<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No._)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Pets.com, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
not applicable
(2) Aggregate number of securities to which transaction applies:
not applicable
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was
determined):
not applicable
(4) Proposed maximum aggregate value of transaction:
$9,763,231
(5) Total fee paid:
$1,953
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
not applicable
(2) Form, Schedule or Registration Statement No.:
not applicable
(3) Filing Party:
not applicable
(4) Date Filed:
not applicable
<PAGE> 2
PETS.COM, INC.
945 BRYANT STREET
SAN FRANCISCO, CA 94103
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 16, 2001
TO THE STOCKHOLDERS OF
PETS.COM, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Pets.com,
Inc., a Delaware corporation (the "Company" or "Pets.com"), will be held on
Tuesday, January 16, 2001, at 8:00 a.m. local time, at the offices of Venture
Law Group, 2775 Sand Hill Road, Menlo Park, California 94025, to consider and
vote upon the following proposals:
1. To ratify and approve the Plan of Complete Liquidation and
Dissolution of the Company, substantially in the form of Exhibit A attached
to the accompanying Proxy Statement.
2. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to change the name of the Company to IPET
Holdings, Inc.
3. To transact such other business as may properly come before the
meeting and any adjournments thereof.
Only stockholders of record at the close of business on December 13, 2000,
the record date fixed by the Board of Directors, are entitled to notice of and
to vote at the meeting and any adjournment thereof.
By Order of the Board of Directors,
/s/ Paul G. Manca
Paul G. Manca
Chief Financial Officer
San Francisco, California
December 28, 2000
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE> 3
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: WHAT WILL BE VOTED ON AT THE SPECIAL MEETING?
A: The proposals to be voted on at the Special Meeting are whether to ratify and
approve a Plan of Complete Liquidation and Dissolution attached as Exhibit A
(the "Plan"), and whether to approve an amendment to our Amended and Restated
Certificate of Incorporation to change our name to IPET Holdings, Inc.
Q: WHAT WILL HAPPEN IF THE PLAN IS APPROVED?
A: If the Plan is approved, we will complete the liquidation of our remaining
assets, satisfy our remaining obligations and make distributions to our
stockholders of available liquidation proceeds.
Q: WHEN WILL THE STOCKHOLDERS RECEIVE ANY PAYMENT FROM THE LIQUIDATION OF THE
COMPANY?
A: We anticipate that an initial distribution of liquidation proceeds will be
made to the stockholders sometime in 2001. Thereafter, as we liquidate our
remaining assets and properties we will distribute available liquidation
proceeds, if any, to stockholders as the Board of Directors deems
appropriate. We anticipate that the majority of the remaining liquidation
proceeds will be distributed over a period of three years.
Q: WHAT IS THE AMOUNT OF THE PAYMENT THAT STOCKHOLDERS WILL RECEIVE FROM THE
LIQUIDATION OF THE COMPANY?
A: Because of the uncertainties as to the precise net realizable value of our
assets that we have not yet sold and the ultimate settlement amount of our
liabilities, it is impossible to predict with certainty the aggregate net
value which will ultimately be distributed to our stockholders. In addition,
holders of 1,143,895 shares of our outstanding Series A Preferred Stock are
entitled to receive $0.00125 per share (or a total distribution of
approximately $1,430) prior to any distribution of funds to our stockholders
generally. We believe that the proceeds stockholders could receive over time
is up to approximately $0.25 per share; however we are unable at this time to
predict the precise nature, amount and timing of any distributions, due in
part to our inability to predict the net value of our non-cash assets and the
ultimate amount of our liabilities, many of which have not been settled. If
we are unable to settle these liabilities or achieve a sufficient value for
our remaining non-cash assets, our stockholders could receive zero proceeds.
See the factors described by us beginning on page 6 of this Proxy Statement
which could result in zero proceeds to stockholders.
Q: WHAT WILL HAPPEN IF THE PROPOSAL TO CHANGE OUR NAME IS APPROVED?
A: If this proposal is approved, we will file an Amended and Restated
Certificate of Incorporation with the Delaware secretary of state to change
the Company's name to IPET Holdings, Inc. and the Company will continue to
exist under that name until a final dissolution is effected. We have already
entered into a letter of intent to sell the Pets.com trademark and the
corresponding URL domain name.
Q: WHAT DO THE COMPANY STOCKHOLDERS NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
Proxy Statement, each Pets.com stockholder should complete and sign his or
her proxy and return it in the enclosed return envelope as soon as possible
so that his or her shares may be represented at the meeting. A majority of
shares entitled to vote must be represented at the meeting to enable Pets.com
to conduct business at the meeting.
Q: CAN THE COMPANY STOCKHOLDERS CHANGE THEIR VOTE AFTER THEY HAVE MAILED THEIR
SIGNED PROXIES?
A: Yes. A stockholder can change his or her vote any time before proxies are
voted at the meeting. Each stockholder can change his or her vote in one of
three ways. First, a stockholder can send a written notice via registered
mail to our Chief Financial Officer, Paul Manca, at our executive offices,
stating that he or she would like to revoke his or her proxy. Second, a
stockholder can complete and submit a new proxy. If a stockholder chooses
either of these two methods, he or she must submit the notice of revocation
or the new proxy to the Company. Third, a stockholder can attend the meeting
and vote in person.
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Q: IF THE COMPANY SHARES ARE HELD IN "STREET NAME" BY A STOCKHOLDER'S BROKER,
WILL THE BROKER VOTE THESE SHARES ON BEHALF OF THE STOCKHOLDER?
A: A broker will vote Company shares only if the holder of these shares provides
the broker with instructions on how to vote. Stockholders should follow the
directions provided by their brokers regarding how to instruct brokers to
vote the shares.
Q: CAN I STILL SELL MY SHARES OF COMPANY COMMON STOCK?
A: We received a delisting notice from the Nasdaq Stock Market on December 1,
2000 due to the low trading price per share of our stock and indicating that
our Common Stock would be delisted from the Nasdaq Stock Market on or about
January 23, 2001 unless we are able to maintain compliance with Nasdaq's
listing requirements. We currently are not able to maintain compliance with
Nasdaq's listing requirements and if the Plan is approved by the
stockholders, it is likely that our noncompliance with Nasdaq's listing
requirements will continue and that Nasdaq will take action to delist our
securities from their National Market System. If our Common Stock is delisted
from Nasdaq, trading, if any, would thereafter be conducted on the
over-the-counter market in the so-called "pink sheets" or on the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
Consequently, stockholders may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of the Common Stock. In addition,
it is likely that we will close our stock transfer books and restrict
transfers of our Common Stock after filing the Certificate of Dissolution
with the State of Delaware.
Q: WHO CAN HELP ANSWER QUESTIONS?
A: If you have any additional questions about the proposed Plan or if you need
additional copies of this Proxy Statement or any public filings referred to
in this Proxy Statement, you should contact: Paul Manca, Chief Financial
Officer at (415) 222-9999. Our public filings can also be accessed at the
SEC's web site at www.sec.gov.
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<PAGE> 5
PETS.COM, INC.
945 BRYANT STREET
SAN FRANCISCO, CA 94103
------------------------
PROXY STATEMENT
------------------------
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 16, 2001
Proxies in the form enclosed with this Proxy Statement are solicited by the
Board of Directors of Pets.com, Inc. (the "Company" or "Pets.com") for use at
the Special Meeting of Stockholders of the Company to be held on Tuesday,
January 16, 2001 at 8:00 a.m. local time, at the offices of Venture Law Group,
2775 Sand Hill Road, Menlo Park, California 94025, and any adjournments thereof
(the "Special Meeting").
Only stockholders of record as of December 13, 2000 (the "Record Date")
will be entitled to vote at the Special Meeting. As of that date, there were
35,377,240 shares of Common Stock, par value $.00125 per share, of the Company
("Common Stock") issued and outstanding and 1,143,895 shares of non-voting
Series A Preferred Stock, par value $.00125 per share of the Company ("Preferred
Stock") issued and outstanding. Each share of Common Stock outstanding as of the
Record Date will be entitled to one vote and stockholders may vote in person or
by proxy. No outstanding shares of Preferred Stock will be entitled to vote.
Execution of a proxy will not in any way affect a stockholder's right to attend
the Special Meeting and vote in person. Any stockholder giving a proxy has the
right to revoke it by written notice to the Chief Financial Officer of the
Company at any time before it is exercised, or by voting in person at the
Special Meeting. If a stockholder is not attending the Special Meeting, any
proxy or notice should be returned in time for receipt no later than the close
of business on the day preceding the Special Meeting.
The representation in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting is
necessary to establish a quorum for the transaction of business. The matters
being submitted to stockholders require the affirmative vote of a majority of
the issued and outstanding shares entitled to vote at the Special Meeting. Votes
cast by proxy or in person at the Special Meeting will be tabulated by the
Inspector of Elections (the "Inspector") with the assistance of the Company's
transfer agent. The Inspector will also determine whether or not a quorum is
present. Abstentions are included in the number of shares present or represented
and voting on the proposal, and, therefore, will have the effect of a negative
vote.
At the Special Meeting, (i) a proposal to ratify and approve a plan of
complete liquidation and dissolution of the Company and (ii) a proposal to amend
the Company's Amended and Restated Certificate of Incorporation to change the
Company's name to IPET Holdings, Inc. will be subject to the vote of holders of
the Company's Common Stock. The Board of Directors of the Company knows of no
other matters to be presented at the Special Meeting. If any other matter should
be presented at the Special Meeting upon which a vote may be properly taken,
shares represented by all proxies received by the Board of Directors will be
voted with respect thereto in accordance with the judgment of the persons named
as attorneys in the proxies.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be voted in favor of such matter, and will also not be counted
as votes cast or shares voting on such matter. Accordingly, abstentions and
"broker non-votes" will have the effect of a vote against the proposal to
approve the plan of complete liquidation and dissolution and any other matter
requiring the affirmative vote of a certain percentage of shares outstanding.
<PAGE> 6
SECURITIES OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our Common Stock as of November 30, 2000 and upon conversion of all
outstanding shares of Preferred Stock into Common Stock by:
- each stockholder known to us to own beneficially more than 5% of our
Common Stock;
- each of our current directors and the named officers (as defined in the
Securities Act of 1933, as amended (the "Securities Act")); and
- all current directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Pets.com, Inc., 945 Bryant Street, San Francisco, California 94103.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares beneficially owned by
each stockholder as of November 30, 2000. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of Common Stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of November 30, 2000 are
deemed outstanding. Those shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. The percent
of beneficial ownership for each stockholder is based on 36,660,961 shares of
Common Stock outstanding as of November 30, 2000 (assuming conversion of all
outstanding shares of non-voting Preferred Stock into Common Stock).
<TABLE>
<CAPTION>
PERCENT OF
SHARES COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED OWNED
---------------- ------------ ------------
<S> <C> <C>
Amazon.com, Inc............................................. 8,973,029 24.5%
1200 12th Avenue South, Suite 1200
Seattle, WA 98108-1226
Entities Affiliated with Hummer Winblad Venture Partners.... 4,677,114 12.8%
2 South Park, 2nd Floor
San Francisco, CA 94107
Petstore.com, Inc. ......................................... 3,700,587 10.1%
1545 Park Avenue
Emeryville, CA 94608
Mark J. Britto.............................................. 8,973,029 24.5%
John R. Hummer.............................................. 4,677,114 12.8%
John B. Balousek............................................ 285,227 *
David Chichester............................................ 33,333 *
Michela English............................................. 0 *
Julia L. Wainwright......................................... 1,012,318 2.8%
Christopher E. Deyo......................................... 623,175 1.8%
Paul G. Manca............................................... 106,666 *
Paul W. Melmon.............................................. 234,493 *
Ralph E. Lewis.............................................. 73,833 *
All executive officers and directors as a group (15
persons).................................................. 16,474,319 44.0%
</TABLE>
---------------
* Less than 1% of the outstanding shares of Common Stock.
The beneficial ownership for entities affiliated with Hummer Winblad
Venture Partners is comprised of 2,631,337 shares held by Hummer Winblad Venture
Partners III, L.P., 138,491 shares held by Hummer Winblad Technology Fund III,
L.P., and 1,907,286 shares held by Hummer Winblad Venture Partners IV, L.P. The
general partner of each of the first two funds listed in the first sentence of
this paragraph is Hummer
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Winblad Equity Partners III, LLC, and the general partner of the third fund is
Hummer Winblad Equity Partners IV, LLC. The members of each of the foregoing
general partners are principals of Hummer Winblad Venture Partners.
The beneficial ownership for Mark J. Britto is comprised of 8,973,029
shares held by Amazon.com. Mr. Britto is a director of Pets.com and Vice
President of Strategic Alliances of Amazon.com and he disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
these shares.
The beneficial ownership for John R. Hummer is comprised of 2,631,337
shares held by Hummer Winblad Venture Partners III, L.P., 138,491 shares held by
Hummer Winblad Technology Fund III, L.P., and 1,907,286 shares held by Hummer
Winblad Venture Partners IV, L.P. Mr. Hummer is a director of Pets.com and a
member of each Hummer Winblad Equity Partners III, LLC and Hummer Winblad Equity
Partners IV, LLC, the general partners for the three investment funds listed in
the first two sentences of this paragraph, and he disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest in these shares.
The beneficial ownership for John B. Balousek includes 15,894 shares held
by the Balousek Family Ltd. Partnership and 233,333 shares under outstanding
stock options that are currently exercisable or exercisable within 60 days of
November 30, 2000.
The beneficial ownership for David Chichester includes 33,333 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of November 30, 2000.
The beneficial ownership for Julie L. Wainwright includes 100,000 shares
under outstanding stock options that are currently exercisable or exercisable
within 60 days of November 30, 2000.
The beneficial ownership for Christopher E. Deyo includes 100,000 shares
under outstanding stock options that are currently exercisable or exercisable
within 60 days of November 30, 2000.
The beneficial ownership for Paul G. Manca includes 106,666 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of November 30, 2000.
The beneficial ownership for Paul W. Melmon includes, 43,333 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of November 30, 2000.
The beneficial ownership for Ralph Lewis includes 73,833 shares under
outstanding stock options that are currently exercisable or exercisable within
60 days of November 30, 2000.
The beneficial ownership for our executive officers and directors as a
group includes 819,256 shares under outstanding stock options that are currently
exercisable or exercisable within 60 days of November 30, 2000.
PROPOSAL NO. 1
RATIFICATION AND APPROVAL OF PLAN OF
COMPLETE LIQUIDATION AND DISSOLUTION
GENERAL
Our Board of Directors is proposing the Plan of Complete Liquidation and
Dissolution (the "Plan") for ratification and approval by our stockholders at
the Special Meeting. The Plan was approved by the Board of Directors, subject to
stockholder approval, on November 4, 2000 and went into effect on November 7,
2000. A copy of the Plan is attached as Exhibit A to this Proxy Statement.
Certain material features of the Plan are summarized below. STOCKHOLDERS SHOULD
READ THE PLAN IN ITS ENTIRETY.
Our Board of Directors unanimously adopted resolutions on November 4, 2000
(the "Effective Date") which authorized the orderly liquidation of the Company's
assets pursuant to the Plan. The Plan authorized the Company's officers to
commence the sale of the Company's individual assets on November 7, 2000 if the
Company had not received any offers to invest material capital into the Company
or to acquire the business as a going concern. The Board of Directors resolved
that immediately commencing the sale of assets would be
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<PAGE> 8
necessary to maximize stockholder value because our assets have rapidly
declining value. As of November 7, 2000, the Company had not received any offers
to purchase the business as a going concern, and the Company's officers
subsequently commenced the sale of our assets and the general winding down of
the Company's business, including such things as laying off personnel,
terminating commercial agreements and exiting related obligations. As of the
date of this Proxy Statement, the Company has completed the sale of a
substantial portion of its assets and paid or settled a substantial portion of
its liabilities. After the Effective Date, we have not engaged in any business
activities except for the purpose of preserving the value of our assets,
prosecuting and defending lawsuits by or against us or our subsidiaries,
adjusting and winding up our business and affairs, selling and liquidating our
properties and assets, including our intellectual property and other intangible
assets, paying our creditors, terminating commercial agreements and
relationships and preparing to make distributions to stockholders, in accordance
with the Plan. In addition, if the Plan is approved by our stockholders, we will
file a Certificate of Dissolution with the Secretary of State of the State of
Delaware.
Our Board of Directors may, at any time, turn management of the Company
over to a third party to complete the liquidation of our remaining assets and
distribute proceeds from the sale of assets to our stockholders pursuant to the
Plan. This third-party management may be in the form of a liquidating trust,
which, if adopted, would succeed to all of the assets, liabilities and
obligations of the Company. Our Board of Directors may appoint one or more of
its members, an officer of the Company or a third party to act as trustee or
trustees of such liquidating trust. If, however, all of our assets are not
distributed within three years after the date our Certificate of Dissolution is
filed with the State of Delaware, we will transfer our remaining assets to a
liquidating trust if we have not already done so. Your ratification and approval
of the Plan will also constitute your approval of any appointment and
compensation of such trustees.
During the liquidation of our assets, we may pay to our officers,
directors, employees, and agents, or any of them, compensation for services
rendered in connection with the implementation of the Plan. Your ratification
and approval of the Plan will constitute your approval of the payment of any
such compensation.
The following resolution will be offered at the Special Meeting:
"RESOLVED, THAT THE PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
RECOMMENDED BY THE BOARD OF DIRECTORS BE RATIFIED AND APPROVED."
BACKGROUND AND REASONS FOR THE PLAN
COMPANY BACKGROUND
We operated as an online retailer of pet products, integrating product
sales with expert information on pets and their care. We sought to address the
entire pet products market. Our broad selection of SKUs was integrated with
extensive pet-related information and resources designed to help consumers make
informed purchasing decisions. We designed our Web store to provide our
customers with a convenient, one-stop shopping experience that was organized to
reflect how consumers think about shopping for their pets. Our Web store was
designed to address the needs of many of the most popular pets, and we sought to
provide quality customer service through our in-house distribution, fulfillment,
customer service, and technology operations. We also encouraged participation in
the pet community both through our Web store and through Pets.commitment, our
charitable initiative that supported the role that pets and people play in each
others' lives.
We were incorporated in California in February 1999. Certain assets related
to our Web store, including the Pets.com domain name and numerous pet-related
URL's and internet domain names, were sold to us from a third party concurrent
with our first round of venture capital investment in April 1999.
Shortly thereafter, we launched our first major online banner campaigns,
including banner and button purchases on major portals and shopping areas. In
mid 1999, we redesigned and launched our new Web site, which included an
improved user interface, a more flexible, fully-featured database structure and
enhanced integration of content and merchandise. We continued to focus on
building our organization, developing our technology infrastructure, further
developing and upgrading our Web site, increasing customer traffic and
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sales, expanding our product assortment, promoting our brand and enhancing our
fulfillment and customer service operations. In the fall of 1999, we invested in
an offline advertising campaign, supplemented by online advertising, business
incentive programs, direct marketing and public relations, which successfully
established brand recognition for Pets.com.
As a result of these efforts our revenues for 1999 were approximately $5.8
million. In order to manage the increase in our site traffic and revenues, we
expanded and upgraded our site, order fulfillment operations and organizational
infrastructure. This expansion included enhancing the features and functions on
our site, adding server and database capacity, building our internally developed
order fulfillment and logistics system, and opening an order fulfillment
facility in Greenwood, Indiana.
In order to finance this rapid growth, we raised a total of $79.8 million
in private equity financing between June and December 1999 from leading venture
capital firms, such as Hummer Winblad Venture Partners and Bowman Capital
Management, and strategic investors such as Amazon.com. In January 2000, we also
entered into a strategic relationship with GO.com and its related online
properties including Disney.com and Family.com. In February 2000, we completed
our initial public offering of 7,500,000 shares of our Common Stock, and raised
approximately $77 million to further finance our activities, and at that time we
reincorporated in the State of Delaware.
Despite our growth in revenues, the Company incurred significant net
losses. During 1999, we incurred a net loss of approximately $61.8 million, and
for the first nine months of 2000, our net loss was approximately $84.9 million.
REVIEW OF ALTERNATIVES
In July 2000, we engaged Merrill Lynch & Co to assist the Company in
finding financing for the Company or any parties interested in acquiring the
Company. These efforts continued through the summer and early fall during which
Merrill Lynch & Co. contacted more than 50 domestic and international strategic
and financial prospects on our behalf. In addition, during this time, the
Company independently contacted numerous potential investors and acquirors and
explored various options to finance or sell the Company. By late October 2000,
the Company's management believed that it was highly unlikely that any 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 meet in person,
and those that did meet with us in person were ultimately not prepared to
provide capital or acquire the Company. Our Board concluded that the orderly
wind down of the Company was the course of action that most likely offers the
highest return to the stockholders and that to continue the operation of the
business would reduce the assets and cash that may ultimately be returned to our
stockholders.
In light of this situation and the continued material declining value of
comparably traded public companies, on November 4, 2000, assuming no acceptable
offers to acquire the Company or to invest capital in our operations were
received on or before 9:00 a.m. Pacific standard time on November 7, 2000, our
Board of Directors unanimously approved the orderly wind down of our operations,
including the layoff of approximately 255 of our 320 employees which was
completed on November 7, 2000, the closure of our Web store effective November
10, 2000, the ceasing of all sales transactions effective November 10, 2000, and
authorizing management to immediately commence efforts to sell the majority of
our assets, including inventory, distribution center equipment, URLs, content
and our Sock Puppet brand icon and other intellectual property, terminate
commercial agreements and relationships, exit our commercial obligations, and
generally wind down our business and operations. The Board determined that
immediate sale of such assets was the best way to preserve stockholder value
since any delay in their sale was likely to diminish the liquidation value of
such assets. As of the date of this Proxy Statement, the Company has completed
the sale of a substantial portion of its assets and paid or settled a
substantial portion of its liabilities. The Board of Directors' decision was
reached after no viable offers to acquire or fund capital into the Company were
received.
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<PAGE> 10
CONCLUSION OF THE BOARD OF DIRECTORS
On November 4, 2000, our Board of Directors unanimously adopted the Plan.
In arriving at this conclusion, the Board considered a number of factors,
including alternatives to the proposal and the future prospects of the Company,
as well as the oral advice of Merrill Lynch. Prior to and at the meeting of the
Board of Directors on November 4, 2000, the Board received comparisons of the
Company's net asset value to the prices at which our Common Stock was trading at
different points in time and analyzed the results of management's investigation
of various acquisition, investment and strategic partnering opportunities. The
Board of Directors had been kept informed continuously of our business affairs
and financial condition, and since May 2000 has convened at numerous separate
meetings to consider these issues. The Board has been apprised by Merrill Lynch
of the market values of comparable companies and the lack of prospects for
Pets.com to be financed as a going concern. Accordingly, the Board of Directors
determined that it would not be advisable to continue to operate the Company on
an independent basis indefinitely if the potential for growth and availability
of financing were so limited. Further, after significant effort, we had not been
successful in identifying a buyer or strategic alliance partner acceptable to
the Company. Based on this information, the Board of Directors determined that
distribution to the stockholders of cash proceeds from the sale of the Company's
assets would return the greatest value to our stockholders as compared to other
alternatives; and that liquidation would prevent further erosion of
stockholders' equity through continuing net losses and market declines. There
can be no assurance that the liquidation value per share of Common Stock in the
hands of the stockholders will equal or exceed the price or prices at which the
Common Stock has recently traded or may trade in the future, or that the
liquidation value will exceed zero. However, the Board of Directors believes
that it is in the best interests of the Company and our stockholders to
distribute to the stockholders the Company's net assets, if any, pursuant to the
Plan. If the Plan is not ratified and approved by the stockholders, the Board of
Directors will explore what, if any, alternatives are available for the future
of Pets.com, particularly in light of the fact that the Company has consummated
the sale of a substantial portion of its assets as of the date of this Proxy
Statement. The Board of Directors does not believe, however, that there are
viable alternatives to the Plan, and even if there were, that any of our
employees would continue to be available to execute them.
FACTORS TO BE CONSIDERED BY STOCKHOLDERS IN DECIDING WHETHER TO APPROVE THE PLAN
There are many factors that the Company's stockholders should consider when
deciding whether to vote to ratify and approve the Plan. Such factors include
those set forth in the Company's publicly filed reports, including its Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2000 and its Form
8-K dated November 7, 2000, as well as those factors set forth below.
THERE ARE RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS.
This Proxy Statement contains certain forward looking statements, including
statements concerning the value of the Company's net assets, the anticipated
liquidation value per share of Common Stock as compared to its market price
absent the proposed liquidation, and the likelihood of stockholder value
resulting from sale of certain of its significant assets. Some of our other
assets may be difficult for the Company to convert into cash, and we can make no
assurance that we will receive any material amounts in respect of such assets.
No assurance can be given that the amount to be received in liquidation will
equal or exceed the price or prices at which the Common Stock has recently
traded or may trade in the future, or that the liquidation value will exceed
zero. Stockholders who disagree with the Board of Directors' determination that
the ratification and adoption of the Plan is in the best interests of the
Company and its stockholders should vote "against" ratification and approval of
the Plan.
STOCKHOLDERS MAY BE LIABLE TO CREDITORS OF THE COMPANY FOR UP TO AMOUNTS
RECEIVED FROM THE COMPANY IF THE COMPANY'S RESERVES ARE INADEQUATE.
If the Plan 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 "DGCL"), the Company will continue to
exist for three years after the dissolution becomes effective or for such longer
period
6
<PAGE> 11
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. Under the DGCL, in the
event the Company fails to create an adequate contingency reserve 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). Accordingly, in such event a stockholder could be
required to return all distributions previously made to such stockholder. In
such event, a stockholder could receive nothing from the Company under the Plan.
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. However, after a
review of its assets and liabilities, the Company believes that the reserves
will be adequate and that a return of amounts previously distributed will not be
required. See "Contingent Liabilities; Contingency Reserve; Liquidating Trust."
SHARES OF OUR SERIES A PREFERRED STOCK WILL BE ENTITLED TO RECEIVE $0.00125 PER
SHARE BEFORE ANY DISTRIBUTION OF FUNDS IS MADE TO HOLDERS OF OUR COMMON STOCK.
Pursuant to our Certificate of Designation of Rights, Preferences and
Privileges of Series A Preferred Stock filed with the Secretary of State of
Delaware on July 6, 2000, upon our liquidation or dissolution holders of shares
of our Series A Preferred Stock will be entitled to receive $0.00125 per share
before any distribution of funds is made to holders of our Common Stock. They
are also entitled to receive accrued but unpaid dividends declared by the Board
of Directors on our Common Stock, but no such dividends have ever been declared.
Based on the foregoing, approximately $1,430 would be paid to the holders of
1,143,895 outstanding shares of Series A Preferred Stock before we distribute to
all stockholders proceeds from the sale of our assets. After the foregoing
initial payment has been made to the Series A Preferred stockholders, they would
also share on a pro-rata basis in the general distribution of proceeds from the
sale of our assets to be made to all Common stockholders, as if their shares of
Series A Preferred Stock have been converted to an equal number of shares of
Common Stock.
IF WE FAIL TO RETAIN THE SERVICES OF CURRENT KEY PERSONNEL, THE PLAN MAY NOT
SUCCEED.
The success of the Plan 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 of qualified personnel is particularly
difficult under the Company's current circumstances. For this reason and others
discussed below, the Company has entered into retention agreements with certain
executive officers. See "Approval of Plan of Complete Liquidation and
Dissolution -- Possible Effects of the Approval of the Plan Upon Directors and
Officers."
OUR STOCK TRANSFER BOOKS WILL CLOSE ON THE FINAL RECORD DATE, AFTER WHICH IT
WILL NOT BE POSSIBLE FOR STOCKHOLDERS TO PUBLICLY TRADE IN OUR STOCK.
The Company intends to close its stock transfer books and discontinue
recording transfers of Common Stock at the close of business on the record date
fixed by the Board for filing the Certificate of Dissolution (the "Final Record
Date"). Thereafter, certificates representing the Common Stock shall 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 shall 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.
7
<PAGE> 12
WE EXPECT THAT OUR STOCK WILL BE DELISTED FROM THE NASDAQ STOCK MARKET ON OR
ABOUT JANUARY 23, 2001.
The Company has received a delisting notice from the Nasdaq Stock Market
due to its low trading price per share. The delisting will occur at Nasdaq's
discretion on or about January 23, 2001 if the Company is unable to comply with
Nasdaq's continued listing criteria. The Company expects it will be unable to
satisfy the requirements for continued listing of its Common Stock on the Nasdaq
Stock Market. Moreover, rules of the Nasdaq Stock Market require that companies
listed on the Nasdaq Stock Market continue to have an operating business. If the
Company completes its plans to conclude business activities and dissolve, 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. If Nasdaq delists the Company's Common Stock from the Nasdaq Stock Market,
the ability of stockholders to buy and sell shares will be materially impaired.
OUR BOARD MEMBERS MAY HAVE A POTENTIAL CONFLICT OF INTEREST IN RECOMMENDING
RATIFICATION AND APPROVAL OF THE PLAN.
Members of the Board of Directors may be deemed to have a potential
conflict of interest in recommending ratification and approval of the Plan. See
"Approval of Plan of Complete Liquidation and Dissolution -- Possible Effects of
the Approval of the Plan Upon Directors and Officers."
POSSIBLE EFFECTS OF THE APPROVAL OF THE PLAN UPON DIRECTORS AND OFFICERS
Other than as set forth below, it is not currently anticipated that
liquidation of the Company will result in any material benefit to any of our
officers or to directors who participated in the vote to adopt the Plan.
The following current officers or directors of the Company are parties to
retention bonus agreements with the Company providing for payment to them of
bonus compensation and severance in the amounts specified (less applicable
withholding tax) in the event of a change of control or the liquidation,
dissolution or winding up of the Company. These retention bonus agreements were
adopted by the Company's Board of Directors at various times since April 2000 to
help ensure the Company's executive officers had sufficient incentives to remain
with the Company and maximize the value of the Company's business and its assets
in the event of: (i) a financing in which the Company raised at least $10
million; (ii) a merger or sale of the Company resulting in a change of control;
or (iii) a liquidation of the Company. If none of the foregoing occurred, then
the retention bonuses were intended to guarantee the individual's continued
service with respect to the Company's ongoing operations through March 1, 2001.
Bonus compensation is payable on the effective date of a complete liquidation,
dissolution or winding up of the Company. In addition, each of the officers or
directors listed is entitled to receive severance payments for a period
corresponding to the number of months set forth below following his or her
termination date (the "Severance Period") equal to his or her current base
monthly salary, a pro-rated amount of such employee's "target bonus" based on
the first three quarters in the year in which the termination occurs, and
continuation of health and life insurance benefits through the end of the
Severance Period (all subject to applicable withholding tax).
<TABLE>
<CAPTION>
MONTHS IN TOTAL PRO-RATED
BONUS SEVERANCE SEVERANCE TARGET BONUS
NAME POSITION COMPENSATION PERIOD PAYMENT TO BE PAID
---- -------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Julie L. Wainwright......... Chief Executive Officer $225,000 12 $235,000 $ 0
and Chairman of the
Board of Directors
Christopher E. Deyo......... President $225,000 12 $235,000 $ 0
Paul G. Manca............... Chief Financial Officer $225,000 6 $117,500 $ 0
John R. Benjamin............ Vice President of $ 75,000 6 $ 77,500 $1,550
Merchandising
John M. Hollon.............. Vice President of $ 75,000 6 $ 75,000 $1,875
Editorial
Diane R. Hourany............ Vice President of $ 75,000 12 $160,000 $2,000
Customer Service
Ralph E. Lewis.............. Senior Vice President of $ 75,000 12 $225,000 $1,125
Distribution and
Logistics
</TABLE>
8
<PAGE> 13
<TABLE>
<CAPTION>
MONTHS IN TOTAL PRO-RATED
BONUS SEVERANCE SEVERANCE TARGET BONUS
NAME POSITION COMPENSATION PERIOD PAYMENT TO BE PAID
---- -------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Paul W. Melmon.............. Chief Information $150,000 6 $117,500 $1,763
Officer
Kathryn C. Ringewald........ Vice President of Human $150,000 6 $ 82,500 $1,031
Resources
Matthew K. Gee.............. Senior Vice President $ 75,000 6 $105,000 $2,100
of Merchandising
</TABLE>
On November 4, 2000, the Board of Directors elected not to repurchase
shares of unvested stock that had previously been acquired by employees and
directors pursuant to restricted stock purchase agreements, through early
exercise of employee stock options or otherwise. As a result of that action, the
Company's repurchase right lapsed with respect to the indicated number of shares
held by the individuals below, at the specified purchase prices.
<TABLE>
<CAPTION>
NUMBER OF SHARES PER SHARE
FOR WHICH REPURCHASE PURCHASE
NAME RIGHT LAPSED PRICE
---- ----------------------- ---------
<S> <C> <C>
Julia L. Wainwright......................................... 559,228 $0.0125
Christopher E. Deyo......................................... 326,985 $0.1875
Paul G. Manca............................................... -- --
John R. Benjamin............................................ -- --
John M. Hollon.............................................. 62,500 $0.1875
Diane R. Hourany............................................ 78,602 $0.1875
Ralph E. Lewis.............................................. -- --
Paul W. Melmon.............................................. 119,475 $0.1875
Kathryn C. Ringewald........................................ 60,785 $0.1875
Matthew Gee................................................. -- --
OUTSIDE DIRECTORS
John B. Balousek............................................ 27,000 $ 1.875
David Chichester............................................ -- --
</TABLE>
The table below sets forth information relating to stock options held by
each officer of the Company as well as two outside directors of the Company, as
of November 30, 2000. Other than as set forth below, in connection with its
approval and adoption of the Plan, the Board did not grant acceleration of
unvested, unexercised stock options, which options will therefore terminate upon
dissolution of the Company.
<TABLE>
<CAPTION>
WEIGHTED
ACCELERATION AVERAGE
DUE TO ACCELERATION EXERCISE
TOTAL ORIGINAL DUE TO "IN THE PRICE OF
OPTIONS VESTED OPTION RETENTION MONEY" VESTED
NAME OUTSTANDING OPTIONS(1) AGREEMENTS AGREEMENTS(2) OPTIONS(3) OPTIONS
---- ----------- ---------- ------------ ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Julia L. Wainwright............ 100,000 100,000 -- -- -- $2.0625
Christopher E. Deyo............ 100,000 100,000 -- -- -- $2.0625
Paul G. Manca.................. 375,000 98,333 -- -- -- $1.3951
John R. Benjamin............... 150,600 52,066 -- 23,790 27,000 $1.0599
John M. Hollon................. 58,000 18,666 -- 9,000 -- $2.0424
Diane R. Hourany............... 30,000 20,000 -- -- -- $2.0625
Ralph E. Lewis................. 211,000 65,000 -- -- -- $1.9615
Paul W. Melmon................. 125,000 40,666 -- 21,084 -- $1.7674
Kathryn C. Ringewald........... 57,000 24,875 -- 8,031 -- $1.9339
Matthew Gee.................... 215,000 -- -- 53,750 -- $1.0625
</TABLE>
9
<PAGE> 14
<TABLE>
<CAPTION>
WEIGHTED
ACCELERATION AVERAGE
DUE TO ACCELERATION EXERCISE
TOTAL ORIGINAL DUE TO "IN THE PRICE OF
OPTIONS VESTED OPTION RETENTION MONEY" VESTED
NAME OUTSTANDING OPTIONS(1) AGREEMENTS AGREEMENTS(2) OPTIONS(3) OPTIONS
---- ----------- ---------- ------------ ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
OUTSIDE DIRECTORS
John B. Balousek............... 300,000 225,000 -- -- -- $0.8125
David Chichester............... 100,000 25,000 -- -- -- $2.0625
</TABLE>
---------------
(1) As of November 30, 2000.
(2) If the individual is terminated without cause within one year of a
liquidation or change of control, 25% of the person's unvested shares will
vest. The number of shares set forth in the table represent 25% of the
individual's unvested shares as of November 30, 2000.
(3) Aggregate number of options exercisable at prices below $0.25, the upper end
of the estimated distribution per share.
The Board of Directors may confer other benefits or bonuses to employees
and officers of the Company, including officers who are also directors, in
recognition of their services to the Company based on the performance of such
employees and officers, including performance during the Company's liquidation
process.
The Plan was adopted by the unanimous vote of disinterested directors. It
is not currently anticipated that the liquidation of the Company will result in
any material increase in value of the shares, options or warrants held by any
directors who participated in the vote on the Plan.
PRINCIPAL PROVISIONS OF THE PLAN
The Company will distribute pro rata to its stockholders, in cash or
in-kind, or sell or otherwise dispose of, all its property and assets, except
that the Company does not plan to sell its customer list. To obtain the highest
price for the sale of the Company's assets and to preserve value for the stock
holders, the Company commenced the sale of its assets immediately after approval
of the Plan by the Board on November 4, 2000. As of the date of this Proxy
Statement, the Company has completed the sale of a substantial portion of its
assets and paid or settled a substantial portion of its liabilities and has
generally terminated its commercial agreements, relationships and overall
operations. All but approximately twenty employees have been laid off. In any
case, the sale of assets, excluding the Company's customer list, will be
concluded prior to the third anniversary of the filing of the Certificate of
Dissolution with the Delaware Secretary of State by a final liquidating
distribution either directly to the stockholders or to one or more liquidating
trusts. Any sales of the Company's assets have been and will be made in private
or public transactions and on such terms as are approved by the Board of
Directors. It is not anticipated that any further votes of the Company's
stockholders will be solicited with respect to the approval of the specific
terms of any particular sales of assets approved by the Board of Directors. See
"Sales of the Company's Assets."
Subject to the payment or the provision for payment of the Company's
indebtedness and other obligations, the Company's cash on hand, together with
the cash proceeds of any sales of the Company's other assets, will be
distributed from time to time pro rata to the holders of the Preferred and
Common Stock. The Company intends to establish a reasonable reserve (a
"Contingency Reserve") in an amount determined by the Board of Directors to be
sufficient to satisfy the liabilities, expenses and obligations of the Company
not otherwise paid, provided for or discharged. The net balance, if any, of any
such Contingency Reserve remaining after payment, provision or discharge of all
such liabilities, expenses and obligations will also be distributed to the
Company's stockholders pro rata. No assurances can be given that available cash
and amounts received from 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. The Company currently has no plans to repurchase
shares of capital stock from its stockholders; however, Catalyst Investments,
L.L.C. has returned to us 1,102,400 shares of Common Stock that it previously
purchased from us in consideration of our agreement to terminate a Content
Partner/Distribution Agreement between the Company and certain entities
affiliated with GO.com. Also, an individual stockholder returned 40,000 of our
shares of Common Stock to us
10
<PAGE> 15
in exchange for certain assets relating to coolpetstuff.com. If the Company were
to repurchase shares of capital stock from its stockholders for cash, such
repurchases would be open market purchases and would decrease amounts
distributable to other stockholders if the Company were to pay amounts in excess
of the per share values distributable in respect of the shares purchased and
would increase amounts distributable to other stockholders if the Company were
to pay amounts less than the per share values distributable in respect of such
shares. See "Liquidating Distributions; Nature; Amount; Timing" and "Contingent
Liabilities; Contingency Reserve; Liquidating Trust" below.
If deemed necessary by the Board of Directors for any reason, the Company
may, from time to time, transfer any of its unsold assets to one or more trusts
established for the benefit of the stockholders of the Company, which property
would thereafter be sold or distributed on terms approved by its trustees. If
all of the Company's assets (other than the Contingency Reserve) are not sold or
distributed prior to the third anniversary of the effectiveness of the
dissolution of the Company, the Company will transfer in final distribution such
remaining assets to a trust. The Board of Directors may also elect in its
discretion to transfer the Contingency Reserve, if any, to such a trust. Any of
such trusts are referred to in this Proxy Statement as "liquidating trusts."
Notwithstanding the foregoing, to the extent that a distribution or transfer of
any asset cannot be effected without the consent of a governmental authority, no
such distribution or transfer shall be effected without such consent. In the
event of a transfer of assets to a liquidating trust, the Company would
distribute, pro rata to the holders of its capital stock, beneficial interests
in any such liquidating trust or trusts. It is anticipated that the interests in
any such trusts will not be transferable; therefore, although the recipients of
the interests would be treated for tax purposes as having received their pro
rata share of property transferred to the liquidating trust or trusts and will
thereafter take into account for tax purposes their allocable portion of any
income, gain or loss realized by such liquidating trust or trusts, the
recipients of the interests will not realize the value thereof unless and until
such liquidating trust or trusts distributes cash or other assets to them. The
Plan authorizes the Board of Directors to appoint one or more individuals or
entities to act as trustee or trustees of the liquidating trust or trusts and to
cause the Company to enter into a liquidating trust agreement or agreements with
such trustee or trustees on such terms and conditions as may be approved by the
Board of Directors. Approval and ratification of the Plan also will constitute
the approval by the Company's stockholders of any such appointment and any
liquidating trust agreement or agreements. For further information relating to
liquidating trusts, the appointment of trustees and the liquidating trust
agreements, reference is made to "Contingent Liabilities; Contingent Reserve;
Liquidating Trust."
The Company will close its stock transfer books and discontinue recording
transfers of shares of Common Stock on the earliest to occur of (i) the close of
business on the record date fixed by the Board of Directors for the final
liquidating distribution, (ii) the close of business on the date on which the
remaining assets of the Company are transferred to a liquidating trust, or (iii)
the Final Record Date, and, thereafter, certificates representing shares of
Preferred and Common Stock will not be assignable or transferable on the books
of the Company except by will, intestate succession or operation of law. After
the Final Record Date, the Company will not issue any new stock certificates,
other than replacement certificates. Any person holding options, warrants or
other rights to purchase Preferred or Common Stock must exercise such
instruments or rights prior to the Final Record Date. See "Listing and Trading
of the Common Stock and Interests in the Liquidating Trust or Trusts" and "Final
Record Date" below.
Following approval of the Plan by the stockholders, a Certificate of
Dissolution will be filed with the State of Delaware dissolving the Company. The
dissolution of the Company will become effective, in accordance with the DGCL,
upon proper filing of the Certificate of Dissolution with the Secretary of State
or upon such later date as may be specified in the Certificate of Dissolution.
Pursuant to the DGCL, 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, whether civil, criminal or administrative, by or against it, and enabling
the Company gradually to settle and close its business, to dispose of and convey
its property, to discharge its liabilities and to distribute to its stockholders
any remaining assets, but not for the purpose of continuing the business for
which the Company was organized.
11
<PAGE> 16
ABANDONMENT; AMENDMENT
Under the Plan, the Board of Directors may modify, amend or abandon the
Plan, notwithstanding stockholder ratification and approval, to the extent
permitted by the DGCL. The Company will not amend or modify the Plan under
circumstances that would require additional stockholder solicitations under the
DGCL or the federal securities laws without complying with the DGCL and the
federal securities laws.
LIQUIDATING DISTRIBUTIONS; NATURE; AMOUNT; TIMING
Although the Board of Directors has not established a firm timetable for
distributions to stockholders if the Plan is ratified and 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. As a the date of this Proxy Statement, the Company has completed
the sale of a substantial portion of its assets and paid or settled a
substantial portion of its liabilities. 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. After payment of the initial Series
A Preferred Stock liquidation preference, the proportionate interests of all of
the stockholders of the Company shall be fixed on the basis of their respective
stock holdings at the close of business on the Final Record Date, 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 Plan. 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 and pay and settle its significant remaining
liabilities and obligations.
The Company does not plan to satisfy all of its liabilities and obligations
prior to making distributions to its stockholders, but instead will reserve
assets deemed by management and the Board of Directors to be adequate to provide
for such liabilities and obligations. See "Contingent Liabilities; Contingency
Reserve; Liquidating Trust." Management and the Board of Directors believe that
the Company has sufficient cash to pay its current and accrued obligations
without the sale of any of its assets.
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), although currently declining, will continue to
be incurred following stockholder ratification approval of the Plan. These
expenses will reduce the amount of assets available for ultimate distribution to
stockholders, and, while the Company does not believe that a precise estimate of
those expenses can currently be made, management and the Board of Directors
believe 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 (including contingent liabilities) and to make cash distributions 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, distributions of cash and other assets to the
Company's stockholders will be reduced.
FACTORS TO BE CONSIDERED WITH RESPECT TO SALE OF THE COMPANY'S ASSETS
The sale by the Company of an appreciated asset will result in the
recognition of taxable gain by the Company to the extent the fair market value
of such asset exceeds the Company's tax basis in such asset.
SALES OF THE COMPANY'S ASSETS
The Plan involves the sale of all of the assets of the Company, except for
the Company's customer list. Agreements for the sale of a substantial portion of
the Company's assets and actual sales have been entered into prior to the
Special Meeting and approved by the Board of Directors and officers of the
Company.
12
<PAGE> 17
Ratification and approval of the Plan will constitute approval of any such
agreements and sales. Sales of the Company's assets have been and will be made
on such terms as are approved by the Board of Directors and may be conducted by
either competitive bidding, public sales or privately negotiated sales. It is
not anticipated that any further stockholder votes will be solicited with
respect to the approval of the specific terms of any particular sales of assets
approved by the Board of Directors. The Company does not anticipate amending or
supplementing the Proxy Statement to reflect any such agreement or sale, unless
required by applicable law. The prices at which the Company has been and will be
able to sell its various assets depends 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.
CONDUCT OF THE COMPANY FOLLOWING ADOPTION OF THE PLAN
Following ratification and approval of the Plan by the Company's
stockholders, the Company's activities will be limited to distributing its
assets in accordance with the Plan, establishing a contingency reserve for
payment of the Company's expenses and liabilities, including liabilities
incurred but not paid or settled prior to ratification of the Plan, selling any
remaining assets of the Company, and terminating any remaining commercial
agreements, relationships or outstanding obligations of the Company. Following
the ratification and approval of the Plan by the Company's stockholders, the
Company shall continue to indemnify its officers, directors, employees and
agents in accordance with its Restated Certificate of Incorporation, as amended,
and bylaws, including for actions taken in connection with the Plan and the
winding up of the affairs of the Company. The Company's obligation to indemnify
such persons may be satisfied out of the assets of any liquidating trust. The
Board of Directors and the trustees of any liquidating trust may obtain and
maintain such insurance as may be necessary to cover the Company's
indemnification obligations under the Plan.
REPORTING REQUIREMENTS
Whether or not the Plan is ratified and approved, we have an obligation to
continue to comply with the applicable reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), even though compliance
with such reporting requirements is economically burdensome. If the Plan is
ratified and approved and, in order to curtail expenses, we will, after filing
our Certificate of Dissolution, seek relief from the Securities & Exchange
Commission ("SEC") from the reporting requirements under the Securities Exchange
Act of 1934, as amended (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 SEC might require.
CONTINGENT LIABILITIES; CONTINGENCY RESERVE; LIQUIDATING TRUST
Under the DGCL, the Company is required, in connection with its
dissolution, to pay or provide for payment of all of its liabilities and
obligations. Following the ratification and approval of the Plan by the
Company's stockholders, the Company will pay all expenses and fixed and other
known liabilities, or set aside as a Contingency Reserve cash and other assets
which it believes to be adequate for payment thereof. The Company is currently
unable to estimate with precision the amount of any Contingency Reserve which
may be required, but any such amount (in addition to any cash contributed to a
liquidating trust, if one is utilized) will be deducted before the determination
of amounts available for distribution to stockholders.
The actual amount of the Contingency Reserve will be based upon estimates
and opinions of management and the Board of Directors and derived from
consultations with outside experts and review of the Company's estimated
operating expenses and future estimated liabilities, including, without
limitation, anticipated compensation payments, estimated legal and accounting
fees, operating lease expenses, payroll and other taxes payable, miscellaneous
office expenses, expenses accrued in the Company's financial statements, and
reserves for litigation expenses. There can be no assurance that the Contingency
Reserve in fact will be sufficient. The Company has not made any specific
provision for an increase in the amount of the Contingency Reserve. Subsequent
to the establishment of the Contingency Reserve, the Company will distribute to
its
13
<PAGE> 18
stockholders any portions of the Contingency Reserve which it deems no longer to
be required. After the liabilities, expenses and obligations for which the
Contingency Reserve had been established have been satisfied in full, the
Company will distribute to its stockholders any remaining portion of the
Contingency Reserve.
If deemed necessary, appropriate or desirable by the Board of Directors for
any reason, the Company may, from time to time, transfer any of its unsold
assets to one or more liquidating trusts, or other structure it deems
appropriate, established for the benefit of the stockholders of the Company,
which property would thereafter be sold or distributed on terms approved by its
trustees. The Board of Directors and management may determine to transfer assets
to a liquidating trust in circumstances where the nature of an asset is not
susceptible to distribution (for example, interests in intangibles) or where the
Board of Directors determines that it would not be in the best interests of the
Company and its stockholders for such assets to be distributed directly to the
stockholders at such time. If all of the Company's assets (other then the
Contingency Reserve) are not sold or distributed prior to the third anniversary
of the effectiveness of the dissolution the Company must transfer in final
distribution such remaining assets to a liquidating trust. The Board of
Directors may also elect in its discretion to transfer the Contingency Reserve,
if any, to such a liquidating trust. The purpose of a liquidating trust would be
to distribute such property or to sell such property on terms satisfactory to
the liquidating trustees, and distribute the proceeds of such sale after paying
those liabilities of the Company, if any, assumed by the trust, to the Company's
stockholders. Any liquidating trust acquiring all of the unsold assets of the
Company will assume all of the liabilities and obligations of the Company and
will be obligated to pay any expenses and liabilities of the Company which
remain unsatisfied. If the Contingency Reserve transferred to the liquidating
trust is exhausted, such expenses and liabilities will be satisfied out of the
liquidating trust's other unsold assets.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as trustee or trustees of the liquidating trust
or trusts and to cause the Company to enter into a liquidating trust agreement
or agreements with such trustee or trustees on such terms and conditions as may
be approved by the Board of Directors. It is anticipated that the Board of
Directors will select such trustee or trustees on the basis of the experience of
such individual or entity in administering and disposing of assets and
discharging liabilities of the kind to be held by the liquidating trust or
trusts and the ability of such individual or entity to serve the best interests
of the Company's stockholders. Approval of the Plan by the stockholders will
also constitute the approval by the Company's stockholders of any such
appointment and any liquidating trust agreement or agreements.
The Company may decide to use a liquidating trust or trusts, and the Board
of Directors believes the flexibility provided by the Plan with respect to the
liquidating trusts to be advisable. The trust would be evidenced by a trust
agreement between the Company and the trustees. The purpose of the trust would
be to serve as a temporary repository for the trust property prior to its
disposition or distribution to the Company's stockholders. The transfer to the
trust and distribution of interests therein to the Company's stockholders would
enable the Company to divest itself of the trust property and permit the
Company's stockholders to enjoy the economic benefits of ownership thereof.
Pursuant to the trust agreement, the trust property would be transferred to the
trustees immediately prior to the distribution of interests in the trust to the
Company's stockholders, to be held in trust for the benefit of the stockholder
beneficiaries subject to the terms of the trust agreement. It is anticipated
that the interests would be evidenced only by the records of the trust and there
would be no certificates or other tangible evidence of such interests and that
no holder of Common Stock would be required to pay any cash or other
consideration for the interests to be received in the distribution or to
surrender or exchange shares of Common Stock in order to receive the interests.
It is further anticipated that pursuant to the trust agreements (i) a majority
of the trustees would be required to be independent of the Company's management;
(ii) approval of a majority of the trustees would be required to take any
action; and (iii) the trust would be irrevocable and would terminate after, the
earliest of (x) the trust property having been fully distributed, or (y) a
majority in interest of the beneficiaries of the trust, or a majority of the
trustees, having approved of such termination, or (z) a specified number of
years having elapsed after the creation of the trust.
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<PAGE> 19
UNDER THE DGCL, IN THE EVENT THE COMPANY FAILS TO CREATE AN ADEQUATE
CONTINGENCY RESERVE FOR PAYMENT OF ITS EXPENSES AND LIABILITIES, OR SHOULD SUCH
CONTINGENCY RESERVE AND THE ASSETS HELD BY THE LIQUIDATING TRUST OR TRUSTS BE
EXCEEDED BY THE AMOUNT ULTIMATELY FOUND PAYABLE IN RESPECT OF EXPENSES AND
LIABILITIES, EACH STOCKHOLDER COULD BE HELD LIABLE FOR THE PAYMENT TO CREDITORS
OF SUCH STOCKHOLDER'S PRO RATA SHARE OF SUCH EXCESS, LIMITED TO THE AMOUNTS
THERETOFORE RECEIVED BY SUCH STOCKHOLDER FROM THE COMPANY OR FROM THE
LIQUIDATING TRUST OR TRUSTS.
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 Plan 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 under the Plan.
FINAL RECORD DATE
The Company intends to close its stock transfer books and discontinue
recording transfers of shares of Preferred and Common Stock on the Final Record
Date, and thereafter certificates representing shares of Preferred or Common
Stock will not be assignable or transferable on the books of the Company except
by will, intestate succession or operation of law. After the Final Record Date,
the Company will not issue any new stock certificates, other than replacement
certificates. It is anticipated that no further trading of the Company's shares
will occur on or after the Final Record Date. See "Listing and Trading of the
Common Stock and Interests in the Liquidating Trust or Trusts" below. All
liquidating distributions from the Company or a liquidating trust on or after
the Final Record Date will be made to stockholders according to their holdings
of capital stock as of the Final Record Date. Subsequent to the Final Record
Date, the Company may at its election require stockholders to surrender
certificates representing their shares of the capital stock in order to receive
subsequent distributions. Stockholders should not forward their stock
certificates before receiving instructions to do so. If surrender of stock
certificates should be required, all distributions otherwise payable by the
Company or the liquidating trust, if any, to stockholders who have not
surrendered their stock certificates may be held in trust for such stockholders,
without interest, until the surrender of their certificates (subject to escheat
pursuant to the laws relating to unclaimed property). If a stockholder's
certificate evidencing the capital stock has been lost, stolen or destroyed, the
stockholder may be required to furnish the Company with satisfactory evidence of
the loss, theft or destruction thereof, together with a surety bond or other
indemnity, as a condition to the receipt of any distribution.
LISTING AND TRADING OF THE COMMON STOCK AND INTERESTS IN THE LIQUIDATING TRUST
OR TRUSTS
The Company currently intends to close its stock transfer books on the
Final Record Date and to cease recording stock transfers and issuing stock
certificates (other than replacement certificates) at such time. Accordingly, it
is expected that trading in the shares will cease on and after such date.
The Common Stock is currently listed for trading on the Nasdaq Stock
Market's National Market. For continued listing, a company, among other things,
must meet certain minimum requirements with respect to net tangible assets,
market value of its securities held by non-affiliates, and minimum bid prices
per share. The Company's Common Stock has been trading below the minimum bid
price required for continued listing, and the Company cannot be sure that the
bid price will rise above the required minimum bid price. In addition, a company
must maintain an operating business. The Company had previously received notice
that its Common Stock would be delisted from the Nasdaq National Market on or
about January 23, 2001. The Company expects that, as a result of the prior
notification from Nasdaq, as well as the cessation of its operations and the
anticipated decrease in its assets resulting from distributions to its
stockholders, its Common Stock will be delisted from the Nasdaq National Market
not later than shortly after the approval of the Plan of Liquidation by the
stockholders. Trading, if any, in the Common Stock would thereafter be conducted
in the over-the-
15
<PAGE> 20
counter market in the so-called "pink sheets" or the NASD's "Electronic Bulletin
Board". As a consequence of such delisting, an investor would likely find it
more difficult to dispose of, or to obtain quotations as to, the price of the
Common Stock. Delisting of the Common Stock may result in lower prices for the
Common Stock than would otherwise prevail. In any event, the Company will close
its stock transfer books upon the filing of the Certificate of Dissolution.
Thereafter, the stockholders will not be able to transfer their shares. It is
anticipated that the interests in a liquidating trust or trusts will not be
transferable, although no determination has yet been made. Such determination
will be made by the Board of Directors and management prior to the transfer of
unsold assets to the liquidating trust and will be based on, among other things,
the Board of Directors, and management's estimate of the value of the assets
being transferred to the liquidating trust or trusts, tax matters and the impact
of compliance with applicable securities laws. Should the interests be
transferable, the Company plans to distribute an information statement with
respect to the liquidating trust or trusts at the time of the transfer of assets
and the liquidating trust or trusts may be required to comply with the periodic
reporting and proxy requirements of the Exchange Act. The costs of compliance
with such requirements would reduce the amount which otherwise could be
distributed to interest holders. Even if transferable, the interests are not
expected to be listed on a national securities exchange or quoted through
Nasdaq, and the extent of any trading market therein cannot be predicted.
Moreover, the interests may not be accepted by commercial lenders as security
for loans as readily as more conventional securities with established trading
markets.
As stockholders will be deemed to have received a liquidating distribution
equal to their pro rata share of the value of the net assets distributed to an
entity which is treated as a liquidating trust for tax purposes (see "Certain
Federal Income Tax Consequences"), the distribution of non-transferable
interests could result in tax liability to the interest holders without their
being readily able to realize the value of such interests to pay such taxes or
otherwise.
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, the stockholders of the Company are not entitled to
appraisal rights for their shares of Common Stock in connection with the
transactions contemplated by the Plan.
REGULATORY APPROVALS
No United States federal or state regulatory requirements must be complied
with or approvals obtained in connection with the liquidation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material United States
federal income tax consequences affecting the Company's stockholders that are
anticipated to result from the dissolution and liquidation of the Company. This
discussion does not purport to be a complete analysis of all the potential tax
effects. Moreover, the discussion does not address the tax consequences that may
be relevant to particular categories of investors subject to special treatment
under certain federal income tax laws (such as dealers in securities, banks,
insurance companies, tax-exempt organizations, mutual funds, foreign individuals
and entities, and persons who acquired their Company stock upon exercise of
stock options or in other compensatory transactions). It also does not address
any tax consequences arising under the laws of any state, local or foreign
jurisdiction. The discussion is based upon the Internal Revenue Code of 1986, as
amended, Treasury Regulations, Internal Revenue Service ("IRS") rulings, and
judicial decisions now in effect, all of which are subject to change at any
time; any such changes may be applied retroactively. Distributions pursuant to
the Plan may occur at various times and in more than one tax year. No assurance
can be given that the tax treatment described herein will remain unchanged at
the time of such distributions.
The following discussion has no binding effect on the IRS or the courts and
assumes that the Company will liquidate in accordance with the Plan in all
material respects. No ruling has been requested from the IRS with respect to the
anticipated tax treatment of the Plan, and the Company will not seek an opinion
of counsel with respect to the anticipated tax treatment. If any of the
anticipated tax consequences described herein
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<PAGE> 21
proves to be incorrect, the result could be increased taxation at the corporate
and/or stockholder level, thus reducing the benefit to the stockholders and the
Company from the liquidation. Tax considerations applicable to particular
stockholders may vary with and be contingent on the stockholder's individual
circumstances. This discussion does not constitute legal advice to any
stockholder.
FEDERAL INCOME TAXATION OF THE COMPANY
After the approval of the Plan and until the liquidation is completed, the
Company will continue to be subject to federal income tax on its taxable income,
if any. The Company will recognize gain or loss on sales of its assets pursuant
to the Plan. Upon the distribution of any property, other than cash, to
stockholders pursuant to the Plan, the Company will recognize gain or loss as if
such property were sold to the stockholders at its fair market value, unless
certain exceptions to the recognition of loss apply. Any losses and net
operating loss carryforwards that the Company has may be available to offset any
gains recognized on sales or distribution of Company assets.
FEDERAL INCOME TAXATION OF THE STOCKHOLDERS
As a result of the liquidation of the Company, for federal income tax
purposes stockholders will recognize gain or loss equal to the difference
between (i) the sum of the amount of cash distributed to them and the fair
market value (at the time of distribution) of any property distributed to them,
and (ii) their tax basis for their shares of the Company's capital stock. A
stockholder's tax basis in his or her shares will depend upon various factors,
including the stockholder's cost and the amount and nature of any distributions
received with respect thereto.
A stockholder's gain or loss will be computed on a "per share" basis. The
Company expects to make more than one liquidating distribution, each of which
will be allocated proportionately to each share of stock owned by a stockholder.
The value of each liquidating distribution will be applied against and reduce a
stockholder's tax basis in his or her shares of stock. Gain will be recognized
as a result of a liquidating distribution to the extent that the aggregate value
of the distribution and prior liquidating distributions received by a
stockholder with respect to a share exceeds his or her tax basis for that share.
Any loss will generally be recognized only when the final distribution from the
Company has been received and then only if the aggregate value of all
liquidating distributions with respect to a share is less than the stockholder's
tax basis for that share. Gain or loss recognized by a stockholder will be
capital gain or loss provided the shares are held as capital assets, and will be
long term capital gain or loss if the stock has been held for more than one
year. If it were to be determined that distributions made pursuant to the Plan
were not liquidating distributions, the result could be treatment of
distributions as dividends taxable at ordinary income rates if the Company were
to have any earnings and profits for federal income tax purposes, determined
either on an historic or a current year basis, for the year of distribution.
Upon any distribution of property, the stockholder's tax basis in such
property immediately after the distribution will be the fair market value of
such property at the time of distribution. The gain or loss realized upon the
stockholder's future sale of that property will be measured by the difference
between the stockholder's tax basis in the property at the time of such sale and
the proceeds of such sale.
After the close of its taxable year, the Company will provide stockholders
and the IRS with a statement of the amount of cash distributed to the
stockholders and its best estimate as to the value of any property distributed
to them during that year. There is no assurance that the IRS will not challenge
such valuation. As a result of such a challenge, the amount of gain or loss
recognized by stockholders might be changed. Distributions of property other
than cash to stockholders could result in tax liability to any given stockholder
exceeding the amount of cash received, requiring the stockholder to meet the tax
obligations from other sources or by selling all or a portion of the assets
received.
It is possible that the Company will have liabilities not fully covered by
its Contingency Reserve for which the stockholders will be liable up to the
extent of any liquidating distributions they have received. (See "Contingent
Liabilities; Contingency Reserve; Liquidating Trust"). Such a liability could
require a stockholder to satisfy a portion of such liability out of prior
liquidating distributions received from the Company and
17
<PAGE> 22
the liquidating trust or trusts. Payments by stockholders in satisfaction of
such liabilities would commonly produce a capital loss, which, in the hands of
individual stockholders, could not be carried back to prior years to offset
capital gains realized from liquidating distributions in those years.
LIQUIDATING TRUSTS
If the Company transfers assets to a liquidating trust or trusts, the
Company intends to structure such trust or trusts so that stockholders will be
treated for tax purposes as having received their pro rata share of the property
transferred to the liquidating trust or trusts, reduced by the amount of known
liabilities assumed by the liquidating trust or trusts or to which the property
transferred is subject. Assuming such treatment is achieved, assets transferred
to a liquidating trust will cause the stockholder to be treated in the same
manner for federal income tax purposes as if the stockholder had received a
distribution directly from the Company. The liquidating trust or trusts
themselves should not be subject to federal income tax, assuming that they are
treated as liquidating trusts for federal income tax purposes. After formation
of the liquidating trust or trusts, the stockholders must take into account for
federal income tax purposes their allocable portion of any income, gain or loss
recognized by the liquidating trust or trusts. As a result of the transfer of
property to the liquidating trust or trusts and the ongoing operations of the
liquidating trust or trusts, stockholders should be aware that they may be
subject to tax, whether or not they have received any actual distributions from
the liquidating trust or trusts with which to pay such tax. There can be no
assurance that the liquidating trust or trusts described in the Plan will be
treated as a liquidating trust or trusts for federal income tax purposes.
STATE AND LOCAL TAX
The Company may be subject to liability for state or local taxes with
respect to the sale of its assets. Stockholders may also be subject to state or
local taxes, including with respect to liquidating distributions received by
them or paid to a liquidating trust on their behalf, and with respect to any
income derived by a liquidating trust. Stockholders should consult their tax
advisors with respect to the state and local tax consequences of the Plan.
BACKUP WITHHOLDING
Unless a stockholder complies with certain reporting and/or certification
procedures or is an exempt recipient under applicable provisions of the Code and
Treasury regulations promulgated under the Code, such stockholder may be subject
to a 31% backup withholding tax with respect to any payments received pursuant
to the liquidation. Backup withholding generally will not apply to payments made
to certain exempt recipients such as a corporation or financial institution or
to a stockholder who furnishes a correct taxpayer identification number or
provides a certificate of foreign status and provides certain other required
information. If backup withholding applies, the amount withheld is not an
additional tax, but is credited against that stockholder's U.S. federal income
tax liability.
THE FOREGOING SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS
INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO
ANY STOCKHOLDER. THE TAX CONSEQUENCES OF THE PLAN MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF THE STOCKHOLDER. THE COMPANY RECOMMENDS THAT EACH
STOCKHOLDER CONSULT ITS OWN TAX ADVISOR REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN AS WELL AS THE STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES.
EFFECT OF LIQUIDATION
THE METHODS USED BY THE BOARD OF DIRECTORS AND MANAGEMENT IN ESTIMATING THE
VALUES OF THE COMPANY'S ASSETS ARE INEXACT AND MAY NOT APPROXIMATE VALUES
ACTUALLY REALIZED. THE BOARD OF DIRECTORS' ASSESSMENT ASSUMES THAT ESTIMATES OF
THE COMPANY'S LIABILITIES AND OPERATING COSTS ARE ACCURATE, BUT THOSE ESTIMATES
ARE SUBJECT TO NUMEROUS UNCER-
18
<PAGE> 23
TAINTIES BEYOND THE COMPANY'S CONTROL AND ALSO DO NOT REFLECT ANY CONTINGENT
LIABILITIES THAT MAY MATERIALIZE. FOR ALL THESE REASONS, THERE CAN BE NO
ASSURANCE THAT ACTUAL NET PROCEEDS DISTRIBUTED TO STOCKHOLDERS IN LIQUIDATION
MAY NOT BE SIGNIFICANTLY LESS THAN THE ESTIMATED AMOUNT DISCUSSED IN THIS PROXY
STATEMENT. MOREOVER, NO ASSURANCE CAN BE GIVEN THAT ANY AMOUNTS TO BE RECEIVED
BY THE COMPANY'S STOCKHOLDERS IN LIQUIDATION WILL EQUAL OR EXCEED THE PRICE OR
PRICES AT WHICH THE COMMON STOCK HAS RECENTLY TRADED OR MAY TRADE IN THE FUTURE.
VOTE REQUIRED AND BOARD RECOMMENDATION
The ratification and approval of the Plan of Liquidation requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock. Members of the Board of Directors and the executive officers of
the Company who hold (or are deemed to hold) as of December 13, 2000 an
aggregate of 15,655,063 shares of Common Stock (approximately 44.3% of the
outstanding shares of Common Stock as of December 13, 2000) have indicated that
they will vote in favor of the proposal.
THE BOARD BELIEVES THAT THE PLAN OF LIQUIDATION IS IN THE BEST INTERESTS OF
THE COMPANY'S STOCKHOLDERS AND RECOMMENDS A VOTE FOR THIS PROPOSAL. IT IS
INTENDED THAT SHARES REPRESENTED BY THE ENCLOSED FORM OF PROXY WILL BE VOTED IN
FAVOR OF THIS PROPOSAL UNLESS OTHERWISE SPECIFIED IN SUCH PROXY.
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT NAME CHANGE
The Company is asking its stockholders to vote on a proposal to amend the
Company's Amended and Restated Certificate of Incorporation (the "Restated
Certificate") in order to change the name of the Company from Pets.com, Inc. to
IPET Holdings, Inc. The Board of Directors has unanimously approved such an
amendment to the Restated Certificate. If the corporate name change is approved
by the stockholders, it is anticipated that the Company's Common Stock will
continue to trade under the symbol "IPET" (until delisted).
We desire to change the name of the Company from Pets.com, Inc. to IPET
Holdings, Inc. because the name Pets.com is a valuable asset of the Company
which can be sold in connection with our proposed dissolution to the financial
advantage of stockholders.
Upon consummation of the proposed change of name it will not be necessary
to surrender stock certificates. Instead, if certificates are presented for
transfer, new stock certificates bearing the name IPET Holdings, Inc. will be
issued.
If any action, suite, proceeding or claim has been instituted, made or
threatened, relating to the name change, which make effectuation of the name
change inadvisable in the opinion of the Company's Board of the Directors or
there exists any other circumstance which would make consummation of the name
change inadvisable in the opinion of the Board of Directors, the proposal to
amend the Restated Certificate may be terminated by the Board of Directors
either before or after approval of the name change by the stockholders.
REQUIRED VOTE
Approval of adoption of the Certificate of Amendment in order to change the
name of the Company requires the affirmative vote of the holders of a majority
of the outstanding shares of the Company's Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO ADOPT THE CERTIFICATE OF AMENDMENT WHEREBY THE COMPANY'S NAME WILL
BE CHANGED TO IPET HOLDINGS, INC. IT IS INTENDED THAT SHARES REPRESENTED BY THE
ENCLOSED FORM OF PROXY WILL BE VOTED IN FAVOR OF THIS PROPOSAL UNLESS OTHERWISE
SPECIFIED IN SUCH PROXY.
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<PAGE> 24
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Quarterly Reports on Form 10-Q for the quarters ended March
31, 2000, June 30, 2000 and September 30, 2000, and the Company's Current
Reports on Form 8-K and 8-K/A filed with the SEC on July 28, 2000, September 26,
2000 and November 7, 2000 are incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Special Meeting or any adjournment or postponement thereof shall be deemed
to be incorporated by reference herein and made a part hereof from the date of
the filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Proxy Statement to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference herein modified
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
The Company will provide without charge to each person to whom a copy of
this Proxy Statement is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(not including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Pets.com, Inc., 945 Bryant Street, San Francisco,
California 94103, Attention: Paul Manca, Chief Financial Officer.
OTHER MATTERS
The Board of Directors does not know of any other matters which may come
before the meeting. However, if any other matters are properly presented to the
meeting, it is the intention of the persons named in the accompanying proxy to
vote, or otherwise act, in accordance with their judgment on such matters.
THE BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THIS MEETING MAY VOTE THEIR STOCK
PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
By Order of the Board of Directors,
Paul G. Manca
Chief Financial Officer
20
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NUMBER
------- ------
<S> <C> <C>
Exhibit A Plan of Complete Liquidation and Dissolution................ A-1
</TABLE>
<PAGE> 26
EXHIBIT A
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF
PETS.COM, INC.
This Plan of Complete Liquidation and Dissolution (the "Plan") is intended
to accomplish the complete liquidation and dissolution of Pets.com, Inc., a
Delaware corporation (the "Company"), in accordance with the Delaware General
Corporation Law and Section 331 of the Internal Revenue Code of 1986, as amended
(the "Code"), as follows:
1. The Board of Directors of the Company (the "Board of Directors")
has adopted this Plan and called a meeting (the "Meeting") of the holders
of the Company's Common Stock to take action on the Plan and ratify the
Company's actions taken to date on the Plan. If stockholders holding a
majority of the Company's outstanding common stock, par value $.00125 per
share (the "Common Stock"), vote for the adoption of this Plan at the
Meeting, the Plan shall constitute the adopted Plan of the Company as of
the date of the Meeting, or such later date on which the stockholders may
approve the Plan if the Meeting is adjourned to a later date (the "Adoption
Date").
2. After the Adoption Date, the Company shall not engage in any
business activities except to the extent necessary to preserve the value of
its assets, wind up its business affairs, and distribute its assets in
accordance with this Plan. No later than thirty (30) days following the
Adoption Date, the Company shall file Form 966 with the Internal Revenue
Service.
3. From and after the Adoption Date, the Company shall complete the
following corporate actions:
(a) The Company shall determine whether and when to (i) transfer
the Company's property and assets (other than cash, cash equivalents and
accounts receivable) to a liquidating trust (established pursuant to
Section 6 hereof), or (ii) collect, sell, exchange or otherwise dispose
of all of its property and assets in one or more transactions upon such
terms and conditions as the Board of Directors, in its absolute
discretion, deems expedient and in the best interests of the Company and
the stockholders, without any further vote or action by the Company's
stockholders. The Company shall not sell its customer list unless in
connection with the sale of its business as an ongoing business and the
acquiror's privacy policy is consistent with our existing privacy
policy. It is understood that the Company will be permitted to commence
the sale and disposition of its assets as soon as possible following the
adoption of this Plan by the Company's Board of Directors in order to
attain the highest value for such assets and maximize value for its
stockholders. The Company's assets and properties may be sold in bulk to
one buyer or a small number of buyers or on a piecemeal basis to
numerous buyers. The Company will not be required to obtain appraisals
or other third party opinions as to the value of its properties and
assets in connection with the liquidation. In connection with such
collection, sale, exchange and other disposition, the Company shall
collect or make provision for the collection of all accounts receivable,
debts and claims owing to the Company.
(b) The Company shall pay or, as determined by the Board of
Directors, make reasonable provision to pay, all claims and obligations
of the Company, including all contingent, conditional or unmatured
claims known to the Company and all claims which are known to the
Company but for which the identity of the claimant is unknown.
(c) After payment of $0.00125 per share to holders of outstanding
shares of Series A Preferred Stock, the Company shall distribute pro
rata to its stockholders, all available cash including the cash proceeds
of any sale, exchange or disposition, except such cash, property or
assets as are required for paying or making reasonable provision for the
claims and obligations of the Company. Such distribution may occur all
at once or in a series of distributions and shall be in cash or assets,
in such amounts, and at such time or times, as the Board of Directors or
the Trustees (as defined in Section 6 hereof), in their absolute
discretion, may determine. If and to the extent deemed necessary,
appropriate or desirable by the Board of Directors or the Trustees, in
their absolute discretion, the Company may establish and set aside a
reasonable amount of cash and/or property
A-1
<PAGE> 27
(the "Contingency Reserve") to satisfy claims against the Company,
including, without limitation, tax obligations, and all expenses of the
sale of the Company's property and assets, of the collection and defense
of the Company's property and assets, and the liquidation and
dissolution provided for in this Plan.
4. The distributions to the Stockholders pursuant to Section 3, 6 and
7 hereof shall be in complete redemption and cancellation of all of the
outstanding Preferred Stock and Common Stock of the Company. As a condition
to receipt of any distribution to the Company's stockholders, the Board of
Directors or the Trustees, in their absolute discretion, may require the
stockholders to (i) surrender their certificates evidencing the Preferred
Stock and Common Stock to the Company or its agents for recording of such
distributions thereon or (ii) furnish the Company with evidence
satisfactory to the Board of Directors or the Trustees of the loss, theft
or destruction of their certificates evidencing the Preferred Stock Common
Stock, together with such surety bond or other security or indemnity as may
be required by and satisfactory to the Board of Directors or the Trustees
("Satisfactory Evidence and Indemnity"). As a condition to receipt of any
final distribution to the Company's stockholders, the Board of Directors or
the Trustees, in their absolute discretion, may require the stockholders to
(i) surrender their certificates evidencing the Common Stock to the Company
or its agent for cancellation or (ii) furnish the Company with Satisfactory
Evidence and Indemnity. The Company will finally close its stock transfer
books and discontinue recording transfers of Common Stock on the earliest
to occur of (i) the close of business on the record date fixed by the Board
of Directors for the final liquidating distribution, (ii) the close of
business on the date on which the remaining assets of the Company are
transferred to the Trust or (iii) the date on which the Company files its
Certificate of Dissolution under the Delaware General Corporation Law
(following any post-dissolution continuation period thereunder), and
thereafter certificates representing Preferred Stock and Common Stock will
not be assignable or transferable on the books of the Company except by
will, intestate succession, or operation of law.
5. If any distribution to a stockholder cannot be made, whether
because the stockholder cannot be located, has not surrendered its
certificates evidencing the Preferred Stock or Common Stock as required
hereunder or for any other reason, the distribution to which such
stockholder is entitled (unless transferred to the Trust established
pursuant to Section 6 hereof) shall be transferred, at such time as the
final liquidating distribution is made by the Company, to the official of
such state or other jurisdiction authorized by applicable law to receive
the proceeds of such distribution. The proceeds of such distribution shall
thereafter be held solely for the benefit of and for ultimate distribution
to such stockholder as the sole equitable owner thereof and shall be
treated as abandoned property and escheat to the applicable state or other
jurisdiction in accordance with applicable law. In no event shall the
proceeds of any such distribution revert to or become the property of the
Company.
6. If deemed necessary, appropriate or desirable by the Board of
Directors, in its absolute discretion, in furtherance of the liquidation
and distribution of the Company's assets to the stockholders, as a final
liquidating distribution or from time to time, the Company shall transfer
to one or more liquidating trustees, for the benefit of its stockholders
(the "Trustees"), under a liquidating trust (the "Trust"), any assets of
the Company which are (i) not reasonably susceptible to distribution to the
stockholders, including without limitation non-cash assets and assets held
on behalf of the stockholders (a) who cannot be located or who do not
tender their certificates evidencing the Common Stock or Preferred Stock to
the Company or its agent as herein above required or (b) to whom
distributions may not be made based upon restrictions under contract or
law, including, without limitation, restrictions of the federal securities
laws and regulations promulgated thereunder, or (ii) held as the
Contingency Reserve. The Board of Directors is hereby authorized to appoint
one or more individuals, corporations, partnerships or other persons, or
any combination thereof, including, without limitation, any one or more
officers, directors, employees, agents or representatives of the Company,
to act as the initial Trustee or Trustees for the benefit of the
stockholders and to receive any assets of the Company. Any Trustees
appointed as provided in the preceding sentence shall succeed to all right,
title and interest of the Company of any kind and character with respect to
such transferred assets and, to the extent of the assets so transferred and
solely in their capacity as Trustees, shall assume all of the liabilities
and obligations of
A-2
<PAGE> 28
the Company, including, without limitation, any unsatisfied claims and
unascertained or contingent liabilities. Further, any conveyance of assets
to the Trustees shall be deemed to be a distribution of property and assets
by the Company to the stockholders for the purposes of Section 3 of this
Plan. Any such conveyance to the Trustees shall be in trust for the
stockholders of the Company. The Company, subject to this Section and as
authorized by the Board of Directors, in its absolute discretion, may enter
into a liquidating trust agreement with the Trustees, on such terms and
conditions as the Board of Directors, in its absolute discretion, may deem
necessary, appropriate or desirable. Adoption of this Plan by a majority of
the outstanding Common Stock shall constitute the approval of the
stockholders of any such appointment, any such liquidating trust agreement
and any transfer of assets by the Company to the Trust as their act and as
a part hereof as if herein written.
7. Whether or not a Trust shall have been previously established
pursuant to Section 6, in the event it should not be feasible for the
Company to make the final distribution to its stockholders of all assets
and properties of the Company prior to January 17, 2004 then, on or before
such date, the Company shall be required to establish a Trust and transfer
any remaining assets and properties (including, without limitation, any
uncollected claims, contingent assets and the Contingency Reserve) to the
Trustees as set forth in Section 6.
8. After the Adoption Date, the officers of the Company shall, at such
time as the Board of Directors, in its absolute discretion, deems
necessary, appropriate or desirable, obtain any certificates required from
the Delaware tax authorities and, upon obtaining such certificates, the
Company shall file with the Secretary of State of the State of Delaware a
certificate of dissolution (the "Certificate of Dissolution") in accordance
with the Delaware General Corporation Laws.
9. Adoption of this Plan by holders of a majority of the outstanding
Common Stock shall constitute the approval of the stockholders of the sale,
exchange or other disposition in liquidation of all of the property and
assets of the Company, whether such sale, exchange or other disposition
occurs in one transaction or a series of transactions, and shall constitute
ratification of all contracts for sale, exchange or other disposition which
are conditioned on adoption of this Plan.
10. In connection with and for the purposes of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay any brokerage, agency,
professional and other fees and expenses of persons rendering services to
the Company in connection with the collection, sale, exchange or other
disposition of the Company's property and assets and the implementation of
this Plan.
11. In connection with and for the purpose of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay the Company's officers,
directors, employees, agents and representatives, or any of them,
compensation or additional compensation above their regular compensation,
in money or other property, as severance, bonus, acceleration of vesting of
stock or stock options, or in any other form, in recognition of the
extraordinary efforts they, or any of them, will be required to undertake,
or actually undertake, in connection with the implementation of this Plan.
Adoption of this Plan by a majority of the outstanding Common Stock shall
constitute the approval of the Company's stockholders of the payment of any
such compensation.
12. The Company shall continue to indemnify its officers, directors,
employees, agents and representatives in accordance with its certificate of
incorporation, as amended, and by-laws and any contractual arrangements,
for the actions taken in connection with this Plan and the winding up of
the affairs of the Company. The Company's obligation to indemnify such
persons may also be satisfied out of the assets of the Trust. The Board of
Directors and the Trustees, in their absolute discretion, are authorized to
obtain and maintain insurance as may be necessary or appropriate to cover
the Company's obligation hereunder, including seeking an extension in time
and coverage of the Company's insurance policies currently in effect.
13. Notwithstanding authorization or consent to this Plan and the
transactions contemplated hereby by the Company's stockholders, the Board
of Directors may modify, amend or abandon this Plan and the
A-3
<PAGE> 29
transactions contemplated hereby without further action by the stockholders
to the extent permitted by the Delaware General Corporation Law.
14. The Board of Directors of the Company is hereby authorized,
without further action by the Company's stockholders, to do and perform or
cause the officers of the Company, subject to approval of the Board of
Directors, to do and perform, any and all acts, and to make, execute,
deliver or adopt any and all agreements, resolutions, conveyances,
certificates and other documents of every kind which are deemed necessary,
appropriate or desirable, in the absolute discretion of the Board of
Directors, to implement this Plan and the transaction contemplated hereby,
including, without limiting the foregoing, all filings or acts required by
any state or federal law or regulation to wind up its affairs.
A-4
<PAGE> 30
PETS.COM, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
JANUARY 16, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints JULIA L. WAINWRIGHT and PAUL G. MANCA, and
each or both of them, proxies, with full power of substitution to vote all
shares of stock of Pets.com, Inc. (the "Company") which the undersigned is
entitled to vote at the Special Meeting of Stockholders of the Company to be
held on Tuesday, January 16, 2001, at 8:00 a.m. local time, at the offices of
Venture Law Group, 2775 Sand Hill Road, Menlo Park, California 94025 and at any
adjournments thereof, upon matters set forth in the Notice of Special Meeting of
Stockholders and Proxy Statement dated December 28, 2000, a copy of which has
been received by the undersigned.
SEE
REVERSE
SIDE
CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
<PAGE> 31
[X] Please mark your vote as indicated in this example.
1. To ratify and approve the Plan of Complete Liquidation and Dissolution. [
] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve the amendment to the Company's Amended and Restated Certificate of
Incorporation to change the Company's name to IPET Holdings, Inc. [
] FOR [ ] AGAINST [ ] ABSTAIN
Please mark, sign, date and promptly return this proxy card using the
enclosed envelope, or otherwise provide your proxy by telephone or the Internet.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ] (Please sign exactly
as your name appears
hereon. If signing as
attorney, executor,
trustee or guardian,
please give your full
title as such. If stock
is held jointly, each
owner should sign.
Please read reverse
side before signing.)
Signature:
Date
Signature:
Date
