1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001 ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________________ to _________________ Commission File Number 000- 29387 IPET HOLDINGS, INC. (FORMERLY PETS.COM, INC.) (Exact name of registrant as specified in its charter) Delaware 95-4730753 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Diablo Management Group 2000 Crow Canyon Place, Suite 270 San Ramon, CA 94583 (Address of principal executive offices) (925) 807-0126 (Registrant's telephone number) Former Addresses: 379 Diablo Road, Suite 270, Danville, CA 94526 945 Bryant Street, San Francisco, CA 94103 (Former name or former address, if changed since last year) Check whether the registrant (1) filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] The number of shares of Common Stock, $.00125 par value, outstanding on January 18, 2001 (the effective date of filing of the Company's Certificate of Dissolution with the Delaware Secretary of State) was 34,216,705 (assuming the conversion of 1,143,895 shares of outstanding non-voting Series A Preferred Stock into Common Stock).
2 IPET HOLDINGS, INC. CONTENTS <TABLE> <CAPTION> PAGE NO. -------- <S> <C> <C> PART I -- FINANCIAL INFORMATION Item 1. Condensed Financial Statements (unaudited): Condensed Statement of Net Assets in Liquidation as of June 30, 2001 and December 31, 2000...... Condensed Statement of Liquidating Activities for the 6-month period ended June 30, 2001........ Notes to Condensed Financial Statements......................................................... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... PART II -- OTHER INFORMATION Item 1. Legal Proceedings...................................................................... Item 2. Changes in Securities and Use of Proceeds.............................................. Item 3. Defaults upon Senior Securities........................................................ Item 4. Submission of Matters to a Vote of Security Holders.................................... Item 5. Other Information...................................................................... Item 6. Exhibits and Reports on Form 8K........................................................ SIGNATURES </TABLE>
3 PART I -- FINANCIAL INFORMATION Item 1. Condensed Financial Statements IPET HOLDINGS, INC. STATEMENT OF NET ASSETS IN LIQUIDATION (in thousands, except shares outstanding and per share data) <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ------------- ----------------- (unaudited) <S> <C> <C> ASSETS Cash and cash equivalents ................................... $ 8,442 $ 10,154 Realization value of assets sold and to be sold ............. -- 1,215 Certificates of deposit securing standby letters of credit .. 110 1,026 Prepaid rent and unleased building deposits ................. 156 100 ----------- ----------- Total assets ................................................... $ 8,708 $ 12,495 =========== =========== LIABILITIES Payables to suppliers and other creditors ...................... $ 785 $ 2,104 Accrued compensation for former employees ...................... -- 762 ----------- ----------- Total liabilities .............................................. 785 2,866 ----------- ----------- Net assets in liquidation ...................................... $ 7,923 $ 9,629 =========== =========== Number of common shares and common share equivalents outstanding 34,216,705 35,418,735 =========== =========== Net assets in liquidation per share ............................ $ 0.231 $ 0.271 =========== =========== </TABLE> See accompanying notes to condensed financial statements
4 IPET HOLDINGS, INC. STATEMENT OF LIQUIDATING ACTIVITIES (in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 2001 ---------------- <S> <C> EXPENSES AND INCOME DURING REPORTING PERIOD: Insurance for former officers and directors ....................... $ (783) Leases not yet terminated on former operating facilities .......... (859) Management, accounting, legal and consulting services regarding liquidation ....................................................... (493) Recoveries and refunds net of other expenses of $82 ............... 205 Earnings on cash and cash equivalents ............................. 224 -------- Decrease in net assets in liquidation ............................. (1,706) NET ASSETS IN LIQUIDATION - beginning of period previously reported......................................................... 10,366 Adjustment to reflect additional liabilities at fair value ........ (737) -------- NET ASSETS IN LIQUIDATION - beginning of period restated .......... 9,629 -------- NET ASSETS IN LIQUIDATION - end of period ......................... $ 7,923 ======== Components of changes in net assets in liquidation: Realization of value of assets sold or to be sold ................. $ (1,215) Release of certificates of deposit to cash and cash equivalents ... (916) Settlement of payables to suppliers and other creditors ........... 1,319 Payment of accrued compensation ................................... 762 Payment of rent in advance ........................................ 56 -------- Subtotal .......................................................... 6 Decrease in cash and cash equivalents ............................. (1,712) -------- Decrease in net assets in liquidation ............................. $ (1,706) ======== </TABLE> See accompanying notes to condensed financial statements. -2-
5 IPET HOLDINGS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of IPET Holdings, Inc., (the "Company"), have been prepared in conformity with generally accepted accounting principles for a company in voluntary liquidation for interim financial information and with consideration given to the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company's management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim period presented. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2000, to be included in the Company's Annual Report on Form 10-K/A to be filed with the Securities and Exchange Commission. Because the examination of the December 31, 2000 financial statements has not yet been completed, the unaudited financial statements for such period included herein are subject to further changes, which changes will be reflected in the audited financial statements for the year ended December 31, 2000 to be included in the Company's Annual Report on Form 10-K/A to be filed with the Securities and Exchange Commission. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year On November 4, 2000 the board of directors of the Company approved the orderly wind down and cessation of the Company's operations and on January 16, 2001 the stockholders of the Company approved the Company's Plan of Complete Liquidation and Dissolution (See Note 2). The accompanying unaudited financial statements have been prepared on the liquidation basis of accounting in order to provide more relevant information regarding the Company's activities during the liquidation period. The liquidation basis of accounting requires that assets and liabilities be stated at estimated fair value. Accordingly, the statements of net assets in liquidation reflect assets and liabilities based upon their estimated fair values and estimated settlement amounts and include adjustments to reflect the effects on the recoverability and classification of assets or the amounts and classification of liabilities due to the Company's decision to cease operations. Changes in the estimated liquidation value of assets and liabilities are recognized in the period in which such refinements are known. The Company initially established the carrying values of its assets and liabilities, as reflected in the statement of Net Assets In Liquidation as of December 31, 2000, based upon having given reasonable consideration to all information available at the time such values were established. Subsequent to establishing such carrying values, management has continued to investigate and analyze prior and current transactions; and, as a result, has determined that the fair value of certain additional liabilities for business and payroll taxes, costs of attempts to raise capital before the decision to liquidate, and general operations amounting to $737,000 should have been initially included. Accordingly, those amounts have been reflected in the Company's Net Assets In Liquidation as of December 31, 2000, after giving consideration to the appropriate prior period adjustment. As of June 30, 2001, and December 31, 2000, substantially all merchantable inventory and fixtures and equipment and several of the intangible assets, including the URL, domain name and certain content, had been sold and a lease termination residual had been negotiated. Therefore, they are recorded at the amounts to be ultimately collected. Other intangible assets including the Sock Puppet brand icon and related royalties, advertising and marketing agreements, software licensing agreements and other investments and agreements with PetStore.com, Inc., Discovery.com, Inc., and Safeway, Inc., have been completely written off. Payables to suppliers and creditors are being estimated and/or individually negotiated and are recorded at the amounts so determined. Accrued compensation has been recorded at the amounts actually paid to terminated employees. It is not presently determinable whether the amounts realizable from the disposition of the remaining assets or the amounts that creditors will agree to accept in settlement of the obligations due them will differ materially -3-
6 from the amounts shown in the accompanying financial statements. Differences between the revalued amounts and actual cash transactions will be recognized in the period that they can be reasonably estimated. 2. ORDERLY WIND DOWN AND CESSATION OF OPERATIONS On November 4, 2000, the Board of Directors of the Company unanimously approved the orderly wind down of its operations. On January 16, 2001, the Company's stockholders approved the Company's Plan of Complete Liquidation and Dissolution, and the Company filed a Certificate of Dissolution with the Delaware Secretary of State which became effective as of January 18, 2001. On November 7, 2000, the Company commenced the process of winding down and ceasing its operating activities to include terminating its employees, selling its assets and settling its obligations, including leases. Through January 16, 2001, such activities were managed and conducted by the Company's executive officers, management team and personnel. On January 16, 2001, the Company engaged Diablo Management Group to handle the remaining issues in connection with winding down and dissolution and retained Richard G. Couch of Diablo Management Group to act as sole director and Chief Executive Officer of the Company. During the 6-month period ended June 30, 2001, Diablo Management Group has been paid $218,548 for its services Between January 1 and June 30, 2001, the Company terminated and paid its remaining 33 employees, culminated extinguishing the lease and collecting a $400,000 termination residual for its facilities at 435 Brannan Street, San Francisco, California, realized collections of $1,215,000 from sales of inventory, fixtures and equipment the URL domain name and other intangible assets, and it settled payables to suppliers and other creditors in the amount of $1,032,000 net of refunds and recoveries of $287,000. In addition, the Company negotiated an agreement to extinguish the lease for its facilities at 945 Bryant Street, San Francisco, California, which resulted in the termination of such lease as of April 15, 2001. The Company also vacated its Indiana distribution center in January 2001 and concluded all lease obligations relating thereto. Certificates of deposit, totaling $916,000, securing stand-by letters of credit furnished as collateral for a lease and credit card processing arrangement, were released. The Company is currently continuing the process of liquidating its remaining assets and settling its remaining liabilities. The Company may not be able to find qualified buyers for the remainder of its assets at prices necessary to generate significant additional cash to satisfy its future obligations and selling costs. Furthermore, because many of the Company's assets, particularly its intellectual property, will decline in value over time, the Company may not be able to consummate the sale of these assets in time to generate meaningful value. In addition, the Company may not be able to negotiate the orderly wind down of its obligations to creditors. These include, without limitation, long-term contractual payment and performance obligations associated with the Company's remaining building and facilities lease in Union City, California, business agreements with third parties, and agreements with vendors and broadband service providers. As a result of these and other risks the timing of any distribution to stockholders is uncertain at this time. 3. LEASE OBLIGATION The Company established a distribution center in Union City, California in July of 1999 and leased a warehouse comprised of 143,232 square feet for a term of 5 years concluding on August 14, 2004. Monthly rent in the amount of $59,768 has been paid during the 6-month liquidation period ended June 30, 2001, notwithstanding the fact that the warehouse has been vacant since February, 2001. In addition to the monthly rent, the lease provides for an increase of up to 6% of the base rent on December 15, 2002, and further requires the Company to pay its pro rata share of certain exterior maintenance and repairs to the warehouse building. During the liquidation period ended June 30, 2001, the Company was notified by the landlord of its share of costs for a new roof and exterior painting. The amount of $233,167, which has been accrued on the Statement of Net Assets In Liquidation as of June 30, 2001, was paid in August, 2001. Minimum future rent on the Union City warehouse lease through August 14, 2004 amounts to approximately $2,200,000. Management is aggressively pursuing opportunities to lease the space. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -4-
7 This discussion contains forward-looking statements. These statements relate to future events or future financial results from the sale of assets and settlement of liabilities, dissolution proceedings, and distribution of proceeds to stockholders. These statements are based on current information which we have assessed but which by its nature is dynamic and subject to rapid and even abrupt changes. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other words that convey uncertainty of future events or outcomes. These statements are only predictions. Our actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the wind down of our business. In evaluating these statements, you should consider various factors, including the risks outlined in (i) the Risk Factors section under Item 2 of this Report, (ii) the Risk Factors section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on April 2, 2001, and (iii) other reports we filed from time to time with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q should be considered in the context of these risk factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our expectations. OVERVIEW IPET Holdings, Inc., formerly Pets.com, Inc., operated as an online retailer of pet products, integrating product sales with expert information on pets and their care. We commenced operations 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 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 aggressive, 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 $90.2 million in private equity financing between April and December 1999 from venture capital and strategic investors. 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. At that time we reincorporated in the State of Delaware. Despite our growth in revenues, we 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. -5-
8 REVIEW OF ALTERNATIVES In July 2000, we engaged Merrill Lynch & Co. to assist us in finding financing or identifying parties interested in acquiring the Company. These efforts continued through the summer and early fall during which Merrill Lynch contacted more than 50 domestic and international strategic and financial prospects on our behalf. In addition, during this time, we independently contacted numerous potential investors and acquirors and explored various options to finance or sell the Company. By late October 2000, our 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 eight were even prepared to meet in person. Our Board concluded that the orderly wind down of the Company was the course of action that would most likely offer 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 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, the Sock Puppet brand icon and our 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. The Board of Directors' decision was reached after no viable offers to acquire or fund capital into the Company were received. CONCLUSION OF THE BOARD OF DIRECTORS On November 4, 2000, our Board of Directors unanimously adopted a Plan of Complete Liquidation and Dissolution of the Company (the "Plan"), which was subsequently approved by our stockholders at a special meeting of stockholders on January 16, 2001. In arriving at its conclusion to adopt the Plan, our Board considered a number of factors, including alternatives to the proposal and our future prospects, 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 had convened at numerous separate meetings to consider these issues. The Board had been apprised by Merrill Lynch of the market values of comparable companies and the lack of prospects for the Company 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 an acceptable buyer or strategic alliance partner. Based on this information, the Board of Directors determined that distribution to our stockholders of cash proceeds from the sale of our 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 although there is 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 traded prior to effecting the dissolution. DISSOLUTION On January 16, 2001, our stockholders approved the Plan as well as a proposal to change our name from Pets.com, Inc. to IPET Holdings, Inc. On January 16, 2001, we filed with the Delaware Secretary of State an amendment to our Certificate of Incorporation to effect the name change and on January 18, 2001 we filed a Certificate of Dissolution which took effect on that date. At the close of business on January 18, 2001, we also -6-
9 closed our stock transfer books, discontinued recording transfers of Common Stock, and our Common Stock was delisted from the Nasdaq Stock Market. Thereafter, certificates representing our Common Stock were no longer assignable or transferable on the books of the Company. Accordingly, the proportionate interests of all of our stockholders are fixed on the basis of their respective stock holdings at the close of business on January 18, 2001, and any distributions made by the Company after this date will be made solely to the stockholders of record at the close of business on January 18, 2001. In addition, all officers and directors of the Company resigned on January 16, 2001, effective immediately after the stockholder meeting. Richard G. Couch of Diablo Management Group was retained by our former Board of Directors to act as the sole Director and Chief Executive Officer, President, Chief Financial Officer and Treasurer, and Secretary for the Company after this date. Diablo Management Group currently handles all remaining affairs for IPET Holdings, Inc., including the final disposition of our remaining assets and settlement of outstanding creditor liabilities. As of January 16, 2001, we had vacated all facilities and terminated four of our five building leases. We have culminated our work with the landlord at our Union City, California distribution center to complete repairs and have paid for such costs. In addition we are aggressively seeking to establish a new tenant for the facility. All of our inventory, furniture, computer equipment, and warehouse equipment has been sold or otherwise disposed of. We have also completed the sale of most of our domain names, trademarks and other intellectual property. We are working to sell the Sock Puppet brand icon and other remaining domain names. The collection of our receivables has been completed. We have settled the majority of our trade payables and we are working with the remaining vendors to reduce our overall cash liabilities. There are a number of tax filings that must be completed with their related costs. At this time it is unclear exactly when or how large a distribution can be made to our stockholders. It is important that we complete an independent audit, gain release from our creditors, resolve any tax liabilities, complete the termination of our remaining building lease and make sure that all other potential liabilities have been resolved before we can announce or make any distribution of remaining proceeds to our stockholders. ACTIVITIES WHILE IN LIQUIDATION The following table sets forth our unaudited liquidating-period activities data for the six months ended June 30, 2001. This unaudited periodic information has been derived from our unaudited financial statements and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of such information in accordance with generally accepted accounting principles for a company in voluntary liquidation for interim financial information. <TABLE> <CAPTION> Six Months Ended June 30, 2001 ---------------- <S> <C> EXPENSES AND INCOME DURING REPORTING PERIOD: Insurance for former officers and directors ....................... $ (783) Leases not yet terminated on former operating facilities .......... (859) Management, accounting, legal and consulting services regarding liquidation ....................................................... (493) Recoveries and refunds net of other expenses of $82 .............. 205 Earnings on cash and cash equivalents ............................. 224 -------- Decrease in net assets in liquidation ............................. (1,706) NET ASSETS IN LIQUIDATION - beginning of period previously reported ........................................................ 10,366 Adjustment to reflect additional liabilities at fair value ........ (737) -------- NET ASSETS IN LIQUIDATION - beginning of period restated .......... 9,629 -------- </TABLE> -7-
10 <TABLE> <CAPTION> Six Months Ended June 30, 2001 ---------------- <S> <C> NET ASSETS IN LIQUIDATION - end of period ......................... $ 7,923 ======== Components of changes in net assets in liquidation: Realization of value of assets sold or to be sold ................. $ (1,215) Release of certificates of deposit to cash and cash equivalents ... (916) Settlement of payables to suppliers and other creditors ........... 1,319 Payment of accrued compensation ................................... 762 Payment of rent in advance ........................................ 56 -------- Subtotal .......................................................... 6 Decrease in cash and cash equivalents ............................. (1,712) -------- Decrease in net assets in liquidation ............................. $ (1,706) ======== </TABLE> On January 16, 2001, the Company's stockholders approved the Company's Plan of Complete Liquidation and Dissolution and on January 18, 2001 the Company filed a Certificate of Dissolution with the Delaware Secretary of State which became effective as of that date. In addition, on January 16, 2001, Company engaged Diablo Management Group to handle the remaining issues in connection with winding down and dissolution and retained Richard G. Couch of Diablo Management Group to act as sole director and Chief Executive Officer of the Company. Expenses And Income During Reporting Period. During the six months ended June 30, 2001, the Company terminated all employees and paid out $762,000 of accrued compensation and settled $1,032,000 of trade payables, net of refunds and recoveries of $287,000, thereby reducing to 20 the number of remaining unsettled creditor accounts. In addition, the Company made regular payments on its operating leases and maintained all properties as required by various lease terms. All lease obligations were terminated during the period except for the facility in Union City, California. An accounting firm was retained to conduct an examination of the Company's financial statements; and, substantial efforts were expended in that regard. Further, the Company retained the services of various professionals to manage and assist with the liquidation process and pursue asset sales and recovery. All cash in excess of a minimum amount held for routine operating expenses was invested in interest-bearing accounts including money market funds, savings accounts and certificates of deposit. Components Of Changes In Net Assets In Liquidation. During the six months ended June 30, 2001, the Company completed disposition of all inventory, fixtures, equipment and other assets, except for a certain relatively few domain names and the Pets.com Sock Puppet icon, realizing collections of $1,215,000. Cash deposits in the amount of $916,000, pledged as security for various stand-by letters of credit securing credit card processing and all leases, except for the Union City warehouse, were released, with the exception of a $110,000 certificate of deposit securing the Union City warehouse lease. The Company also disposed of its 30% interest in PetsPark. The Company is currently continuing the process of liquidating its remaining assets and settling its remaining liabilities. RISK FACTORS This Quarterly Report on Form 10-Q contains certain forward looking statements, including statements concerning the Company's future financial results from the sale of assets and settlement of liabilities, dissolution proceedings, and distribution of proceeds to stockholders. Some remaining assets of the Company may be difficult for us 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 traded prior to our dissolution. In addition, you should keep in mind that the risks described below are not the only risks that we face. The risks described below are the risks that we currently believe are material to the Company. However, additional risks not presently known to us, or risks that we currently believe are immaterial, may also impair our ability to distribute proceeds to our stockholders. You should also refer to the other information set forth in this Quarterly Report on Form 10-Q, including the discussions set forth in -8-
11 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as our financial statements and the related notes. Our business, financial condition or results could be adversely affected by any of the following risks. If we are adversely affected by such risks, then the proceeds we plan to distribute to our stockholders may be adversely affected. STOCKHOLDERS MAY BE LIABLE TO CREDITORS OF THE COMPANY FOR UP TO AMOUNTS RECEIVED FROM THE COMPANY IF THE COMPANY'S RESERVES ARE INADEQUATE. A Certificate of Dissolution was filed with the State of Delaware and became effective as of January 18, 2001, dissolving the Company as of that date. Pursuant to the Delaware General Corporation Law (the "DGCL"), the Company will continue to exist for three years after the dissolution became effective or for such longer period as the Delaware Court of Chancery shall direct, for the purpose of prosecuting and defending suits against it and enabling the Company gradually to close its business, to dispose of its property, to discharge its liabilities and to distribute to its stockholders any remaining assets. 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 for 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, however, 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. 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. Series A stockholders 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 $1,430.00 will be paid to the holders of 1,143,895 shares of Series A Preferred Stock that were outstanding on January 18, 2001 before we distribute to all stockholders proceeds remaining from the sale of our assets. After the foregoing initial payment has been made to the Series A Preferred stockholders, they will also share on a pro-rata basis in the general distribution of proceeds remaining 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. SUCCESS OF THE PLAN DEPENDS ON QUALIFIED PERSONNEL TO EXECUTE IT. The success of the Plan depends in large part upon our ability to retain the services of qualified personnel to handle the sale of our remaining assets and settlement of remaining liabilities. Although we have retained the services of Diablo Management Group for this purpose, the retention of qualified personnel is particularly difficult under the Company's current circumstances. OUR STOCK TRANSFER BOOKS WERE CLOSED ON JANUARY 18, 2001, THE FINAL RECORD DATE, AFTER WHICH ANY TRADES WILL NOT BE RECORDED BY THE COMPANY. -9-
12 We closed our stock transfer books and discontinued recording transfers of Common Stock at the close of business on January 18, 2001 (the "Final Record Date"), the date of effectiveness of the Certificate of Dissolution we filed with the Delaware Secretary of State. Thereafter, certificates representing the Common Stock will not be assignable or transferable on our books except by will, intestate succession or operation of law. The proportionate interests of all of our stockholders will be fixed on the basis of their respective stock holdings at the close of business on the Final Record Date, and, after the Final Record Date, any distributions made by the Company will 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 our books as a result of any assignments by will, intestate succession or operation of law. For any other trades after the Final Record Date, the seller and purchaser of the stock will need to negotiate and rely on "due-bill" contractual obligations between themselves with respect to the allocation of stockholder proceeds arising from ownership of the shares. OUR STOCK WAS DELISTED FROM THE NASDAQ NATIONAL MARKET ON JANUARY 18, 2001 AND IS SIGNIFICANTLY LESS LIQUID THAN BEFORE. Our stock was delisted from trading on the Nasdaq Stock Market on January 18, 2001 due to its low trading price per share and the fact that we had ceased our business operations. After this delisting, the ability of stockholders to buy and sell our shares has been materially impaired, and is limited primarily to over-the-counter quotation services, such as Pink Sheets, that handle high-risk ventures and are not regulated by the Securities and Exchange Commission. AFTER THE COMPANY'S WIND-DOWN THERE MAY BE NO CASH TO DISTRIBUTE TO OUR STOCKHOLDERS AND IF THERE IS CASH TO DISTRIBUTE, THE TIMING OF ANY SUCH DISTRIBUTION IS UNCERTAIN. There is currently no firm timetable for the distribution of proceeds to our stockholders, because of contingencies inherent in winding up the Company's business. The liquidation is expected to be concluded prior to the third anniversary of the filing of the Certificate of Dissolution in Delaware by a final liquidating distribution either directly to the stockholders or to a liquidating trust. The proportionate interests of all of our stockholders will 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 will be made solely to stockholders of record on the close of business on the Final Record Date, except to reflect permitted transfers. We are, however, currently unable to predict the precise nature, amount or timing of any distribution to stockholders. The actual nature, amount and timing of all distributions will be determined by our Board of Directors, in its sole discretion, and will depend in part upon our ability to convert our remaining assets into cash. Uncertainties as to the precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value ultimately distributable to stockholders. Claims, liabilities and expenses from operations (including costs associated with Diablo Management Group's efforts to sell our remaining assets and settle our remaining liabilities, taxes, legal and accounting fees and miscellaneous office expenses) will continue to be incurred. These expenses will reduce the amount of cash available for ultimate distribution to stockholders. However, no assurances can be given that available cash and amounts received on the sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims and to make cash distributions to stockholders. If such available cash and amounts received from the sale of assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash, or any cash, to our stockholders. OUR INABILITY TO REACH CASH BREAK-EVEN AND OUR RESULTING DISSOLUTION COULD GIVE RISE TO SECURITIES CLASS ACTION CLAIMS AGAINST US, WHICH COULD DEPLETE THE PROCEEDS THAT ARE TO BE DISTRIBUTED TO STOCKHOLDERS. Securities class action claims have been brought against companies in the past where the market price of the company's securities has fallen due to an inability of the company to achieve operational profitability. Any such litigation could be very costly and divert our remaining resources from being available for distribution to our -10-
13 stockholders. Any adverse determination in this kind of litigation could also deplete our cash position, and reduce proceeds that would otherwise be distributed to our stockholders. THE PROCEEDS FROM THE SALE OF OUR ASSETS MAY BE LESS THAN ANTICIPATED. Sales of our remaining assets, which include the Sock Puppet brand icon and miscellaneous domain names, will be made on such terms as are approved by the Board of Directors and may be conducted by competitive bidding, public sales or privately negotiated sales. The prices at which we will be able to sell these assets will depend largely on factors beyond our 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. Because some of our remaining assets, particularly intellectual property assets, may decline in value over time, we may not be able to consummate the sale of these assets in time to generate meaningful value. In addition, we may not obtain as high a price for a particular asset as we might secure if we were not in liquidation. WE MAY BE UNABLE TO NEGOTIATE SETTLEMENTS WITH RESPECT TO OUR REMAINING LIABILITIES. We are currently in the process of negotiating settlements with respect to our remaining obligations and liabilities which include without limitation building and facilities leases, tax obligations, claims by licensees, contracts and trade payables with third parties including vendors and broadband service providers. If we are unable to successfully negotiate termination of these obligations, we will have fewer cash proceeds to distribute to our stockholders. WE WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING REQUIREMENTS. We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome. In order to curtail expenses, after filing our Certificate of Dissolution we sought relief from the Securities & Exchange Commission from the reporting requirements under the Exchange Act. Until such relief is granted we will continue to make obligatory Exchange Act filings. We anticipate that even if such relief is granted in the future, we will continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution along with any other reports that the Securities & Exchange Commission may require. WE HAVE NOT COMPLETED THE AUDIT OF OUR FISCAL 2000 FINANCIALS THAT ARE TO BE FILED WITH OUR ANNUAL REPORT ON FORM 10-K/A. Because the examination of our December 31, 2000 financial statements has not yet been completed, the unaudited financial statements for such period included herein are subject to further changes, which changes will be reflected in the audited financial statements for the year ended December 31, 2000 to be included in the Company's Annual Report on Form 10-K/A to be filed with the Securities and Exchange Commission. There can be no assurance that such changes will not be significant. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash and cash equivalents. Due to the short-term nature of these investments and our investment policies and procedures, we have determined that the risk associated with interest rate fluctuations related to these financial instruments does not pose a material risk to the Company. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. -11-
14 We are not currently subject to any material legal proceedings. However, it is possible that we may become a party to various legal proceeding arising from the settlement of our outstanding liabilities. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (a) Not applicable. (b) Not applicable. (c) Recent Sales of Unregistered Securities; Uses of Proceeds From Registered Securities. (a) Securities Sold. None. (b) Not Applicable. (c) Not Applicable. (d) Not Applicable. (e) Not Applicable. (f) Use of Proceeds from sale of Registered Securities. On February 16, 2000, we closed our initial public offering of Common Stock, $0.00125 par value. The managing underwriters in the offering were Merrill Lynch & Co., Bear Stearns & Co. Inc., Thomas Weisel Partners LLC, and Warburg Dillon Read LLC (the "Underwriters"). The shares of Common Stock sold in the offering were registered under the Securities Act of 1933, as amended (the "Act") on a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-92433) that was declared effective by the SEC on February 11, 2000. The offering commenced on February 11, 2000 and ended on February 16, 2000, on which date 7,500,000 shares of Common Stock registered under the Registration Statement were sold at a price of $11.00 per share. The aggregate price of the offering amount registered and sold was $82,500,000. In connection with the offering, we paid an aggregate of $5,775,000 in underwriting discounts and commissions to the Underwriters and the aggregate proceeds to the Company were approximately $75.3 million after deducting estimated offering expenses of $1.4 million. We used the net proceeds primarily for working capital and general corporate purposes, including marketing expenses to build brand awareness, purchases of inventory, expansion of our sales and marketing organization, development of our distribution capabilities, expansion of our customer base, and expenses incurred in connection with our requisition of certain assets and partnerships of PetStore.com, Inc. In addition, approximately $1.4 million was paid to ten corporate officers in the form of retention bonuses, and another $1.4 million was paid to such officers as severance. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. -12-
15 (a) Exhibits: none. (b) Current Reports on Form 8-K: none -13-
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IPET HOLDINGS, INC. By: /s/ RICHARD G. COUCH --------------------------------------------- Richard G. Couch Chief Executive Officer, President, Secretary, Chief Financial Officer and Treasurer Date: August 13, 2001 -14-