Apple Computer, Inc., including
senior director of communications and collaboration technologies and was a
member of the product strategy council. Prior to joining Apple, Mr. Felong held
senior management positions at Frame Technology Corporation, GO Corporation,
Claris Corporation and the Jet Propulsion Laboratory. Mr. Felong studied
Mathematics at the State University of New York at Fredonia and Computer
Science at West Los Angeles College and West Coast University.
Bruce S. Mowery has served as our Vice President of Marketing and
Business Development since April 1999. Mr. Mowery has more than 20 years of
technology marketing experience. From June 1997 to March 1999, Mr. Mowery was
the owner and managing partner of Ellipsis Consulting, a marketing consulting
firm. From March 1996 to May 1997, Mr. Mowery served as a vice president of
marketing at Visioneer, a manufacturer of personal imaging products. From
October 1993 to November 1996, Mr. Mowery was a vice president of sales and
marketing at MNI Interactive, Inc., an Internet e-commerce firm involved in the
sale of music products. He was the senior director of marketing at Apple from
April 1984 to September 1996. Mr. Mowery also served as an entrepreneur in
residence at Kleiner, Perkins, Caulfield and Byers, a venture capital firm,
during 1996. Mr. Mowery received a B.A. in International Studies from Ohio
State University and an M.A. in Management from American Graduate School of
International Management.
Samuel J. Salkin has served as our Vice President of Merchandising and
Operations since August 1998. He served as the chief operating officer for the
Jewish Community Federation, the central fund-raising and community-planning
agency of the San Francisco Jewish community from September 1997 to September
1998. From January 1994 to September 1996, Mr. Salkin was the president and
chief executive officer of Peet's Coffee & Tea, Inc., then a privately held
retailer of specialty coffee with more than 50 retail stores in California. Mr.
Salkin currently serves on the board of directors of Real Good Trading Company,
a retail firm specializing in ecological energy systems and consumer products.
Mr. Salkin received a B.S. in Industrial and Labor Relations and an M.S. in
Development Sociology from Cornell University.
Mark Leschly has been a member of our board of directors since October
1998. Since June 1999, Mr. Leschly has served as a managing director of Rho
Management Company, Inc., a New York-based
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<PAGE>
international investment firm with principal activities in venture capital,
private equity funds and public securities. From September 1995 to June 1999,
Mr. Leschly was a general partner at Healthcare Ventures, a venture capital
firm specializing in making healthcare investments. Mr. Leschly currently
serves on the board of directors of Diversa Corporation and is a member of the
Board of Directors of various private companies. He is also a member of the
advisory board of the Harvard AIDS Institute. Mr. Leschly received an M.B.A.
from the Stanford Graduate School of Business.
Thomas A. Penn has been a member of our board of directors since October
1999. Since June 1998, Mr. Penn has been a partner at Boston Millennia
Partners, a Boston-based venture capital firm. From March 1994 to March 1998,
Mr. Penn served as the president and chief executive officer of Tektagen, Inc.,
a contract services organization that provides product development services and
support to the biotechnology and pharmaceutical industries. Mr. Penn is a
member of the board of directors of various private companies. Mr. Penn
received a B.S. in Metallurgy and Materials Science and a B.S. in Industrial
Management from the Massachusetts Institute of Technology, an M.B.A. from the
Stanford Graduate School of Business and a J.D. from the University of
Pennsylvania.
Perk Perkins has been a member of our board of directors since June 1998.
Since November 1992, Mr. Perkins has served as president and chief executive
officer of The Orvis Company, a retailer of outdoor sporting equipment and
clothing. From July 1977 to November 1992, Mr. Perkins served in various
positions with Orvis, including vice president of merchandising, vice president
of operations and president of Orvis UK. He currently serves on the board of
directors of the Center for Compatible Economic Development and is the co-chair
of the Conservation Committee of The Nature Conservancy.
Donald R. Roden has been a member of our board of directors since January
2000. From October 1995 to November 1999, Mr. Roden was the president, chief
executive officer and a member of the board of directors of Bergen Brunswig
Corporation. Prior to joining Bergen Brunswig Corporation, he was the chief
executive officer of Reed Elsevier Medical, North America Division. From
October 1977 to April 1989, Mr. Roden was the owner of Pracon Incorporation, a
healthcare consulting and communications company. Mr. Roden received a B.A. in
Business from University of Wisconsin and an M.B.A. in Pharmaceutical
Management from Fairleigh Dickinson University.
E. Scott Russell has been a member of our board of directors since
October 1998. Since September 1996, Mr. Russell has served as a general partner
of SOFTBANK Venture Capital. Prior to joining SOFTBANK, Mr. Russell spent 16
years managing corporate MIS technology for Swiss Bank Corporation, SBC
Warburg, Goldman, Sachs & Co. and J.P. Morgan & Co. Incorporated. While with
SBC Warburg, he headed the technology division in Asia and later served on the
firm's information technology management committee based in London. Mr. Russell
currently serves on the board of directors of BUY.COM Inc. and E-Loan, Inc.,
and is a member of the board of directors of various private companies. Mr.
Russell received a B.S. in Engineering from Carnegie Mellon University and an
executive M.B.A. from London School of Business.
John Sculley III has been a member of our board of directors since June
1998. Since March 1994, Mr. Sculley has served as a partner in the investment
firm of Sculley Brothers LLC. From November 1993 to February 1994, Mr. Sculley
served as the chief executive officer of Spectrum Information Technologies,
Inc., a manufacturer of weather monitoring and soil testing equipment. In
January 1995, Spectrum, together with three of its four operating subsidiaries,
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of New York. From 1983 to 1993, Mr. Sculley served as the chief
executive officer of Apple Computer, Inc. Since 1984, Mr. Sculley has also been
the chief executive officer of Sculley Bros., Inc., a private investment
company. Mr. Sculley currently serves on the board of directors of NetObjects,
Inc. and Talk City, Inc. Mr. Sculley received a B.S. in Architecture from Brown
University and an M.B.A. from the Wharton School of Business.
John Neil Weintraut has been a member of our board of directors since
June 1998. Mr. Weintraut is a founder of 21st Century Internet Venture
Partners, a venture capital firm, and has been a partner since its
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<PAGE>
founding in October 1996. From June 1987 to May 1996, Mr. Weintraut was a
partner at Hambrecht & Quist, an investment banking firm, where he led the
enterprise software practice and, later, the Internet practice. He currently
serves on the board of directors of CareerBuilder, Inc. Mr. Weintraut received
a B.S. in Electrical Engineering from Drexel University and an M.B.A. from the
Wharton School of Business.
Classified Board of Directors
Our board of directors is currently comprised of eight directors. Our
board will be divided into three classes of directors serving staggered three-
year terms upon the effectiveness of this offering. As a result, approximately
one-third of the board of directors will be elected each year. These
provisions, together with provisions in our certificate of incorporation, allow
our board of directors to fill vacancies of or increase the size of the board
and may deter our stockholders from removing incumbent directors and filling
these vacancies with their own nominees to gain control of the board.
Our board of directors has designated that Messrs. Leschly, Penn and
Weintraut will serve as Class I directors, whose terms expire at the 2001
annual meeting of stockholders. Messrs. Kendall and Russell will serve as Class
II directors whose terms expire at the 2002 annual meeting of stockholders.
Messrs. Perkins, Roden and Sculley will serve as Class III directors whose
terms expire at the 2003 annual meeting of stockholders.
Director Compensation
Our directors who are also employees will receive no additional
compensation for their services as directors. Our non-employee directors will
receive a fee of $1,000 for each meeting of the board attended in person. In
addition, our non-employee directors are eligible to receive options and be
issued shares of common stock directly under our 2000 non-employee director
stock option program. Non-employee directors will be granted an initial option
to purchase 25,000 shares of our common stock with subsequent annual option
grants to purchase 5,000 shares of our common stock. The exercise price per
share for these options will equal the fair market value of our common stock at
the date of grant. Each stock option received by our non-employee directors
will vest and become exercisable over a period of four years. Our directors who
are also employees are eligible to receive options and be issued shares of
common stock directly under our amended and restated 1998 stock option plan and
2000 stock incentive plan.
Board Committees
Our board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Leschly and
Penn, reviews and approves the salaries, bonuses and other compensation payable
to our executive officers and administers and makes recommendations concerning
our employee benefit plans.
The audit committee, consisting of Messrs. Penn, Roden and Sculley, makes
recommendations to our board of directors regarding selection of independent
public accountants. The committee reviews the scope and results of the audit
and other services provided by our independent accountants, and reviews our
accounting policies and systems of internal accounting controls.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.
There are no family relationships among any of our directors or executive
officers.
54
<PAGE>
Executive Compensation
Summary Compensation Information
The following table contains information in summary form concerning the
compensation paid to our Chief Executive Officer and each of our four most
highly compensated executive officers whose total salary, bonus and other
compensation exceeded $100,000 during the fiscal year ended December 31, 1999.
In accordance with the rules of the Securities Exchange Commission, the
compensation described in this table does not include perquisites and other
personal benefits received by the executive officers named in the table below
which do not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for these executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term All Other 1999
Compensation Compensation Compensation(1)
---------------- ------------ ---------------
Securities
Underlying Total Health
Name and Principal Position Year Salary Bonus Options Insurance
- --------------------------- ---- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Donald M. Kendall, Jr....... 1999 $132,500 $ -- -- $ --
Chief Executive Officer and 1998 85,000 -- -- --
Director
Bradford S. Oberwager....... 1999 131,250 2,500 300,000 --
Chief Operating Officer 1998 15,057 -- 235,000 --
Eric Budin.................. 1999 144,167 -- -- --
Vice President of Corporate 1998 70,000 -- -- --
Development
Samuel J. Salkin............ 1999 172,221 -- 133,078 912
Vice President of 1998 55,549 -- 144,000 --
Merchandising and
Operations
Clarence A. Felong.......... 1999 164,031 25,000 519,207 1,166
Vice President of 1998 -- -- -- --
Engineering
</TABLE>
- --------
(1) Consists of medical reimbursements.
55
<PAGE>
Option Grants During Fiscal 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended December 31, 1999. All of these options were granted under
our amended and restated 1998 stock option plan at an exercise price equal to
the fair market of our common stock at the time of grant. Except as noted in
the footnote for the respective executive officer, each option vests over a
period of four years and is exercisable immediately. Our board of directors
determined the fair market value of our common stock on the date of grant
based on, among other things, our financial results and prospects and the
share price in arms-length transactions that accrued around the time of the
grant. The exercise price may in some cases be paid by delivery of other
shares or by offset of the shares subject to options. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are provided in accordance with the rules of the Securities
and Exchange Commission and do not represent our estimate or projection of the
future common stock price.
Options Granted in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Number of Total Options Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees in for Option Term
Options Fiscal Year Exercise Price Expiration ---------------------
Name Granted 1999(1) Per Share Date 5% 10%
- ---- ---------- ------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald M. Kendall, Jr... -- -- $ -- --
Bradford S. Oberwager... 300,000 9.4% 0.330 10/8/2009 62,261 157,776
Eric Budin.............. -- -- -- --
Samuel J. Salkin........ 83,078 2.6% 0.166 5/25/2009 8,673 21,979
50,000 1.6% 3.620 12/15/2009 113,831 288,460
Clarence A. Felong...... 419,207 13.2% 0.166 4/14/2009 43,764 110,903
100,000 3.1% 3.620 12/15/2009 227,662 576,920
</TABLE>
- -------
(1) The percentage of total options is based on an aggregate of 3,181,888
options granted to employees in fiscal 1999.
Option Exercises
The following table sets forth information concerning exercisable and
unexercisable stock options held by each of the executive officers named in
the summary compensation table at the fiscal year ended December 31, 1999. The
value realized upon exercise is based on the estimated fair value of our
common stock of $0.33 per share at the time of exercise less the per share
exercise price, multiplied by the number of shares acquired upon exercise. The
value of unexercised in-the-money options is based on the assumed initial
public offering price of $ per share less the per share exercise price,
multiplied by the number of shares underlying the options. All options were
granted under our amended and restated 1998 stock option plan.
Aggregate Option Exercises in Fiscal Year Ended December 31, 1999
and Option Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Donald M. Kendall, Jr... -- $ -- -- --
Bradford S. Oberwager... 235,000 38,540 300,000/0 --
Eric Budin.............. -- -- -- --
Samuel J. Salkin........ 144,000 31,824 133,078/0 --
Clarence A. Felong...... -- -- 519,207/0 --
</TABLE>
56
<PAGE>
Employment Agreement
Mr. Newman is a party to an agreement with us effective as of April 1,
2000. As contemplated by this agreement, Mr. Newman will serve as our
President, Chief Executive Officer and a member of our board of directors.
Under the agreement, we agree to pay Mr. Newman a base salary of $500,000 and a
signing bonus of $1,000,000. Mr. Newman has decided to accept the signing bonus
in shares of our restricted common stock priced at $4.82 per share in lieu of a
cash payment. Accordingly, on April 1, 2000, Mr. Newman will receive 207,468
shares of our restricted common stock. One quarter of these shares of
restricted common stock will vest on April 1, 2001 and the remaining shares of
restricted common stock will vest monthly over a three-year period. This bonus,
however, is forfeitable if Mr. Newman voluntarily terminates his employment
with us within the first year. Mr. Newman was also granted options to purchase
1,663,752 shares of our common stock at an exercise price of $4.82 per share.
One quarter of the options will vest on April 1, 2001 and the remaining options
will vest monthly over a three-year period, subject to Mr. Newman's continued
service. If Mr. Newman is terminated within the first year of his employment,
25% of his options will automatically vest on the termination date.
Additionally, Mr. Newman will receive a guaranteed $250,000 bonus, payable
before April 30, 2000, as a first-year performance bonus. Mr. Newman will also
receive a one-time, up-front allowance of $500,000 to use to pay for relocation
costs and needs.
Compensation Protection Agreements
We will enter into compensation protection agreements with each of our
executive officers. These agreements are for a term of three years commencing
in January 2000 and are subject to automatic annual extensions. If within 12
months of a change of control of our company, an executive officer's employment
with us is terminated by us other than for cause or by the officer personally
for good reason, excluding by reason of the officer's disability, death or
retirement, then we must pay that officer: (a) his or her accrued compensation,
including unpaid base salary, pro rata bonus, and vacation pay; and (b) an
amount equal to two times the sum of the officer's highest annual base salary
and annual bonus in effect immediately prior to the change of control. In
addition, until the third anniversary of the officer's termination we will
provide the officer with the maximum benefits provided to that officer between
the effective date of the agreement and 90 days preceding the date of the
change of control. The officer will also receive immediate vesting and removal
of all restrictions on any outstanding incentive awards granted under our stock
option and other stock incentive plans, excluding our employee stock purchase
plan, or any other arrangement, unless it would render unavailable pooling of
interest accounting for a change of control, and the board of directors
determined that such change of control shall be accounted for as a pooling of
interest. However, acceleration shall occur regardless of whether it would
render pooling of interest accounting unavailable to the extent provided in any
employment agreement, offer letter, stock option or other equity-based
compensation protection agreement with an executive officer prior to the date
of the compensation protection agreement with us. The compensation protection
agreements further provide that the executive officers will not be required to
mitigate the amounts due to them as a result of their termination.
Benefit Plans
Amended and Restated 1998 Stock Option Plan
Our amended and restated 1998 stock option plan was adopted by our board
of directors in January 2000. We expect to receive stockholder approval prior
to the effectiveness of this offering. We have reserved a total of 8,117,500
shares of our common stock under our 1998 stock option plan for issuance
pursuant to stock options. As of December 31, 1999, options to purchase an
aggregate of 3,261,344 shares were outstanding, 736,416 shares of common stock
had been purchased pursuant to exercises of stock options and 119,740 shares
were available for future grant. Our board of directors may grant incentive
stock options, which are stock options that qualify under Section 422 of the
Internal Revenue Code, to our employees. Non-qualified stock options may be
granted to employees, non-employee directors and consultants. The maximum term
of options
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<PAGE>
granted under our 1998 stock option plan is ten years, however, the maximum
term for incentive stock options granted to any person holding more than 10% of
the voting power of all classes or our stock is five years. Our board of
directors may amend our 1998 stock option plan at any time. Our 1998 stock
option plan will terminate in 2008, unless terminated earlier by the board of
directors.
An option holder may exercise an option granted under our 1998 stock
option plan in whole or in part at any time during the term of the option and
the option holder's continuous service with us. Shares purchased under an
option are subject to our right to repurchase them, to the extent that the
shares have not yet vested, when the option holder's service with us ceases. An
option granted under the plan generally vests over a four-year period, with 25%
vesting after one year and the remaining shares vesting monthly over a three-
year period. An option holder whose service with us ceases for any reason,
other than upon death, disability or termination for cause, may exercise vested
options in the 60-day period following termination, unless the options expire
sooner by their terms. The 60-day period is extended by up to six months for
terminations due to death or disability. An option holder whose service is
terminated by us for cause may not exercise vested options after the date of
termination.
Employees who were offered positions of employment with us prior to March
1, 1999, also have an acceleration provision in their option agreement in the
case of a change of control transaction. A change of control transaction is
defined generally as a transaction or series of transactions in which our
equity holders immediately prior to the change of control do not retain at
least 50% of the voting power of and interest in the successor entity. In the
case of a change of control, an additional 12.5% of the employee's shares
covered by the option will immediately vest. This percentage will increase to
25% if the employee is employed by us immediately prior to the change of
control and will be laid off by the successor entity as of the time of the
change of control.
2000 Stock Incentive Plan
Our 2000 stock incentive plan was adopted by our board of directors in
January 2000. We expect to receive stockholder approval prior to the
effectiveness of this offering. Our 2000 stock incentive plan provides for the
grant of:
. incentive stock options to our employees, including officers and
employee directors;
. non-qualified stock options to our employees, directors and
consultants;
. stock appreciation rights; and
. other types of awards.
Our 2000 stock incentive plan will be administered by our compensation
committee which selects the optionees, determines the number of shares to be
subject to each option, determines the exercise price of each option and
determines the vesting and exercise periods of each option. Our 2000 stock
incentive plan authorizes the issuance of an aggregate of up to 4,000,000
shares of common stock plus any remaining shares under the 1998 stock option
plan. The 2000 stock incentive plan also provides for annual increases in the
number of shares of common stock subject to the plan by the number of shares
equal to 5% of the total number of shares outstanding or a lesser number of
shares as determined by the compensation committee. We have not yet granted any
options under this plan.
The exercise price of all incentive stock options granted under our 2000
stock incentive plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of all non-qualified
stock options granted under our 2000 stock incentive plan shall be determined
by the compensation committee, but cannot be less than 85% of the fair market
value on the date of grant unless otherwise determined by the compensation
committee. With respect to any participant who owns stock possessing more than
10% of the voting power of all our classes of stock, the exercise price of any
incentive stock option
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<PAGE>
granted must equal at least 110% of the fair market value on the grant date and
the maximum term of any these options must not exceed five years. The term of
all other awards granted under our 2000 stock incentive plan will be determined
by the compensation committee.
An option holder's initial grant will vest 25% at the first anniversary
date and monthly thereafter, such that the option will be fully exercisable
four years after its date of grant. Subsequent options will vest monthly
commencing on the first month after the grant date, such that the option will
be fully exercisable four years after the grant date.
An option holder under our 2000 stock incentive plan whose services with
us ceases for any reason, other than death or disability, may exercise vested
options in the 90-day period following termination, unless the options expire
sooner by their terms. For terminations caused by death or disability, the
exercise period is 12 months.
In the event of a change of control where the acquiror assumes options
granted under the 2000 stock incentive plan, none of these options are subject
to accelerated vesting. However, assumed options will automatically become
fully vested if the grantee is terminated by the acquiror within six months of
a change of control. In the event of a change of control where the acquiror
does not assume options granted under the 2000 stock incentive plan, all of
these options become fully vested upon the closing of the acquisition.
Unless terminated earlier, our 2000 stock incentive plan will terminate
in 2010. Our board of directors has authority to amend or terminate our 2000
stock incentive plan, provided that this action will not impair the rights of
any participant without the written consent of that participant.
2000 Non-Employee Director Stock Option Program
Our 2000 non-employee director stock option program was adopted by our
board of directors pursuant to the 2000 stock incentive plan and is subject to
the terms and conditions of the 2000 stock incentive plan. The non-employee
director program provides for automatic option grants to non-employee
directors. Our non-employee director program has been approved by our board of
directors prior to the effectiveness of this offering. The non-employee
director program is effective upon the effectiveness of this offering, and no
options will be granted under this program until that time.
The purpose of the non-employee director program is to enhance our
ability to attract and retain the best available non-employee directors and to
provide them additional incentives to promote the success of our business.
Under this program, each non-employee director in office upon the
effectiveness of this offering and each non-employee director first elected to
our board of directors following the effectiveness of this offering will
automatically be granted an option to acquire 25,000 shares of our common stock
at an exercise price per share equal to the fair market value of our common
stock at the date of grant. Twenty-five percent of the options will vest and
become exercisable 12 months after the grant date, with the remaining option
shares vesting monthly over the remaining three-year period and an additional
1/48 of the shares subject to the option will vest on each monthly anniversary
of the grant date thereafter. Upon the date of each annual stockholders'
meeting, each non-employee director who has been a member of our board of
directors for at least 11 months prior to the date of the stockholders' meeting
will receive an automatic option grant for 5,000 shares of our common stock at
an exercise price equal to the fair market value of our common stock at the
date of grant. These options will vest monthly over a four-year period and
become exercisable as to 1/48 of the shares subject to the option on each
monthly anniversary of the grant date.
The term of each automatic option grant and the extent to which it will
be transferable will be provided in a stock option agreement. The option
exercise price may be paid by cash, check, shares of our common stock, the
assignment of part of the proceeds from the sale of shares acquired upon
exercise of the option or any combination of these methods.
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The non-employee director program is administered by our board of
directors or a committee designated by the board made up of two or more non-
employee directors. The program administrator determines the terms and
conditions of awards and interprets the terms of the program.
Unless terminated earlier, the non-employee director program will
terminate automatically in 2010 when the 2000 stock incentive plan terminates.
Our board of directors has the authority to amend, suspend or terminate the
non-employee director program provided that these actions do not affect awards
to non-employee directors previously granted under the program unless agreed to
by the affected non-employee directors.
2000 Employee Stock Purchase Plan
Our employee stock purchase plan was adopted by our board of directors in
January 2000. We expect to receive stockholder approval prior to the
effectiveness of this offering. Our employee stock purchase plan is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal
Revenue Code to provide our employees with an opportunity to purchase common
stock through payroll deductions.
An aggregate of 2,000,000 shares of common stock has been reserved for
issuance and are available for purchase under our employee stock purchase plan,
pending adjustment for a stock split, or any future stock dividend or other
similar change in our common stock or our capital structure. The employee stock
purchase plan provides for annual increases in the number of shares of common
stock subject to the plan equal to the lesser of:
. two million shares;
. the number of shares equal to 1.75% of the total number of shares
outstanding; or
. a lesser number of shares as determined by the compensation
committee.
All of our employees who are regularly employed for more than five months
in any calendar year and work more than 20 hours per week are eligible to
participate in our employee stock purchase plan. Employees hired after the
closing of this offering are eligible to participate in our employee stock
purchase plan, subject to a ten-day waiting period after hiring. Non-employee
directors, consultants, and employees subject to the rules or laws of a foreign
jurisdiction that prohibit or make impractical their participation in our
employee stock purchase plan are not eligible to participate in this plan.
Our employee stock purchase plan designates offer periods, purchase
periods and exercise dates. Offer periods are generally overlapping periods of
24 months. The initial offer period begins on the effective date of our
employee stock purchase plan, which is the effective date of the registration
statement relating to this offering, and ends on February 14, 2002. Additional
offer periods will commence each February 15 and August 15. Purchase periods
are generally six months in length, with the initial purchase period commencing
on the effective date of our employee stock purchase plan and ending on August
14, 2000. Thereafter, purchase periods will commence each February 15 and
August 15. Exercise dates are the last day of each purchase period. In the
event we merge with or into another corporation, sell all or substantially all
of our assets, or enter into other transactions in which all of our
stockholders before the transaction own less than 50% of the total combined
voting power of our outstanding securities following the transaction, the
administrator of our employee stock purchase plan may elect to shorten the
offer period then in progress.
On the first day of each offer period, a participating employee is
granted a purchase right. A purchase right is a form of option to be
automatically exercised on the forthcoming exercise dates within the offer
period during which authorized deductions are to be made from the pay of
participants and credited to their accounts under our employee stock purchase
plan. When the purchase right is exercised, the participant's withheld salary
is used to purchase shares of common stock. The price per share at which shares
of common stock are to be purchased under our employee stock purchase plan
during any purchase period is the lesser of 85% of the fair market value of the
common stock on the date of the grant of the option, which is the commencement
of the offer period, or 85% of the fair market value of the common stock on the
exercise date, which is the last day of
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a purchase period. The participant's purchase right is exercised in this manner
on each exercise date arising in the offer period unless, on the first day of
any purchase period, the fair market value of the common stock is lower than
the fair market value of the common stock on the first day of the offer period.
If so, the participant's participation in the original offer period is
terminated, and the participant is automatically enrolled in the new offer
period effective the same date.
Payroll deductions may range from 1% to 10% in whole percentage
increments of a participant's regular base pay, exclusive of bonuses, overtime,
shift-premiums, commissions, reimbursements or other expense allowances.
Participants may not make direct cash payments to their accounts. The maximum
number of shares of common stock that any employee may purchase under our
employee stock purchase plan during a purchase period is 500 shares. The
Internal Revenue Code imposes additional limitations on the amount of common
stock that may be purchased during any calendar year.
Our employee stock purchase plan will be administered by our board of
directors or a committee designated by our Board, which will have the authority
to terminate or amend our employee stock purchase plan, subject to specified
restrictions, and otherwise to administer our employee stock purchase plan and
to resolve all questions relating to the administration of the plan.
401K Plan
In 1999, we implemented a 401(k) plan covering all employees. Pursuant to
the 401(k) plan, employees may elect to reduce their current compensation up to
the prescribed annual limit, which is $10,500 in 2000, and contribute these
amounts to the 401(k) plan. Employees become fully vested in these
contributions immediately, subject to limitations on access to the
contributions during the duration of employment. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code so that contributions by
employees or by us to the 401(k) plan, and income earned on the 401(k) plan
contributions, are not taxable to employees until withdrawn from the 401(k)
plan. Contributions by us, if any, will be deductible by us when made. We have
not made any contributions under this plan. The trustee under the 401(k) plan,
at the direction of each participant, invests the 401(k) plan employee salary
deferrals in selected investment options.
Limitation of Liability and Indemnification Matters
The certificate of incorporation that we will adopt immediately prior to
the effectiveness of this offering provides that, except to the extent
prohibited by Delaware law, our directors will not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as
directors. Under Delaware law, the directors have a fiduciary duty to our
company that is not eliminated by this provision of the certificate of
incorporation and, in appropriate circumstances, equitable remedies including
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the
Delaware law for:
. breach of the director's duty of loyalty;
. acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or which involve intentional
misconduct, or knowing violations of law;
. actions leading to improper personal benefit to the director; and
. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law.
This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws.
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Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of
incorporation provides that we will indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that the person is or was a
director or officer, or is or was serving at our request as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses, judgements, fines and
amounts paid in settlement actually and reasonably incurred by the person in
the action, suit or proceeding.
We plan to enter into indemnification agreements with our directors and
our executive officers containing provisions that may require us, among other
things, to indemnify our directors and officers against liabilities that may
arise by reason of their status of service as directors or officers other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to obtain directors and officers'
liability insurance for our directors or officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
The Securities and Exchange Commission is of the opinion that
indemnification of directors, officers and persons controlling our company for
violations of the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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RELATED PARTY TRANSACTIONS
In May 1998, we entered into restricted stock purchase agreements with
our co-founders, Donald M. Kendall, Jr. and Eric Budin, under which they
received shares of our securities in exchange for their entire membership
interest in Nutrition Direct, LLC, our predecessor entity. Mr. Kendall received
1,449,834 shares of our common stock and 22,976 shares of our Series A
convertible preferred stock. Mr. Budin received 989,526 shares of our common
stock. Under the terms of these agreements, we have repurchase rights with
respect to any unvested shares. Approximately 30% of their shares vested
immediately and the remainder vest monthly over a 34-month period beginning in
May 1998. In March 1999, the agreements were revised to amend the accelerated
vesting provisions upon a change of control transaction and the subsequent
termination of their employment.
The following table sets forth information concerning option grants to
our current executive officers and directors since our inception in January
1998. In each case, the exercise price for the options reflected the fair
market value per share of our common stock as determined by our board of
directors or its compensation committee.
<TABLE>
<CAPTION>
Exercise Price
Name Date of Grant Options Per Share
- ---- ------------- ------- --------------
<S> <C> <C> <C>
Bradford S. Oberwager...................... 12/18/1998 235,000 $0.166
10/8/1999 300,000 0.330
Laureen De Buono........................... 11/3/1999 375,000 3.620
Clarence A. Felong......................... 4/14/1999 419,207 0.166
12/15/1999 100,000 3.620
Bruce S. Mowery............................ 6/1/1999 227,078 0.166
12/15/1999 50,000 3.620
Samuel J. Salkin........................... 8/4/1998 144,000 0.109
5/25/1999 83,078 0.166
12/15/1999 50,000 3.620
Perk Perkins............................... 10/29/1998 30,000 0.166
John Sculley III........................... 10/29/1998 90,000 0.166
</TABLE>
Mr. Oberwager's option to purchase 235,000 shares of our common stock
vests over a 23-month period, which began in May 1999. Upon a change of control
of our company, an additional 12.5% of the shares into which the options are
exercisable immediately vest. Upon a change of control and a subsequent
termination of employment, an additional 25% of the shares into which the
options are exercisable immediately vests. Mr. Oberwager's option to purchase
300,000 shares of our common stock vests subject to the terms and conditions of
our 1998 stock option plan. Upon a change of control of our company, an
additional 12.5% of the shares into which the options are exercisable
immediately vest. Upon a change of control and a subsequent termination of
employment, an additional 25% of the shares into which the options are
exercisable immediately vests. Solely upon the termination of employment
without cause, 50% of the shares into which the options are exercisable
immediately vest.
Ms. De Buono's option to purchase 375,000 shares of our common stock
vests subject to the terms and conditions of our 1998 stock option plan. Upon
termination of employment for reasons other than those indicated in Ms. De
Buono's employment offer letter, between six and 12 months from the start of
her employment, 25% of the options immediately vest. Upon a change of control
of our company, 12.5% of the shares into which the options are exercisable
immediately vest, and upon a change of control and a subsequent termination of
employment or diminution of duties, 37.5% of the shares into which the options
are exercisable immediately vest.
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Mr. Mowery's option to purchase 277,078 shares of our common stock and
Mr. Felong's option to purchase 519,207 shares of our common stock vest subject
to the terms and conditions of our 1998 stock option plan with no accelerated
vesting.
Mr. Salkin's option to purchase 144,000 shares of our common stock vests
subject to the terms and conditions of our 1998 stock option plan. Upon a
change of control of our company, 12.5% of the shares into which the options
are exercisable immediately vest, and upon a change of control and a subsequent
termination of employment or diminution of duties, 25% of the shares into which
the options are exercisable immediately vest. Mr. Salkin's option to purchase
133,078 shares of our common stock vests subject to the terms and conditions of
our 1998 stock option plan with no accelerated vesting.
Mr. Perkins' option to purchase 30,000 shares of our common stock and Mr.
Sculley's option to purchase 90,000 shares of our common stock vested
immediately.
In February 1998, we issued a warrant to purchase an aggregate of 14,634
shares of our Series A convertible preferred stock to Donald M. Kendall, Sr.,
father to Donald M. Kendall, Jr., our Chief Executive Officer. The warrant
expires in May 2003, or immediately upon the occurrence of any of the
following:
. liquidation, dissolution or winding up of our business;
. sale, lease or other disposition of all or substantially all of our
assets; or
. our merger or consolidation with or into any corporation or other
entity where our equity holders immediately prior to such event do
not retain at least 50% of the voting power of and interest in the
successor entity.
In August 1999, we entered into a stock purchase agreement with Bergen
Brunswig Drug Company, our primary fulfillment provider of health products. In
this agreement we issued 1,169,922 shares of our common stock to Bergen
Brunswig in connection with transactions related to the prescription
pharmaceuticals Internet fulfillment services agreement with Medi-Mail, a
wholly owned subsidiary of Bergen Brunswig.
In November 1999, we entered into a share purchase agreement with Roger
Hardy and William Wrixon, who in the aggregate owned the entire equity interest
in Clearly Contacts, now a division of our company. In exchange for Mr. Hardy's
entire interest in Clearly Contacts, he received $262,500 and 165,000 shares of
our common stock. In exchange for Mr. Wrixon's entire interest in Clearly
Contacts, he received $87,500 and 55,000 shares of our common stock.
As of December 31, 1999, we have issued shares of preferred stock in
private placement transactions as follows:
. an aggregate of 398,109 shares of Series A convertible preferred
stock at $1.64 per share to five investors;
. an aggregate of 1,528,000 shares of Series B mandatorily redeemable
convertible preferred stock at $1.64 per share to four investors;
. an aggregate of 6,611,446 shares of Series C mandatorily redeemable
convertible preferred stock at $1.66 per share to seven investors;
and
. an aggregate of 9,233,864 shares of Series D mandatorily redeemable
convertible preferred stock at $4.82 per share to 39 investors.
The following table sets forth the number of shares of Series A
convertible preferred stock and, Series B, Series C and Series D mandatorily
redeemable convertible preferred stock purchased by our directors,
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officers, five percent stockholders and their respective affiliates. Upon the
completion of this offering, each share of the preferred stock converts into
shares of our common stock. Each share of Series A convertible preferred stock
and Series B mandatorily redeemable convertible preferred stock converts into
one and one half shares of our common stock. Each share of Series C and D
mandatorily redeemable preferred stock converts into one share of our common
stock.
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Holder Preferred Preferred Preferred Preferred
- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Donald M. Kendall, Jr................. 22,976 46,000 12,169 18,520
Donald M. Kendall, Sr................. 250,384 -- -- --
John Sculley, III..................... -- 46,000 -- 41,493
21st Century Internet Fund, L.P....... -- 1,105,000 1,117,470 989,626
SOFTBANK Affiliates................... -- -- 1,746,988 1,659,751
Rho Management Trust I................ -- -- 1,987,952 1,360,995
Boston Millennia Limited Partnership
and affiliates....................... -- -- -- 1,659,746
Health Business Partners, LLC and its
affiliates........................... -- 331,000 391,566 636,203
HealthCare Ventures V, L.P............ -- -- 1,325,301 220,796
</TABLE>
We have entered into a registration rights agreement with various
preferred stockholders described above pursuant to which they will have
specified registration rights with respect to their shares of common stock
following this offering. Upon the completion of this offering, all shares of
our outstanding preferred stock will be automatically converted into shares of
common stock.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Delaware law. We
will enter into compensation protection agreements with each of our executive
officers.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. We intend that all future transactions, including loans, between
us and our officers, directors, principal stockholders and their affiliates
will be approved by a majority of our board of directors, including a majority
of the independent and disinterested outside directors on our board of
directors and will be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common
stock as of December 31, 1999 and as adjusted to reflect the sale of the shares
of common stock in this offering by:
. each person or entity known by us to own beneficially more than 5% of
our common stock;
. our Chief Executive Officer, each of the executive officers named in
the summary compensation table and each of our directors; and
. all of our executive officers and directors as a group.
The beneficial ownership is calculated based on 23,800,172 shares of our
common stock issued and outstanding as of December 31, 1999, assuming the
conversion of Series A convertible preferred stock and Series B, Series C and
Series D mandatorily redeemable convertible preferred stock into common stock,
which will occur automatically upon the effectiveness of this offering, and
shares outstanding immediately following the completion of this offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares issuable upon the exercise of options
that are currently exercisable or become exercisable within 60 days of December
31, 1999 are considered outstanding for the purpose of calculating the
percentage of outstanding shares of our common stock held by the individual,
but not for the purpose of calculating the percentage of outstanding shares of
our common stock held by an other individual. Except as indicated in the
footnotes to this table, and as affected by applicable community property laws,
all persons listed have sole voting and investment power for all shares shown
as beneficially owned by them.
The address of each of the executive officers and directors is c/o
more.com, Inc., 520 Third Street, Second Floor, San Francisco, California
94107.
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares Beneficially Owned
Beneficially --------------------------------
Beneficial Owner Owned Prior to Offering After Offering
- ---------------- ------------ ----------------- --------------
<S> <C> <C> <C>
21st Century Internet Fund, L.P......................... 3,764,596 15.8%
John Neil Weintraut, Member
21st Century Internet Management Partners, LLC
Two South Park, 2nd Floor, San Francisco, CA 94107
Rho Management Trust I.................................. 3,348,947 14.1%
Mark Leschly, Managing Director
Rho Management Company, Inc., Investment Advisor
152 W 57th Street, New York, NY 10019
SOFTBANK Affiliates (1)................................. 3,406,739 14.3%
E. Scott Russell
200 West Evelyn Ave., Suite 200, Mountain View, CA
94043
Boston Millennia Limited Partnership and 1,314,315 5.5%
Affiliates (2).........................................
Martin Hernon, General Partner
Glen Partners Limited Partnership, General Partner
30 Rowes Wharf, Boston, MA 02110
HealthCare Ventures V, L.P.............................. 1,546,097 6.5%
Jeffrey Steinberg
Administrative Partner of HealthCare Partners V, L.P.
The General Partner of HealthCare Partners V, L.P.
44 Nassau Street, Princeton, NJ 08542-4511
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares Beneficially Owned
Beneficially --------------------------------
Beneficial Owner Owned Prior to Offering After Offering
- ---------------- ------------ ----------------- --------------
<S> <C> <C> <C>
Health Business Partners, LLC and its Affiliates (3)... 1,524,269 6.4%
Daniel Warshay, Member
5784 Post Road, Suite 5, Warwick, RI 02818
Donald M. Kendall, Jr. (4)............................. 1,583,987 6.7%
Eric Budin (5)......................................... 989,526 4.2%
Bradford Oberwager (6)................................. 820,375 3.4%
Samuel Salkin (7)...................................... 277,078 1.2%
Clarence A. Felong (8)................................. 519,207 2.2%
Mark Leschly (9)....................................... 3,348,947 14.1%
Thomas A. Penn (10).................................... 1,314,315 5.5%
Perk Perkins (11)...................................... 30,000 *
Donald R. Roden........................................ -- --
E. Scott Russell (12).................................. 3,406,739 14.3%
John Sculley III (13).................................. 90,000 *
John Neil Weintraut (14)............................... 3,764,596 15.8%
Executive officers and directors as a group 16,796,848 70.6%
(11 persons) (15).....................................
</TABLE>
- --------
(1) Consists of (a) 2,528,419 shares held by SOFTBANK Venture Capital IV,
L.P.; (b) 48,445 shares held by SOFTBANK Technology Advisors Fund, L.P.;
(c) 795,128 shares held by SOFTBANK Venture Capital V, L.P.; (d) 21,694
shares held by SOFTBANK Technology Advisors Fund V, L.P.; and (e) 13,053
shares held by SOFTBANK / Technology Entrepreneurs Fund V, L.P.
(2) Consists of 1,293,230 shares held by Boston Millennia Limited Partnership
and 21,085 shares held by Boston Millennia Associates I Partnership.
(3) Consists of (a) 496,500 shares held by GreenTree Nutrition Investors,
LLC; (b) 391,566 shares held by Greentree Nutrition Investors II, LLC;
and (c) 636,203 shares held by Greentree Nutrition Investors IV, L.P.
Health Business Partners, LLC is the general partner and administrator of
the above funds.
(4) Includes 463,843 shares subject to repurchase by us as of December 31,
1999.
(5) Includes 309,227 shares subject to repurchase by us as of December 31,
1999.
(6) Includes 163,478 shares subject to repurchase by us as of December 31,
1999 and an option to purchase 300,000 shares of common stock exercisable
within 60 days of December 31, 1999.
(7) Includes 96,000 shares subject to repurchase by us as of December 31,
1999 and an option to purchase 133,078 shares of common stock exercisable
within 60 days of December 31, 1999.
(8) Represents an option to purchase 519,207 shares of common stock
exercisable within 60 days of December 31, 1999.
(9) Mark Leschly, one of our directors, is a director of Rho Management
Company, Inc. The shares represent shares held by Rho Management Company,
Inc. Mr. Leschly disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest as a director.
(10) Thomas A. Penn, one of our directors, is a Partner at Boston Millennia
Partners. The shares represent shares held by Boston Millennia Limited
Partnership and its affiliate. Mr. Penn disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest as a general
partner.
(11) Represents an option to purchase 30,000 shares of common stock
exercisable within 60 days of December 31, 1999.
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<PAGE>
(12) E. Scott Russell, one of our directors, is a managing member of SOFTBANK
Venture Capital. The shares represent shares held by SOFTBANK affiliates.
Mr. Russell disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest as a managing member.
(13) Represents an option to purchase 90,000 shares of common stock
exercisable within 60 days of December 31, 1999.
(14) John Neil Weintraut, one of our directors, is a partner at 21st Century
Internet Venture Partners. The shares represent shares held by 21st
Century Internet Ventures Partners. Mr. Weintraut disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
as a partner.
(15) Includes (a) 11,834,597 shares deemed to be beneficially owned by certain
of our directors as set forth in notes (2), (9), (10) and (11) above; and
(b) 1,724,363 shares of common stock issuable upon exercise of stock
options held by our executive officers and directors within 60 days of
December 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and of provisions of our
certificate of incorporation and bylaws is merely a summary. A complete
description of the rights and preferences is set forth in the provisions of our
certificate of incorporation, our bylaws and applicable corporate laws. The
description of common stock and preferred stock reflect changes to our capital
structure that will occur upon the effectiveness of this offering in accordance
with the terms of the certificate of incorporation that we will adopt
immediately prior to the effectiveness of this offering.
Upon the effectiveness of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $0.001 par value per share
and 10,000,000 shares of undesignated preferred stock, par value $0.001.
Common Stock
As of December 31, 1999, we are authorized to issue 30,000,000 shares of
common stock. After giving effect to the conversion of all outstanding shares
of our Series A convertible preferred stock and Series B, Series C and Series D
mandatorily redeemable convertible preferred stock upon the completion of this
offering, 23,800,172 shares of our common stock were issued and outstanding.
The holders of our common stock are entitled to one vote for each share
held of record upon such matters and in such manner as may be provided by law.
Subject to preferences applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably dividends, if any,
as may be declared by our board of directors out of funds legally available for
dividend payments. In the event we liquidate, dissolve or wind up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
the preferred stock. Holders of common stock have no preemptive rights or
rights to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
As of December 31, 1999, we are authorized to issue 19,706,478 shares of
our preferred stock. As of December 31, 1999, each of the 398,109 shares of our
Series A convertible preferred stock and 1,528,000 shares of our Series B
mandatorily redeemable convertible preferred stock will convert into one and
one half shares of common stock. Each of the 6,611,446 shares of our Series C
mandatorily redeemable convertible preferred stock and 9,233,864 shares of our
Series D convertible preferred stock will convert into one share of common
stock upon the effectiveness of this offering. Upon the effectiveness of this
offering, our board of directors will be authorized, absent any limitations
prescribed by law, without stockholder approval, to issue up to an aggregate of
10,000,000 shares of preferred stock, in one or more series, each of the series
to have rights and preferences, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by our board of directors. The rights of the holders of common
stock will be subject to, and maybe adversely affected by, the rights of
holders of any preferred stock that maybe issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We have no present plans to issue any shares of preferred stock.
Registration Rights
After this offering, a number of holders of shares of our common stock
will be entitled to registration rights with respect to their shares. Beginning
180 days after this offering, a number of holders may require us to register
all or part of their shares. In addition, these holders may require us to
include their shares in future
69
<PAGE>
registration statements that we file and may require us to register their
shares on Form S-3. Furthermore, beginning 180 days after this offering, other
holders of our common stock may also require us to include their shares in
future registration statements that we file. Upon registration, these shares
will be freely tradable in the public market without restriction.
All expenses in effecting these registrations, with the exception of
underwriting discounts and selling commissions, will be borne by us. These
registration rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in the registration. We have agreed to indemnify the holders of these
registration rights, and each selling holder has agreed to indemnify us,
against liabilities under the Securities Act, the Securities Exchange Act or
other applicable federal or state law.
Warrants
Series A Warrants
We issued warrants to purchase an aggregate of 20,731 shares of Series A
convertible preferred stock to all our Series A convertible preferred stock
holders except Donald M. Kendall, Jr. The warrants expire in May 2003, or
immediately upon the occurrence of any of the following:
. liquidation, dissolution or winding up of our business;
. sale, lease or other disposition of all or substantially all of our
assets; or
. our merger or consolidation with or into any corporation or other
entity where our equity holders immediately prior to such event do
not retain at least 50% of the voting power of and interest in the
successor entity.
Series C Warrants
In connection with an equipment leasing facility, we issued warrants to
purchase an aggregate of 48,192 shares of Series C convertible preferred stock
with an exercise price of $1.66 per share. In general, the warrants expire on
the later of ten years from issuance, or five years from the closing of an
initial public offering by us.
Anti-Takeover Provisions
Provisions of Delaware law and our certificate of incorporation and
bylaws could make our acquisition by means of a tender offer, a proxy contest
or otherwise, and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control to first negotiate with us. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweighs the disadvantages of discouraging proposals, including proposals that
are priced above the then current market value of our common stock, because,
among other things, negotiation of these proposals could result in an
improvement of their terms.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law.
This provision generally prohibits any Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date the stockholder became an interested stockholder,
unless:
. prior to that date the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
70
<PAGE>
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock outstanding at the time the
transaction began; or
. on or following that date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity
or person beneficially owning 15% or more of the outstanding voting stock of
the corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Certificate of Incorporation and Bylaws
Our certificate of incorporation and bylaws will contain provisions that
could have the effect of discouraging potential acquisition proposals or making
a tender offer or delaying or preventing a change in control of our company. In
particular, our certificate of incorporation and bylaws, as applicable, among
other things:
. provide that our board of directors will be divided into three
classes of directors, as nearly equal in number as is reasonably
possible, serving staggered terms so that directors' initial terms
will expire at the first, second and third succeeding annual meeting
of the stockholders following our initial public offering,
respectively. At each such succeeding annual meeting, directors
elected to succeed those directors whose terms are expiring at such
meeting shall be elected for a three-year term of office. A vote of
at least 80% of our capital stock would be required to amend this
provision;
. provide that special meetings of the stockholders may be called only
by our president, our secretary or at the direction of the board.
Advance written notice is required, which generally must be received
by the secretary not less than 30 days nor more than 60 days prior to
the meeting, by a stockholder of a proposal or director nomination
that such stockholder desires to present at a meeting of
stockholders. Any amendment of this provision would require a vote of
at least 80% of our capital stock;
. provide that our stockholders will not be permitted to act by written
consent;
. do not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority stockholder holding a
sufficient number of shares may be able to ensure the election of one
or more directors. The absence of cumulative voting may have the
effect of
71
<PAGE>
limiting the ability of minority stockholders to effect changes in
the board and, as a result, may have the effect of deterring a
hostile takeover or delaying or preventing changes in control or
management of our company;
. provide that vacancies on our board may be filled by a majority of
directors in office, although less than a quorum, and not by the
stockholders; and
. allow us to issue up to 10,000,000 shares of undesignated preferred
stock with rights senior to those of the common stock and that
otherwise could adversely affect the rights and powers, including
voting rights, of the holders of common stock. In certain
circumstances, this issuance could have the effect of decreasing the
market price of the common stock, as well as having the anti-takeover
effect discussed above.
These provisions are intended to enhance the likelihood of continuity
and stability in the composition of our board and in the policies formulated
by them, and to discourage certain types of transactions that may involve an
actual or threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal
and to discouraging certain tactics that may be used in proxy fights. However,
these provisions could have the effect of discouraging others from making
tender offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our management.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe. Its
address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone
number is (781) 575-2469.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have shares of common stock
outstanding. Of this amount, the shares offered by this prospectus will be
available for immediate sale in the public market as of the date of this
prospectus. Following the expiration of 180-day lockup agreements with the
representatives of the underwriters, shares will be available for sale in
the public market, subject in some cases to compliance with the volume and
other limitations of Rule 144 of the Securities Act.
<TABLE>
<CAPTION>
Approximate Number
Days after the Date of of Shares Eligible for
this Prospectus Future Sale Comment
- ------------------------ ---------------------- ---------------------------------------------------------------
<S> <C> <C>
Upon effectiveness...... Freely tradable shares sold in this offering
180 days................ Lock-up released; shares saleable under Rule 144, 144(k) or 701
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of common stock; or
. the average weekly trading volume during the four calendar weeks
preceding the sale, subject to the filing of a Form 144 with respect
to the sale.
A person who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell his or her
shares under Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell under the limitations imposed
by Rule 144, even after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under
Rule 144 because this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
Our company and our directors, executive officers, stockholders with
registration rights and other stockholders and option holders have agreed,
under the purchase agreement and other agreements, that they will not sell any
common stock without the prior written consent of Merrill Lynch for a period of
180 days from the date of this prospectus, except that we may, without consent,
grant options and sell shares under our stock plans.
Any employee or consultant who purchased his or her shares under a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of December 31, 1999, the holders of options to purchase
approximately shares of common stock will be eligible to sell their shares
upon the expiration of the 180-day lockup period, subject to the vesting of
those options.
We intend to file a registration statement on Form S-8 under the
Securities Act of 1933, as amended, as soon as practicable after the completion
of this offering to register shares of common stock
73
<PAGE>
subject to outstanding stock options or reserved for issuance under our stock
plans. This registration will permit the resale of these shares by
nonaffiliates in the public market without restriction under the Securities
Act, upon completion of the lock-up period described above. Shares registered
under the Form S-8 registration statement held by affiliates will be subject to
Rule 144 volume limitations.
74
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from us,
the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Lehman Brothers Inc. ............................................
U.S. Bancorp Piper Jaffray Inc. .................................
------
Total.......................................................
======
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act, or to contribute
to payments the underwriters may be required to make in respect of those
liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters propose
initially to offer the shares to the public at the initial public offering
price on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
75
<PAGE>
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to
more.com........................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ million and are payable by us.
Over-allotment Option
We have granted options to the underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise these options for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
these options, each will be obligated, subject to conditions contained in the
purchase agreements, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered by this prospectus for
sale to some of our directors, officers, employees, distributors, dealers,
business associates and related persons. If these persons purchase reserved
shares, this will reduce the number of shares available for sale to the general
public. Any reserved shares that are not orally confirmed for purchase within
one day of the pricing of this offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
No Sales of Similar Securities
We, our executive officers and directors and all existing stockholders
have agreed, with exceptions, not to sell or transfer any common stock for 180
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, these other individuals and we have
agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any common stock;
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to
the common stock; or
. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
76
<PAGE>
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "MORE."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among the representatives and us. In addition to prevailing market
conditions, the factors to be considered in determining the initial public
offering price are:
. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, our company and the industry
in which we compete;
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the over-
allotment option described above. Purchases of the common stock to stabilize
its price or to reduce a short position may cause the price of the common stock
to be higher than it might be in the absence of such purchases.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
in the open market to reduce the underwriters' short position or to stabilize
the price of such shares, they may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those shares. The
imposition of a penalty bid may also affect the price of the shares in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
77
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Morrison & Foerster LLP, San Francisco, California. Legal matters in
connection with this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Attorneys employed by Morrison & Foerster LLP will purchase shares
in our directed share program.
EXPERTS
The consolidated financial statements of more.com, Inc. as of December
31, 1998 and 1999 and for the period from January 9, 1998 (inception) to
December 31, 1998 and the year ended December 31, 1999, and the financial
statements of Comfort Living, Inc. as of December 31, 1998 and 1999 and for
each of the years then ended, included in this prospectus have been so included
in reliance on the reports (which for Comfort Living, Inc. contains an
explanatory paragraph relating to the ability of Comfort Living, Inc. to
continue as a going concern as described in Note 1 to its financial statements)
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
CHANGE IN PRINCIPAL ACCOUNTANTS
In January 2000, Ernst & Young LLP was dismissed, and
PricewaterhouseCoopers LLP replaced Ernst & Young LLP as our independent
accountants. The selection of PricewaterhouseCoopers LLP as our independent
accountants was ratified by our audit committee in January 2000. During fiscal
1998 and fiscal 1999, we had no disagreement with our former accountants, Ernst
& Young LLP, on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement. Ernst
& Young LLP did not issue a report on our financial statements with respect to
the year ended December 31, 1999.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C.
a Registration Statement on Form S-1 under the Securities Act with respect to
the common stock offered in this prospectus. This prospectus, filed as part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement and its exhibits and schedules, portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and our common stock, we refer you to the
Registration Statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of
such contract, agreement or document filed as an exhibit to the Registration
Statement, with each such statement being qualified in all respects by
reference to the document to which it refers. Anyone may inspect the
Registration Statement and its exhibits and schedules without charge at the
public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or
any part of these materials from the SEC upon the payment of certain fees
prescribed by the SEC. You may also inspect these reports and other information
without charge at a Web site maintained by the SEC. The address of this site is
http://www.sec.gov.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be required to file
reports, proxy statements and other information with the SEC. You will be able
to inspect and copy these reports, proxy statements and other information at
the public reference
78
<PAGE>
MORE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
more.com, Inc. Consolidated Financial Statements
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Pro Forma Combined Consolidated Financial Information
Overview................................................................... F-31
Pro Forma Combined Consolidated Balance Sheet.............................. F-32
Pro Forma Combined Consolidated Statement of Operations Information........ F-33
Notes to Pro Forma Combined Consolidated Financial Information............. F-34
Comfort Living, Inc.
Report of Independent Accountants.......................................... F-35
Balance Sheets............................................................. F-36
Statements of Operations................................................... F-37
Statements of Stockholders' Equity (Net Capital Deficiency)................ F-38
Statements of Cash Flows................................................... F-39
Notes to Financial Statements.............................................. F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of more.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
more.com, Inc. and its subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for the period from January 9,
1998 (inception) through December 31, 1998 and for the year ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 4, 2000
F-2
<PAGE>
MORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity at
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 8,549 $ 24,655
Short-term investments............... 1,003 --
Accounts receivable, net............. 23 591
Inventories.......................... 22 175
Prepaid expenses and other current
assets.............................. 172 641
-------- --------
Total current assets............... 9,769 26,062
Fixed assets, net...................... 300 6,452
Intangible assets, net................. 1,472 7,551
Other assets........................... -- 96
-------- --------
Total assets........................... $ 11,541 $ 40,161
======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................... $ 331 $ 1,421
Accrued liabilities.................. 466 6,174
Current portion of borrowings under
lines of credit..................... 375 891
-------- --------
Total current liabilities.......... 1,172 8,486
-------- --------
Borrowings under lines of credit, less
current portion....................... 225 1,376
Mandatorily redeemable convertible
preferred stock (Note 6).............. 13,481 58,064 $ --
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Preferred stock: issuable in series,
$0.001 par value; 419 shares
authorized, 398 shares issued and
outstanding, actual; none issued and
outstanding, pro forma.............. 10 10 --
Common stock: $0.001 par value;
30,000 shares authorized; 2,939 and
5,065 shares issued and outstanding,
actual; 30,000 shares authorized,
23,800 shares issued and
outstanding, pro forma.............. 3 5 24
Additional paid-in capital........... 2,190 16,698 74,753
Deferred stock-based compensation.... (371) (4,624) (4,624)
Accumulated deficit.................. (5,169) (39,854) (39,854)
-------- -------- --------
Total stockholders' equity
(deficit)......................... (3,337) (27,765) $ 30,299
-------- -------- ========
$ 11,541 $ 40,161
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
MORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
Net revenues:.............................. $ 99 $ 2,923
Cost of net revenues (1)................. 143 3,753
------- --------
Gross profit (loss).................... (44) (830)
------- --------
Operating expenses:
Marketing and sales (2).................. 2,613 20,480
Product development (3).................. 1,387 3,254
General and administrative (4)........... 788 5,187
Amortization of deferred stock-based
compensation............................ 404 5,061
------- --------
Total operating expenses............... 5,192 33,982
------- --------
Operating loss............................. (5,236) (34,812)
Other income (expense):
Interest income.......................... 107 482
Interest expense......................... (40) (355)
------- --------
Net loss................................... $(5,169) $(34,685)
Accretion of discount on mandatorily
redeemable convertible preferred stock.... (101) (1,597)
------- --------
Net loss available to common stockholders.. $(5,270) $(36,282)
======= ========
Basic and diluted net loss per share....... $ (5.90) $ (15.74)
Pro forma basic and diluted net loss per
share (unaudited)......................... $ (2.68)
Weighted average shares outstanding used to
compute basic and diluted net loss per
share..................................... 893 2,305
Weighted average shares outstanding used to
compute pro forma basic and diluted net
loss per share (unaudited)................ 13,556
</TABLE>
- --------
(1) Excludes stock-based compensation charges of $11 in 1998 and $31 in 1999.
(2) Excludes stock-based compensation charges of $93 in 1998 and $1,619 in
1999.
(3) Excludes stock-based compensation charges of $39 in 1998 and $1,986 in
1999.
(4) Excludes stock-based compensation charges of $261 in 1998 and $1,425 in
1999.
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
MORE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Stockholders' Deficit
-----------------------------------------------------------------------------
Series A
Convertible
Preferred
Stock Common stock Additional Deferred Total
------------- ------------- Paid-in Stock-based Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Deficit
------ ------ ------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common stock and
Series A convertible
preferred stock to founders
upon incorporation.......... 23 $10 2,439 $ 2 $ 40 $ -- $ -- $ 52
Issuance of Common stock in
connection with acquisition
of Acumin................... -- -- 500 1 864 -- -- 865
Issuance of Series A
convertible preferred stock
and warrants in exchange for
cancellation of notes
payable..................... 375 -- -- -- 612 -- -- 612
Deferred stock-based
compensation related to
stock options granted....... -- -- -- -- 775 (775) -- --
Amortization of deferred
stock- based compensation... -- -- -- -- -- 404 -- 404
Accretion of discount on
Series B and Series C
mandatorily redeemable
convertible preferred
stock....................... -- -- -- -- (101) -- -- (101)
Net loss and comprehensive
loss........................ -- -- -- -- -- -- (5,169) (5,169)
--- --- ----- --- ------- ------- -------- --------
Balance at December 31,
1998........................ 398 10 2,939 3 2,190 (371) (5,169) (3,337)
--- --- ----- --- ------- ------- -------- --------
Issuance of Common stock in
connection with fulfillment
agreement................... -- -- 1,170 1 4,550 -- -- 4,551
Exercise of stock options.... -- -- 736 1 146 -- -- 147
Options issued to
consultants................. -- -- -- -- 375 -- -- 375
Deferred stock-based
compensation related to
stock options granted....... -- -- -- -- 9,314 (9,314) -- --
Amortization of deferred
stock-based compensation.... -- -- -- -- -- 5,061 -- 5,061
Accretion of discount on
Series D mandatorily
redeemable convertible
preferred stock............. -- -- -- -- (1,597) -- -- (1,597)
Issuance of common stock in
conjunction with acquisition
of Clearly Contacts Lenses,
Inc......................... -- -- 220 -- 1,720 -- -- 1,720
Net loss and comprehensive
loss........................ -- -- -- -- -- -- (34,685) (34,685)
--- --- ----- --- ------- ------- -------- --------
Balance at December 31,
1999........................ 398 $10 5,065 $ 5 $16,698 $(4,624) $(39,854) $(27,765)
=== === ===== === ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
MORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss........................................................ $(5,169) $(34,685)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization expense......................... 129 1,682
Interest expense related to converted notes payable........... 12 153
Amortization of deferred stock-based compensation............. 404 5,061
Compensation expense recorded for consultants................. -- 282
Changes in operating assets and liabilities, net of assets and
liabilities acquired in a purchase business combinations:
Accounts receivable......................................... (23) (568)
Inventories................................................. 13 (112)
Prepaid expenses and other current assets................... (172) (374)
Other assets................................................ -- (96)
Accounts payable............................................ 331 990
Accrued liabilities......................................... 466 5,708
------- --------
Net cash used in operating activities..................... (4,009) (21,959)
------- --------
Cash flows from investing activities
Purchases of fixed assets, net of acquired business............. (341) (5,762)
Purchases of short-term investments............................. (1,003) --
Sales of short-term investments................................. -- 1,003
Acquisition of intangible assets................................ -- (323)
Business combinations, net of cash acquired..................... (730) (414)
------- --------
Net cash used in investing activities..................... (2,074) (5,496)
------- --------
Cash flows from financing activities
Borrowings under lines of credit................................ 600 1,350
Repayment of lines of credit.................................... -- (769)
Proceeds from issuance of convertible notes payable............. 600 --
Proceeds from issuance of convertible subordinated notes
payable........................................................ -- 12,000
Net proceeds from issuance of mandatorily redeemable convertible
preferred stock................................................ 13,380 30,833
Net proceeds from issuance of preferred and common stock........ 52 147
------- --------
Net cash provided by financing activities....................... 14,632 43,561
------- --------
Net increase in cash and cash equivalents....................... 8,549 16,106
Cash and cash equivalents at beginning of period................ -- 8,549
------- --------
Cash and cash equivalents at end of period...................... $ 8,549 $ 24,655
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
more.com, Inc. (the "Company" or "more.com") is an Internet health
superstore. Its e-commerce Web site, www.more.com, was launched on August 17,
1999. The Company was incorporated on May 14, 1998 in Delaware. Prior to its
incorporation, the Company operated as Nutrition Direct LLC, which was formed
on January 9, 1998 by the founders who contributed a total of $52,000 in cash.
Immediately after the Company's incorporation as more.com, the founders
retained the same voting rights as they had possessed in Nutrition Direct LLC.
The Company has derived substantially all of its revenue from sales in North
America.
The Company has incurred significant operating losses since inception of
operations and has limited working capital. The Company has financed its
operations to date through the issuance of debt and equity securities. Further
development and establishment of the Company's business will require additional
equity financing. The Company believes that financing can be obtained from
existing or new investors. However, there can be no assurance that the Company
will be able to obtain such equity financing on acceptable terms, if at all.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
Business and Concentration Risks
The Company operates in the e-commerce market, which is new, rapidly
evolving and highly competitive. The Company competes with other Internet
companies, established chain drugstores, mass market retailers, supermarkets,
warehouse clubs, cosmetic departments at major department stores and mail-order
pharmacies.
The Company currently depends primarily on one vendor to provide order
fulfillment. Although the Company believes that there are alternative vendors
for order fulfillment, there can be no assurance that the Company will maintain
its relationship with this vendor.
The Company is heavily dependent upon a number of other third parties for
credit card processing. In addition, the United Parcel Service of America, Inc.
and the United States Postal Service deliver substantially all of the Company's
products. Interruption of the services of any of these third parties could have
a material adverse impact on the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported results of operations during the reporting period. Actual
results could differ from those estimates.
F-7
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and other liabilities, approximate fair value due to their
short maturities. Based upon borrowing rates currently available to the Company
for loans with similar terms, the carrying value of capital lease obligations
approximates fair value.
Cash and Cash Equivalents
The Company considers investments in highly liquid investments purchased
with original maturities of 90 days or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value. The Company
maintains its cash in depository accounts with high credit quality financial
institutions.
Short-Term Investments
The Company has classified all short-term investments in debt securities
as available-for-sale. Available-for-sale securities are carried at cost which
approximates fair market value. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in interest income. Interest earned on securities classified as available-for-
sale is also included in interest income.
Concentrations of Credit Risk and Credit Evaluations
The Company is subject to concentrations of credit risk from its holdings
of cash, cash equivalents and short-term investments, which are held
principally with two domestic financial institutions. The Company conducts
business with individuals over the Internet. Sales to individuals are
principally paid for via credit cards and the Company's accounts receivable are
not significant.
Inventories
Inventories are carried at the lower of cost (determined on the specific
identification basis) or market. Inventories consist of raw materials, work in
process and nutritional products available for sale.
Fixed Assets
Fixed assets, including leasehold improvements, are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from two to five years. Leasehold improvements are amortized over the term of
the lease or estimated useful lives, whichever is shorter. Maintenance and
repair expenditures are charged to operations as incurred.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). In
accordance with SOP 98-1, the Company has capitalized certain purchased
software costs and Web site development costs. SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use.
F-8
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets relate to the Company's acquisition of certain
intellectual property rights, and goodwill related to business acquisitions
accounted for under the purchase method of accounting, and deferred fulfillment
costs. Intellectual property rights and goodwill are amortized using the
straight-line method over their estimated useful lives, ranging from 12 to 36
months. Deferred fulfillment costs are being amortized using the straight-line
method over the term of the fulfillment arrangement, which is ten years.
Long-Lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. In
circumstances where impairment is determined to exist, the Company will write
down the asset to its fair value based on the present value of estimated
expected future cash flows. To date, no such impairment has been indicated.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method of accounting for income
taxes. Under FAS 109, deferred tax assets and liabilities are measured based on
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
Pro Forma Stockholders' Equity
Effective upon the closing of the initial public offering of the
Company's common stock, the outstanding shares of Series A convertible
preferred stock and Series B, Series C and Series D mandatorily redeemable
convertible preferred stock will automatically convert into 597,000, 2,292,000,
6,611,000 and 9,234,000 shares, respectively, of common stock. The Company has
also issued Series A warrants and Series C warrants which will automatically
convert into 31,097 and 48,192 shares, respectively, of common stock. The pro
forma effects of these transactions are unaudited and have been reflected in
the accompanying pro forma consolidated balance sheet at December 31, 1999.
Net Loss Per Common Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS No. 128")
and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of
FAS No. 128 and SAB 98, basic net loss per share is computed by dividing the
net loss available to common stockholders for the period by the weighted
average number of shares of common stock outstanding during the period. The
calculation of diluted net loss per share gives effect to common stock
equivalents; however, potential common shares are excluded if their effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A
convertible preferred stock and Series B, Series C and Series D mandatorily
redeemable convertible preferred stock.
Pro forma basic and diluted net loss per share is computed on the basis
that all of the Series A convertible preferred stock and the Series B, Series C
and Series D manditorily redeemable convertible preferred stock convert into
common stock in accordance with their terms upon the closing of a "Qualified
Offering" as described in Note 6.
F-9
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
January 9, 1998 Year ended
(inception) to December 31,
December 31, 1998 1999
----------------- ------------
(in thousands)
<S> <C> <C>
Numerator:
Net loss available to common
shareholders........................... $(5,270) $(36,282)
======= ========
Denominator:
Weighted average common shares
outstanding............................ 2,518 3,573
Less weighted average common shares
issued subject to repurchase
agreements............................. (1,625) (1,268)
------- --------
Denominator for basic and diluted
calculation............................ 893 2,305
-------
Weighted average effect of pro forma
conversion of securities:
Series A preferred stock.............. 597
Series B preferred stock.............. 2,292
Series C preferred stock.............. 6,611
Series D preferred stock.............. 1,751
--------
Denominator for pro forma basic and
diluted calculation (unaudited)...... 13,556
========
Net loss per share:
Basic and diluted....................... $ (5.90) $ (15.74)
======= ========
Pro forma basic and diluted
(unaudited)............................ $ (2.68)
========
</TABLE>
The following table sets forth common stock equivalents (potential common
stock) that are not included in the diluted net loss per share calculation
above because their effect would be antidilutive for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Period from
January 9,
1998
(inception)
to Year ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Weighted average effect of common stock
equivalents:
Series A preferred stock..................... 379 597
Series B preferred stock..................... 1,455 2,292
Series C preferred stock..................... 1,162 6,611
Series D preferred stock..................... -- 1,751
Preferred stock warrants..................... 19 63
Unvested shares of common stock subject to
repurchase.................................. 1,625 1,268
Stock options................................ 211 1,920
----- ------
4,851 14,502
===== ======
</TABLE>
F-10
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted
the disclosure-only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). APB 25 provides
that the compensation expense relative to the Company's employee stock options
is measured based on the intrinsic value of the stock option. FAS 123 requires
companies that continue to follow APB 25 to provide a pro forma disclosure of
the impact of applying the fair value method of FAS 123. The Company accounts
for stock issued to nonemployees in accordance with the provisions of FAS 123
and the Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services".
Advertising Expenses
The Company recognizes advertising expenses in accordance with Statement
of Position 93-7, "Reporting on Advertising Costs." As such, the Company
expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used. Advertising production costs are expensed
as incurred. Advertising expenses totaled $2.0 million for the period from
January 9, 1998 (inception) to December 31, 1998, and $13.4 million for the
year ended December 31, 1999.
Revenue Recognition
Net revenues include product sales net of returns and allowances, and
advertising sales and gross outbound standard shipping charges. The Company
recognizes revenue from product sales, net of discounts, coupon redemption and
estimated sales returns, when the products are shipped to customers. Gross
outbound standard shipping and handling charges are included in net sales. The
Company provides an allowance for sales returns, which is based on historical
experience. For all product sales transactions with its customers, the Company
acts as a principal, takes title to all products sold upon shipment, bears
credit risk, and bears inventory risk of loss for returned products that are
not eligible to be returned to suppliers, although these risks are mitigated
through arrangements with credit card issuers and shippers. The Company
recognizes revenue from advertising sales ratably over the term of the
advertising campaigns. To the extent that advertising customers have paid the
Company for advertisements that have yet to be published on the Company's Web
site, the Company defers revenue recognition until such advertisements are
delivered.
In September 1999, the Company entered into an agreement with Bergen
Brunswig Drug Company ("BBDC") for BBDC to become the Company's advertising
agent. Under the terms of the agency agreement, BBDC will act as the Company's
agent for finding third parties to place ads on the Company's Web site. BBDC
will earn a commission based upon the advertising revenues that the Company
earns. Under the terms of the contract, BBDC guaranteed minimum monthly
advertising revenue to the Company in the first year of the contract, with the
aggregate of the monthly minimums totaling $5.0 million by August 1, 2000. For
the year ended December 31, 1999, the Company recognized $400,000, all of which
related to the BBDC minimum monthly guarantee. The Company did not recognize
any advertising revenue for the period from January 9, 1998 (inception) to
December 31, 1998.
Comprehensive Income
The Company complies with the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS
130 establishes standards for reporting comprehensive
F-11
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income and its components in financial statements. Comprehensive income, as
defined, includes all changes in equity (net assets) during a period from non-
owner sources. There is no difference between comprehensive loss and net loss
for all periods presented.
Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). SOP 98-1 requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. SOP 98-1 was adopted by the Company
on January 1, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 was adopted by the
Company on January 1, 1999 and requires costs of start-up activities and
organization costs to be expensed as incurred.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133, as amended by FAS
137, is effective for fiscal years beginning after June 15, 2000. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income (loss) depending on
whether a derivative is designed as part of a hedge transaction and, if so, the
type of hedge transaction involved. The Company does not expect that adoption
of FAS 133 will have a material impact on its consolidated financial position
or results of operations as the Company does not currently hold any derivative
financial instruments.
NOTE 2--BALANCE SHEET COMPONENTS (IN THOUSANDS):
Inventories
Inventories are carried at the lower of cost (determined on the specific
identification basis) or market. Inventories consist of raw materials, work in
process and nutritional products available for sale as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Raw Materials.................................... $-- $ 27
Work in Process.................................. -- 90
Finished Goods................................... 22 58
--- ----
Total.......................................... $22 $175
=== ====
</TABLE>
F-12
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fixed Assets
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Computers and equipment........................ $298 $1,698
Purchased software............................. -- 1,646
Web site development costs..................... -- 3,456
Furniture, fixtures and leasehold
improvements.................................. 43 394
---- ------
341 7,194
Less: accumulated depreciation and
amortization.................................. (41) (742)
---- ------
$300 $6,452
==== ======
</TABLE>
Intangible Assets
The components of intangible assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred fulfillment costs....................... $ -- $ 4,551
Goodwill......................................... 1,510 3,324
Customer base.................................... -- 243
Assembled workforce.............................. 50 304
Other............................................ -- 198
------ -------
$1,560 $ 8,620
Less: Accumulated amortization................... (88) (1,069)
------ -------
$1,472 $ 7,551
====== =======
</TABLE>
Accrued Liabilities
The components of accrued liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Accrued vacation................................. $ 12 $ 218
Loss on promotional program...................... -- 1,700
Advertising...................................... 219 1,455
Equipment purchase............................... -- 1,150
Other............................................ 235 1,651
---- ------
$466 $6,174
==== ======
</TABLE>
F-13
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--FINANCING ARRANGEMENTS
In June 1998, the Company entered into a line of credit agreement with a
bank that provides for borrowings of up to $600,000. The agreement provides for
two lines of credit: an Equipment Line of Credit and a Revolving Line of
Credit. The maximum available to borrow under each line of credit is $300,000.
The outstanding borrowings of $300,000 under the Revolving Line of Credit at
December 31, 1998, which bore interest at the bank's prime rate plus 1.50%,
were fully repaid in June 1999. In accordance with the terms of the agreement,
the outstanding borrowings of $300,000 under the Equipment Line of Credit at
December 31, 1998 were converted into a term note in June 1999. Under the term
note, the unpaid principal will be repaid in 24 equal monthly installments
commencing in July 1999 and will bear interest at the bank's prime rate (8.50%
at December 31, 1999) plus 2.00%. At December 31, 1999, $225,000 was
outstanding under this term note. Outstanding borrowings under this agreement
are collateralized by substantially all of the Company's assets. This agreement
prohibits cash dividends being paid by the Company without the bank's prior
written consent.
In May 1999, the Company entered into a $1.1 million financing agreement
with a vendor for the purchase of the Company's enterprise resource planning
system. The arrangement is composed of four financing contracts for $144,000,
payable over 30 months, $212,000, payable over 30 months, $362,000, payable
over 36 months, and $368,000, payable over 12 months. All four contracts are
payable on a quarterly basis. Prepayment of any outstanding amounts is
allowable, subject to certain penalties. At December 31, 1999, the Company had
approximately $805,000 outstanding under these notes bearing interest at a rate
of approximately 14.50% per annum.
In July 1999, the Company entered into an equipment line of credit
arrangement under a Senior Loan and Security Agreement with a financing
institution, which provides for borrowings of up to $2.0 million. Under the
terms of the agreement, the Company will enter into promissory notes for
borrowings made to purchase certain equipment, machinery, fixtures and
intangibles. Each note requires minimum payments of principal and interest over
42 months. Equipment, intangibles, and other assets of the Company are pledged
as collateral for this agreement. Prepayments are subject to certain penalties.
At December 31, 1999, the Company had approximately $1.2 million outstanding
under this line of credit with an effective interest rate of approximately
15.00% per annum. In connection with the line of credit arrangement, the
Company issued warrants to purchase 48,192 shares of Series C mandatorily
redeemable convertible preferred stock at $1.66 per share. The warrants expire
upon the earlier of 10 years or upon a merger or a sale of substantially all of
the Company's assets. The fair value attributable to these warrants, calculated
using the Black-Scholes option pricing model, was $76,000, which is being
charged to interest expense over the term of the agreement.
Future minimum payments under these financing arrangements are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.............................................................. $ 891
2001.............................................................. 673
2002.............................................................. 451
2003.............................................................. 252
------
Total Payments...................................................... $2,267
======
</TABLE>
F-14
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In February and March 1998, the Company issued convertible subordinated
promissory notes to certain investors in exchange for $600,000 in cash. The
notes bore interest at 10% per annum and were convertible into shares of
capital stock sold in the next financing round with proceeds to the Company of
at least $1.0 million. In May 1998, all promissory notes and accrued interest
were converted into 375,133 shares of Series A convertible preferred stock. In
connection with the issuance of the promissory notes, the Company issued
warrants to purchase 20,731 shares of Series A convertible preferred stock at
an exercise price of $1.64 per share. These warrants expire upon a liquidation,
dissolution, sale, lease or disposition of substantially all of the assets of
the Company, a merger, or five years from the issuance of the warrants. The
fair value attributable to these warrants was not material.
In July 1999, the Company issued convertible subordinated promissory
notes to certain Series C convertible preferred stockholders for $7.0 million
in cash. The notes bore interest at 10.00% per annum and all principal and
accrued interest were due on January 29, 2000 for all but one note. Principal
and accrued interest on the one note were due on February 18, 2000. The notes
were subordinated to the June 1999 term note and to the July 1999 equipment
line of credit. Upon a sale by the Company of the Company's preferred
securities with proceeds to the Company of at least $15.0 million, outstanding
principal and accrued interest under these convertible subordinated promissory
notes automatically convert into such preferred securities at the preferred
stock sale price per share. In October 1999, all outstanding principal and
accrued interest was converted into 1,481,227 shares of Series D mandatorily
redeemable convertible preferred stock.
In October 1999, the Company issued additional convertible subordinated
promissory notes to certain Series C convertible preferred stockholders for
$5.0 million in cash. The notes bore interest at 10.00% per annum and all
principal and accrued interest were due on April 8, 2000. The notes were
subordinated to the June 1999 term note and to the July 1999 equipment line of
credit. Upon a sale by the Company of its preferred securities with proceeds to
the Company of at least $25.0 million, outstanding principal and accrued
interest under these convertible subordinated promissory notes automatically
convert into such preferred securities at the preferred stock sale price per
share. In November 1999, all outstanding principal and accrued interest was
converted into 1,040,044 shares of Series D mandatorily redeemable convertible
preferred stock.
NOTE 5--RELATED PARTY TRANSACTIONS
Fulfillment Arrangement
In April 1999, the Company entered into a letter of understanding with a
vendor, which established the vendor as the Company's primary wholesale
supplier of non-prescription products at specified fulfillment charges.
In August 1999, the Company entered into a letter of intent to execute
formal over-the-counter and prescription fulfillment agreements with the
vendor. These agreements were executed in December 1999. In exchange for
entering into the letter of intent, the Company issued 1,169,922 shares of its
common stock to the vendor. These shares were deemed to have a fair value of
$4.6 million, which has been recorded as an intangible asset that is being
amortized as an operating expense over the term of the fulfillment agreement,
which is ten years.
F-15
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--STOCKHOLDERS' EQUITY
The Company is authorized to issue 30,000,000 shares of common stock and
19,706,478 shares of preferred stock each with a par value of $0.001 per share.
Common Stock Issued to Founders
In May 1998, the Company incorporated in Delaware and acquired all of the
outstanding equity interests of its predecessor, Nutrition Direct, LLC, a
California limited liability company (the "LLC") in exchange for the issuance
of 2,439,360 shares of common stock and 22,976 shares of Series A convertible
preferred stock of the Company. Approximately one-third of the common shares
and all of the preferred shares were immediately vested. The remaining common
shares are subject to a repurchase right which expires ratably over a 34-month
period which began in May 1998. The repurchase right allows the Company to
repurchase unvested shares at a repurchase price of $0.11 per share, determined
to be the value of the stock on the date of purchase, in the event of
termination of employment, death or disability. Upon a change in control, an
additional six months of unvested shares become immediately vested. Upon a
change in control plus termination, an additional twelve months of unvested
shares become immediately vested. At December 31, 1999, 721,539 shares were
subject to the repurchase right.
Preferred Stock
Preferred stock at December 31, 1999 consists of the following (in
thousands):
<TABLE>
<CAPTION>
Shares Shares Issuance Liquidation Redemption
Series Authorized Outstanding Price Amount Amount
- ------ ---------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A....................... 419 398 $1.64 $ 653 $ 653
B....................... 1,528 1,528 1.64 10,024 2,506
C....................... 6,660 6,611 1.66 43,900 10,975
D....................... 11,100 9,234 4.82 178,032 44,507
------ ------ -------- -------
Total................. 19,707 17,771 $232,609 $58,641
====== ====== ======== =======
</TABLE>
The holders of Series A convertible preferred stock and Series B, Series
C and Series D manditorily redeemable convertible preferred stock ("preferred
stock") have various rights and preferences as follows:
Conversion
Each share of convertible preferred stock is convertible, at the option
of the holder, into fully paid and nonassessable shares of common stock at the
conversion rate. The conversion rate of the Series A convertible preferred
stock and Series B mandatorily redeemable convertible preferred stock is 3:2.
The conversion rate of the Series C and Series D mandatorily redeemable
convertible preferred stock is 1:1. The conversion rates are subject to
adjustment from time to time. The number of shares of common stock into which a
share of a series of preferred stock is convertible is referred to as the
conversion rate of such series.
Each share of preferred stock will automatically be converted into shares
of common stock, based on the then effective conversion rate, at any time upon
the affirmative vote of the holders of at least a two-thirds majority of the
outstanding shares of the Series A convertible preferred stock and the Series B
mandatorily redeemable convertible preferred stock voting together as one class
for those series or immediately upon a firmly underwritten public offering, as
defined in the Company's Articles of Incorporation ("Qualified
F-16
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Offering") at a price not less than $4.92 per share and not less than $20.0
million in the aggregate. Each share of the Series C and Series D mandatorily
redeemable convertible preferred stock will be converted upon the affirmative
vote of the holders of at least a two-thirds majority of the then outstanding
shares of that series, or immediately upon the closing of a Qualified Offering
at a price of not less than $4.98 per share and not less than $20.0 million in
the aggregate and at a price not less than $12.05 per share and not less than
$30.0 million in the aggregate, respectively.
Dividends
The holders of shares of Series A convertible preferred stock, in
preference to the holders of common stock but only after dividends have been
paid to the Series B, Series C and Series D mandatorily redeemable convertible
preferred stock, are entitled to receive dividends at the rate of $0.1312 per
annum on each outstanding share of Series A convertible preferred stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares).
The holders of shares of Series B, Series C and Series D mandatorily
redeemable convertible preferred stock, in preference to the holders of any
other stock of the Company, are entitled to receive dividends at the rates of
$0.1312, $0.1328, and $0.3856 per annum on each outstanding share of Series B,
Series C and Series D mandatorily redeemable convertible preferred stock,
respectively (as adjusted for any stock dividends, combinations or splits with
respect to such shares).
Such dividends are payable only when, as and if declared by the Board of
Directors, but only out of funds that are legally available, and are
noncumulative.
Redemption
Series A convertible preferred stock is not redeemable.
Upon affirmative vote or written consent, the holders of not less than a
majority of the outstanding shares of Series B, Series C and Series D
mandatorily redeemable convertible preferred stock, voting together as a single
class on an as-converted basis, may require the Company to redeem for cash all
shares of Series B, Series C and Series D mandatorily redeemable convertible
preferred stock outstanding on October 22, 2004. Redemption will be in two
equal annual installments on the dates that are three months and fifteen months
after the Company's receipt of a Redemption Election, as defined. The
redemption price is the original issue price plus all declared but unpaid
dividends. If the Company does not have sufficient funds legally available to
redeem all the shares to be redeemed at the redemption date, then the Company
will redeem such shares pro rata to the extent possible and will redeem the
remaining shares to be redeemed as soon as sufficient funds are legally
available.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company
(which includes any transaction in which more than 50% of the Company's voting
power is transferred, or the Company sells substantially all of its assets),
whether voluntary or involuntary, the holders of convertible preferred stock
are entitled to receive, prior and in preference to any distribution of the
assets of the Company to the holders of common stock, by reason of their
ownership, an amount equal to the sum of $1.64 for each share of Series A
convertible preferred stock and Series B mandatorily redeemable convertible
preferred stock, $1.66 for each share of Series C mandatorily redeemable
convertible preferred stock, and $4.82 for each share of Series D
F-17
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
mandatorily redeemable convertible preferred stock, plus any declared but
unpaid dividends with respect to such shares. The remaining assets, if any, are
to be distributed ratably to the holders of common and preferred stock on an
as-if-converted to common stock basis until the holders of Series B, Series C
and Series D mandatorily redeemable convertible preferred stock have received
an aggregate of $6.56, $6.64 and $19.28 per share, respectively, at which time
the remaining assets legally available for distribution will be paid on a pro
rata basis to the holders of common stock. If, upon the occurrence of a
liquidation event, the assets and funds distributed among the holders of the
preferred stock are insufficient to permit the payment to holders of the full
preferential amount, then all assets and funds of the Company legally available
for distribution are to be distributed ratably among the holders of preferred
stock, in proportion to the preferential amount each such holder is otherwise
entitled to receive.
Voting
The holders of preferred stock are entitled to the number of votes equal
to the number of shares of common stock into which each share of preferred
stock could be converted.
Antidilution Provisions
The conversion price of the Company's preferred stock is subject to
adjustment to prevent dilution in the event that the Company issues additional
shares of preferred stock, common stock or common stock equivalents at a
purchase price less than the then-effective conversion price, provided,
however, that without triggering antidilution adjustments, the Company may
issue to directors, officers, employees, or consultants shares of common stock
that are reserved for issuance under the Company's stock option plan or in
connection with financing or other transactions which involve consideration and
which are approved by the Board of Directors.
Convertible Preferred Stock and Mandatorily Redeemable Convertible Preferred
Stock Warrants
In connection with the issuance of promissory notes, the Company issued
warrants to Series A convertible preferred stock investors to purchase shares
of the Company's Series A convertible preferred stock. In connection with an
equipment financing arrangement, the Company issued warrants to purchase shares
of the Company's Series C mandatorily redeemable convertible preferred stock to
a capital lessor. All warrants were immediately exercisable after issuance. The
Series A warrants expire in May 2003, or immediately upon the occurrence of:
(a) a liquidation, dissolution or winding up of the Company's business; (b) a
sale, lease or other disposition of all or substantially all of the Company's
assets; or, (c) a merger or consolidation where more than 50% of the voting
interests are not retained by the Company. The Series C warrants expire on the
later of ten years from issuance, or five years from the closing of an initial
public offering by the Company. The Company estimated the fair value of the
warrants using the Black-Scholes option pricing model. The fair value of the
Series A preferred stock warrants was de minimus. The fair value of the Series
C warrants was estimated to be $76,000. The Company records the expense related
to these warrants over the life of the associated financing instrument as
additional interest expense. The following table summarizes the outstanding
warrants (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Date Exercise Fiscal Year Unamortized
of Grant Shares Price of Expiration Amounts
--------- ------ -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Series A preferred stock
warrants................. May 1998 21 $1.64 2003 $ --
Series C preferred stock
warrants................. July 1999 48 1.66 2009 76
</TABLE>
F-18
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, pursuant to the Company's issuances of convertible
preferred and mandatorily redeemable convertible preferred stock and preferred
stock warrants, the Company had reserved shares of common stock for future
issuance as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Conversion of Series A mandatorily redeemable convertible
preferred stock and warrants.................................... 628
Conversion of Series B mandatorily redeemable convertible
preferred stock................................................. 2,292
Conversion of Series C mandatorily redeemable convertible
preferred stock and warrants.................................... 6,660
Conversion of Series D mandatorily redeemable convertible
preferred stock................................................. 9,234
</TABLE>
NOTE 7--EMPLOYEE BENEFIT PLAN
401(k) Savings Plan
The company has a savings plan (the "Savings Plan") which qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may
defer a percentage (not to exceed 25%) of their eligible pretax earnings up to
the Internal Revenue Service's annual contribution limit. All employees on the
United States payroll of the Company are eligible to participate in the Plan.
The Company will determine its contributions, if any, based on its
current profits and/or retained earnings. No contributions have been made since
the inception of the Savings Plan.
Stock Option Plan
The Company has reserved 4,117,500 shares of common stock under the
Company's 1998 Stock Option Plan (the "Plan"). The Plan provides for incentive
stock options, as defined by the Internal Revenue Code, to be granted to
employees, at an exercise price not less than 100% of the fair value at the
grant date as determined by the Board of Directors, unless the optionee is a
10% shareholder, in which case the option price will not be less than 110% of
such fair market value. The Plan also provides for nonqualified stock options
to be issued to nonemployee directors and consultants at an exercise price of
not less than 85% of the fair value at the grant date. Option vesting schedules
are determined by the Board of Directors at the time of issuance. Stock options
generally vest 25% at the end of the first anniversary date and monthly
thereafter up to a maximum of four years. Options granted under the Plan are
exercisable over a maximum term of ten years from the date of grant. Upon a
change of control, as defined in the Plan, 12.5% of outstanding options as of
the date of the change in control become immediately exercisable, the
percentage of which may increase to 25% if the option holder is employed
immediately prior to the change in control and is terminated at time of change
in control. As of December 31, 1999, 119,740 options to purchase shares of
common stock were available for future grant under the Plan.
F-19
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the stock option activity is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Weighted-
Number Average
of Exercise
Shares Price
------ ---------
<S> <C> <C>
Granted.................................................. 1,083 $ 0.14
Canceled................................................. (257) 0.11
-----
Outstanding at December 31, 1998......................... 826 0.15
Granted.................................................. 3,393 1.36
Exercised................................................ (736) 0.20
Canceled................................................. (222) 0.17
-----
Outstanding at December 31, 1999......................... 3,261 1.40
=====
</TABLE>
The weighted-average fair value of options granted to employees during
the period from January 9, 1998 (inception) to December 31, 1998 and the year
ended December 31, 1999 were $1.18 and $3.07 per share, respectively.
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------------
Weighted-
Range of Weighted-Average Average
Exercise Number Remaining Exercise Number Weighted-Average
Price Outstanding Contractual Life Price Outstanding Exercise Price
-------- -------------- ---------------- --------- -------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 0.11 20 8.58 years $ 0.11 7 $ 0.11
$ 0.17 1,370 9.44 years $ 0.17 84 $ 0.17
$ 0.33 744 9.74 years $ 0.33 -- $ 0.33
$ 3.62 1,127 9.90 years $ 3.62 -- $ 3.62
----- ---
3,261 91
===== ===
</TABLE>
The Company recorded deferred stock-based compensation of $775,000
during the period from January 9, 1998 (inception) to December 31, 1998 and
$9.3 million during the year ended December 31, 1999, representing the
difference between the exercise price and the deemed fair market value for
financial accounting purposes of the Company's common stock on the grant date
for certain of the Company's stock options granted to employees. These amounts
are being amortized by charges to operations over the vesting periods of the
individual stock options. Such amortization amounted to $404,000 for the
period from January 9, 1998 (inception) to December 31, 1998 and $5.1 million
for the year ended December 31, 1999.
Options Issued to Consultants
Included in the tables above are options granted to consultants to
purchase 49,632 and 211,390 shares of common stock during the period from
January 9, 1998 (inception) to December 31, 1998 and during the year ended
December 31, 1999, respectively. These options were granted in exchange for
consulting services. Amounts allocated to consulting expense during the period
from January 9, 1998 (inception) to December 31, 1998 were not material.
Amounts charged to consulting expense under the consulting arrangements is
$282,000 during the year ended December 31, 1999. The value attributable to
options granted to consultants during the
F-20
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period from January 9, 1998 (inception) to December 31, 1998 and during the
year ended December 31, 1999 were de minimis and $375,000, respectively.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Pro forma information regarding net loss is required by FAS 123.
This information is required to be determined as if the Company has accounted
for its employee stock options under the fair value method of FAS 123. Under
this method, the estimated fair value of the options is amortized to expense
over the options' vesting period. The fair value for these options was
estimated at the date of grant using the minimum value method with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year Ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Risk-free interest rate....................... 4.81% 5.91%
Expected life of the option................... 5 years 5 years
Expected dividend yield....................... 0% 0%
</TABLE>
The option valuation models used under FAS 123 were developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility and expected life of the option. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The effect of applying the FAS 123 fair value method to the Company's
stock-based awards results in net loss as follows (in thousands):
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Net loss, as reported........................ $(5,169) $(34,685)
Net loss, pro forma.......................... $(5,170) $(34,726)
</TABLE>
F-21
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities and equipment under noncancelable operating
leases with various expiration dates through 2002. The following are the
minimum lease obligations under these leases at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
2000.......................................................... $398
2001.......................................................... 188
2002.......................................................... 133
----
Total minimum lease payments.............................. $719
====
</TABLE>
Rent expense under operating lease arrangements for the period from
January 9, 1998 (inception) to December 31, 1998 totaled $84,000 and the year
ended December 31, 1999 totaled $281,000.
Advertising Contracts
The Company has entered into various online advertising and promotional
program agreements. The following are the future minimum commitments owed by
the Company under the non-cancelable agreements at December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
2000................................................................ $ 597
2001................................................................ 250
-----
Total minimum payments.......................................... $ 847
=====
</TABLE>
Charter Customer Promotion
The Company established a charter customer promotion beginning with the
launch of its Web site, August 17, 1999, through January 26, 2000 (the
"Promotion Period"). The purpose of the promotion was to attract and retain
customers. At the end of the promotion, approximately 85,000 customers were
charter customers. The program allows a charter customer to purchase those
products that they purchased during the Promotion Period, for the life of the
charter member, at the prices that prevailed during the Promotion Period. The
program applies only to products which the charter customer purchased during
the Promotion Period. The program also allows a charter customer to receive
free shipping with future purchases, as long as the purchase includes at least
one charter customer product. For all but seven $1 promotion items, all
products sold under the charter customer program were sold at a gross profit.
Terms and conditions of the promotion require the charter customer to
purchase each product on the customer's list at least once annually and to
purchase the products only for personal use. The Company reserves the right to
establish a minimum order requirement for charter customers to qualify for free
shipping, to limit quantities, and to disqualify any individual who tampers,
disrupts, or interferes with the promotion. If the manufacturer stops making a
specific charter customer product or the Company discontinues selling the
charter customer product, no substitutions are permitted. The Company reserves
the right to modify or terminate the charter customer promotion if the
promotion cannot run as planned due to computer bugs, viruses, tampering,
unauthorized intervention, fraud, technical failures, or any other causes
beyond its control, or if the Company undergoes a change in ownership, or if
the promotion violates applicable law in any jurisdiction.
F-22
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has recorded a liability of $1.7 million for estimated
future losses attributable to the charter customer promotion through December
31, 1999. The expense was recorded in marketing and sales. The Company has
also deferred revenue of $120,000 in 1999 which represents the estimated value
of this promotion to charter customers. The deferred revenue will be amortized
into revenue over an estimated life of the benefit to the customer of five
years. These amounts were determined based on the Company's historical records
of charter customer transactions, third party industry data on comparable
product life cycles, third party industry data on consumer purchasing patterns
for products sold by the Company, estimated inflation rates and terms and
conditions of the charter customer promotion. The Company will continue to
assess its exposure to loss for these products and adjust such reserves as
necessary. A significant change in actual consumer purchasing patterns,
inflation, or product life cycles, could have a material effect on the
required reserve and results of operations.
Contingencies
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated. In the opinion
of management, there are no pending claims of which the outcome is expected to
result in a material adverse effect on the financial position or results of
operations or cash flows of the Company.
NOTE 9--INCOME TAXES
The Company was formed as a limited liability company ("LLC") in January
1998, and converted to a C corporation in May 1998. Net operating losses and
tax credits generated prior to the Company's incorporation as a C Corporation
were passed through to the owners of the LLC. At December 31, 1999, the
Company had net operating loss carryforwards of approximately $32.0 million
and $31.4 million for both federal and state income tax purposes,
respectively, which begin to expire in the years 2018 and 2006. At December
31, 1999, the Company had research credit carryforwards of approximately
$39,000 and $33,000 for federal and state income tax purposes, respectively.
The federal credit, if not utilized, will expire in the year 2018. Pursuant to
Section 382 of the Internal Revenue Code, due to changes in the Company's
ownership, future utilization of a portion of these net operating loss and
credit carryforwards will be subject to a limitation of approximately $250,000
per year.
The components of the net deferred tax assets and liabilities are
presented below (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 1,893 $ 12,701
Tax credit carryforwards................................ 0 61
Accruals and reserves................................... 0 979
Fixed assets............................................ 0 (15)
------- --------
1,893 13,726
Less: Valuation allowance............................... (1,893) (13,726)
------- --------
Net deferred tax asset.................................. $ 0 $ 0
======= ========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its net deferred tax asset. The valuation allowance recorded for the
period ended December 31, 1998 and the year December 31, 1999 increased by
$1.9 million and $11.8 million, respectively.
F-23
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the income tax benefit at the statutory rate of
34% and the Company's effective tax rate is due primarily to the valuation
allowance established to offset the net deferred tax asset. The provision for
income taxes is different than the amount computed using the applicable
statutory federal income tax rate with the difference for each year summarized
below:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Federal tax benefit at statutory rate.......................... (34) (34)
State taxes, net of federal benefit............................ (6) (6)
Adjustment due to the increase in valuation allowance.......... 40 35
Other.......................................................... 0 5
--- ---
Provision for income taxes..................................... 0 0
=== ===
</TABLE>
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash activities for 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Supplemental cash flow disclosure
Cash paid for interest........................... $ 20 $ 142
Supplemental disclosure of noncash investing and
financing activities
Common stock issued in connection with
acquisitions.................................... $ 865 $ 1,720
Series A convertible preferred stock and warrants
issued in exchange for cancellation of notes
payable and related accrued interest............ $ 612 $ --
Note payable assumed from software vendor........ $ 1,086
Series D mandatory redeemable convertible
preferred stock issued in exchange for
cancellation of convertible notes payable and
related accrued interest........................ $12,153
Common stock issued in connection with
fulfillment and advertising arrangement......... $ -- $ 4,551
Accretion of discount on mandatorily redeemable
convertible preferred stock..................... $ 101 $ 1,597
Deferred stock-based compensation related to
options granted................................. $ 775 $ 9,314
Deferred consulting related to options granted to
consultants..................................... $ -- $ 375
Fixed assets acquired and included in accounts
payable......................................... $ -- $ 375
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Acquired net assets associated with acquisitions:
Fair value of net tangible assets.............. $ 35 $ (19)
Fair value of assembled workforce.............. 50 254
Fair value of customer base.................... -- 118
Goodwill....................................... 1,510 1,814
------- -------
$ 1,595 $ 2,167
======= =======
</TABLE>
F-24
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--BUSINESS COMBINATIONS AND ASSET PURCHASES
In November 1998, the Company acquired all of the outstanding capital
stock of Acumin Corporation ("Acumin") in a transaction which was accounted
for under the purchase method of accounting. Acumin is a producer of custom
blended vitamins that are personalized to the individual health needs of its
customers. The purchase consideration was $1.6 million, consisting of $730,000
in cash and 500,000 shares of the Company's common stock with a fair value of
$1.73 per share based upon the fair value of the Company's common stock as
determined based upon concurrent equity transactions with unrelated parties.
The Company also entered into an escrow agreement with the seller of Acumin
whereby the seller would be paid $100,000 subject to the seller's continuing
employment with the Company for twelve months following the closing date of
the purchase transaction. This amount has been recognized as compensation
expense over the twelve month period (i.e., $17,000 and $83,000 recognized in
the period ended December 31, 1998 and the year ended December 31, 1999,
respectively) and was fully paid in November 1998.
The purchase consideration was allocated to the acquired assets based on
fair values as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets................................................ $ 35
Assembled workforce................................................ 50
Goodwill........................................................... 1,510
------
Total purchase consideration..................................... $1,595
======
</TABLE>
In January 1999, the Company acquired customer lists from Vitasave, Inc.
for $125,000 in cash. The intangible assets acquired are being amortized over
three years.
In June 1999, the Company paid $130,000 for ownership rights to the
more.com domain name.
In December, 1999, the Company acquired all of the outstanding capital
stock of Clearly Contacts Lenses, Inc. ("Clearly Contacts"). Clearly Contacts
sells contact lenses to customers worldwide through their Internet Web site.
The aggregate purchase price of the acquisition was $2.2 million. The
consideration for the acquisition consisted of $350,000 of cash, 220,000
shares of the Company's common stock, with an estimated value of $7.82 per
share based upon the fair value of the Company's common stock as determined
based upon concurrent equity transactions with unrelated parties.
Additionally, the Company incurred approximately $97,000 of transaction costs,
including legal and other advisory services. The Clearly Contacts acquisition
was accounted for under the purchase method of accounting, and its results of
operations are included in the Company's consolidated financial statements
from the date of acquisition.
The purchase consideration was allocated to the acquired assets based on
fair values as follows (in thousands):
<TABLE>
<S> <C>
Assembled workforce................................................ $ 254
Customer base...................................................... 118
Goodwill........................................................... 1,814
Net tangible liabilities........................................... (19)
------
Total purchase consideration..................................... $2,167
======
</TABLE>
F-25
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited pro forma consolidated financial information reflect the
results that would have occurred had the acquisitions occurred at the beginning
of each of the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
January 9, 1998
(inception) to Year ended
December 31, December 31,
1998 1999
--------------- ------------
<S> <C> <C>
Net revenues................................ $ 300 $ 3,205
Net loss.................................... $(6,871) $(35,706)
Basic and diluted weighted-average net loss
per share.................................. $ (5.16) $ (14.88)
</TABLE>
The pro forma net losses include additional amortization of goodwill and
purchased intangibles of approximately $1.6 million and $1.0 million for the
period ended December 31, 1998 and the year ended December 31, 1999. This
unaudited pro forma combined consolidated financial information is presented
for illustrative purposes only and is not necessarily indicative of the
consolidated results of operations in future periods or the results that
actually would have been realized.
NOTE 12--SUBSEQUENT EVENTS
Initial public offering
The Company's Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
the Company to sell shares of its common stock to the public.
Pending Comfort Living Acquisition
In January 2000, the Company signed a letter of intent to acquire all of
the outstanding capital stock of Comfort Living, Inc. ("Comfort Living"). The
acquisition is subject to the approval of Comfort Living's stockholders. The
Company's management believes the acquisition is probable. The acquisition will
be accounted for using the purchase method of accounting and, accordingly, the
net assets and results of operations of Comfort Living will be included in the
Company's consolidated financial statements subsequent to the acquisition date.
Comfort Living reported net revenues and a net loss for the year ended December
31, 1999 of $4.6 million and $543,000, respectively.
The purchase consideration includes $2.5 million of cash and 1,500,000
shares of the Company's common stock, valued at $14.9 million based on the
deemed per share value of the Company's common stock. The Company also expects
to incur approximately $500,000 in acquisition related expenses, including
legal and other advisory related services.
Additionally, the Company's Board of Directors has approved 357,000 stock
option grants to employees of Comfort Living to be issued subsequent to the
closing of the acquisition. The options have an exercise price of $4.82 per
share and the Company will record additional deferred stock-based compensation
of approximately $1.8 million.
F-26
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The total purchase price of $17.9 million will be allocated to net assets
acquired, including tangible and intangible assets, and liabilities assumed,
based on their respective estimated fair values at the acquisition date. The
estimate of fair value of the net assets acquired is expected to be allocated
as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net tangible liabilities.......................... $ (195)
Fair value of assembled workforce (to be amortized over 2
years)......................................................... 1,516
Fair value of customer base (to be amortized over 2 years)...... 812
Goodwill (to be amortized over 2 years)......................... 15,717
-------
$17,850
=======
</TABLE>
The acquisition has been structured as a tax-free exchange of stock. The
differences between the recognized fair values of acquired net assets,
including tangible and intangible net assets, and their historical tax bases
are not deductible for tax purposes.
Retailer Arrangement
On January 20, 2000, the Company entered into a five year agreement with
Phar-Mor.com, Inc. ("Phar-Mor.com"), a chain of discount retail drugstores, to
become an exclusive online provider of health, beauty and wellness products. As
part of the agreement, Phar-Mor.com will prominently promote the Company's Web
site via a unique URL on its own Web sites, and will promote the Company in all
of its marketing and promotional materials, including prescription bags,
shopping bags, circulars, print advertising, Internet and other online
advertising, newsletters, and placement of signs at physical locations. In
addition, Phar-Mor.com has committed to purchase between $1.0 million and $2.0
million of third party advertising during each year of the agreement based on a
percentage of revenues generated from its unique URL, and has agreed not to
sell on any of its sites any products of the types currently offered on the
Company's Web site.
Included as part of the agreement is an arrangement by which the Company
has agreed to pay to Phar-Mor.com a referral fee equal to 49% of the Company's
gross profit from each product (excluding prescription drugs) sold on the
Company's site to customers who reached the site using Phar-Mor.com's unique
URL.
Phar-Mor.com also purchased 1,037,345 shares of the Company's Series D
mandatorily redeemable convertible preferred stock at $4.82 per share, totaling
$5.0 million. Given the timing between this issuance and the Company's public
offering, the difference between the value of the Company's common stock and
the issuance price of $4.82 per share represents a deemed discount on the
mandatorily redeemable convertible preferred stock which will be accounted for
as deferred marketing costs and amortized to marketing and sales over the five
year term of the arrangement.
In association with this transaction, an outside consultant earned a
placement fee of $150,000 and vested 125,000 common stock options which had a
deemed fair value of $1.2 million, determined using the Black-Scholes option
pricing model, which will be expensed in the first quarter of 2000.
2000 Non-Employee Director Option Program
In January 2000 the Board of Directors adopted and in February 2000 the
stockholders approved the 2000 Non-Employee Director Option Program ("Director
Program") under the provisions of the 2000 Plan, which will become effective
upon the effective date of the initial public offering. Members of the Board
who
F-27
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are not employees of the Company are eligible to participate in the Director
Program. The option grants under the Director Program are automatic and
nondiscretionary, and the exercise price of the options must be 100% of the
fair market value of the common stock on the date of grant. Each eligible
director who first becomes a member of the Board will initially be granted an
option to purchase 25,000 shares on the date such director first becomes a
director. Those directors who are members of the Board upon the effective date
of the initial public offering will initially be granted an option to purchase
25,000 shares on such date. Immediately following each annual meeting of the
Company, beginning in 2001, each eligible director will automatically be
granted an additional option to purchase 5,000 shares if such director has
served continuously as a member of the board for at least eleven months. The
options have a term of ten years, provided that they will terminate three
months following the date the director ceases to be a director or other service
provider of the Company (twelve months if the termination is due to death or
disability). The initial options for 25,000 shares will vest 25% at the first
anniversary date and monthly thereafter, such that the Option will be fully
exercisable four years after its date of grant. The subsequent options for
5,000 shares will vest monthly commencing on the first month after the grant
date, such that the Option will be fully exercisable four years after the grant
date.
2000 Stock Incentive Plan
In January 2000 the Board of Directors adopted and in February 2000 the
stockholders approved the 2000 Stock Incentive Plan (the "2000 Plan"). Under
the 2000 Plan, 4,000,000 shares are reserved of the Company's common stock,
plus the aggregate number of remaining shares available under the 1998 Plan on
the effective date of the initial public offering. In January 2001 and every
year thereafter until the year 2009, shares reserved for issuance will
automatically increase by a number equal to 5% of the total number of shares of
common stock outstanding or a lesser number of shares determined by the 2000
Plan administrator. The 2000 Plan provides for the award of options, stock
appreciation rights, sales or bonuses of restricted stock, dividend equivalent
rights, performance units or performance shares (the "Awards"). Options granted
under the 2000 Plan may be either incentive stock options ("ISO") or
nonqualified stock options ("NSO"). ISOs may be granted only to Company
employees (including officers and directors who are also employees and
employees of any subsidiaries and parent companies). NSOs may be granted to
employees, outside directors, and consultants of the Company or any related
entity. Options under the 2000 Plan may be granted for periods of up to ten
years and at prices no less than 85% of the estimated fair value of the shares
on the date of grant as determined by the Board of Directors unless otherwise
determined by the 2000 Plan administrator, provided, however, that (i) the
exercise price of an ISO may not be less than 100% of the fair market value of
the shares on the date of grant, and (ii) the exercise price of an ISO granted
to a 10% shareholder may not be less than 110% of the fair value of the shares
on the date of grant. Each initial grant will vest 25% at the first anniversary
date and monthly thereafter, such that the Option will be fully exercisable
four years after its date of grant. Subsequent options will vest monthly
commencing on the first month after the grant date, such that the Option will
be fully exercisable four years after the grant date.
In the event of a change of control where the acquiror assumes options
granted under the 2000 Plan, none of these options are subject to accelerated
vesting. However, assumed options will automatically become fully vested if the
grantee is terminated by the acquiror within six months of a change of control.
In the event of a change of control where the acquiror does not assume options
granted under the 2000 Plan, all of these options become fully vested upon the
closing of the acquisition.
Employee Stock Purchase Plan
In January 2000 the Board of Directors adopted and in February 2000 the
stockholders approved the Employee Stock Purchase Plan (the "ESPP"), which will
become effective upon the effective date of the initial
F-28
<PAGE>
MORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
public offering. Under the ESPP 2,000,000 shares of common stock are reserved
for issuance thereunder. On each January and every year thereafter beginning in
2001, the aggregate number of shares reserved for issuance under the ESPP will
be increased automatically to the lesser of 1.75% of the total number of common
shares outstanding and 2,000,000 shares or a lesser number of shares determined
by the ESPP Administrator. Employees generally will be eligible to participate
in the ESPP if they are customarily employed by the Company for more than 20
hours per week and more than five months in a calendar year and are not (and
would not become as a result of being granted an option under the ESPP) 5%
stockholders of the Company. Under the ESPP, eligible employees may select a
rate of payroll deduction up to 10% of their W-2 cash compensation subject to
certain maximum purchase limitations. The first offering period is expected to
begin on the effective date of the initial public offering. Depending on the
effective date, the first Purchase Period within the first offering period may
be more or less than six months long. Offering periods thereafter will begin on
February 15 and August 15. Purchases will occur on each February 14 and August
14. The price at which the common stock is purchased under the ESPP is 85% of
the lesser of the fair market value of the Company's common stock on the date
before the first day of the applicable offering period or on the date before
the stock is purchased.
Stock Option Grants
On January 27, 2000, the Company approved an additional 4,000,000 shares
for issuance under the 1998 Stock Option Plan. During the period from January
1, 2000 through February 2, 2000 the Company granted stock options to employees
and consultants to purchase an aggregate of 196,900 shares of common stock for
$4.82 per share. The Company has recorded $1.2 million of deferred stock-based
compensation related to these grants.
Authorization of Shares
In connection with the approval of the various plans, the Board approved
an amendment to the certificate of incorporation on January 27, 2000 to
increase the total authorized number of preferred and common stock to
62,000,000 shares.
Compensation Protection Agreements
The Company will enter into compensation protection agreements with each
of our executive officers. These agreements are for a term of three years
commencing in January 2000 and are subject to automatic annual extensions. If
within 12 months of a change of control of our company, an executive officer's
employment with us is terminated by us other than for cause or by the officer
personally for good reason, excluding by reason of the officer's disability,
death or retirement, then we must pay that officer: (a) his or her accrued
compensation, including unpaid base salary, pro rata bonus, and vacation pay;
and (b) an amount equal to two times the sum of the officer's highest annual
base salary and annual bonus in effect immediately prior to the change of
control. In addition, until the third anniversary of the officer's termination
we will provide the officer with the maximum benefits provided to that officer
between the effective date of the agreement and 90 days preceding the date of
the change of control. The officer will also receive immediate vesting and
removal of all restrictions on any outstanding incentive awards granted under
our stock option and other stock incentive plans, excluding our employee stock
purchase plan, or any other arrangement, unless the accelerated vesting would
cause pooling of interest accounting to be unavailable and the Board would
determine that such change in control would be accounted for as a pooling of
interest. However, such acceleration shall occur regardless of whether it would
render pooling of interest accounting unavailable if that officer entered into
any employment agreement, offer letter, stock option or other equity-based
compensation protection agreement providing for acceleration prior to the
effective date of entering into the compensation protection agreement
F-29
<PAGE>
with us. The compensation protection agreements further provide that the
executive officers will not be required to mitigate the amounts due to them as
a result of their termination.
Subsequent Events
Issuance of Series E Mandatorily Redeemable Convertible Preferred Stock
In January 2000, the Company authorized the sale of up to 4,000,000
shares of Series E mandatorily redeemable convertible preferred stock
("preferred stock") at a price of $7.50 per share. In February 2000, the
Company issued 3,399,991 shares raising approximately $25.5 million from
various new and existing investors. The Series E preferred stock carries
substantially the same terms as the Series B, Series C and Series D mandatorily
redeemable convertible preferred stock and is convertible into common stock at
a one-to-one ratio upon an initial public offering subject to certain
conditions ("Qualified IPO").
If the Company consummates a Qualified IPO on or before January 31, 2001
at a price less than $10.125 then the conversion price for each share of Series
E Stock shall be adjusted to a price equal to 74.074% of the IPO Price,
provided however, that in no event shall the Conversion Price be adjusted below
$4.82. Dividends are payable when and as declared on Series E preferred stock
at the rate of $0.60 per share per annum.
F-30
<PAGE>
MORE.COM, INC.
PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
Overview
In January, 2000, the Company signed a merger agreement to acquire all of
the outstanding capital stock of Comfort Living, Inc. ("Comfort Living").
Although the acquisition is subject to the approval of Comfort Living's
stockholders, the Company's management believes the acquisition is probable.
The acquisition will be accounted for using the purchase method of accounting
and, accordingly, the net assets and results of operations of Comfort Living
will be included in the Company's consolidated financial statements subsequent
to the acquisition date.
The purchase consideration includes $2.5 million of cash and 1,500,000
shares of the Company's common stock, valued at $14.9 mllion based on the
deemed per share value of the Company's common stock. The Company also expects
to incur approximately $500,000 in acquisition related expenses, including
legal and other advisory related services.
The total purchase price of $17.9 million will be allocated to net assets
acquired, including tangible and intangible assets, and liabilities assumed,
based on their respective estimated fair values at the acquisition date. The
estimate of fair value of the net assets acquired is based on management
estimates.
The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net tangible liabilities........................... $ (195)
Fair value of assembled workforce................................ 1,516
Fair value of customer base...................................... 812
Goodwill......................................................... 15,717
-------
$17,850
=======
</TABLE>
The acquisition has been structured as a tax-free exchange of stock. The
differences between the recognized fair values of acquired net assets,
including tangible and intangible net assets, and their historical tax bases
are not deductible for tax purposes.
The following unaudited pro forma combined consolidated statement of
operations gives effect to this acquisition as if it had occurred as of January
1, 1999, by consolidating the results of operations of Comfort Living with the
results operations of the Company for the twelve months ended December 31,
1999.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the period presented
and should not be construed as being a representation of future operating
results.
The historical consolidated financial statements for the Company and
Comfort Living are included elsewhere in this offering memorandum and the
unaudited pro forma consolidated financial information presented herein should
be read in conjunction with those consolidated financial statements and related
notes.
The accompanying notes are an integral part of these financial statements
F-31
<PAGE>
MORE.COM, INC.
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------
Comfort
more.com, Living, Pro
Inc. Inc. Adjustments Forma
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 24,655 $ 80 $(3,000)(A) $ 21,735
Accounts receivable, net..... 591 -- -- 591
Inventories.................. 175 468 -- 643
Prepaid expenses and other
current assets.............. 641 30 -- 671
-------- ------ ------- --------
Total current assets....... 26,062 578 (3,000) 23,640
Fixed assets, net.............. 6,452 333 -- 6,785
Intangible assets, net......... 7,551 -- 18,045 (B) 25,596
Other assets................... 96 11 -- 107
-------- ------ ------- --------
Total assets................... $ 40,161 $ 922 $15,045 $ 56,128
======== ====== ======= ========
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............. $ 1,421 $ 410 $ -- $ 1,831
Accounts payable to related
party....................... -- 49 -- 49
Deferred revenue............. -- 109 -- 109
Accrued liabilities.......... 6,174 376 -- 6,550
Current portion of borrowings
under lines of credit....... 891 150 -- 1,041
Capital lease obligations,
current..................... -- 6 -- 6
-------- ------ ------- --------
Total current liabilities.. 8,486 1,100 -- 9,586
-------- ------ ------- --------
Borrowings under lines of
credit, less current portion.. 1,376 -- -- 1,376
Capital lease obligations,
long-term..................... -- 17 -- 17
Mandatorily redeemable
convertible preferred stock
(Note 6)...................... 58,064 -- -- 58,064
Commitments and contingencies
(Note 8)
Stockholders' equity (deficit):
Preferred stock.............. 10 -- -- 10
Common stock................. 5 -- 2 (A) 7
Additional paid-in capital... 16,698 615 14,233 (A)(C) 31,546
Deferred stock-based
compensation................ (4,624) -- -- (4,624)
Accumulated deficit (39,854) (810) 810 (C) (39,854)
-------- ------ ------- --------
Total stockholders' equity
(deficit)................. (27,765) (195) 15,045 (12,915)
-------- ------ ------- --------
$ 40,161 $ 922 $15,045 $ 56,128
======== ====== ======= ========
</TABLE>
See accompanying notes to Pro Forma Combined Consolidated Financial Information
F-32
<PAGE>
MORE.COM, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year ended December 31, 1999
-----------------------------------------------
more.com, Comfort
Inc. Living, Inc. Adjustments Pro Forma
--------- ------------ ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues: $ 2,923 $4,628 -- $ 7,551
Cost of net revenues..... 3,753 3,551 -- 7,304
-------- ------ ------- --------
Gross profit (loss).... (830) 1,077 -- 247
-------- ------ ------- --------
Operating expenses:
Marketing and sales...... 20,480 254 -- 20,734
Product development...... 3,254 -- -- 3,254
General and
administrative.......... 5,187 1,336 9,023 (D) 15,546
Amortization of stock-
based compensation...... 5,061 -- -- 5,061
-------- ------ ------- --------
Total operating
expenses.............. 33,982 1,590 9,023 44,595
-------- ------ ------- --------
Operating loss............. (34,812) (513) (9,023) (44,348)
Other income (expense):
Other.................... -- (13) -- (13)
Interest income.......... 482 -- -- 482
Interest expense......... (355) (17) -- (372)
-------- ------ ------- --------
Net loss................... $(34,685) $ (543) $(9,023) $(44,251)
======== ====== ======= ========
Accretion of discount on
mandatorily redeemable
convertible preferred
stock..................... (1,597) -- -- (1,597)
-------- ------ ------- --------
Net loss available to
common stockholders....... $(36,282) $ (543) $(9,023) $(45,848)
======== ====== ======= ========
Basic and diluted net loss
per share................. $ (15.74) $ (12.05)
Pro forma basic and diluted
net loss per share........ $ (2.68) $ (3.05)
Weighted average shares
outstanding used to
compute basic and diluted
net loss per share........ 2,305 1,500 3,805 (E)
Weighted average shares
outstanding used to
compute pro forma basic
and diluted net loss per
share..................... 13,556 1,500 15,056 (E)
</TABLE>
See accompanying notes to Pro Forma Combined Consolidated Financial Information
F-33
<PAGE>
MORE.COM, INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
(unaudited)
NOTE 1--BASIS OF PRESENTATION
The unaudited pro forma combined consolidated statement of operations has
been prepared to reflect the probable acquisition of Comfort Living Inc. by the
Company as if the acquisition had occurred as of January 1, 1999 by combining
the separate historical statement of operations of more.com, Inc. and Comfort
Living Inc. for the year ended December 31, 1999. The unaudited pro forma
combined consolidated balance sheet has been prepared to reflect the probable
acquisition of Comfort Living Inc. by the Company as if the acquisition had
occurred on December 31, 1999 by combining the historical balance sheets of the
Company and Comfort Living Inc. as of December 31, 1999.
NOTE 2--PRO FORMA ADJUSTMENTS
The following adjustments were applied to the historical statement of
operations and balance sheet to arrive at the pro forma combined consolidated
statement of operations and balance sheet:
(A) Reflects the cash and equity consideration for the acquisition of
Comfort Living.
(B) To record the intangible assets acquired pursuant to the
acquisition.
(C) Reflects the elimination of Comfort Living's stockholders' deficit.
(D) Reflects the amortization expense related to assembled workforce and
customer base and goodwill to be acquired in the acquisition for the
period January 1, 1999 through December 31, 1999.
(E) For the year ended December 31, 1999, basic and diluted net loss per
share includes the common shares to be issued as consideration for
the acquisition. These shares are assumed to be outstanding as of
January 1, 1999. Pro forma basic and diluted net loss per share for
the year ended December 31, 1999 is computed using the weighted
average number of common shares outstanding, including the pro forma
effects of the automatic conversion of the Company's Series A,
Series B, Series C and Series D preferred stock and preferred stock
warrants into shares of the Company's common stock effective upon
the closing of the Company's initial public offering as if such
conversion occurred on January 1, 1999, or at date of original
issuance, if later.
Pro forma diluted net loss per share excludes potential shares of
common stock, consisting of options, as their effect would be
antidilutive.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Comfort Living, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity (net capital deficiency) and cash flows
present fairly, in all material respects, the financial position of Comfort
Living, Inc. (the "Company") at December 31, 1998 and 1999 and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a net loss of approximately
$543,000 and net cash outflows from operations of approximately $151,000 for
the year ended December 31, 1999. The Company also has an accumulated deficit
of approximately $195,000 and a working capital deficit of approximately
$178,000 at December 31, 1999. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are partially described in Note 1. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
In January 2000, the Company entered into a letter of intent to be acquired by
more.com, Inc. in a purchase transaction.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
January 27, 2000
F-35
<PAGE>
COMFORT LIVING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 98,316 $ 79,954
Inventories............................................. 85,531 467,769
Prepaid expenses........................................ 3,094 29,949
--------- ----------
Total current assets.................................. 186,941 577,672
Furniture and equipment, net.............................. 30,202 332,542
Other assets.............................................. 1,352 11,663
--------- ----------
Total assets.......................................... $ 218,495 $ 921,877
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........................................ $ 80,411 $ 410,217
Accounts payable to related party....................... -- 49,242
Accrued payroll......................................... 10,364 181,194
Accrued liabilities..................................... 45,775 194,933
Deferred revenue........................................ 48,576 109,367
Current portion of borrowings under line of credit ..... -- 150,000
Capital lease obligations, current...................... 4,161 5,399
--------- ----------
Total current liabilities............................. 189,287 1,100,352
Capital lease obligations, long-term...................... 11,392 16,135
--------- ----------
Total liabilities..................................... 200,679 1,116,487
--------- ----------
Commitments (Note 7)
Stockholders' equity (net capital deficiency):
Common Stock: no par value;
Authorized shares--1,000 at December 31, 1998 and 1,500
at December 31, 1999; issued and outstanding 1,000 at
December 31, 1998 and 1,078.125 at December 31, 1999... -- 615,225
Accumulated earnings (deficit).......................... 17,816 (809,835)
--------- ----------
Total stockholders' equity (net capital deficiency)... 17,816 (194,610)
--------- ----------
Total liabilities and stockholders' equity (net
capital deficiency)................................ $ 218,495 $ 921,877
========= ==========
</TABLE>
F-36
<PAGE>
COMFORT LIVING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Net revenues............................................ $1,520,072 $4,627,942
Costs of goods sold..................................... 1,038,258 3,550,564
---------- ----------
Gross profit............................................ 481,814 1,077,378
---------- ----------
Operating expenses:
Sales and marketing..................................... 57,710 253,571
General and administrative.............................. 220,531 1,297,910
Depreciation and amortization........................... 3,802 38,716
---------- ----------
Total operating expenses............................ 282,043 1,590,197
---------- ----------
Operating income (loss)................................. 199,771 (512,819)
Other expense:
Interest expense...................................... 4,782 17,228
Other................................................. -- 12,848
---------- ----------
Total other expense................................. 4,782 30,076
---------- ----------
Net income (loss)....................................... $ 194,989 $ (542,895)
========== ==========
Net income (loss) per share:
Basic and dilutive.................................... $ 194.99 $ (540.19)
Weighted average number of shares outstanding........... 1,000 1,005
</TABLE>
F-37
<PAGE>
COMFORT LIVING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Total
Stockholders
Common Stock Accumulated Equity (Net
------------------ Earnings Capital
Shares Amount (Deficit) Deficiency)
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998........... 1,000 $ -- $ (24,519) $ (24,519)
Distributions...................... -- -- (152,654) (152,654)
Net income......................... -- -- 194,989 194,989
--------- -------- --------- ---------
Balance at December 31, 1998....... 1,000 -- 17,816 17,816
Issuance of common stock for $8,000
per share (net of issuance costs
of $9,775)........................ 78,125 615,225 -- 615,225
Distributions...................... -- -- (284,756) (284,756)
Net loss........................... -- -- (542,895) (542,895)
--------- -------- --------- ---------
Balance at December 31, 1999....... 1,078,125 $615,225 $(809,835) $(194,610)
========= ======== ========= =========
</TABLE>
F-38
<PAGE>
COMFORT LIVING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $194,989 $(542,895)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,802 38,716
Loss on sale of furniture and equipment ............... -- 12,848
Provision for obsolete inventory....................... 32,268 110,344
Changes in current assets and liabilities:
Accounts receivable.................................. 1,567 --
Inventories.......................................... (91,465) (492,582)
Prepaid expenses..................................... (3,094) (26,855)
Other assets......................................... (1,352) (10,311)
Accounts payable..................................... 37,410 329,806
Accounts payable to related party.................... -- 49,242
Accrued payroll...................................... 7,495 170,830
Accrued liabilities.................................. 40,799 149,158
Deferred revenues.................................... 48,576 60,791
-------- ---------
Net cash provided by (used in) operating
activities........................................ 270,995 (150,908)
-------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment..................... (9,531) (344,950)
-------- ---------
Net cash used in investing activities.............. (9,531) (344,950)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net..................... -- 615,225
Principal payments on line of credit..................... (7,871) --
Borrowings under line of credit.......................... -- 150,000
Principal payments on capital leases..................... (7,923) (2,973)
Distribution to stockholders............................. (152,654) (284,756)
-------- ---------
Net cash provided by (used in) financing
activities........................................ (168,448) 477,496
-------- ---------
Net increase (decrease) in cash and cash equivalents..... 93,016 (18,362)
Cash and cash equivalents, beginning of period........... 5,300 98,316
-------- ---------
Cash and cash equivalents, end of period................. $ 98,316 $ 79,954
======== =========
Supplemental cash flow information:
Cash paid during the year for interest................... $ 4,782 $ 16,506
======== =========
Noncash investing and financing activities:
Furniture and equipment acquired under capital leases.... $ 14,412 $ 8,954
======== =========
</TABLE>
F-39
<PAGE>
COMFORT LIVING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
Comfort Living, Inc. (the "Company") is an online retailer of health and
comfort products, offering many brand name products. Its eCommerce web site,
www.ComfortLiving.com, was launched in January 1996. The Company's product line
includes personal comfort products, back pain products, baby products,
maternity products, and allergy control products. The Company was incorporated
in Maryland on March 25, 1988 as Allergy Home Care Products, Inc. The Company's
name was changed to Comfort Living, Inc, on November 12, 1999. The Company has
derived substantially all of its revenue from sales in the United States.
The Company experienced a net loss of approximately $543,000 and net cash
outflows from operations of approximately $151,000 for the year ended December
31, 1999. The Company also had an accumulated deficit of approximately $195,000
and a working capital deficit of approximately $178,000 at December 31, 1999.
The Company's near and long-term operating strategies focus on exploiting
existing and potential competitive advantages while concentrating on reducing
costs, beginning with the cost of maintaining inventory by moving towards a
fully integrated drop ship system and including controlling the cost of payroll
as a percentage of sales. Management continues to focus on increasing sales by
identifying ways to increase market share and diversify its products.
In order for the Company to maintain operations into 2001, the Company
must improve its financial condition by increasing operating cash flows,
obtaining additional equity financing or consummating the sale of the Company
to more.com, Inc. or another company.
In January 2000, the Company entered into a letter of intent to be
acquired by more.com, Inc. in a purchase transaction.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported results of operations during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash equivalents, which consist of a demand deposit and money market
account, are recorded at cost, which approximate fair value. The Company
maintains its cash in depository accounts with one financial institution. At
times, such balances may be in excess of the FDIC limit. The Company considers
investments in highly liquid instruments purchased with original maturities of
90 days or less to be cash equivalents.
Concentrations of credit risk and credit evaluations
The Company is subject to concentrations of credit risk from its holdings
of cash and cash equivalents, which are held at one domestic financial
institution. The Company conducts business with individuals over the Internet.
Sales to individuals are principally paid for via credit cards and the
Company's accounts receivable are
F-40
<PAGE>
COMFORT LIVING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
not significant. In addition to the concentration disclosed in Note 4, the
Company purchased $445,000 of products from one vendor for the year ended
December 31, 1999, which represents approximately 13% of cost of goods sold.
Inventories
Inventories are carried at the lower of cost (determined on average cost,
which approximates the first-in first-out basis) or market. Inventories consist
of products purchased for resale.
Furniture and equipment
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Leasehold improvements are amortized
over the lesser of the estimated useful life or the life of the lease.
Long-lived assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. In
circumstances where impairment is determined to exist, the Company will write
down the asset to its fair value based on the present value of estimated
expected future cash flows. To date, no such impairment has been indicated.
Income taxes
The Company has elected to be taxed as an S corporation. Accordingly,
federal and state income taxes are the personal responsibility of the
stockholders, and no provision for income taxes has been provided in the
statements of operations.
Advertising expense
The Company recognizes advertising expense in accordance with Statement
of Position 93-7, "Reporting on Advertising Costs." As such, the Company
expenses the cost of communicating advertising in the period in which the
advertising space or airtime is used. Advertising production costs are expensed
as incurred. For the year ended December 31, 1998 and 1999, advertising expense
totaled $12,000 and $23,000, respectively.
Revenue recognition
The Company recognizes revenue when the products are shipped to customers
(FOB Shipping Point). The Company provides for potential product returns in the
period of the sale. Product returns have not been material to date. Revenues
from drop shipment sales are recorded in net sales when the products are
shipped to customers (FOB Shipping Point) as the Company retains the risk of
loss on the products. The revenue and associated cost of outbound shipping and
handling charges are included in net sales and cost of goods sold,
respectively.
F-41
<PAGE>
COMFORT LIVING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment reporting
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (FAS) No. 131, "Disclosures about
Segments of Enterprise and Related Information." During each of the years ended
December 31, 1998 and 1999, the Company focused its business activities on the
marketing and sale of their products over the Internet. Since management's
primary form of internal reporting is aligned with the marketing and sale of
their products, the Company believes it operates in one segment.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable, line of credit and capital lease
obligations are carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of FAS No.
130, "Reporting Comprehensive Income." FAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income (loss) as
compared to its reported net income (loss).
NOTE 3--FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
Estimated Life
1998 1999 (in years)
------- -------- --------------
<S> <C> <C> <C>
Computers and equipment................ $19,112 $ 87,903 3
Purchased software..................... -- 197,862 3
Furniture and fixtures................. 2,849 56,071 7
Leasehold improvements................. -- 30,228 5
Auto................................... 12,920 -- 5
------- --------
34,881 372,064
Less: Accumulated depreciation and
amortization.......................... (4,679) (39,522)
------- --------
$30,202 $332,542
======= ========
</TABLE>
The cost and accumulated depreciation of items under capital lease at
December 31, 1998 is $5,000 and $1,000, respectively. The cost and accumulated
depreciation of items under capital lease at December 31, 1999 is $28,000 and
$6,000, respectively.
NOTE 4--RELATED PARTY TRANSACTIONS AND BALANCES
Under an informal agreement starting January 1999, the Company purchased
certain products through J. Inc., a company owned by a stockholder and
employee.
During the year ended December 31, 1999, the Company purchased $1.0
million of products from this related party which represents approximately 28%
of cost of goods sold. At December 31, 1999, the Company owed $49,000 to J.
Inc.
F-42
<PAGE>
COMFORT LIVING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--BORROWINGS UNDER LINES OF CREDIT
On June 14, 1999, the Company obtained a $150,000 line of credit from
Crestar Bank that expires June 14, 2004 for working capital purposes.
Borrowings under this line of credit at December 31, 1999 amounted to $150,000.
Interest is payable at prime plus two percent per annum (10.5% at December 31,
1999). The line of credit is collateralized by substantially all of assets of
the Company.
NOTE 6--STOCKHOLDERS' EQUITY
On November 12, 1999, the Board of Directors authorized an increase in
the number of authorized shares of common stock with no par value from 1,000 to
1,500 shares.
In December 1999, the Company held a private placement offering in which
78.125 shares were sold at $8,000 per share to family and friends of
stockholders and employees.
During 1999, the Company exchanged promises of equity participation for
certain consulting services. The value of the consulting services of
approximately $161,000 is reflected in 1999 results of operations and accrued
liabilities at December 31, 1999. The Company expects to settle the promises of
equity participation in connection with the acquisition of the Company.
During 1998 and 1999, the Company promised stock options to certain
employees. Because no stock option plan had been adopted, no measurement date
occurred for accounting purposes. The Company expects to settle the promises
through the issuance of equity instruments in connection with the acquisition
of the Company. At that time, a compensation charge of approximately $2.4
million is expected to result.
NOTE 7--COMMITMENTS
The Company leases its facilities under a noncancelable operating lease
that expires May 2004. The Company also leases various equipment under four
capital leases that expire from July 2000 to December 2003. The following are
the minimum lease obligations under these leases at December 31, 1999:
<TABLE>
<CAPTION>
Years Ended
December 31, Operating Capital Total
------------ --------- ------- --------
<S> <C> <C> <C>
2000........................................ $ 36,420 $ 9,221 $ 45,641
2001........................................ 37,513 8,175 45,688
2002........................................ 38,638 8,175 46,813
2003........................................ 39,798 5,589 45,387
2004........................................ 15,089 -- 15,089
-------- ------- --------
Total....................................... $167,458 31,160 $198,618
======== ========
Less: Amount attributed to interest......... (9,626)
-------
Net present value of capital lease
commitments (including $5,399 considered
current)................................... $21,534
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1998
and 1999 totaled $23,000 and $52,000, respectively.
F-43
<PAGE>
Inside Back Cover
-----------------
[Screen shot of more.com's web page for checkout]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Shares
[more.com Logo]
Common Stock
Merrill Lynch & Co.
Lehman Brothers
U.S. Bancorp Piper Jaffray
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount*
-------
<S> <C>
Securities and Exchange Commission Filing Fee.......................... $22,770
NASD Filing Fee........................................................
Nasdaq National Market Listing Fee..................................... 95,000
Accounting Fees and Expenses...........................................
Blue Sky Fees and Expenses.............................................
Legal Fees and Expenses................................................
Transfer Agent and Registrar Fees and Expenses.........................
Printing Expenses......................................................
Miscellaneous Expenses.................................................
-------
Total................................................................ $
=======
</TABLE>
- --------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject to
certain limitations. Our certificate of incorporation and bylaws provide that
we shall indemnify our directors, officers, employees and agents to the full
extent permitted by Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. In addition, we intend to enter into separate indemnification
agreements with our directors, officers and certain employees which would
require us, among other things, to indemnify them against certain liabilities
which may arise by reason of their status as directors, officers or certain
other employees. We also intend to maintain director and officer liability
insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between us and our officers and directors may be sufficiently
broad to permit indemnification of our officers and directors for liabilities,
including reimbursement of expenses incurred, arising under the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of us and our
officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
From our incorporation to December 31, 1999, we have granted or issued
and sold the following unregistered securities:
<TABLE>
<C> <S>
1. Stock options to employees, officers, directors and consultants
under our amended and restated 1998 stock option plan exercisable
for up to an aggregate of 3,997,761 shares of our common stock, at a
weighted average exercise price of $1.40 per share.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
2. On May 14, 1998, we issued to Donald M. Kendall, Jr. 1,449,834
shares of our common stock and 22,976 shares of our Series A
convertible preferred stock in exchange for his entire membership
interest in Nutrition Direct, LLC, our predecessor entity.
3. On May 14, 1998, we issued to Eric Budin 989,526 shares of our
common stock in exchange for his entire membership interest in
Nutrition Direct, LLC, our predecessor entity.
4. On August 18, 1999, we issued to Bergen Brunswig Drug Company
1,169,922 shares of our common stock in connection with transactions
relating to the Prescription Pharmaceuticals Internet Fulfillment
Services Agreement with Medi-Mail, Inc., a wholly owned subsidiary
of Bergen Brunswig.
5. On November 30, 1999, we issued to Roger Hardy 165,000 shares of our
common stock in exchange for 75 shares of common stock in Clearly
Contacts Lenses, Inc., now a division of more.com.
6. On November 30, 1999, we issued to William Wrixon 55,000 shares of
our common stock in exchange for 25 shares of common stock in
Clearly Contacts Lenses, Inc., now a division of more.com.
7. On February 5, 1998, we issued to North Hollywood Restaurants, Inc.
a warrant to purchase 3,659 shares of our Series A convertible
preferred stock at $1.64 per share for approximately $6,001.00.
8. On February 5, 1998, we issued to Donald M. Kendall, Jr., a warrant
to purchase 14,634 shares of our Series A convertible preferred
stock at $1.64 per share for approximately $24,000.00.
9. On March 2, 1998, we issued to Peter M. Flanigan a warrant to
purchase 1,219 shares of our Series A convertible preferred stock at
$1.64 per share for approximately $1,999.00.
10. On March 5, 1998, we issued to Nikolaus V. Huetz a warrant to
purchase 1,219 shares of our Series A convertible preferred stock at
$1.64 per share for approximately $1,999.00.
11. On May 14, 1998, we sold to Donald M. Kendall, Sr. 250,384 shares of
our Series A convertible preferred stock at $1.64 per share for
approximately $410,630.00.
12. On May 14, 1998, we sold to Peter M. Flanigan 31,089 shares of our
Series A convertible preferred stock at $1.64 per share for
approximately $50,986.00.
13. On May 14, 1998, we sold to North Hollywood Restaurants, Inc. 62,596
shares of our Series A convertible preferred stock at $1.64 per
share for approximately $102,657.00
14. On May 14, 1998, we sold to Nikolaus von Heutz 31,064 shares of our
Series A convertible preferred stock at $1.64 per share for
approximately $50,945.00.
15. On May 14, 1998, we sold to 21st Century Internet Fund, L.P.
1,105,000 shares of our Series B mandatorily redeemable convertible
preferred stock at $1.64 per share for approximately $1,812,200.00.
16. On May 14, 1998, we sold to GreenTree Nutrition Investors, LLC
331,000 shares of our Series B mandatorily redeemable convertible
preferred stock at $1.64 per share for approximately $542,840.00.
17. On May 27, 1998, we sold to Donald M. Kendall, Jr. 46,000 shares of
our Series B mandatorily redeemable convertible preferred stock at
$1.64 per share for approximately $75,440.00.
18. On May 27, 1998, we sold to John Sculley, III 46,000 shares of our
Series B mandatorily redeemable convertible preferred stock at $1.64
per share for approximately $75,440.00.
19. On July 14, 1999, we issued to Phoenix Leasing Incorporated a
warrant to purchase 26,506 shares of our Series C mandatorily
redeemable convertible preferred stock at $1.66 per share for
approximately $44,000.00.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
20. On July 14, 1999, we issued to Robert Kingsbook a warrant to
purchase 21,686 shares of our Series C mandatorily redeemable
convertible preferred stock at $1.66 per share for approximately
$35,999.00.
21. On October 28, 1998, we sold to RHO Management Trust I 1,987,952
shares of our Series C mandatorily redeemable convertible preferred
stock at $1.66 per share for approximately $3,300,000.00.
22. On October 28, 1998, we sold to Healthcare Ventures V, L.P.
1,325,301 shares of our Series C mandatorily redeemable convertible
preferred stock at $1.66 per share for approximately $2,200,000.00.
23. On October 28, 1998, we sold to SOFTBANK Venture Capital IV, L.P.
1,714,145 shares of our Series C mandatorily redeemable convertible
preferred stock at $1.66 per share for approximately $2,845,481.00.
24. On October 28, 1998, we sold to SOFTBANK Technology Advisors Fund,
L.P. 32,843 shares of our Series C mandatorily redeemable
convertible preferred stock at $1.66 per share for approximately
$54,519.00.
25. On October 28, 1998, we sold to 21st Century Internet Fund, L.P.
1,117,470 shares of our Series C mandatorily redeemable convertible
preferred stock at $1.66 per share for approximately $1,855,000.00.
26. On October 28, 1998, we sold to GreenTree Nutrition Investors, II,
LLC 391,566 shares of our Series C mandatorily redeemable
convertible preferred stock at $1.66 per share for approximately
$650,000.00.
27. On October 28, 1998, we sold to Donald M. Kendall Jr. 42,169 shares
of our Series C mandatorily redeemable convertible preferred stock
at $1.66 per share for approximately $70,001.00.
28. On October 22, 1999, we sold to 21st Century Internet Fund, L.P.
989,626 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $4,770,000.00.
29. On October 22, 1999, we sold to Rho Management 1,360,995 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $6,560,000.00.
30. On October 22, 1999, we sold to SOFTBANK Venture Capital IV 814,274
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $3,924,800.00.
31. On October 22, 1999, we sold to SOFTBANK Technology Advisors 15,602
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $75,202.00.
32. On October 22, 1999, we sold to SOFTBANK Venture Capital V, L.P.
795,128 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $3,832,517.00.
33. On October 22, 1999, we sold to SOFTBANK Technology Advisors V, L.P.
21,694 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $104,565.00.
34. On October 22, 1999, we sold to SOFTBANK Technology Entrepreneurs
Fund 13,053 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$62,915.00.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
35. On October 22, 1999, we sold to Healthcare Ventures V, L.P. 220,796
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $1,064,237.00.
36. On October 22, 1999, we sold to Boston Millennia Partners Limited
Partnership 1,293,230 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$6,233,368.00.
37. On October 22, 1999, we sold to Boston Millennia Associates I
Partnership 21,085 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$101,634.00.
38. On October 22, 1999, we sold to FIMA Finance Management, Inc.
207,468 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $1,000,000.00.
39. On October 22, 1999, we sold to Allyn Woodward 8,298 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $40,000.00.
40. On October 22, 1999, we sold to Josef von Rickenbach 5,186 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $24,998.00.
41. On October 22, 1999, we sold to Leon Seynave 20,746 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $100,001.00.
42. On October 22, 1999, we sold to South Ferry #2 L.P. 103,733 shares
of our Series D mandatorily redeemable convertible preferred stock
at $4.82 per share for approximately $499,998.00.
43. On October 22, 1999, we sold to Swander Pace Capital Fund, L.P.
595,990 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $2,872,672.00.
44. On October 22, 1999, we sold to SPC GP Fund, LLC 9,913 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $47,781.00.
45. On October 22, 1999, we sold to SPC Executive Advisors Fund, LLC
9,872 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $47,583.00.
46. On October 22, 1999, we sold to SPC Associates Fund, LLC 6,632
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $31,966.00.
47. On October 22, 1999, we sold to Seligman New Technologies Fund, Inc.
672,198 shares of our Series D mandatorily redeemable convertible
preferred stock at $4.82 per share for approximately $3,239,999.00.
48. On October 22, 1999, we sold to Seligman Investment Opportunities
Fund 157,676 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$759,998.00.
49. On October 22, 1999, we sold to Seligman Communications and
Information Fund, Inc. 207,468 shares of our Series D mandatorily
redeemable convertible preferred stock at $4.82 per share for
approximately $1,000,001,00.
50. On October 22, 1999, we sold to Bayview 99 1, LP 16,856 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $81,246.00.
51. On October 22, 1999, we sold to Bayview 99 II, LP 14,264 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $68,752.00.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
52. On October 22, 1999, we sold to Peter Vidmar 20,746 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $100,000.00.
53. On October 22, 1999, we sold to Donald M. Kendall, Jr. 18,520 shares
of our Series D mandatorily redeemable convertible preferred stock
at $4.82 per share for approximately $89,270.00.
54. On October 22, 1999, we sold to John Sculley, III 41,493 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $200,000.00.
55. On October 22, 1999, we sold to Diane Woolf 2,074 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $10,000.00
56. On October 22, 1999, we sold to Yash Pal Talreja 18,672 shares of
our Series D mandatorily redeemable convertible preferred stock at
$4.82 per share for approximately $89,999.00.
57. On October 22, 1999, we sold to Steven Cash 25,933 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $124,997.00.
58. On October 22, 1999, we sold to Gordon Friedman 10,000 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $48,200.00.
59. On October 22, 1999, we sold to Clark Callander 5,186 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $24,997.00.
60. On October 22, 1999, we sold to Steve Abbott 500 shares of our
Series D mandatorily redeemable convertible preferred stock at $4.82
per share for approximately $2,410.00.
61. On November 5, 1999, we sold to GreenTree Nutrition Investors IV,
L.P. 636,203 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$3,066,498.00.
62. On November 5, 1999, we sold to Star Growth Enterprise 394,191
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $1,900,001.00.
63. On November 5, 1999, we sold to SVM Star Ventures
Managementgesellschaft mbH Nr. 3, 20,747 shares of our Series D
mandatorily redeemable convertible preferred stock at $4.82 per
share for approximately $100,001.00.
64. On November 5, 1999, we sold to Galen Partners III, L.P. 379,073
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $1,827,132.00.
65. On November 5, 1999, we sold to Galen Partners International III,
L.P. 34,313 shares of our Series D mandatorily redeemable
convertible preferred stock at $4.82 per share for approximately
$165,389.00.
66. On November 5, 1999, we sold to Galen Employee Fund III, L.P. 1,552
shares of our Series D mandatorily redeemable convertible preferred
stock at $4.82 per share for approximately $7,481.00.
</TABLE>
The issuances of the securities in all of the above transactions were
deemed to be exempt from registration under the Securities Act in reliance on:
(a) Section 4(2) of the Securities Act by an issuer not involving a public
offering, where the purchasers represented their intention to acquire the
securities for investment only and not with a view to distribution and received
or had access to adequate information about the Registrant; (b) Registration S
promulgated under the Securities Act for sell of securities outside the United
States in offshore transactions to purchasers who are non-"U.S. Persons"; or
(c) Rule 701 promulgated under the Securities Act for transactions pursuant to
a compensatory benefit plan or written compensation contract.
II-5
<PAGE>
On November 4, 1998, we issued 500,000 shares of our common stock in
exchange for the substantial business assets of Acumin Corporation, now a
division of more.com, Inc. The issuance of such securities was exempt from the
registration requirements of the Securities Act due to the exemptions from
registration provided by Sections 3(b) and 4(2) thereof.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No underwriters were employed in any
of the above transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
Item 17. Undertakings
We hereby undertake to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by one
of our directors, officers or controlling persons in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, more.com,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Francisco, State
of California on the 13th day of March, 2000.
MORE.COM, INC.
By: /s/ Laureen De Buono
-------------------------------------
Laureen De Buono
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald M. Kendall, Jr.* Chief Executive Officer and March 13, 2000
______________________________________ Director (Principal
Donald M. Kendall, Jr. Executive Officer)
/s/ Laureen De Buono Chief Financial Officer and March 13, 2000
______________________________________ Secretary (Principal
Laureen De Buono Financial, Accounting
Officer)
/s/ Mark Leschly* Director March 13, 2000
______________________________________
Mark Leschly
/s/ Thomas A. Penn* Director March 13, 2000
______________________________________
Thomas A. Penn
Director
______________________________________
Perk Perkins
/s/ Donald R. Roden* Director March 13, 2000
______________________________________
Donald R. Roden
/s/ E. Scott Russell* Director March 13, 2000
______________________________________
E. Scott Russell
/s/ John Sculley III* Director March 13, 2000
______________________________________
John Sculley III
/s/ John Neil Weintraut* Director March 13, 2000
______________________________________
John Neil Weintraut
/s/ Laureen De Buono
*By: _________________________________
Laureen De Buono
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
------- -------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*........................
3.1 Amended and Restated Certificate of Incorporation of
more.com*..............................................
3.2 Bylaws of more.com*....................................
4.1 Reference is made to Exhibits 3.1 and 3.2*.............
4.2 Specimen Stock Certificate of more.com*................
4.3 Restricted Stock Purchase Agreement between Registrant
and Donald M. Kendall, dated May 14, 1998+.............
4.4 Restricted Stock Purchase Agreement between Registrant
and Eric Budin, dated May 14, 1998 and an amendment
thereof, dated March 15, 1999+.........................
4.5 Amended and Restated Investors' Rights Agreement
between Registrant and the holders of our Series B,
Series C, Series D and Series E convertible preferred
stock dated February 11, 2000*.........................
4.6 Form of Registration Rights Agreement between
Registrant and certain holders of common stock+........
5.1 Opinion of Morrison & Foerster LLP as to the legality
of the common stock*...................................
10.1 Form of Indemnification Agreement between Registrant
and each of its executive officers and directors+......
10.2 Registrant's Amended and Restated 1998 Stock Option
Plan, as amended and restated, including forms of
agreements thereunder+.................................
10.3 Registrant's 2000 Stock Incentive Plan, including forms
and agreements thereunder+.............................
10.5 Registrant's 2000 Employee Stock Purchase Plan,
including forms and agreements thereunder+.............
10.6 Form of Compensation Protection Agreements between
Registrant and each of its executive officers+.........
10.7 Lease for 520 Third Street, Second Floor, San
Francisco, California 94107, dated August 1, 1999+.....
10.8 Lease for 485 Third Street, San Francisco, California
94107, dated October 29, 1999+.........................
10.9 Lease for 495 Third Street, San Francisco, California
94107, dated October 29, 1999+.........................
10.10 Lease for 3401 Market Street, Philadelphia,
Pennsylvania 19104, dated February 13, 1997 and
amendments thereunder+.................................
10.11 Internet Fulfillment Services Agreement between
Registrant and Bergen Brunswig Drug Company, dated July
1, 1999+...............................................
10.12 Prescription Pharmaceuticals Internet Fulfillment
Services Agreement between Registrant and Medi-Mail,
Inc., dated August 18, 1999+...........................
10.13 Service Mark License and Access Agreement between
Registrant and Bergen Brunswig Drug Company, dated
August 18, 1999+.......................................
10.14 Advertising Representative Agreement between Registrant
and Bergen Brunswig Drug Company, dated September 30,
1999+..................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Document Page
------- -------- ------------
<C> <S> <C>
10.15 Database License and Supply and Purchase Agreement
between Registrant and Lens Express, Inc., dated January
17, 2000+...............................................
16.1 Letter regarding change in Certifying Accountant........
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1*............................................
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.............................................
24.1 Powers of Attorney......................................
27.1 Financial Data Schedule+................................
</TABLE>
- --------
* To be filed by amendment
+ Previously filed
<PAGE>
EXHIBIT 10.16
February 29, 2000
Mr. Frank A. Newman
820 South Bayside Drive
Tampa, FL 33609
Re: Employment Agreement
Dear Frank:
On behalf of more.com, I am pleased and delighted to confirm the terms of our
agreement for you to become the President and Chief Executive Officer of
more.com. This offer is conditional upon your acceptance of the terms and
conditions of this offer of employment and your execution a mutually agreeable
Employee Confidential Information and Inventions Agreement.
Your position with more.com will be President and Chief Executive Officer. You
will also be a member of the more.com Board of Directors. You will be
responsible for all of the strategic and operational activities of more.com, and
report directly to the Board of Directors. As we discussed, your position is a
full-time position, and your employment will commence as soon as is practicable.
(The date your employment commences is referred to as your Start Date.)
Your initial base salary will be $500,000 per year, payable at the frequency and
in accordance with more.com's regularly established payroll policies. You will
also receive, as we have discussed, a $1,000,000 "Sign-On" Bonus, payable on
your Start Date. However, if you would prefer, more.com can issue you on your
Start Date $1,000,000 worth of restricted common stock, valued at $4.82 per
share. This restricted common stock will vest as follows: one-quarter on the
first anniversary of your Start Date, and the remainder in 1/36 increments over
the 36 months following the first anniversary of your Start Date. This bonus
(either in cash or restricted stock) is forfeitable by you only in the event you
voluntarily terminate your employment with more.com, other than as a result of a
change in control, within the first year of your Start Date. We would suggest
that you seek the advice of your financial and legal advisors regarding the tax
implications for you of a restricted common stock grant. Additionally, you will
receive a guaranteed $250,000 bonus, payable within thirty (30) days of the
anniversary of your Start Date, as a first-year performance bonus. more.com
will be establishing an annual cash performance incentive plan going forward, in
which all officers will be able to participate. All payments to you will be
subject to legally required withholding. It is more.com's policy to review
salary, and overall compensation levels annually. Accordingly, your base salary
and other compensation, including cash performance bonuses and follow-on stock
option grants, may be reviewed and adjusted or provided annually at more.com's
sole discretion based on company and individual performance; raises in
compensation are not guaranteed. In no way whatsoever, however, will your base
salary decline in any way.
<PAGE>
Frank A. Newman
February 29, 2000
Page 2
You will also be eligible to participate in the employee benefits generally made
available to our officer-level employees from time to time. At the present
time, those benefits include health, dental, and vision insurance for you and
your family, a 401(k) plan, a flexible spending plan, parking, a partial health
club membership, provision of a cell phone, use of a lap-top computer, and paid
time off in accordance with applicable benefit plans and more.com's written
policies, as they may be amended from time to time at more.com's discretion. We
will also provide to you a supplemental short-term disabiity, long-term
disability, and life insurance policy with a benefit equal to at least three
times your base salary.
more.com has a company option plan that permits many of our employees to
participate in the equity ownership of more.com. Our Board of Directors has
approved an option grant to you of 1,663,752 options, in the form of a
combination of ISO and NQ options, which represents 5% of the outstanding shares
of more.com, on a fully-diluted basis (post-Series E and the Comfort Living
acquisition, both of which closed last week). The price of your options will be
at $4.82 per share, assuming a Start Date no later than April 1, 2000. These
options will be subject to the terms of the Option Plan and your execution of an
Option Agreement. One-quarter of these options will vest on the first
anniversary of your Start Date, and the remaining stock will vest in 1/36
increments over the 36 months following the first anniversary of your Start
Date.
In connection with a change of control, as that term is defined in the Option
Plan, you will receive those benefits that are enumerated in the Compensation
Protection Agreement (which includes a benefit of two years base salary and
bonus, as well as accelerated vesting of options, the latter subject only to
certain "pooling" restrictions), the form of which has been approved by the
Board of Directors, and will require your execution on your Start Date.
In connection with your relocation from Largo, Florida to the San Francisco Bay
area, more.com will provide to you a one-time, up-front allowance of $500,000 to
use to pay for all of your relocation costs and needs. What you do not use of
this allowance for relocation is yours to keep. In addition, more.com will
gross you up for the incremental federal and state income tax liability you
incur in connection with this $500,000 allowance, so that the impact of this
payment is tax-neutral to you. more.com will not be responsible in any way for
any of your relocation expenses as a result of providing to you this allowance.
You will devote your best efforts to the performance of your job for more.com.
While employed at more.com, you will not undertake any other activity requiring
your business time and attention without Board approval, with the exception of
your current participation on the Boards of Directors of Jabil Circuit, AmSouth
Bank, JoAnn Stores, and the National Assocation of Chain Drug Stores.
<PAGE>
Frank A. Newman
February 29, 2000
Page 3
We agree that you intend to resign as soon as practicable from the Boards of
AmSouth Bank and JoAnn Stores. You agree that you will not support (by way of
investment* or otherwise) any activity that is competitive with more.com's
business or pose a conflict of interest with that business. You will follow
more.com's policies and procedures (including our policies protecting other
employees against discrimination and sexual harassment) as made available to
you from time to time. As a condition of your employment, you will execute a
mutually agreeable Employee Confidential Information and Inventions Agreement.
Your employment with more.com will be "at will"; in other words, either you or
more.com will have the right to terminate your employment with more.com at any
time, for any reason, with or without notice and with or without cause, at your
or our discretion, subject to the terms of this paragraph and paragraph six
above. In the event, however, that you are terminated without cause (outside of
a change in control circumstance), you will receive a severance benefit equal to
twice your base salary. If you are terminated within one year from your Start
Date, 25% of your options will automatically vest upon the termination date.
In the unlikely event of a dispute between more.com and you arising out of your
employment or the termination of your employment, we each agree to submit our
dispute to binding arbitration. This means that there will be no court or jury
trial of disputes between us concerning your employment or the termination of
your employment. Arbitration will be held in San Francisco, California in front
of three arbitrators in accordance with the Employment Arbitration Rules of the
American Arbitration Association. Each party will select an arbitrator of his
choice; both arbitrators will then select a third arbitrator. The arbitration
decision will be based on a majority decision by the three-person arbitration
panel. While this agreement to arbitrate is intended to be broad (and covers,
for example, claims under state and federal laws prohibiting discrimination on
the basis of race, sex, age, disability, family leave, etc.), it is not
applicable to your rights under the California Workers' Compensation Law, which
are governed under the special provisions of that law, or to enforcement of the
Employee Confidential Information and Inventions Agreement that you are signing.
Frank, we are very excited about your joining us. Please sign and return a copy
of this letter to me, keeping a copy for your records. The terms set forth in
this letter supersede all prior agreements,
* other than ownership of less than 1% of publicly traded shares of competitors
(initialled) DMK FAN
<PAGE>
Frank A. Newman
February 29, 2000
Page 4
understandings and representations between us concerning the subject matter of
this letter. On behalf of the Board of Directors, we look forward to your
joining more.com.
Sincerely,
/s/ Donald M. Kendall, Jr.
Donald M. Kendall, Jr.
Chief Executive Officer
I, Frank Newman, understand and agree to the above terms. I understand that my
employment with more.com is at will, and I acknowledge that no representations
or promises other than those set forth above have been made to me with regard to
the terms and conditions of my employment.
Signed: Frank A. Newman
---------------------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
("Registration Statement") of our report dated February 10, 2000, relating to
the consolidated financial statements of more.com, Inc., and of our report
dated February 4, 2000, relating to the financial statements of Comfort Living
Inc., both of which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCooper LLP
San Jose, California
March 10, 2000
<PAGE>
February 11, 2000
VIA EDGAR AND COURIER
- ---------------------
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: more.com, Inc.
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
On behalf of our client, more.com, Inc., a Delaware corporation (the
"Company"), we hereby transmit a Registration Statement on Form S-1 (the
"Registration Statement") together with copies of all exhibits thereto, filed
for the purpose of registering shares of the Company's Common Stock (the "Common
Stock") under the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations promulgated thereunder by the Securities and Exchange
Commission (the "Commission"). Manually executed signature pages have been
signed prior to the time of this electronic filing and will be retained by the
Company for five years.
The Company has paid a filing fee of $22,770, calculated in accordance with
Section 6(b) of the Securities Act, via wire transfer of such amount to the
lockbox maintained by the Commission at the Mellon Bank in Pittsburgh,
Pennsylvania pursuant to Rule 3(a) promulgated under the Securities Act.
The shares of Common Stock that are the subject of the Registration
Statement will be offered and sold in the Company's initial public offering,
which will be underwritten on a firm commitment basis by the underwriters
identified on the front cover of the preliminary prospectus included in the
Registration Statement. The underwriters have advised us that the offering will
be reviewed by representatives of the National Association of Securities
Dealers, Inc. (the "NASD") and that copies of the Registration Statement and the
form of Underwriting Agreement are being forwarded concurrently to the NASD.
Please note that confidential treatment has been requested, pursuant to
Rule 406 promulgated by the Commission under the Securities Act, for certain
portions of the Internet Fulfillment Services Agreement files as Exhibit No.
10.11. Prescription
<PAGE>
Securities and Exchange Commission
February 11, 2000
Page Two
Pharmaceuticals Internet Fulfillment Services Agreement filed as Exhibit No.
10.12, Service Mark License and Access Agreement filed as Exhibit No. 10.13,
Advertising Representative Agreement filed as Exhibit No. 10.14 and Database
License and Supply and Purchase Agreement filed as Exhibit No. 10.15 to the
Registration Statement. As set forth by Rule 406, such request for confidential
treatment has been provided in a separate letter to the Commission.
We will forward courtesy copies of the Registration Statement, the exhibits
thereto and our request for confidential treatment as soon as we are notified
that the registration has been assigned to a specific examiner.
If you have any questions or comments regarding the Registration Statement
or the exhibits thereto, please contact me at (415) 268-7113.
Very truly yours,
/s/ GAVIN B. GROVER
Gavin B. Grover
Enclosures
cc: Laureen De Buono - more.com, Inc.
Steven L. Bernson, Wilson Sonsini Goodrich & Rosati
