U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] 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 O-28690
SHOPNET.COM, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 13-3871821
------------------------------------ --------------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
14 East 60th Street, Suite 402, New York, New York 10022
(Address of Principal Executive Offices)
(212) 688-9223
(Issuer's Telephone Number, Including Area Code)
N/A
-----------------------------------------------------
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the latest practicable date: Common Stock, $.001 par
value: 7,472,224 shares outstanding as of May 8, 2001.
SHOPNET.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated balance sheets at March 31, 2001 (unaudited) and December 31, 2000. 3
Consolidated statements of operations and comprehensive income for the three months 4
ended March 31, 2001 and 2000 (unaudited).
Consolidated statement of stockholders' equity for the three months ended March 31, 5
2001 (unaudited).
Consolidated statements of cash flows for the three months ended March 31, 2001 and 6
2000 (unaudited).
Notes to consolidated financial statements (unaudited). 7-16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17-
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 8-K
SIGNATURES
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(unaudited) 2000
Current assets:
Cash $ ...................................................... 2,846 $ 107,734
Cash - restricted ........................................... 1,117,428 1,114,572
Accounts receivable, net .................................... 59,712 47,966
Other receivables ........................................... 9,173 27,922
Prepaid expenses ............................................ 86,318 107,632
Inventory ................................................... 1,705,846 3,464,229
Advances to officer ......................................... 40,000 40,000
----------- -----------
Total current assets ................................... 3,021,323 4,910,055
----------- -----------
Furniture, computer equipment, and leasehold improvements, net .. 55,931 61,708
Film production and distribution costs, net ..................... 1,350,000 1,350,000
Costs in excess of net assets of business acquired .............. 744,999 762,737
Investments in movie ventures ................................... 250,163 248,210
Deferred tax asset - non-current ................................ 202,500 202,500
Marketable securities - affiliate ............................... 12,700 107,950
Other assets .................................................... 20,635 20,635
----------- -----------
Total assets ........................................... $ 5,658,251 $ 7,663,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor ............................................... $ 1,824,104 $ 3,165,909
Accounts payable ............................................ 374,702 1,095,490
Accrued expenses ............................................ 58,550 99,843
Capital lease obligations .............................. 17,507 17,074
Other taxes payable ......................................... 955 11,051
Deferred tax liability ...................................... 4,704 4,704
----------- -----------
Total current liabilities .............................. 2,280,522 4,394,071
----------- -----------
Capital lease obligations, net of current portion ............... 8,418 12,960
----------- -----------
Total liabilities ...................................... 2,288,940 4,407,031
----------- -----------
Commitments and contingencies (Note 8) .......................... -- --
----------- -----------
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
7,472,244 shares issued, outstanding and subscribed ........ 7,472 7,472
Additional paid-in capital .................................. 6,638,852 6,638,852
Accumulated deficit ......................................... (3,289,713) (3,497,510)
----------- -----------
Accumulated other comprehensive income ...................... 12,700 107,950
----------- -----------
Total stockholders' equity ............................. 3,369,311 3,256,764
----------- -----------
Total liabilities and stockholders' equity ...................... $ 5,658,251 $ 7,663,795
=========== ===========
See accompanying notes to consolidated financial statements (unaudited)
3
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
------------------- --------------------
Net sales $ 3,653,260 $ 2,720,982
Cost of sales 2,437,428 1,771,477
------------------- --------------------
Gross profit 1,215,832 949,505
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 855,166 638,078
Amortization of costs in excess of net assets of business
acquired 17,738 17,738
------------------- --------------------
Total expenses 872,904 655,816
------------------- --------------------
Income before other income (expense)
and provision for income taxes 342,928 293,689
------------------- --------------------
Other income (expense):
Equity in earnings (loss) of affiliate (547) -
Other income 235 -
Rental income 6,700 5,550
Interest and finance expense (156,746) (106,636)
Interest income 15,227 17,871
------------------- --------------------
Total other income (expense) (135,131) (83,215)
-------------------- ---------------------
Income (loss) before provision for
income taxes 207,797 210,474
(Benefit) provision for income taxes - 5,466
------------------- --------------------
Net income
207,797 205,008
Other items of comprehensive (loss) income (95,250) 698,500
-------------------- --------------------
Comprehensive net income $ 112,547 $ 903,508
------------------- --------------------
Basic:
Net income $ .03 $ .03
================== ====================
Weighted average number of
common shares outstanding 7,472,244 6,192,943
=================== ====================
4
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 . 7,472,244 $ 7,472 $ 6,638,852 $(3,497,510) $ 107,950 $ 3,256,764
Net income for the three months
ended March 31, 2001 ......... -- -- -- 207,797 -- 207,797
Unrealized loss on securities . -- -- -- -- (95,250) (95,250)
----------- ----------- ----------- ----------- ----------- -----------
7,472,244 $ 7,472 $ 6,638,852 $(3,289,713) $ 12,700 $ 3,369,311
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements (unaudited)
5
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income $ 112,547 $ 903,508
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Equity in loss of affiliate 547 -
Unrealized loss (gain) on securities 95,250 (698,500)
Amortization and depreciation 23,515 28,676
Decrease (increase) in:
Accounts receivable (11,746) (9,061)
Other receivable 18,749 -
Prepaid expenses 21,314 (3,267)
Inventory 1,758,383 1,577,710
Other - 54
Increase (decrease) in:
Accounts payable (720,788) (158,771)
Accrued expenses (41,293) (803,360)
Due to factor (1,341,805) (597,636)
Other taxes payable (10,096) -
--------------- --------------
Net cash (used in) provided by operating activities (95,423) 239,353
--------------- --------------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements - (12,477)
Investment in affiliate (2,500) -
--------------- --------------
Net cash used in investing activities (2,500) (12,477)
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock - 294,898
Proceeds from line of credit - 100,000
Repayments to related parties - (350,000)
Principal payments on capital leases (4,109) (4,365)
--------------- ---------------
Net cash (used in) provided by financing activities (4,109) 40,533
--------------- --------------
Net (decrease) increase in cash (102,032) 267,409
Cash, beginning of period 1,222,306 1,376,239
-------------- --------------
Cash, end of period $ 1,120,274 $ 1,643,648
============== ==============
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 156,746 $ 103,261
============== ==============
Income taxes $ 14,745 $ 16,698
============== ==============
See accompanying notes to consolidated financial statements (unaudited)
6
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
Shopnet.com, Inc. ("Shopnet") was incorporated in the State of
Delaware on December 1, 1995 under the name of Hollywood
Productions, Inc. It was formed for the purpose of acquiring
screenplays and producing motion pictures. On May 10, 1999,
the Company filed an amendment to its Articles of
Incorporation to change its name to Shopnet.com, Inc. On May
12, 1999, Shopnet incorporated a new wholly owned subsidiary,
Hollywood Productions, Inc. ("Hollywood"), to which the
Company assigned all of its film rights. Accordingly, Shopnet
is considered a holding company. During September 1996,
simultaneously with the completion of its Initial Public
Offering ("IPO"), Shopnet acquired all of the capital stock of
Breaking Waves, Inc. ("Breaking Waves"). Breaking Waves
designs, manufactures, and distributes private and brand name
labels of children's swimwear nationally.
NOTE 2 - INTERIM RESULTS AND BASIS OF PRESENTATION
The unaudited consolidated financial statements as of March
31, 2001 and for the three month periods ended March 31, 2001
and 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Items 303
and 301(B) of Regulation S-B. In the opinion of management,
the unaudited financial statements have been prepared on the
same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position as of March
31, 2001 and the results of our operations and cash flows for
the three month periods ended March 31, 2001 and 2000. The
financial data and other information disclosed in these notes
to the interim financial statements related to these periods
are unaudited. The results for the three month periods ended
March 31, 2001 are not necessarily indicative of the results
to be expected for any subsequent quarter or the entire fiscal
year ending December 31, 2001. The balance sheet at December
31, 2000 has been derived from the audited financial
statements at that date.
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 Securities and Exchange Commission's rules and
regulations. It is suggested that these unaudited financial
statements be read in conjunction with our audited
financial statements and notes thereto for the year ended
December 31, 2000 as included in our report on Form 10-KSB
filed on April 17, 2001.
7
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 3 - ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued
110,000 shares of common stock in exchange for all of the
issued and outstanding capital stock of Breaking Waves. The
transaction was accounted for using the purchase method of
accounting. As a result of the transaction, excess of cost
over net assets acquired totaling $1,064,283 was recorded and
is being amortized over the useful lives of the related assets
which is fifteen years. Amortization expense totaled $17,738
for each of the three months ended March 31, 2001 and 2000.
NOTE 4 - INVESTMENTS IN MOVIE VENTURES
a) Battle Studies
Pursuant to a co-production agreement dated April 17, 1998 with
North Folk Films, Inc., the Company invested through March 31,
2001, $220,000 for a 50% interest in a new entity, Battle
Studies Productions, LLC ("Battle Studies") a limited liability
company. Battle Studies will be treated as a joint venture in
order to co-produce motion pictures and to finance the costs of
production and distribution of such motion pictures. The joint
venture retains all rights to the motion pictures, the
screenplays, and all ancillary rights attached thereto.
The Company accounts for the investment in Battle Studies under
the equity method. For the three months ended March 31, 2001 and
2000, the Company recorded a $547 and $-0- equity loss for its
proportionate share of Battle Studies operations.
On October 12, 2000, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures")
to distribute Battle Studies motion picture ("Machiavelli
Rises") to foreign countries. Battle Studies has granted rights
under the agreement for the theatrical, video, non-theatrical
and television markets. The term of the agreement is for
twenty-four months for all portions of territory outside of the
United States and English speaking Canada. Battle Studies
expects to realize 75% (which is net of a 25% fee to Raven
Pictures) of the expected estimated gross revenues derived from
foreign countries less $20,000 for marketing and advertising
expenses.
8
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 4 - INVESTMENTS IN MOVIE VENTURES (con't.)
On January 17, 2001, Battle Studies entered into a distribution
agreement with KOAN, Inc. ("KOAN") to distribute and promote
Battle Studies' motion pictures ("Machiavelli Rises") in the
United States and Canada. Battle Studies has granted rights
under the agreement for free TV, pay TV, cable, satellite, video
and DVD markets. The terms of the agreement is for twenty-four
months and it will be automatically renewed unless KOAN receives
a letter of cancellation at least thirty days prior to the date
of termination or if sales have not exceeded $250,000 over the
twenty - four month period. Battle Studies expects to realize
70% (which is net of a 30% fee to KOAN) of the expected
estimated gross revenues derived from the United States and
Canada less $5,000 per year for promotional costs.
b) The Girl, LLC
Pursuant to an agreement dated July 1, 1999 with Artistic
License Films Inc., Hollywood invested through March 31, 2001,
$35,000 for a 22.533% interest in a new entity, The Girl, LLC a
limited liability company ("The Girl, LLC") formed to finance,
produce and distribute the film "The Girl". In return for its
participation in The Girl, LLC Hollywood shall be entitled to
receive a non-contested, non-dilutable 22.533% ownership
interest in The Girl, LLC a recoupment of its investment on no
less favorable terms than any other investor and 22.533% of 100%
of any contingent compensation which shall be actually received
by The Girl, LLC.
Hollywood accounts for the investment in The Girl, LLC under the
equity method. Accordingly, as of March 31, 2001, the Company
has only recorded its initial $35,000 investment since no
revenues have been derived from this film as of March 31, 2001.
NOTE 5 - MARKETABLE SECURITIES - AFFILIATE
On November 24, 1998, pursuant to a sales agreement (the "Sales
Agreement") entered into during September 1998 by and between
Breaking Waves and Play Co. Toys & Entertainment Corp. ("Play
Co," a toy retailer and a publicly traded company whose Chairman
of the Board is also the President of Shopnet and the Company),
Breaking Waves purchased 1,400,000 unregistered shares of Play
Co.'s common stock for a total of $504,000 comprised of $300,000
in cash and by shipping $204,000 of merchandise to Play Co.
After the purchase, Breaking Waves owned 25.4% of the
outstanding common stock of Play Co.
During the quarter ended March 31, 2000, and subsequent thereto,
Play Co. converted a portion of its series E preferred stock
into common stock, thereby reducing Breaking Waves' percentage.
As of March 31, 2000, Breaking Waves' common stock percentage
was approximately 11% which was subsequently reduced to
approximately 1.5%. Accordingly, the investment in Play Co. is
accounted for under the requirements of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Carrying value is based on fair market value
during the quarter. The unrealized gain which amounted to
$698,500 has been recorded as a component of comprehensive
income.
9
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 5 - MARKETABLE SECURITIES - AFFILIATE (con't.)
On March 28, 2001, Play Co. filed for protection under Title
Eleven of the United States Code with the United State
Bankruptcy Court for the Southern District of New York. The fair
market value of the investment as of March 31, 2001 is $12,700.
Under SFAS 115, the securities are considered available for sale
and therefore the carrying value is based on the fair market
value of the securities at March 31, 2001 which amounted to
$12,700. The change in unrealized gain or loss has been recorded
as a component of comprehensive income. The Company has pledged
such shares as collateral for a standby letter of credit in
connection with Breaking Waves entering into a new factoring
agreement with Century Business Credit Corporation ("Century")
and are therefore considered non-current (See Note 6 (b)).
NOTE 6 - DUE TO FACTOR
a) CIT Group
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended
December 9, 1998) with CIT Group (formerly, Heller Financial,
Inc. "CIT") to sell their interest in all present and future
receivables without recourse. Breaking Waves paid CIT a
factoring commission of .85% of the first $5,000,000 of
receivables sold and .65% of receivables sold in excess of
$5,000,000 for each year.
Breaking Waves took advances of up to 85% of the receivable,
with interest at the rate of 1 3/4% over prime. In connection
with the factoring agreement, the Company agreed to maintain
$1,150,000 of cash in a segregated account in order to
collateralize standby letters of credit. In addition, during the
year ended December 31, 1999, Breaking Waves was required to
transfer an additional $200,000 of cash as collateral for the
standby letter of credit. On or about September 12, 2000 the
agreement with CIT was cancelled and a new factoring agreement
was entered into as discussed below. As of March 31, 2001, a
balance of $1,683 is due from CIT and as of December 31, 2000,
a balance of $312 was due to CIT. Interest expense related to
this agreement totaled $-0- and $92,192 for the three months
ended March 31, 2001 and 2000.
10
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 6 - DUE TO FACTOR (con't.)
b) Century Business Credit Corporation
On or about September 12, 2000, Breaking Waves entered into a
factoring and revolving inventory loan and security agreement
with Century to sell their interest in all present and future
receivables without recourse. Breaking Waves submits all sales
offers to Century for credit approval prior to shipment, and
pays a factoring commission of .75% of receivables sold. Century
retains from the amount payable to Breaking Waves a reserve for
possible obligations such as customer disputes and possible
credit losses on unapproved receivables. Breaking Waves may take
advances of up to 85% of the receivables, with interest at the
rate of 1 3/4% over prime.
In connection with the factoring agreement, the Company agreed
to continue maintaining $1,150,000 of cash in a segregated
account in order to collateralize standby letters of credit for
Breaking Waves. Additionally, Breaking Waves was required to
pledge as additional collateral $200,000 of its own cash and its
investment in Play Co., which is represented by 1,270,000 shares
of Play Co's common stock.
Pursuant to the terms of a Reimbursement and Compensation
Agreement, a trust ("Trust"), the beneficiary of which is a
relative of the Company's President and Chief Executive Officer
and a majority stockholder, pledged assets as collateral for
securing a $250,000 letter of credit to replace a portion of a
letter of credit previously pledged by the Company. Accordingly,
on December 20, 2000 the original agreement with the factor was
amended to allow such replacement of collateral. Breaking Waves'
Loan and Security Agreement with Century dated December 20, 2000
requires the provision of one or more letters of credit in the
aggregate amount of $1,150,000 to partially secure the line of
credit.
Breaking Waves agreed to reimburse the Trust for any and all
losses, fees, charges and expenses to the Trust in the event the
letter of credit is called by Century and/or the issuing bank
demands reimbursement from the Trust. Breaking Waves'
obligations are guaranteed by the Company in addition to being
secured by a first security interest in all of the assets of the
Company and a subordinate security interest in all of the assets
of Breaking Waves. Breaking Waves paid a fee of $42,500 to the
Trust and reimbursed the Trust for all related professional and
other fees incurred by the Trust in connection with such
transaction.
11
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 6 - DUE TO FACTOR (con't.)
Interest expense related to this agreement totaled $156,022 for
the three months ended March 31, 2001. Century has a secured
interest in Breaking Wave's inventory as collateral for the
advances. As of March 31, 2001, the net advances to Breaking
Waves from Century amounted to $1,825,787.
NOTE 7 - LINE OF CREDIT
On March 30, 2000, the Company entered into a revolving line of
credit agreement with a bank. Total available credit under the
line of credit is $250,000. Total outstanding balance was
payable in monthly installments including 9% interest. As a
condition of the line of credit, the Company was required to
deposit $250,000 in a certificate of deposit as collateral with
the bank. The line of credit was repaid in full and closed as of
July 12, 2000.
NOTE 8 - CAPITAL LEASE OBLIGATIONS
During 1998, the Company acquired computer equipment and
proprietary software for its subsidiary, Breaking Waves,
pursuant to the following terms and conditions:
i) On August 13, 1998, the Company acquired various computer
and related components for $28,583 by entering into a
capital lease obligation with interest at approximately 9.2%
per annum, requiring 48 monthly payments of principal and
interest of $762. The lease is secured by the related
computer equipment.
ii) On September 13, 1998, the Company acquired proprietary
software for $32,923 by entering into a capital lease
obligation with interest at approximately 10.9% per annum,
requiring 48 monthly payments of principal and interest of
$850. The lease is secured by the related software.
12
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 8 - CAPITAL LEASE OBLIGATIONS (con't.)
At March 31, 2001, the aggregate future minimum lease payments
due pursuant to the above capital lease obligations are as
follows:
Year ended
December 31:
2001 $ 14,502
2002 13,486
Total minimal lease payments 27,988
----------------
Less: Amounting representing interest 2,063
----------------
Present value of net minimum lease payments $ 25,925
================
At March 31, 2001 equipment and software under capital leases
is carried at a book value of approximately $27,700.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
The Company and its subsidiary have entered into lease
agreements for administrative offices. The Company leases its
administrative office pursuant to a 5-year lease expiring
November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leased
administrative offices through January 1998 pursuant to a
lease requiring annual payments of $71,600 expiring December
2004. Lastly, Breaking Waves leases an offsite office for one
of its designers on a month to month basis with annual
payments approximating $11,000. The Company and Breaking
Waves' approximate future minimum rentals under non-cancelable
operating leases in effect on March 31, 2001 are as follows:
2001 $ 100,367
2002 71,600
2003 71,600
2004 71,600
Thereafter -
--------------
$ 315,167
Rent expense for the three months ended March 31, 2001 and
2000 amounted to $43,677 and $41,971, respectively.
13
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
b) Significant vendors and customers
Breaking Waves purchases 100% of its inventory from two
vendors in Indonesia and one in Samoa. Breaking Waves believes
other sources and vendors are available and that it is not
dependent exclusively on these vendors. For the three months
ended March 31, 2001 Breaking Waves had two customers, which
comprise 27% and 13%, of net sales, respectively. For the
three months ended March 31, 2000, Breaking Waves had three
customers which compromised 20%, 12%, and 11% of net sales,
respectively.
c) Seasonality
Breaking Waves' business is considered seasonal with a large
portion of its revenues and profits being derived between
November and March. Each year from April through October,
Breaking Waves engages in the process of designing and
manufacturing the following season's swimwear lines, during
which time its incurs the majority of its production costs
with limited revenues.
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a license
agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States.
The agreement covered a term from January 1, 1996 to June
30, 1998 and contained a provision for an additional
three-year extension, at the option of Breaking Waves,
through and until June 30, 2001. Breaking Waves has
exercised this option, thereby so extending the agreement.
The agreement calls for minimum annual royalties of $75,000
to $200,000 over the life of the agreement with options
based on sales levels from $1,000,000 for the first year to
$4,000,000 in the sixth year. Breaking Waves has negotiated
an additional two-year extension thereby extending the
agreement through and until June 30, 2003, and it contains a
provision for an additional two-year extension, at the
option of Breaking Waves, through and until June 30, 2005.
The new agreement signed February 28, 2001 and effective
July 1, 2001 calls for minimum annual royalties of $50,000
to $87,500 over the life of the extension with options based
on sales levels from $1,000,000 for the seventh year to
$1,750,000 in the tenth year. Breaking Waves recorded
royalties under this agreement totaling $75,000 and $59,198
during the three months ended March 31, 2001 and 2000
respectively.
ii) During June 2000, Breaking Waves entered into a license
agreement with an effective date of November 1, 2000 with
Gottex Models Ltd., as Israeli corporation and Gottex Models
(USA) Corp., a New York corporation for the use of the
trademark "Gottex" in the United States of America for
children's swimwear. The agreement calls for a royalty fee
of 7% of net sales with guaranteed minimum annual royalties
of $70,000 to $140,000 over the life of the agreement.
Breaking Waves recorded royalties under the agreement
totaling $14,887 for the three months ended March 31, 2001.
14
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (con't.)
e) Co-production and property purchase agreements
Pursuant to co-production and property purchase agreements
dated March 15, 1996, as amended, the Company acquired the
rights to co-produce a motion picture and to finance the costs
of production and distribution of such motion picture with the
co-producer agreeing to finance $100,000 of the costs of
production. The Company retains all rights to the motion
picture, the screenplay, and all ancillary rights attached
thereto. The motion picture was completed during the latter
part of 1996 and, accordingly, the Company commenced the
marketing and distribution process.
As of March 31, 2001, the Company invested $2,006,956 for the
co-production and distribution of such motion picture whereas
the co-producers have invested $100,000. For the three months
ended March 31, 2001 and 2000, the Company derived no revenue
from the motion picture and amortized no film costs.
f) Employment Agreements
On November 27, 1996, the Company entered into two
employment agreements (as amended) with two key employees of Breaking
Waves. Such employees are responsible for the designing, marketing and
sales of Breaking Waves. The employment agreements are for a term of
three years with annual salaries of $110,000 each for 1997 and $60,000
and $130,000 for 1998 (as amended), respectively. One of the employment
agreements was further amended effective January 1, 1999 with an annual
salary increase from $60,000 to $70,000. In addition to the salaries,
the Company agreed that the employees are entitled to receive on each
of November 27, 1996, 1997, and 1998, shares of common stock in the
amount equal to the fair market value of $25,000 (before amendment) to
each employee subject to a vesting schedule. In connection with the
decrease in salary from originally $110,000 per year to $70,000 per
year for one of the key employees, the Company reduced the value of
shares to be issued to $13,636 for 1998.
As of March 31, 2001, the Company has not renegotiated the employment
agreements with the two key employees of Breaking Waves and
accordingly, all prior arrangements are in effect.
15
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (con't.)
g) Litigation
On or about June of 2000, an action was brought in the Queens
County Supreme Court against the Company and several others
claiming, among other things, that the Company allegedly
breached a contract and engaged in fraudulent statements
(including supposedly promising the plaintiff options and then
not allowing the plaintiff to exercise these options). The
plaintiff seeks, among other things, compensatory damages in
the amount of $497,500, punitive damages in the amount of
$995,000, together with costs and attorney's fees. The Company
intends to contest the action vigorously and believes that
such claims against it are baseless and without merit.
NOTE 10 - STOCKHOLDER'S EQUITY
a )Stock Dividends
i) On January 14, 1999, the Company declared a 100% stock
dividend to all shareholders of record as of January 29,
1999 amounting to a total of 2,686,944 shares of common
stock. The stock dividend was issued on February 5, 1999.
In order for shareholders to receive their stock dividend,
they must exchange the old shares for the new shares. As a
result of such stock dividend, the Company issued
2,686,027 shares of its common stock. An additional 917
shares are entitled to the dividend, and such shares shall
be issued to the holders upon the redemption of the old
shares. Effective for stock dividends these shares are
2,420 at December 31, 2000.
ii) On January 7, 2000, the Company declared a 10% stock
dividend to all shareholders of record as of January 20,
2000 amounting to 537,389 shares of common stock. Such
stock dividend was issued on February 1, 2000.
iii) On May 8, 2000, the Company declared a 20% stock dividend
to all shareholders of record as of May 19, 2000 amounting
to 1,245,235 shares of common stock. Such stock dividend
was distributed on June 19, 2000.
b) Sale of common stock
On February 1, 2000, the Company sold 100,000 shares of common
stock for $300,000 (before certain transaction costs) pursuant
to a private transaction with an unrelated party. Giving
effect to the May 2000 20% stock dividend the related shares
are 120,000.
16
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 10 - STOCKHOLDER'S EQUITY (con't.)
c) Warrants
i) Initially, each Warrant issued in the initial public
offering of September 24, 1996 entitled the holders
thereof to purchase one share of the Company's common
stock at an exercise price of $6.50 per share, until
September 9, 2001. On June 23, 1997, the Board of
Directors approved a reduction in the exercise price of
the Warrants from $6.50 to $3.00. On February 5, 1998, the
Company effected a one for three reverse split of the
Company's common stock. Accordingly, the Company adjusted
the terms of the Warrants to reflect the reverse split
such that exercise of three Warrants would entitle the
holder to purchase one share of common stock at an
exercise price of $9.00. Giving effect to the January 1999
100% common stock dividend, January 2000 10% common stock
dividend and May 2000 20% common stock dividend the
warrants have been cumulatively adjusted such that the
exercise of each Warrant at an exercise price of $3.41
purchases .88 of a share of common stock.
ii) On April 15, 1998, the Company's Board of Directors
authorized the distribution of warrants to all holders of
shares of the Company's common stock as of May 8, 1998.
Pursuant to the distribution, each shareholder of record
received one warrant to purchase one share of common stock
at an exercise price of $4.00 per share. The warrants,
which are exercisable for a period of three years,
commencing one year after issuance, shall be issued and
distributed once the Company has filed a registration
statement for same and same has been declared effective by
the Securities and Exchange Commission. The Company to
date has not filed the registration statement.
NOTE 11 - RELATED PARTIES TRANSACTIONS
a) For the three months ended March 31, 2001 and 2000, $12,000
and $11,080, respectively of financial consulting fees were
paid to an affiliate of the Company's President.
b) During October 1996, pursuant to two promissory notes, the
Company loaned two of its officers a total of $87,000 bearing
interest at six and one-half percent (6 1/2) payable over
three years. As of March 31, 2001, the unpaid portion amounted
to $37,000, which has been classified as current. As of March
31, 2001, the Company's President was also advanced additional
funds totaling $3,000 which are non-interest bearing and due
on demand and are classified as current.
17
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
NOTE 11 - RELATED PARTIES TRANSACTIONS (con't.)
c) During October 1999, Play Co. loaned funds to Breaking Waves
in return for an unsecured promissory note in the amount of
$200,000. Such note was due and was repaid in full on March
29, 2000 plus interest at 9% per annum.
d) On November 29, 1999, Play Co. loaned additional funds to
Breaking Waves in return for an unsecured promissory note in
the amount of $400,000. Such note is due in two
installments. The first installment of $100,000 was paid
January 30, 2000 and the second installment of $300,000 was
paid April 30, 2000. Interest accrued at 9% per annum.
e) During October 1999, Play Co. loaned funds to the Company in
return for an unsecured promissory note in the amount of
$50,000. Such note was due and repaid in full on March 29,
2000 plus interest at 9% per annum.
NOTE 12 - SUBSEQUENT EVENT
During April 2001, the motion picture "The Girl" was completed
and accordingly, The Girl, LLC has commenced the marketing and
distribution process of the motion picture. The distribution
process in the United States has started with the release of
the movie in theaters and the distribution process with
foreign countries is still being negotiated.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts may
be considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
General
Shopnet.com, Inc. ("Shopnet" or the "Company") was incorporated in the
State of Delaware on December 1, 1995 as Hollywood Productions, Inc. On May 10,
1999, Shopnet filed an amendment to its Articles of Incorporation effecting a
change in its name to its current one. On May 12, 1999, it incorporated a new
wholly-owned subsidiary, Hollywood Productions, Inc. ("Hollywood"), to which it
assigned its film production business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, Breaking Waves, Inc.
("Breaking Waves"). Shopnet was formed initially for the purpose of acquiring
screenplays and producing motion pictures. In September 1996, in connection with
the completion of its Initial Public Offering ("IPO"), it acquired all of the
capital stock of Breaking Waves which designs, manufactures, and distributes
private and brand name label children's swimwear.
The consolidated financial statements at March 31, 2001 include the
accounts of Shopnet and its wholly owned subsidiaries, Breaking Waves and
Hollywood (collectively referred to as the "Company" except where specific
delineation is required), after elimination of all significant intercompany
transactions and accounts.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related footnotes which provide
additional information concerning the Company's financial activities and
condition. Since Shopnet and its subsidiaries operate in different industries,
the discussion and analysis is presented by segment in order to be more
meaningful.
Three months ended March 31, 2001 as compared to the three months ended
March 31, 2000
Breaking Waves
For the three months ended March 31, 2001 and 2000, Breaking Waves
generated net sales of $3,653,260 and $2,720,982, respectively, with a cost of
sales amounting to $2,437,428 and $1,771,477, respectively. The increase in
sales amounting to $932,278, or approximately 34.2%, from 2000 to 2001 was
19
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
primarily attributable to the introduction of the new "Coral Cove" product line.
The gross profit for the three months ended March 31, 2001 amounted to
$1,215,832, or 33.4% of sales, as compared to the three months ended March 31,
2000 during which it amounted to $949,505, or 34.9% of sales.
Selling, general, and administrative expenses during the three months
ended March 31, 2001 and 2000 amounted to $711,879 or 19.5% of sales and
$497,260 or 18.3% of sales, respectively.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the three months ended March 31:
2001 2000
--------------- -------------------
Officers, office staff, designer and
sales salaries and related benefits $ 134,459 $ 134,827
Commission expense 128,325 57,412
Warehousing costs 190,462 121,872
Royalty fees 89,887 59,198
Rent expense 24,522 17,619
Factor commissions 36,276 25,335
Miscellaneous general corporate
overhead expenses 107,948 80,997
The overall expense increase of approximately $214,619 is directly
associated with the sales increase for the quarter as compared to the prior year
quarter.
In November 1998, Breaking Waves purchased 1,400,000 shares of Play
Co. Toys & Entertainment Corp. ("Play Co.") for a total of $504,000 comprised
of $300,000 in cash and by shipping $204,000 in merchandise. After the
purchase, Breaking Waves owned 25.4% of the outstanding common stock of Play
Co.
During the quarter ended March 31, 2000, and subsequent thereto Play
Co. converted a portion of its series E preferred stock into common stock,
thereby reducing Breaking Waves' percentage. As of March 31, 2000, Breaking
Waves' common stock percentage was approximately 11% which was subsequently
reduced to approximately 1.5%. Accordingly, the investment in Play Co. is
accounted for under the requirements of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Carrying value is based on fair
market value during the quarter. The unrealized gain for the quarter ended March
31, 2000 which amounted to $698,500 has been recorded as a component of
comprehensive income
On March 28, 2001, Play Co. filed for protection under Title Eleven of
the United States Code with the United State Bankruptcy Court for the Southern
District of New York. The fair market value of the investment as of March 31,
2001 is $12,700. The change in unrealized gain or loss has been recorded as a
component of comprehensive income.
Interest expense in connection with its factoring agreement amounted to
$156,022 and $92,192 for the three months ended March 31, 2001 and 2000,
respectively.
20
Breaking Waves generated net income of $351,767 and $347,726, for the
three months ended March 31, 2001 and 2000, respectively, after an estimated
income tax provision of $-0- and $5,000, respectively, for the three months
ended March 31, 2001 and 2000.
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary,
Hollywood, to which it assigned its film production business. All film related
operations prior to May 12, 1999 were conducted by Shopnet under its former
name.
For the three months ended March 31, 2001 and 2000, Hollywood generated
no sales from its motion picture "Dirty Laundry." Although sales have been
minimal since the completion of the motion picture, the Company expects
increases in sales during 2001 and thereafter as a result of a newly implemented
marketing strategy.
Hollywood has also invested in movie ventures. See "Investments in
Movie Ventures."
Shopnet.com
For the three months ended March 31, 2001 and 2000, Shopnet generated
minimal revenue comprised of interest from its money market and other ancillary
revenue from its corporate office.
Shopnet's selling, general, and administrative expense amounted to
$142,922 and $140,819 for the three months ended March 31, 2001 and 2000,
respectively. This represents an increase of $2,103, or approximately 1.5%.
The major components of the Company's expenses are as follows for the
years ended December 31:
2001 2000
Salaries (officer and office staff) and stock compensation
and related benefits $ 44,684 $ 47,561
Rent 19,156 19,402
Legal and professional fees 18,650 18,517
Consulting fees 6,000 11,080
Other general corporate and administrative expense 54,432 44,259
Shopnet generated a net loss of $125,285 and $121,980 for the three
months ended March 31, 2001 and 2000, respectively.
Liquidity and Capital Resources
At March 31, 2001, the Company has a consolidated working capital
amounting to $740,801. The Company anticipates that its current available cash
will be sufficient for the next twelve months and does not anticipate any cash
shortfalls. Breaking Waves' ownership interest in Play Co. amounted to
21
approximately 1.5% as of March 31, 2001 as evidenced by the 1,270,000 shares of
common stock it currently owns. As of March 31, 2001, Breaking Waves has
decreased its investment in Play Co. to $12,700 based on fair market value of
its common stock holdings.
The Company considers highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Included in
cash are certificates of deposit of $900,400. Shopnet maintains cash deposits in
accounts which are in excess of Federal Deposit Insurance Corporation limits by
approximately $800,000. Shopnet believes that such risk is minimal. Shopnet
maintains a letter of credit with a financial institution as a condition of
Breaking Wave's factoring agreement. The financial institution requires Shopnet
to maintain $1,150,000 on deposit as collateral for the letter of credit. The
$900,400 of certificates of deposit represents a portion of the $1,150,000. In
addition, during 1999, Breaking Waves was required to transfer a $200,000 cash
deposit to its factoring agent as additional collateral. Accordingly, both cash
amounts are designated as restricted.
For the three months ended March 31, 2001 and 2000, the Company
reported consolidated net income of $207,797 and $205,008 after an income tax
expense of $-0- and $5,466, respectively. In addition, for the three months
ended March 31, 2001 and 2000, the Company reported comprehensive net income of
$112,547 and $903,508, which includes an unrealized gain (loss) on the
investment in Play Co. of ($95,250) and $698,500, respectively.
On February 1, 2000, the Company sold 100,000 shares of common stock
for $300,000 (before certain offering costs) pursuant to a transaction with an
unrelated party.
On March 30, 2000, the Company entered into a revolving line of credit
agreement with a bank. Total available credit under the line of credit was
$250,000. Total borrowings under the line as of March 31, 2000 were $100,000.
The outstanding balance was to be repaid in monthly installments including 9%
interest. As a condition of the line of credit, the Company was required to
deposit $250,000 in a certificate of deposit as collateral. The certificate of
deposit was classified as restricted cash.
Investments in Movie Ventures
Battle Studies
Pursuant to a co-production agreement dated April 17, 1998, Hollywood
invested $220,000 for a 50% interest in a new entity, Battle Studies
Productions, LLC ("Battle Studies"), a limited liability company. North Folk
Films, Inc., an unrelated party, also invested $220,000 for the remaining 50%
interest in Battle Studies. Battle Studies is treated as a joint venture in
order to co-produce motion pictures and to finance the costs of production and
distribution of such motion pictures. The joint venture retains all rights to
the motion pictures, the screenplays, and all ancillary rights attached thereto.
Total production costs to date have aggregated approximately $440,000 of which
Hollywood has funded 50%. In accordance with the terms of the co-production
22
agreement, the proceeds of the film will be distributed as follows: first, both
parties shall be entitled to recoup their initial investment in the film, at
135% thereof; then, after repayment to the respective parties of additional
costs incurred by same, any remaining proceeds shall be distributed 50% to North
Folk and 50% to Hollywood. The film was shown in January 1999 in both New York
and at the Brussels Film Festival.
Hollywood accounts for the investment in Battle Studies on the equity
method. Accordingly, as of March 31, 2001, Hollywood has recorded its investment
at $215,163. This represents its initial investment of $220,000 less $4,837 of
equity loss for its proportionate share of Battle Studies.
On October 12, 2000, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures") to distribute
Battle Studies motion picture ("Machiavelli Rises") to foreign countries. Battle
Studies has granted rights under the agreement for the theatrical, video,
non-theatrical and television markets. The term of the agreement is for
twenty-four months for all portions of territory outside of the United States
and English speaking Canada. Battle Studies expects to realize 75% (which is net
of a 25% fee to Raven Pictures) of the expected estimated gross revenues derived
from foreign countries less $20,000 for marketing and advertising expenses.
On January 17, 2001, Battle Studies entered into a distribution
agreement with KOAN, Inc. ("KOAN") to distribute and promote Battle Studies'
motion pictures ("Machiavelli Rises") in the United States and Canada. Battle
Studies has granted rights under the agreement for free TV, pay TV, cable,
satellite, video and DVD markets. The terms of the agreement is for twenty-four
months and it will be automatically renewed unless KOAN receives a letter of
cancellation at least thirty days prior to the date of termination or if sales
have not exceeded $250,000 over the twenty - four month period. Battle Studies
expects to realize 70% (which is net of a 30% fee to KOAN) of the expected
estimated gross revenues derived from the United States and Canada less $5,000
per year for promotional costs.
The Girl
Pursuant to an agreement dated July 1, 1999 with Artistic License Films
Inc., Hollywood invested $35,000 for a 22.533% interest in a new entity, The
Girl, LLC a limited liability company formed to finance, produce and distribute
the film "The Girl". In return for its participation in The Girl, LLC, Hollywood
shall be entitled to receive a non-contested, non-dilutable 22.533% ownership
interest in The Girl, LLC, a recoupment of its investment on no less favorable
terms than any other investor and 22.533% of 100% of any contingent compensation
which shall be actually received by The Girl, LLC. The Girl, LLC retains all
rights to the motion pictures, the screenplays, and all ancillary rights
attached thereto.
Hollywood accounts for the investment in The Girl, LLC under the equity
method. Accordingly, as of March 31, 2001, the Company has only recorded its
initial $35,000 investment since the release of the movie occurred in April
2001.
Factoring Arrangements
23
CIT Group
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended December 9, 1998)
with CIT Group (formerly, Heller Financial, Inc. "CIT") to sell their interest
in all present and future receivables without recourse. Breaking Waves paid CIT
a factoring commission of .85% of the first $5,000,000 of receivables sold and
.65% of receivables sold in excess of $5,000,000 for each year. Breaking Waves
took advances of up to 85% of the receivable, with interest at the rate of 1
3/4% over prime. In connection with the factoring agreement, the Company agreed
to maintain $1,150,000 of cash in a segregated account in order to collateralize
standby letters of credit. In addition, during 1999, the Company was required to
transfer an additional $200,000 of cash as collateral for the standby letter of
credit. On or about September 12, 2000 the agreement with CIT was cancelled and
a new factoring agreement was entered into with Century Business Credit
Corporation (" Century"). Interest expense related to this agreement totaled
$-0- and $92,192 for the three months ended March 31, 2001 and 2000,
respectively. As of March 31, 2001, a balance of $1,683 is due from CIT. As of
March 31, 2000, the net advances to Breaking Waves from CIT amounted to
$1,178,638.
Century Business Credit Corporation
On or about September 12, 2000, Breaking Waves entered into a factoring
and revolving inventory loan and security agreement with Century to sell their
interest in all present and future receivables without recourse. Breaking Waves
submits all sales offers to Century for credit approval prior to shipment, and
pays a factoring commission of .75% of receivables sold. Century retains from
the amount payable to Breaking Waves a reserve for possible obligations such as
customer disputes and possible credit losses on unapproved receivables. Breaking
Waves may take advances of up to 85% of the receivables, with interest at the
rate of 1 3/4% over prime. In connection with the factoring agreement, the
Company agreed to maintain $1,150,000 of cash in a segregated account in order
to collateralize standby letters of credit for Breaking Waves. Additionally,
Breaking Waves was required to pledge as additional collateral $200,000 of its
own cash and its investment in Play Co. which is represented by 1,270,000 shares
of Play Co.'s common stock. Pursuant to the terms of a Reimbursement and
Compensation Agreement, a trust ("Trust"), the beneficiary of which is a
relative of the Company's President and Chief Executive Officer and a relative
of a majority stockholder, pledged assets as collateral for securing a $250,000
letter of credit to replace a portion of a letter of credit previously pledged
by the Company. Accordingly, on December 20, 2000 the original agreement with
the factor was amended to allow such replacement of collateral. Breaking Waves'
Loan and Security Agreement with Century dated December 20, 2000 requires the
provision of one or more letters of credit in the aggregate amount of $1,150,000
to partially secure the line of credit.
Breaking Waves agreed to reimburse the Trust for any and all losses,
fees, charges and expenses to the Trust in the event the letter of credit is
called by Century and/or the issuing bank demands reimbursement from the Trust.
Breaking Waves' obligations are guaranteed by the Company in addition to being
secured by a first security interest in all of the assets of the Company and a
subordinate security interest in all of the assets of Breaking Waves. Breaking
Waves paid a fee of $42,500 to the Trust and reimbursed the Trust for all
related professional and other fees incurred by the Trust in connection with
such transaction. Interest expense related to this agreement totaled $156,022
for the three months ended March 31, 2001. Century has a secured interest in
Breaking Wave's inventory as collateral for the advances. As of March 31, 2001,
the net advances to Breaking Waves from Century amounted to $1,825,787.
24
Capital Lease Obligations
During 1998, the Company acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:
On August 13, 1998, the Company acquired various computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum, requiring 48 monthly payments of principal and
interest of $762. The lease is secured by the related computer equipment.
On September 13, 1998, the Company acquired proprietary software for
$32,923 by entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments of principal and
interest of $850. The lease is secured by the related software.
Lease Commitments
Shopnet and Breaking Waves have entered into lease agreements for
administrative offices. Shopnet leases its administrative office pursuant to a 5
year lease expiring November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leases its administrative
offices pursuant to a lease requiring annual payments of $71,600 expiring
December 2004. Lastly, Breaking Waves leases an offsite office for one of its
designers on a month to month basis with annual payments approximating $11,000.
Rent expense for the three months ended March 31, 2001 and 2000
amounted to $43,677 and $41,971, respectively.
License Agreements
On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. ("Beach"). Pursuant to the licensing agreement, Breaking
Waves was given the right to use certain designs for its children's line under
the "Daffy Waterwear" label from January 1, 1996 to June 30, 1998. Thereafter,
the agreement provided for a three year extension, at the option of Breaking
Waves, through and until June 30, 2001. Breaking Waves has exercised this
option, thereby so extending the agreement. The agreement calls for minimum
annual royalties of $75,000 to $200,000 over the life of the agreement with
options based on sales levels from $1,000,000 for the first year to $4,000,000
in the sixth year. Breaking Waves has negotiated an additional two year
extension thereby extending the agreement through and until June 30, 2003, and
it contains a provision for an additional two year extension, at the option of
Breaking Waves, through and until June 30, 2005. The new agreement signed
February 28, 2001 and effective July 1, 2001 calls for minimum annual royalties
of $50,000 to $87,500 over the life of the extension with options based on sales
levels from $1,000,000 for the seventh year to $1,750,000 in the tenth year. The
Company recorded royalties under this agreement totaling $75,000 and $59,198
during the three months ended March 31, 2001 and 2000, respectively.
25
During June 2000, Breaking Waves entered into a license agreement with
an effective date of November 1, 2000 with Gottex Models Ltd., an Israeli
Corporation and Gottex Models (USA) Corp., a New York Corporation for the use of
the trademark "Gottex" in the United States of America for children's swimwear.
The agreement calls for a royalty fee of 7% of net sales with guaranteed minimum
annual royalties of $70,000 to $140,000 over the life of the agreement. Breaking
Waves recorded royalties under this agreement totaling $14,887 for the three
months ended March 31, 2001.
In connection with such licensing agreement, Breaking Waves entered
into a consulting agreement with Larry Nash, Inc. ("Consultant") a New York
Corporation, whereby Mr. Nash, the Consultant's sole stockholder shall provide
sales and consulting services in connection with Breaking Waves' new Gottex
line. Mr. Nash has provided similar services for the past twelve years with
another company for which he represented the Gottex children's swimwear line.
This agreement is effective August 5, 2000 and shall continue to August
5, 2001 and from year to year thereafter unless cancelled by either party on
thirty (30) days prior written notice.
26
PART II
Item 1. Legal Proceedings: On or about June of 2000, an action was brought in
the Queens County Supreme Court against the Company and several others claiming,
among other things, that the Company allegedly breached a contract and engaged
in fraudulent statements (including supposedly promising the plaintiff options
and then not allowing the plaintiff to exercise these options). The plaintiff
seeks, among other things, compensatory damages in the amount of $497,500,
punitive damages in the amount of $995,000, together with costs and attorney's
fees. We have responded to the complaint and denied the allegations. We intend
to contest this action vigorously and believe that such claims are baseless and
without merit.
The Company is not a party to any other material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business. Neither the Company's officers, directors, affiliates, nor owners of
record or beneficially of more than five percent of any class of the Company's
Common Stock is a party to any material proceeding adverse to the Company or has
a material interest in any such proceeding adverse to the Company.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: On March 9, 2001,
the Company held its Annual Meeting of Stockholders In the election of
directors, the six director nominees were elected with the following votes:
Number Of Votes
Nominee For Withheld
Harold Rashbaum 1,765,352 5,245
Jeanne Falletta 1,770,144 453
Alain LeGuillou, M.D. 1,767,418 3,179
+James Frakes 1,770,058 539
Michael Friedland 1,770,058 539
Debra Riggs 1,770,058 539
The Stockholders voted in favor of the ratification of the appointment of
Massella, Tomaro & Co. as independent auditors for the fiscal year ended
December 31, 2000 as follows:
Number Of Votes
Ratification of Appointment of Auditors For Against Abstain
--------------------------------------- --- ------- -------
1,767,695 200 2,682
27
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this ___ day of May 2001.
SHOPNET.COM,INC.
By: ______________________________
Harold Rashbaum
President and Chief Executive Officer
29