<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission File Number
000- 29387
PETS.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4730753
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
945 Bryant St.
San Francisco, CA 94103
(Address of principal executive offices)
(415) 222-9999
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No
The number of shares of common stock, $.00125 par value, outstanding on
September 30, 2000 was 34,659,768.
<PAGE> 2
PETS.COM, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited) ................................................. 3.
Condensed Balance Sheets as of September 30, 2000 and December 31, 1999 .................... 3.
Condensed Statements of Operations for the three and nine month periods ended
September 30, 2000 and 1999 ................................................................ 4.
Condensed Statements of Cash Flows for the nine month periods ended
September 30, 2000 and 1999 ................................................................ 5.
Notes to Condensed Financial Statements .................................................... 6.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 10.
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 16.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 16.
Item 2. Changes in Securities and Use of Proceeds .................................................. 17.
Item 3. Defaults upon Senior Securities ............................................................ 17.
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 17.
Item 5. Other Information .......................................................................... 17.
Item 6. Exhibits and Reports on Form 8K ............................................................ 18.
SIGNATURES ......................................................................................... 19.
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
PETS.COM, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(unaudited) (See Note 6)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 23,065 $ 30,196
Inventories .......................................... 7,766 6,756
Prepaid advertising expenses ......................... 18,268 7,223
Other prepaid expenses and current assets ............ 2,147 999
--------- ---------
Total current assets .................................... 51,246 45,174
Certificate of deposit .................................. 1,007 845
Fixed assets, net ....................................... 19,630 11,327
Intangible assets, net .................................. 305 399
Other assets ............................................ 5,858 2,565
--------- ---------
Total assets ............................................ $ 78,046 $ 60,310
========= =========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable ..................................... $ 4,738 $ 6,563
Accrued expenses ..................................... 3,004 2,137
Payable to related parties ........................... 1,210 370
Capital lease obligations ............................ 82 16
--------- ---------
Total current liabilities ............................... 9,034 9,086
Capital lease obligations, long term .................... 719 104
Stockholders' equity:
Convertible preferred stock .......................... 1 20
Common stock ......................................... 43 6
Additional paid-in capital ........................... 225,461 128,442
Accumulated deficit .................................. (146,648) (61,778)
Stockholder note receivable .......................... -- (188)
Deferred stock-based compensation .................... (10,564) (15,382)
--------- ---------
Total stockholders' equity .......................... 68,293 51,120
--------- ---------
Total liabilities and stockholders' equity .............. $ 78,046 $ 60,310
========= =========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE> 4
PETS.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 9,365 $ 568 $ 25,780 $ 619
Cost of goods sold ................................. 9,642 (1,766) 32,670 (1,842)
-------- -------- -------- --------
Gross margin .................................. (277) (1,198) (6,890) (1,223)
Operating expenses:
Marketing and sales ........................... 14,709 10,693 60,654 11,815
Product development ........................... 2,268 2,194 7,211 3,835
General and administrative .................... 3,843 1,205 8,855 2,043
Amortization of stock-based compensation ...... 1,040 1,139 3,136 1,139
-------- -------- -------- --------
Total operating expenses ................. 21,860 15,231 79,856 18,832
-------- -------- -------- --------
Operating loss ..................................... (22,137) (16,429) (86,746) (20,055)
Interest income, net ............................... 393 577 1,857 700
Other income ....................................... 19 -- 19 --
-------- -------- -------- --------
Net loss ........................................... $(21,725) $(15,852) $(84,870) $(19,355)
======== ======== ======== ========
Basic and diluted net loss per share ............... $ (0.68) $ (10.91) $ (3.38) $ (10.84)
======== ======== ======== ========
Weighted average shares outstanding used to
compute basic and diluted net loss per share ...... 31,985 1,453 25,102 1,786
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
PETS.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net loss ......................................................................... $(84,870) $(19,355)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 3,911 319
Gain on disposal of fixed assets ............................................ (19) --
Common stock and preferred stock issued for intellectual property ........... -- 416
Amortization of deferred stock-based compensation ........................... 3,136 1,139
Marketing and sales ......................................................... 2,925 --
Changes in:
(910) (1,872)
Inventories
Prepaid advertising expenses ........................................... 7,223 (2,214)
Other prepaid expenses and current assets .............................. (1,148) (411)
Certificates of deposit ................................................ (162) (150)
Other assets ........................................................... 130 (272)
Accounts payable, accrued expenses and other ........................... (817) 5,815
-------- --------
Net cash used in operating activities ............................................ (70,601) (16,585)
Investing Activities:
Purchase of fixed assets ......................................................... (10,979) (7,568)
Strategic debt and equity investments ............................................ (3,423) --
-------- --------
Net cash used in investing activities ............................................ (14,402) (7,568)
Financing Activities:
Proceeds from exercise of stock options .......................................... 120 388
Repurchase of stock options exercised ............................................ (149) --
Proceeds from issuances of preferred stock ....................................... 2,480 59,982
Proceeds from issuances of common stock .......................................... 75,862 14
Repayments on capital lease ...................................................... (441) --
-------- --------
Net cash provided by financing activities ........................................ 77,872 60,384
-------- --------
Net increase/(decrease) in cash and cash equivalents ............................. (7,131) 36,231
Cash and equivalents at beginning of period ...................................... 30,196 --
-------- --------
Cash and equivalents at end of period ............................................ $ 23,065 $ 36,231
======== ========
Supplemental Cash Flow Information:
Property and equipment acquired under capital lease obligations ............... $ 1,122 $ --
Issuance of preferred stock for media advertising ............................ $ 11,024 $ --
Issuance of common stock for acquisition of Petstore.com assets .............. $ 9,569 $ --
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 6
PETS.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of Pets.com,
Inc., (the "Company"), have been prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company's management,
the statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December 31, 1999,
included in the Company's Prospectus, dated February 10, 2000 filed with the
Securities and Exchange Commission in connection with the Company's initial
public offering. The results of operations for any interim period are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year
On November 4, 2000 the board of directors of the Company
approved the orderly wind down and cessation of the Company's operations (See
Note 6). The accompanying unaudited financial statements do not include any
adjustments to reflect the effects on the recoverability and classification of
assets or the amounts and classification of liabilities due to the Company's
subsequent decision to cease operations.
2. Net Loss Per Share
Net loss per share is computed using the weighted average number
of shares of common stock outstanding less the number of shares subject to
repurchase. Shares associated with stock options and warrants are not included
in the calculation of diluted net loss per share because they are antidilutive.
The following table sets forth the computation of basic and
diluted net loss per share for the periods indicated:
<PAGE> 7
(unaudited)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss ............................................. $(21,725) $(15,852) $(84,870) $(19,355)
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding .......... 33,880 5,012 26,997 3,796
Less weighted average common shares issued
subject to repurchase agreements .............. (1,895) (3,559) (1,895) (2,010)
-------- -------- -------- --------
Denominator for basis and diluted calculation ..... 31,985 1,453 25,102 1,786
======== ======== ======== ========
Net loss per share:
Basic and diluted .................................... $ (.68) $ (10.91) $ (3.38) $ (10.84)
======== ======== ======== ========
</TABLE>
<PAGE> 8
3. Stockholders' Equity
On January 7, 2000 the Company's board of directors approved an
amendment to the Company's articles of incorporation to increase the total
number of authorized preferred stock shares to 18,101,862, and to designate
1,200,000 shares of preferred stock as Series C.
On January 15, 2000, the Company entered into an agreement with
Buena Vista Internet Group and Infoseek Corporation, affiliates of The Walt
Disney Company, to perform joint marketing, content development and other
promotional activities. An affiliate of The Walt Disney Company also purchased
1,102,400 shares of Series C convertible preferred stock in exchange for media
rights valued at approximately $11 million on ABC, Inc.
On January 19, 2000 the Company's board of directors authorized,
concurrent with the Company's reincorporation in Delaware, a .8 for 1 reverse
stock split. All share and per share amounts in the accompanying financial
statements have been adjusted to reflect this split.
Initial Public Offering of Common Stock
On February 11, 2000 the Company completed its initial public
offering of 7,500,000 shares of common stock resulting in approximately $75.3
million in net proceeds. In connection with the closing of the offering, all of
the outstanding convertible preferred stock was converted into an aggregate of
17,402,940 shares of common stock.
4. New Accounting Pronouncements
In December 1999 the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting principle
in the quarter ending December 31, 2000. While the Company has not completed its
assessment of the impact of the adoption of SAB 101, it believes that the
implementation will not have a material adverse impact on its existing revenue
recognition policies.
5. Acquisition
On July 13, 2000, the Company acquired certain strategic assets
and partnerships of Petstore.com, Inc., an online retailer of pet products and
services. As part of the transaction, the Company issued 5,243,752 shares of
common stock. The acquisition is accounted for as a purchase. Also related to
the above transaction, Discovery, Inc. agreed to acquire 1,430,700 shares of
Pets.com stock for $3 million in cash.
The unaudited pro forma results of operations assuming consummation of the
acquisition as of January 1, 2000 are as follows:
<PAGE> 9
<TABLE>
<CAPTION>
2000
--------
<S> <C>
Revenues ......................................... $ 30,165
Net loss ......................................... $(120,429)
Basic and diluted net loss per common share ...... $ (4.80)
</TABLE>
6. Subsequent Event
On November 4, 2000, the Board of Directors of the Company
unanimously approved the orderly wind down of its operations to include the
layoff of approximately 255 of its 320 employees which was completed on November
7, 2000, the closure of its web site effective November 10, 2000, the ceasing of
all sales transactions effective November 10, 2000, the acceleration of the
vesting of all outstanding stock options under the Company's 1999 Stock Plan and
undertaking the efforts to sell the majority of its assets, including inventory,
distribution center equipment, URLs, content and its Sock Puppet brand icon and
other intellectual property. The Board of Director's decision was reached after
no viable offers to acquire or fund capital into the Company were received. The
decision came after a lengthy and exhaustive effort to both raise capital,
dating back to early summer, or more recently, to sell the Company outright.
Merrill Lynch was engaged to assist the Company in its efforts and assisted in
contacting more than 50 domestic and international strategic and financial
prospects on its behalf. The Company worked to examine all options. In the end,
however, the result of these efforts was insufficient as no party was prepared
to provide capital or acquire the Company. In fact, out of the more than 50
prospects contacted, fewer than 8 were even prepared to visit with the Company.
The Company has concluded that the orderly wind down of the Company is the
course of action that most likely offers the highest return to stockholders and
that to continue the operation of the business at this time would reduce assets
and cash that may ultimately be returned to the stockholders. We expect to
proceed with the dissolution of the Company unless we receive a credible offer
to purchase the Company. The Company may not be able to find qualified buyers
for its assets at prices necessary to generate cash to satisfy its current and
future obligations. Furthermore, because many of the Company's assets,
particularly its intellectual property, will decline in value over time, the
Company may not be able to consummate the sale of these assets in time to
generate meaningful value. In addition, the Company may not be able to negotiate
the orderly wind down of its obligations to creditors. These include, without
limitation, long term contractual payment and performance obligations associated
with the Company's building and facilities leases, business agreements with
third parties, and agreements with vendors and shipping services. As a result of
these and other risks, the Company may not be able to generate meaningful cash,
or any cash, which could be returned to its stockholders, and the timing of any
distribution is uncertain at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
This discussion contains forward-looking statements. These
statements relate to future events or our future financial performance
including, by way of example, statements concerning the effective liquidation of
the company's assets, the orderly wind down of the company, the settlement of
all creditor and other claims against the company, or the distribution of any
cash or other assets to stockholders. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, expect,
plan, intend, anticipate, believe, estimate, predict, potential or continue, the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should consider various factors, including the risks
outlined in the Risk Factors section our prospectus related to our initial
public offering filed with the Securities and Exchange Commission (SEC) on
February 10, 2000 (File No. 333-92433), and from time to time, in our periodic
reports filed with the SEC. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
the effective liquidation of the company's assets, the orderly wind down of the
company, the settlement of all creditor and other claims against the company, or
the distribution of any cash or other assets to stockholders levels of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward
<PAGE> 10
looking statements after the date of this Quarterly Report on Form 10-Q to
conform such statements to actual results or to changes in our expectations.
OVERVIEW
On November 4, 2000, the Board of Directors of the Company
unanimously approved the orderly wind down of its operations to include the
layoff of approximately 255 of its 320 employees which was completed on November
7, 2000, the closure of its web site effective November 10, 2000, the ceasing of
all sales transactions effective November 10, 2000, the acceleration of the
lapse of the company's repurchase right with regard to the common stock held by
employees of the company as of November 7, 2000, and undertaking the efforts to
sell the majority of its assets, including inventory, distribution center
equipment, URLs, content and its Sock Puppet brand icon and other intellectual
property. The Board of Director's decision was reached after no viable offers to
acquire or fund capital into the Company were received. The decision came after
a lengthy and exhaustive effort to both raise capital, dating back to early
summer, or more recently, to sell the Company outright. Merrill Lynch was
engaged to assist the Company in its efforts and assisted in contacting more
than 50 domestic and international strategic and financial prospects on its
behalf. The Company worked to examine all options. In the end, however, the
result of these efforts was insufficient as no party was prepared to provide
capital or acquire the Company. In fact, out of the more than 50 prospects
contacted, fewer than 8 were even prepared to visit with the Company. The
Company has concluded that the orderly wind down of the Company is the course of
action that most likely offers the highest return to stockholders and that to
continue the operation of the business at this time would reduce the assets and
cash that may ultimately be returned to the stockholders. We expect to proceed
with the dissolution of the Company unless we receive a credible offer to
purchase the Company. The Company may not be able to find qualified buyers for
its assets at prices necessary to generate cash to satisfy its current and
future obligations. Furthermore, because many of the Company's assets,
particularly its intellectual property, will decline in value over time, the
Company may not be able to consummate the sale of these assets in time to
generate meaningful value. In addition, the Company may not be able to negotiate
the orderly wind down of its obligations to creditors. These include, without
limitation, long term contractual payment and performance obligations associated
with the Company's building and facilities leases, business agreements with
third parties, and agreements with vendors and shipping services. As a result of
these and other risks, the Company may not be able to generate meaningful cash,
or any cash, which could be returned to its stockholders, and the timing of any
distribution is uncertain at this time.
Results of Operations
Because we commenced commercial operations on February 17, 1999
and had a short operating history, we believe that period-to-period comparisons
are less meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our results of
operations that compares the quarter ended September 30, 2000 to the quarter
ended June 30, 2000.
On November 10, 2000, we ceased all sales transactions, closed
our website, and commenced the wind down of our business.
The following table sets forth our unaudited quarterly statement
of operations data for the three months ending September 30, 2000 and the three
months ending June 30, 2000. This unaudited periodic information has been
derived from our unaudited financial statements and, in the opinion of
management, includes all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles.
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
September 30, June 30,
2000 2000
-------- --------
<S> <C> <C>
Net Sales .......................................... $ 9,365 $ 8,764
Cost of goods sold ................................. 9,642 10,513
-------- --------
Gross margin .................................. (277) (1,749)
Operating expenses:
Marketing and sales ........................... 14,709 17,091
Product development ........................... 2,268 2,257
General and administrative .................... 3,843 2,681
Amortization of stock-based compensation ...... 1,040 1,022
-------- --------
Total operating expenses ................. 21,860 23,051
-------- --------
Operating loss ..................................... (22,137) (24,800)
Interest income, net ............................... 393 741
Other income/expense ............................... 19 --
-------- --------
Net loss ........................................... $(21,725) $(24,059)
======== ========
Basic and diluted net loss per share ............... $ (0.68) $ (10.91)
======== ========
Weighted average shares outstanding used to
Compute basic and diluted net loss per share ...... 31,985 1,453
======== ========
</TABLE>
Net Sales. Net sales consist of product sales, magazine
advertising sales, licensing revenues and charges to customers for outbound
shipping and handling and are net of allowances for product returns, promotional
discounts and coupons. We recognize product and shipping revenues when the
related product is shipped. We recognize magazine advertising revenue when
editions in which the advertising appears are distributed. Net sales for the
third quarter of 2000 were $9.4 million, a 7% increase over net sales for the
second quarter of 2000 of $8.8 million. The increase in net sales was a result
of the increase in our customer base, the increase in our repeat orders as a
percentage of total orders and a reduction in coupons issued and redeemed.
Cost of Sales and Gross Margin. Cost of sales consists primarily
of the costs of products sold to customers and outbound and inbound shipping
costs. Gross Margin improved from negative 20% in the second quarter of 2000 to
negative 3% during the third quarter of 2000. The negative gross margin
improvement was primarily attributable to a decrease in our shipping costs as
our second distribution center in Indianapolis reached its full load of U.S.
shipping by the end of the second quarter 2000. We also incurred a one-time
shipping charge adjustment of approximately $631,000 in the third quarter 2000.
Marketing and Sales Expenses. Marketing and sales expenses
consist primarily of advertising and promotional expenditures, distribution
expenses, supplies, payroll and related expenses for personnel engaged in
marketing, merchandising, business development and customer service and
distribution
<PAGE> 12
expenses. Marketing and sales expenses decreased from $17.1 million in the
second quarter of 2000 to $14.7 in the third quarter 2000. The decrease was due
to a reduction in expenses associated with advertising media and promotional
costs and a continued decrease in distribution costs associated with the
increased shipping load from our Indianapolis distribution center.
Product Development Expenses. Product development expenses
consist primarily of payroll and related expenses for our Web store development,
systems personnel, consultants, content and other Web store costs. Product
development expenses remained consistent at $2.3 million in the second quarter
of 2000 and the third quarter 2000.
General and Administrative Expenses. General and administrative
expenses consist of payroll and related expenses for development, design,
production, finance, human resources, executive and administrative personnel,
corporate facility expenses, professional services expenses, travel and other
general corporate expenses. General and administrative expenses increased from
$2.7 million in the second quarter of 2000 to $3.8 million in the third quarter
of 2000. The increase was primarily due to increased expenses associated with
the relocation of the Company's headquarters to a new larger facility as well as
the expenses associated with Company's requirements as a public company.
Amortization of Stock-Based Compensation. Amortization of
stock-based compensation remained consistent at $1.0 million in the third
quarter of 2000 and the second quarter of 2000.
Interest Income, net. Interest income represents earnings on our
cash and cash equivalents net of interest expense associated with capital lease
obligations. Interest income was $0.4 million in the third quarter of 2000
compared to $0.7 million in the second quarter of 2000. The decrease was due to
the reduction in cash balances in interest-bearing accounts.
Income Taxes. There was no provision or benefit for income taxes
for any period since inception due to our operating losses. We have not
recognized any benefit from the future use of loss carryforwards for any period
since inception because of uncertainty surrounding their realization.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations
primarily through private sales of convertible notes payable and preferred
stock, which, yielded net cash proceeds of $109.2 million. In February 2000, we
completed our initial public offering and issued 7,500,000 shares of common
stock at an initial public offering price of $11.00 per share. In connection
with our initial public offering, we received approximately $75.3 million in net
cash proceeds.
We incurred net losses of $146.6 million from inception to
September 30, 2000.
The net cash used in operating activities of $70.6 million in the
first nine months of 2000 primarily reflected the net loss for the period of
$84.9 million.
Net cash used in investing activities was $14.4 million for the
first nine months of 2000. Net cash used in investing activities primarily
consisted of leasehold improvements and purchases of equipment and systems,
including computer equipment, warehouse handling equipment and fixtures and
furniture. The Company also made an equity investment in PetsPark, Ltd., an
U.K.-based online pet retailer, of $2.0 million.
Net cash provided by financing activities was $77.9 million for
the first nine months of 2000 and consisted primarily of approximately $75
million in proceeds from the Company's initial public offering in February 2000.
As of September 30, 2000 we had $23.1 million of cash and cash
equivalents. As of that date, our principal commitments consisted of obligations
outstanding under capital and operating leases aggregating approximately $2.7
million through September 30, 2000. We have incurred leasehold improvement
capital expenditures of approximately $2.3 million through the third quarter of
2000 to prepare the facility for occupancy.
RISK FACTORS
<PAGE> 13
The following is a discussion of additional factors which
currently impact or may impact our business, operating results and/or financial
condition. Anyone making an investment decision with respect to our capital
stock is cautioned to carefully consider these factors, along with the factors
discussed in the Risk Factors section of our prospectus related to our initial
public offering filed with the Securities and Exchange Commission (SEC) on
February 10, 2000 (File No. 333-92433) and our periodic reports filed pursuant
to the Exchange Act.
From time to time, information we provide or statements we make
may contain "forward looking" information that involves risks and uncertainties.
In particular, statements contained in this Quarterly Report on Form 10-Q that
are not historical facts (including, but not limited to statements contained in
"Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations") and statements related to the Company's wind down and its effect
on the Company and its stockholders may constitute forward looking statements
and are made under the safe harbor provisions of The Private Securities
Litigation Reform Act of 1995. The following discussion of our risk factors
should be read in conjunction with the financial statements and related notes
thereto. Such factors, among others, may have a material adverse effect upon our
business, results of operations and financial condition.
THE COMPANY HAS COMMENCED THE WIND DOWN OF ITS BUSINESS AND MAY NOT BE ABLE TO
GENERATE MEANINGFUL CASH, OR ANY CASH, WHICH COULD BE RETURNED TO STOCKHOLDERS.
On November 4, 2000, the Board of Directors of the Company
unanimously approved the orderly wind down of its operations to include the
layoff of approximately 255 of its 320 employees which was completed on November
7, 2000, the closure of its web site effective November 10, 2000, the ceasing of
all sales transactions effective November 10, 2000, the acceleration of the
vesting of all outstanding stock options under the Company's 1999 Stock Plan,
and undertaking the efforts to sell the majority of its assets, including
inventory, distribution center equipment, URLs, content and its Sock Puppet
brand icon and other intellectual property. The Board of Director's decision was
reached after no viable offers to acquire or fund capital into the Company were
received. The Company may not be able to find qualified buyers for its assets at
prices necessary to generate cash to satisfy its current and future obligations.
Furthermore, because many of the Company's assets, particularly its intellectual
property, will decline in value over time, the Company may not be able to
consummate the sale of these assets in time to generate meaningful value. In
addition, the Company may not be able to negotiate the orderly wind down of its
obligations to creditors. These include, without limitation, long term
contractual payment and performance obligations associated with the Company's
building and facilities leases, business agreements with third parties, and
agreements with vendors and shipping services. As a result of these and other
risks, the Company may not be able to generate meaningful cash, or any cash,
which could be returned to its stockholders, and the timing of any distribution
is uncertain at this time.
STOCKHOLDERS MAY NOT RECEIVE ANY DISTRIBUTIONS AS PART OF THE COMPANY'S WIND
DOWN. FURTHERMORE, IF THE COMPANY'S CONTINGENCY RESERVE IS INADEQUATE TO COVER
EXPENSES AND LIABILITIES, STOCKHOLDERS MAY BE LIABLE TO CREDITORS OF THE COMPANY
FOR AMOUNTS RECEIVED.
If the Company's wind down is approved by the stockholders, a
Certificate of Dissolution will be filed with the State of Delaware dissolving
the Company. Pursuant to the Delaware General Corporation Law, the Company will
continue to exist for three years after the dissolution becomes effective or for
such longer period as the Delaware Court of Chancery shall direct, for the
purpose of prosecuting and defending suits against it and enabling the Company
gradually to close its business, to dispose of its property, to discharge its
liabilities and to distribute to its stockholders any remaining assets. The
Company will establish a contingency reserve for payment of its expenses and
liabilities during this three-year period. Under the Delaware General Corporate
Law, in the event the contingency reserve created by the Company is inadequate
for payment of its expenses and liabilities during this three-year period, each
stockholder could be held liable for payment to the Company's creditors of such
stockholder's pro rata share of amounts owed to creditors in excess of the
contingency reserve. The liability of any stockholder would be limited to the
amounts previously received by such stockholder from the Company (and from any
liquidating trust or trusts) as distributions. Accordingly, in such event a
stockholder could be required to return all such
<PAGE> 14
distributions previously made to such stockholder. In such event, a stockholder
could receive nothing from the Company. Moreover, in the event a stockholder has
paid taxes on amounts previously received, a repayment of all or a portion of
such amount could result in a stockholder incurring a net tax cost if the
stockholder's repayment of an amount previously distributed does not cause a
commensurate reduction in taxes payable. There can be no assurance that the
contingency reserve established by the Company will be adequate to cover any
expenses and liabilities.
If the Company were held by a court to have failed to make
adequate provision for its expenses and liabilities or if the amount ultimately
required to be paid in respect of such liabilities exceeded the amount available
from the contingency reserve and the assets of the liquidating trust or trusts,
a creditor of the Company could seek an injunction against the making of
distributions under the Company's wind down on the ground that the amounts to be
distributed were needed to provide for the payment of the Company's expenses and
liabilities. Any such action could delay or substantially diminish the cash
distributions to be made to stockholders and/or interest holders.
THE COMPANY MAY NOT BE ABLE TO RETAIN THE SERVICES OF THE KEY EMPLOYEES REQUIRED
TO COMPLETE ITS WIND DOWN.
The success of the Company's wind down depends in large part upon
the Company's ability to retain the services of certain of its current personnel
or to attract qualified replacements for them. The retention and attraction of
qualified personnel is particularly difficult under the Company's current
circumstances.
THE COMPANY MUST AFFIX A FINAL RECORD DATE ON WHICH IT SHALL DETERMINE THE
PROPORTIONATE INTEREST OF EACH STOCKHOLDER AND AFTER WHICH IT WILL BE UNABLE TO
RECORD TRANSFERS OF COMMON STOCK ON THE COMPANY'S BOOKS.
The Company intends to close its stock transfer books and
discontinue recording transfers of Common Stock at the close of business on the
final record date to be fixed by the Board of Directors for filing the
Certificate of Dissolution after approval by the Company's stockholders. The
date of the special meeting of stockholders seeking their approval of the
certificate of dissolution has not yet been set. Thereafter, certificates
representing the Common Stock will not be assignable or transferable on the
books of the Company except by will, intestate succession or operation of law.
The proportionate interests of all of the stockholders of the Company will be
fixed on the basis of their respective stock holdings at the close of business
on the final record date, and, after the final record date, any distributions
made by the Company shall be made solely to the stockholders of record at the
close of business on the final record date, except as may be necessary to
reflect subsequent transfers recorded on the books of the Company as a result of
any assignments by will, intestate succession or operation of law.
THE COMPANY'S COMMON STOCK WILL BE DELISTED FROM THE NASDAQ STOCK MARKET.
The Company has received a delisting notice from the Nasdaq
Stock Market due to its low trading price per share. The Company expects that it
will be unable to satisfy the requirements for continued listing of its Common
Stock on the Nasdaq National Market. Moreover, rules of the Nasdaq Stock Market
require that companies listed on the Nasdaq National Market continue to have an
operating business. If the Company completes its plans to conclude its business
activities, it will no longer have an operating business. In addition, as the
Company distributes cash to its stockholders, certain other listing criteria may
not be met. The Company expects that Nasdaq will delist its common stock from
Nasdaq stock market, although the timing is uncertain. When Nasdaq delists the
Company's Common Stock from the Nasdaq National Market, the ability of
stockholders to buy and sell shares may be materially impaired.
AFTER THE COMPANY'S WIND DOWN THERE MAY BE NO CASH TO DISTRIBUTE TO THE
COMPANY'S STOCKHOLDERS AND IF THERE IS CASH TO DISTRIBUTE, THE TIMING OF ANY
SUCH DISTRIBUTION IS UNCERTAIN.
<PAGE> 15
Although the Board of Directors has not established a firm
timetable for distributions to stockholders if the Company's wind down is
approved by the stockholders, the Board of Directors intends, subject to
contingencies inherent in winding up the Company's business, to make such
distributions as promptly as practicable. The liquidation is expected to be
concluded prior to the third anniversary of the filing of the Certificate of
Dissolution in Delaware by a final liquidating distribution either directly to
the stockholders or to a liquidating trust. The proportionate interests of all
of the stockholders of the Company will be fixed on the basis of their
respective stock holdings at the close of business on the final record date, as
determined by the Board of Directors, and after such date, any distributions
made by the Company shall be made solely to stockholders of record on the close
of business on the final record date, except to reflect permitted transfers. The
Board of Directors is, however, currently unable to predict the precise nature,
amount or timing of this distribution or any other distributions pursuant to the
Company's wind down, or whether the wind down will be approved by the Company's
stockholders. The actual nature, amount and timing of all distributions will be
determined by the Board of Directors, in its sole discretion, and will depend in
part upon the Company's ability to convert its remaining assets into cash.
Uncertainties as to the precise net value of the Company's
non-cash assets and the ultimate amount of its liabilities make it impracticable
to predict the aggregate net value ultimately distributable to stockholders.
Claims, liabilities and expenses from operations (including operating costs,
salaries, income taxes, payroll and local taxes, legal and accounting fees and
miscellaneous office expenses) will continue to be incurred. These expenses will
reduce the amount of assets available for ultimate distribution to stockholders.
However, no assurances can be given that available cash and amounts received on
the sale of assets will be adequate to provide for the Company's obligations,
liabilities, expenses and claims and to make cash distributions to stockholders.
If such available cash and amounts received on the sale of assets are not
adequate to provide for the Company's obligations, liabilities, expenses and
claims, the Company may not be able to distribute meaningful cash, or any cash,
to its stockholders.
THE PROCEEDS FROM THE SALE OF THE COMPANY'S ASSETS MAY BE LESS THAN ANTICIPATED.
As of November 14, 2000, no sale of assets has been effected
pursuant to the Company's wind down and no agreement to sell any of the assets
of the Company has been reached. However, agreements for the sale of assets may
be entered into prior to stockholder approval of the Company's wind down and, if
entered into, may be contingent upon the approval of the wind down. Stockholder
approval of the Company's wind down, if obtained, will constitute approval of
any such agreements and sales. Sales of the Company's assets will be made on
such terms as are approved by the Board of Directors and may be conducted by
competitive bidding, public sales or privately negotiated sales. The prices at
which the Company will be able to sell its various assets will depend largely on
factors beyond the Company's control, including, without limitation, the
condition of financial markets, the availability of financing to prospective
purchasers of the assets, United States and foreign regulatory approvals, public
market perceptions, and limitations on transferability of certain assets. In
addition, the Company may not obtain as high a price for a particular asset as
it might secure if the Company were not in liquidation.
THE COMPANY WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY
REPORTING REQUIREMENTS.
Whether or not the Company's wind down is approved, we have an
obligation to continue to comply with the applicable reporting requirements of
the Securities Exchange Act of 1934, as amended, even though compliance with
such reporting requirements is economically burdensome. If the Company's wind
down is approved and, in order to curtail expenses, we will, after filing our
Certificate of Dissolution, seek relief from the Securities & Exchange
Commission from the reporting requirements under the Exchange Act. We anticipate
that, if such relief is granted, we would continue to file current reports on
Form 8-K to disclose material events relating to our liquidation and dissolution
along with any other reports that the Securities & Exchange Commission might
require.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
<PAGE> 16
We have assessed our vulnerability to certain market risks,
including interest rate risk associated with financial instruments included in
cash and cash equivalents. Due to the short-term nature of these investments and
our investment policies and procedures, we have determined that the risk
associated with interest rate fluctuations related to these financial
instruments does not pose a material risk to the Company.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in litigation relating to
claims arising out of our ordinary course of business.
(a) On April 12, 2000, we filed a complaint for declaratory judgment in the
United States District Court for the Northern District of California
against Robert Smigel, the creator of Triumph, the Insult Comic Dog, to
establish that Pets.com has not infringed upon any trademark held by Mr.
Smigel or engaged in unfair competition, that Mr. Smigel defamed
Pets.com by claiming that we stole the idea for our Sock Puppet from
him, and that Mr. Smigel has engaged in trade libel by making false
accusations against us.
(b) On September 21, 1999 Biolink L.L.C. dba ERI International sued us in
Los Angeles County Superior Court for breach of contract, anticipatory
breach of contract, breach of the implied covenant of good faith and
fair dealing, and fraud arising out of a contract entered into for the
shipment of live fish. During the third quarter of 2000 the lawsuit was
settled out of court. The terms of the settlement were not disclosed by
mutual agreement.
(c) On April 24, 2000, a former employee filed a complaint against us in the
Superior Court of the State of California for the City and County of San
Francisco alleging, in connection with her employment and subsequent
resignation from Pets.com, breach of contract, breach of the covenant of
good faith and fair dealing, fraud, defamation, and misappropriation of
trade secrets. Subsequent to September 30, 2000 the lawsuit was settled
and the terms were not disclosed by mutual agreement.
Item 2. Changes in Securities and Use of Proceeds.
(A) On January 25, 2000, we effected a .8 for 1 reverse stock split and
reincorporated from California to Delaware. Consequently, each
outstanding share of capital stock outstanding prior to this event was
reconstituted as .8 of a share, and each shareholder of the prior
California corporation became the holder of an equivalent number of
shares of capital stock of the successor Delaware corporation.
(B) Not applicable.
(C) Recent Sales of Unregistered Securities; Uses of Proceeds From
Registered Securities.
(a) Securities Sold.
(i) None.
(b) Not Applicable.
(c) Not Applicable.
(d) Not Applicable.
<PAGE> 17
(e) Terms of Conversion or Exercise. Not applicable.
(f) Use of Proceeds from sale of Registered Securities
On February 16, 2000, the Company closed its initial public offering of
its Common Stock, $0.00125 par value. The managing underwriters in the offering
were Merrill Lynch & Co., Bear Stearns & Co. Inc., Thomas Weisel Partners LLC,
and Warburg Dillon Read LLC (the "Underwriters"). The shares of Common Stock
sold in the offering were registered under the Act on a Registration Statement
on Form S-1 (the "Registration Statement") (Reg. No. 333-92433) that was
declared effective by the SEC on February 11, 2000. The offering commenced on
February 11, 2000, on which date 7,500,000 shares of Common Stock registered
under the Registration Statement were sold at a price of $11.00 per share. The
aggregate price of the offering amount registered and sold was $82,500,000. In
connection with the offering, the Company paid an aggregate of $5,775,000 in
underwriting discounts and commissions to the Underwriters and the aggregate
proceeds to the Company were approximately $75.3 million after deducting
estimated offering expenses of $1.4 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following exhibit is attached hereto:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
10.1 Retention Bonus Arrangements between the Company and its officers
10.2 Addendum to Key Employee Retention Agreements between the Company
and its officers
27.1 Financial Data Schedule
</TABLE>
b. The Company filed the following reports on Form 8-K during the
quarter ended September 30, 2000:
<TABLE>
<CAPTION>
Date Item Reported On
---- ----------------
<S> <C>
July 13, 2000 The Company announced the completion of the purchase of substantially all of the
assets of Petstore.com, Inc.
September 26, 2000 The Company amended the form 8-K filed on July 13, 200 to provide additional
financial information concerning the transaction
</TABLE>
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PETS.COM, INC.
By: /s/ PAUL MANCA
-----------------------------------
PAUL MANCA
CHIEF FINANCIAL OFFICER (PRINCIPAL
ACCOUNTING AND FINANCE OFFICER)
Date: November 14, 2000
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
10.1 Retention Bonus Arrangements between the Company and its officers
10.2 Addendum to Key Employee Retention Agreements between the Company
and its officers
27.1 Financial Data Schedule
</TABLE>
