Exhibit 99.1
Financial Statements
DietSmart, Inc.
Year ended June 30, 2001
with Report of Independent Certified Public Accountants
DietSmart, Inc.
Financial Statements
Year ended June 30, 2001
Contents
Report of Independent Certified Public Accountants.......................... 1
Audited Financial Statements
Balance Sheet............................................................... 2
Statement of Operations..................................................... 3
Statement of Stockholders' Equity (Deficit)................................. 4
Statement of Cash Flows..................................................... 5
Notes to Financial Statements............................................... 6
Report of Independent Certified Public Accountants
Board of Directors and Management
DietSmart, Inc.
We have audited the accompanying balance sheet of DietSmart, Inc. (the Company)
as of June 30, 2001, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DietSmart, Inc. at June 30,
2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming DietSmart,
Inc. will continue as a going concern. As more fully described in Note 3, the
Company has incurred significant losses since inception, resulting in a
substantial working capital deficiency at June 30, 2001. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to raise
additional capital and to successfully market and sell its services. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
August 15, 2001
DietSmart, Inc.
Balance Sheet
June 30, 2001
Assets
Current assets:
Cash and cash equivalents $ 205,275
Accounts receivable 31,737
Prepaid expenses and other current assets 18,477
-----------
Total current assets 255,489
Restricted cash 55,025
Property and equipment, net 713,733
Deferred consulting fees 44,349
Other assets 32,292
-----------
Total assets $ 1,100,888
===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 603,021
Accrued liabilities 203,770
Deferred revenue 633,312
Current portion of capital lease obligations 14,891
Related party notes payable 50,000
-----------
Total current liabilities 1,504,994
Capital lease obligations, net of current portion 6,510
Deferred executive compensation 362,298
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.001 par value--2,000,000 shares authorized,
1,645,000 shares issued and outstanding (liquidation value of $1,645,000) 1,645
Series B convertible preferred stock, $.001 par value--1,538,462 shares authorized,
1,406,887 shares issued and outstanding (liquidation value of $1,828,953) 1,407
Common stock, $.001 par value--18,000,000 shares authorized, 6,572,361 shares issued and
outstanding 6,572
Additional paid-in capital 5,109,386
Unearned compensation (779,472)
Accumulated deficit (5,112,452)
------------
Total stockholders' deficit (772,914)
------------
Total liabilities and stockholders' deficit $ 1,100,888
============
See accompanying notes.
2
DietSmart, Inc.
Statement of Operations
Year ended June 30, 2001
Revenues $ 1,877,145
Costs and expenses:
Cost of revenues 178,669
Product development 874,272
Sales and marketing 2,728,322
General and administrative 1,431,245
Depreciation and amortization 218,116
--------------
Total costs and expenses 5,430,624
--------------
Loss from operations (3,553,479)
Interest expense (28,558)
Other income 3,993
--------------
Net loss $(3,578,044)
==============
See accompanying notes.
3
DietSmart, Inc.
Statement of Stockholders' Equity (Deficit)
Total
Series A Series B Additional Stockholders'
Preferred Stock Preferred Stock Common Stock Paid-In Unearned Accumulated Equity
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit (Deficit)
-----------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 1,645,000 $1,645 384,616 $ 385 6,572,361 $6,572 $3,623,931 $(901,085) $(1,534,408) $ 1,197,040
Issuance of Series B
Preferred Stock - - 1,022,271 1,022 - - 1,327,928 - - 1,328,950
Stock options issued to
employees - - - - - - 333,700 (333,700) - -
Vesting of stock options
issued to employees - - - - - - - 455,313 - 455,313
Stock options issued to
consultants - - - - - - 55,397 - - 55,397
Forfeiture of unvested
stock options issued to
consultants - - - - - - (231,570) - - (231,570)
Net loss - - - - - - - - (3,578,044) (3,578,044)
----------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 1,645,000 $1,645 1,406,887 $1,407 6,572,361 $6,572 $5,109,386 $(779,472) $(5,112,452) $ (772,914)
==========================================================================================================
See accompanying notes.
4
DietSmart, Inc.
Statement of Cash Flows
Year ended June 30, 2001
Operating activities
Net loss $(3,578,044)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 218,116
Stock options issued to employees and consultants 597,465
Reversal of stock compensation to consultant (100,000)
Write-off of capitalized website and software development costs 34,500
Changes in operating assets and liabilities:
Accounts receivable (31,737)
Prepaid expenses and other current assets 97,441
Restricted cash (55,025)
Other assets 261,573
Accounts payable and accrued liabilities 650,716
Deferred revenue 633,312
Deferred executive compensation 206,048
-----------
Net cash used in operating activities (1,065,635)
Investing activity
Purchases of property and equipment, net (466,265)
-----------
Net cash used in investing activity (466,265)
Financing activities
Proceeds from issuance of preferred stock 1,328,950
Proceeds from related party notes payable 200,000
Repayment of related party notes payable (150,000)
Payment of capital lease obligations (12,711)
-----------
Net cash provided by financing activities 1,366,239
-----------
Decrease in cash and cash equivalents (165,661)
Cash and cash equivalents at beginning of year 370,936
-----------
Cash and cash equivalents at end of year $ 205,275
===========
See accompanying notes.
5
DietSmart, Inc.
Notes to Financial Statements
June 30, 2001
1. Organization and Basis of Presentation
DietSmart, Inc. (the Company) was incorporated in the State of Delaware on June
15, 1999. The Company is an online weight-loss service that provides its
customers with custom-tailored diet and fitness programs for a fee. The Company
markets its service primarily through advertising and other promotional
arrangements on the World Wide Web. On January 19, 2000, the Company's name was
changed from Dietology, Inc. to DietSmart, Inc.
The financial statements of the Company for prior periods were prepared in
accordance with the accounting and reporting principles prescribed by Statement
of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Restricted Cash
Restricted cash on the accompanying balance sheet consists of funds held by a
credit card processing company as collateral for chargebacks related to credit
card transactions.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which is approximately two years for equipment and computer hardware and
software, including capitalized website and software development costs, and
approximately seven years for furniture and fixtures.
Certain costs incurred in connection with developing the Company's website and
associated features have been capitalized in accordance with Emerging Issues
Task Force (EITF) 00-2, Accounting for Website Development Costs and AICPA
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed for or Obtained For Internal Use. Costs capitalized pursuant to EITF
00-2 and SOP 98-1 are included in property and equipment in the accompanying
balance sheet.
6
DietSmart, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company generates revenue from fees charged to subscribers to its online
diet service. Revenues from customer subscriptions paid in advance are deferred
and recognized on a straight-line basis over the period of the subscription upon
the lapse of the customer's right to a refund.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Pursuant to SFAS No. 123, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, but are required to disclose
in a note to the financial statements pro forma net income amounts as if the
Company had applied the new method of accounting.
The Company accounts for employee stock-based compensation under APB No. 25 and
has complied with the disclosure requirements of SFAS No. 123 (see Note 7).
Long-Lived Assets
The Company accounts for long-lived assets pursuant to SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Management reviews long-lived assets
and the related intangible assets for impairment whenever events or changes in
circumstances indicate the assets may be impaired. An impairment loss is
recorded when the net book value of the assets exceeds the fair value, as
measured by projected undiscounted future cash flows.
7
DietSmart, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is recorded
when it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expenses
incurred for the year ended June 30, 2001 totaled approximately $1,736,000.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents in banks and
accounts receivable from credit card transaction processing companies. The
credit risk associated with cash, cash equivalents and accounts receivable is
considered low due to the credit quality of the financial institutions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. Actual results could differ from these estimates.
3. Going Concern
The financial statements have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred net
losses of $5,112,452 for the period from inception through June 30, 2001 which
has resulted in a working capital deficiency of $1,249,505 at June 30, 2001.
Management is currently pursuing sources of additional financing or a strategic
transaction for the Company; however, there is no guarantee that the Company
will be successful in raising additional capital or entering into a strategic
transaction.
8
DietSmart, Inc.
Notes to Financial Statements (continued)
3. Going Concern (continued)
The Company's continued existence is dependent upon its ability to raise capital
and to market and sell its services successfully. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
4. Property and Equipment
Property and equipment, net as of June 30, 2001, consists of the following:
Furniture and fixtures $ 60,782
Computer equipment and software 176,235
Capitalized website and software development costs 723,382
---------
960,399
Less accumulated depreciation
and amortization (246,666)
---------
$ 713,733
=========
Computer equipment and software includes $48,257 of assets recorded under
capital leases, less accumulated amortization of $26,419, at June 30, 2001.
Amortization of assets recorded under capital leases is included in depreciation
and amortization expense in the accompanying statement of operations.
9
DietSmart, Inc.
Notes to Financial Statements (continued)
5. Income Taxes
The significant components of the Company's net deferred income taxes as of June
30, 2001, are as follows:
Deferred tax assets:
Accrued expenses $ 74,000
Deferred compensation 136,000
Deferred compensation from stock options 221,000
Net operating loss carryforwards 1,639,000
------------
2,070,000
Valuation allowance (1,924,000)
-----------
Total deferred tax assets 146,000
Deferred tax liabilities:
Fixed assets 146,000
-----------
Net deferred income taxes $ -
===========
The Company has incurred net losses since inception. At June 30, 2001, the
Company had approximately $4,356,000 in net operating loss carryforwards for
U.S. federal income tax purposes that expire in various amounts through 2021.
Management has determined that it is more likely than not that the resulting
deferred tax assets, and the Company's other net deferred tax assets, will not
be realized; therefore, a full valuation allowance has been provided. The change
in the valuation allowance for the year ended June 30, 2001 was an increase of
approximately $1,346,000.
The utilization of the Company's net operating loss carryforwards could be
affected by the transaction described in Note 9.
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense during the year ended June 30, 2001 is as follows:
Tax at U.S. statutory rate (34.00)%
State taxes net of federal benefit (3.63)
Nondeductible items 0.02
Change in valuation allowance 37.61
---------
0.00%
=========
10
DietSmart, Inc.
Notes to Financial Statements (continued)
6. Notes Payable
In August 2000, the Company entered into a promissory note with a relative of a
Company officer for short-term working capital borrowings totaling $150,000. The
note provided for interest at a rate equal to the applicable federal rate of
interest per annum (approximately 6.25%). The note and accrued interest thereon
was repaid in December 2000.
In February 2001, the Company entered into another promissory note with a
relative of a Company officer for short-term working capital borrowings totaling
$50,000. The note bears interest at a rate equal to the applicable federal rate
of interest per annum (approximately 6.25% at June 30, 2001) and is payable,
with interest, upon demand as of June 30, 2001. The note is mandatorily payable
upon the occurrence of a corporate transaction, as defined, including a merger
of the Company with another corporation or the sale of substantially all of the
assets of the Company.
7. Stockholders' Equity
The Company is authorized to issue 18,000,000 shares of common stock and
7,000,000 shares of preferred stock, each with a par value of $.001. Under the
Company's Amended and Restated Articles of Incorporation, 2,000,000 shares of
preferred stock have been designated as Series A Preferred Stock and 1,538,462
shares of preferred stock have been designated as Series B Preferred Stock. The
Company's Board of Directors is authorized to establish multiple series of
preferred stock and fix or alter the rights, preferences, privileges and
restrictions of each series.
Common Stock
The holders of common stock are entitled to one vote for each share held. The
holders of common stock are also entitled to receive dividends whenever funds
are legally available and when declared by the Board of Directors, subject to
the prior rights of holders of all classes of stock, at the time outstanding,
having priority rights as to dividends.
As of June 30, 2001, common shares reserved for issuance are as follows:
Series A Preferred Stock 1,645,000
Series B Preferred Stock 1,406,887
Stock options available for grant under the 1999
Stock Option Plan 3,427,639
---------
Total 6,479,526
=========
11
DietSmart, Inc.
Notes to Financial Statements (continued)
7. Stockholders' Equity (continued)
Series A Preferred Stock
The holders of Series A Preferred Stock are entitled to share in any dividends
declared and paid by the Company, pro rata in accordance with the number of
shares of common stock into which the preferred stock is then convertible, as
discussed below. In the event of liquidation, the holders of Series A Preferred
Stock are entitled to receive, prior and in preference to any distributions of
any Company assets to the holders of common stock, an amount per share equal to
the sum of $1.00 for each outstanding share of Series A Preferred Stock (Series
A Original Issuance Price) plus any declared and unpaid dividends on such
shares.
The Series A Preferred Stock can be converted at any time at the option of the
holder into shares of the Company's common stock at a conversion price equal to
the Series A Original Issuance Price divided by the conversion price of $1.00
per share, subject to adjustment in certain events. All shares of Series A
Preferred Stock will be automatically converted into common stock in the event
of the Company's consummation of an initial public offering under the Securities
Act of 1933 at the conversion price in effect at the time of the offering. The
number of votes to which each share of Series A Preferred Stock is entitled is
equal to the number of shares of common stock into which the preferred stock is
then convertible.
Series B Preferred Stock
As of June 30, 2000, the Company received $100,000 from investors for 76,923
shares of Series B Preferred Stock that had not been issued at such date. In
October 2000, the related shares were issued to the investors. These shares have
been included in the balance of outstanding shares at June 30, 2000 in the
accompanying statement of stockholders' equity. Between July 2000 and February
2001, the Company issued an additional 1,022,271 shares of Series B Preferred
Stock. The proceeds from the issuance were approximately $1,329,000.
The holders of Series B Preferred Stock are entitled to share in any dividends
declared and paid by the Company, pro rata in accordance with the number of
shares of common stock into which the preferred stock is then convertible, as
discussed below. In the event of liquidation, the holders of Series B Preferred
Stock are entitled to receive, prior and in preference to any distributions of
any Company assets to the holders of common stock or Series A Preferred Stock,
an amount per share equal to the sum of $1.30 for each outstanding share of
Series B Preferred Stock (Series B Original Issuance Price) plus any declared
and unpaid dividends on such shares.
12
7. Stockholders' Equity (continued)
The Series B Preferred Stock can be converted at any time at the option of the
holder into shares of the Company's common stock at a conversion price equal to
the Series B Original Issuance Price divided by the conversion price of $1.30
per share, subject to adjustment in certain events. All shares of Series B
Preferred Stock will be automatically converted into common stock in the event
of the Company's consummation of an initial public offering under the Securities
Act of 1933 at the conversion price in effect at the time of the offering. The
number of votes to which each share of Series B Preferred Stock is entitled is
equal to the number of shares of common stock into which the preferred stock is
then convertible.
Stock Options
In December 1999, the Company's Board of Directors adopted the DietSmart, Inc.
1999 Stock Option Plan (the Plan), which provides for the granting of up to
3,427,639 nonqualified stock options to employees, directors and consultants and
incentive stock options to key employees. Options granted under the Plan
generally have an exercise price equal to the fair market value of the
underlying common stock at the grant date, have a term of 10 years, and vest
ratably over a four-year period.
Certain options granted to employees under the Plan during the years ended June
30, 2000 and 2001 were at an exercise price lower than the estimated fair market
value of the underlying common stock at the grant date. Compensation expense has
been recognized pro-rata on a straight-line basis for the excess of the
estimated fair market value over the exercise price and totaled approximately
$455,000 for the year ended June 30, 2001, including expense related to the
current year vesting of certain prior year grants.
During the years ended June 30, 2000 and 2001, the Company issued 467,750 and
205,020 options, respectively, to nonemployees for consulting and other advisory
services. These options, as amended in certain instances, have a contractual
life of 10 years, vest either immediately or over various periods, and have an
exercise prices ranging from $0.01 to $1.00 per share. The fair value of these
options was calculated using the Black-Scholes option pricing model using the
following assumptions: expected volatility factor of 60%; risk-free interest
rates ranging from 5.28% to 6.92%; dividend yield of 0%; and expected life of 10
years. The fair value of these options has been recorded as deferred expense
upon their respective issuance dates. The deferred expense balance is being
amortized over the vesting period of the options and unvested options
13
7. Stockholders' Equity (continued)
will be re-measured at each balance sheet date until they are fully vested since
variable accounting is required for options that vest under consulting service
arrangements. Compensation expense recognized for the options totaled
approximately $142,000 for the year ended June 30, 2001, including expense
related to the current year vesting of certain prior year grants.
Pro forma information regarding net income or loss is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value of options
granted was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
volatility factor of 60%; risk-free interest rates ranging from 4.76% to 6.27%;
dividend yield of 0%; and expected life of 4 years. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The effect of applying the fair value method
proscribed by SFAS No. 123 to the Company's options results in pro forma net
loss of approximately $3,638,000 for the year ended June 30, 2001. Because the
determination of the fair value of all options is based on the assumptions
described above, and because additional option grants are expected to be made in
future periods, this pro forma information is not likely to be representative of
the pro forma effects on reported net income or loss for future years.
A summary of the Company's stock option activity and related information for the
year ended June 30, 2001 is as follows:
Weighted
Average
Exercise
Shares Price
----------------------------
Outstanding at beginning of year 2,379,750 $0.09
Granted 912,020 $0.40
Forfeited (381,520) $0.83
-------------
Outstanding at end of year 2,910,250 $0.36
=============
Exercisable at end of year 1,162,833 $0.27
=============
14
7. Stockholders' Equity (continued)
Weighted average exercise price of options
granted during the year:
Issued at market price $1.00
Issued above market price $1.30
Issued below market price $0.30
Weighted average fair value of options granted
during the year:
Issued at market price $0.51
Issued above market price $0.45
Issued below market price $0.80
Information about options outstanding at June 30, 2001 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Life Exercise Exercise
Prices Shares (Years) Price Shares Price
-------------------------------------------------------------------------------------------------------------------
$0.01 to $0.10 1,602,000 8.6 $0.02 648,478 $0.01
$0.30 to $0.80 964,750 9.0 $0.68 494,063 $0.58
$1.00 to $1.30 343,500 9.4 $1.10 20,292 $1.29
----------- ------------
2,910,250 1,162,833
=========== ============
15
8. Commitments and Contingencies
Leases
The Company has obligations under noncancelable capital leases and operating
leases for computer equipment and facilities. The leases expire at various dates
through fiscal 2003 and, in many cases, provide for renewal options. Most of the
leases require the payment of related executory costs, which include payment of
taxes, maintenance and insurance.
A summary of the future minimum lease payments under the Company's noncancelable
leases as of June 30, 2001 is as follows:
Capital Operating
Leases Leases
------------------------
Year ended June 30:
2002 $ 17,368 $36,225
2003 6,727 -
---------------------
Total payments due 24,095 $36,225
=======
Less amount representing interest (2,694)
--------
Total minimum lease payments 21,401
Less current maturities (14,891)
--------
$ 6,510
========
Rent expense totaled approximately $118,000 for the year ended June 30, 2001.
Deferred Executive Compensation
During the year ended June 30, 2000, the Company entered into employment
agreements with certain key executives of the Company. The agreements provide
for future minimum annual compensation as follows:
Year ended June 30:
2002 $187,500
2003 150,000
2004 37,500
--------
Total $375,000
========
16
8. Commitments and Contingencies (continued)
Upon execution of the agreements, the executives entered into a deferral
agreement with the Company that permitted the executives to defer payment of the
base compensation and bonus, if any, provided for under the employment
agreements to a future date. Amounts deferred by the executives under this
arrangement vest immediately upon the earlier to occur of (i) the date of an
investor financing, or series of financings, securing gross proceeds to the
Company or at least $2,000,000 or (ii) the date of the executive's termination
of employment with the Company other than by the executive's voluntary
termination or by the Company for cause. Compensation deferred under the
arrangements accrues interest at a rate of 6% per annum. As of June 30, 2001,
deferred compensation and accrued interest totaled $362,298 and has been
included as a long-term liability in the accompanying balance sheet.
Consulting Agreements
The Company has entered into various consulting agreements with third parties,
as amended, that provide for minimum future cash compensation of $49,083 through
fiscal 2003.
Litigation
In October 1999, the Company entered into a four-year consulting agreement for
website development and maintenance services. Compensation under the agreement
included cash payments of $172,000 and the issuance of options for the purchase
of 327,639 shares of common stock at an exercise price of $0.01 per share.
Through June 30, 2001, the Company had paid approximately $197,000 under the
agreement, which has been capitalized as website and software development costs.
The stock options contemplated under the agreement have not been issued and the
consultant is no longer providing services to the Company.
In December 2000, the Company filed suit against the consultant, alleging breach
of contract, negligence and is seeking monetary damages of $18.5 million. The
consultant has countersued the Company and is seeking remuneration of
approximately $452,000, plus interest and other costs. Although the Company
believes that the consultant's counterclaim is without merit, the Company may be
unsuccessful in defeating this claim. If the Company is unsuccessful in
defending the consultant's counterclaim, any resulting judgment against the
Company could have a material adverse effect on the Company's financial
position.
17
9. Subsequent Events
On July 6, 2001, the Company entered into a letter of intent for the merger of
the Company with eDiets.com, Inc. (eDiets), pursuant to which all of the
outstanding capital stock of the Company would be acquired by eDiets in exchange
for 2,000,000 shares of eDiets common stock and cash of $2,500,000, payable in
installments with interest beginning on the closing date and continuing over a
period of time not to exceed 15 months. The closing of the transaction is
conditioned upon, among other things, satisfactory completion by each of the
parties of due diligence and the negotiation and execution of definitive
agreements, which the parties are obligated in good faith to negotiate, execute
and deliver.
In connection with the execution of the letter of intent, eDiets loaned the
Company $50,000.
18