U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 2001 to June 30, 2001
Commission File Number O-28690
SHOPNET.COM, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 13-3871821
--------------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. 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)
Securities registered pursuant to Section 12(b)
of the Exchange Act:
Title of Each Class and Name of Each Exchange on Which Registered
NONE
Securities registered pursuant to Section 12(g)
of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the Issuer (1) has 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Registrant's consolidated revenues for its six month transition
period ended June 30, 2001 were $4,728,948.
The aggregate market value of the voting stock on October 10, 2001
(consisting of Common Stock, par value $0.001 per share) held by non-affiliates
was approximately $1,964,201 based upon the closing price for such Common Stock
on said date ($.42), as reported by a market maker. On such date, there were
7,472,224 of Registrant's Common Stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The statements which are not historical facts contained in this Transition
Report are forward looking statements that involve risks and uncertainties,
including, but not limited to instability of revenues, future losses and
unpredictable operating results. The Company's actual results may differ
materially from the results discussed in any forward looking statement. Unless
otherwise indicated, all references to the number of our shares of common stock
give effect to the 1 for 3 reverse stock split effected in February 1998, 100%
Common Stock dividend effected in February 1999, 10% Common Stock dividend
effected in February 2000 and the 20% Common Stock dividend effected in June
2000.
In June 2001, the Company's Board of Directors voted to change the end of
the Company's fiscal year from December 31 to June 30. The accompanying
consolidated financial statements as of June 30, 2001 reflect the results of
operations for the six months ended June 30, 2001.
History
ShopNet.com, Inc. (the "Company" or "Shopnet") was formed in December 1995
in the State of Delaware, as Hollywood Productions, Inc. ("HPI"). Its purpose
was to acquire screenplays and produce motion pictures. The Company changed its
name from "Hollywood Productions, Inc." to "Shopnet.Com, Inc." in May 1999.
In September 1996, the Company acquired Breaking Waves, Inc. ("Breaking
Waves"), a New York corporation which remains a wholly owned subsidiary of the
Company. This acquisition was contingent upon and was consummated simultaneously
with the Company's initial public offering ("IPO") and marked the Company's
entrance into the business of designing, manufacturing, and distributing
(throughout the United States) young girls' swimwear and coordinating beach
cover-ups and accessories.
In May 1999, Shopnet incorporated a new subsidiary, Hollywood Productions,
Inc. ("Hollywood"), to which Shopnet assigned its motion picture business. As a
result, Shopnet is now a holding company, owning 100% of Hollywood and Breaking
Waves. Except where otherwise indicated, Shopnet and its subsidiaries are
collectively referred to herein as the "Company."
Motion Picture Business
General
Since its inception in December 1995, the Company has co-produced three
motion pictures: "Dirty Laundry," "Machiavelli Rises" and "The Girl." Each such
film had limited theatrical runs shortly after release. The Company's primary
focus for the forseeable future will be to work directly, or through
distribution arrangements with third parties, to establish distribution for
these completed films through public or cable television - via pay-per-view,
premium and standard channels - the sale of video rights and/or foreign
distribution. To a lesser extent, the Company will continue to seek to acquire
screenplays and produce motion pictures, either directly or through
collaborative arrangements, to be distributed primarily through public or cable
television and the sale of video rights.
"Dirty Laundry"
In March 1995, the Company entered into a property acquisition agreement
(the "Purchase Agreement") and a co-production agreement (the "Production
Agreement") with Rogue Features, Inc. ("Rogue"), an unaffiliated entity, to
acquire the rights to and co-produce a motion picture of the screenplay entitled
"Dirty Laundry." In addition, the Company and Rogue entered into a right of
first refusal agreement with respect to the next two products of Rogue and/or
its principals.
In April 1996, the Company formed D.L. Productions, Inc. ("D.L.
Productions"), a New York corporation, as a wholly owned subsidiary, for the
purpose of holding title to and producing the Dirty Laundry film and receiving
revenues from the distribution thereof. The Purchase Agreement conveyed all
rights to the screenplay and the film itself to the Company. In return, Rogue
directed "Dirty Laundry" and has the right to 25% of its profits as described in
the Production Agreement. Rogue also retained the right to produce a live comedy
or musical upon the earlier of five years after Dirty Laundry's release or the
Company's approval. In addition, Michael Normand, a principal of Rogue, retained
the right to adapt the screenplay of Dirty Laundry into a novel on the Company's
approval of the compensation it is to receive therefrom. The Production
Agreement provided for the principals of Rogue to direct and retain creative
control of the production of the film while the Company retains final approval.
In November 1997, with production of the movie complete, the Company
effected the dissolution of D.L. Productions. Its assets were transferred to the
Company, and the Company took over the marketing of Dirty Laundry.
In June 1998, the Company entered into an agreement with Artistic License
Films, Inc. ("ALF") whereupon ALF agreed to use its best efforts to distribute
the film in at least three New York theaters and two Los Angeles theaters. In
exchange for its efforts, ALF received a $20,000 retainer fee which constitutes
an advance against ALF's distributor's fee of 25% of the gross receipts from the
theatrical distribution of the film
The film was released to five New York and three Los Angeles theaters. It
had a limited run during the fall of 1998 and received marginal reviews (two
stars out of four). Currently, the Company is directly working to distribute the
film through various channels, including public or cable television, the sale of
video rights and foreign distribution.
"Dirty Laundry" is a romantic comedy shot in the New York tri-state area.
It stars Jay Thomas as Joey (a dry cleaner going through a mid-life crisis), and
Tess Harper as Beth (a sex advice columnist for a woman's magazine and Joey's
wife of 15 years). Joey's dry cleaning business is doing poorly, and he is
convinced that he is aging prematurely. Given their increasing lack of intimacy,
Beth encourages Joey to seek counseling, which he does unbeknownst to Beth, who
has become attracted to her chiropractor. Throughout the film, a variety of
bizarre mishaps occur which result in the couple's rekindling of their lost
romance with a surprise ending. Mr. Thomas has co-starred in the motion picture
"Mr. Holland's Opus" and is known for his television work in "Love & War,"
"Cheers," "Murphy Brown," and "Mork & Mindy," and, until recently, was the host
of WTJM "Jammin" 105.1 FM, a New York radio station. Ms. Harper earned a Golden
Globe nomination for her performance in the film "Tender Mercies" and an Oscar
nomination for her role in the film "Crimes of the Heart."
"Machiavelli Rises"
In April 1998, the Company entered into a co-production agreement with
North Folk Films, Inc. ("North Folk") for the production of a film entitled
"Machiavelli Rises." The Company and North Folk formed a limited liability
company, Battle Studies Productions, LLC ("Battle Studies"), to finance,
produce, and distribute the film which commenced production in April 1998. The
film was completed in November 1998. The film was written, directed, and
co-produced by Efraim Horowitz and can be characterized as a contemporary ghost
story about power, greed, love, and Leonardo Da Vinci's lost notebook. Total
production costs to date have aggregated approximately $433,000, of which the
Company has funded approximately $217,500. In accordance with the terms of the
co-production 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 the Company. The film was shown in
January 1999 in both New York and at the Brussels Film Festival.
In February 2000, "Machiavelli Rises" was one of thirty-eight films
showcased at the New York Independent Film Festival ("NYIFF") in New York City
where it was honored with the award for Best Screenplay. In addition, it was
chosen (along with only six other films) for presentment at the Los Angeles
distribution of the NYIFF in April, 2000.
In September 2000 and January 2001, Battle Studies entered into two-year
agreements with each of Raven Pictures International and Koan, Inc. for the
distribution of "Machiavelli Rises" internationally and domestically,
respectively. See "Management's Discussion and Analysis or Plan of Operation -
Investment in Joint Ventures - Battle Studies Productions, LLC." To date, the
film has not generated any distribution revenues.
"The Girl"
In July 1999, the Company entered into an agreement with ALF with respect
to the production of a film entitled "The Girl." Pursuant to such agreement, the
Company and ALF formed a limited liability company, The Girl, LLC ("Girl LLC"),
to finance, produce and distribute the film. As of June 30, 2001, the Company
invested $35,000 for a 22.533% interest in Girl LLC. "The Girl" was completed in
the spring of 2001, has been exhibited at several film festivals and had a very
limited theatrical distribution in New York City. The Girl LLC is in the process
of attempting to secure video and foreign distribution arrangements.
"The Girl," which was filmed in Paris, categorized as a faux film noir,
chronicles a lesbian relationship.
Production
The Company intends to continue to review screenplays for acquisition and
co-production, although to a lesser extent. Typically, once a screenplay is
acquired (i) a budget is prepared, (ii) revisions to the screenplay are made,
(iii) the talent, production crews, and all ancillary items required for the
filming of the motion picture are hired and/or otherwise obtained, and (iv) a
film schedule is established. Once filming is complete, the film is edited,
sound and special effects are added, and a final print is produced. The Company
then arranges private showings of the film and attempts to secure domestic and
foreign distributors.
Production of a motion picture requires approximately five to eight weeks
of filming followed by approximately fourteen weeks of editing and adding sound
and special effects. An additional twelve to sixteen weeks generally is required
in order to secure a distributor for the film. If the Company cannot find a
distributor, it will attempt to distribute the film itself. Once this process is
complete, the film will be ready for release to theaters or other distribution
channels. See "--Distribution, Billing and Revenues."
Distribution, Billing and Revenues
Generally, distribution of a film may be undertaken either by a motion
picture studio, an independent distributor, or through an agent. The Company
expects that any existing films or future films it may produce will be
distributed by an independent distributor or itself through an agent. In a
distribution arrangement, the production company and the distributor determine
who will incur what portion of the costs of marketing a film, at which time a
budget is prepared and the extent of the release of the film is determined. The
release of films may be done in platforming stages. A screening is then held,
and critics are invited to review the film. If the film receives a favorable
response from either the critics and/or the audience, the film's distribution
will expand gradually into additional markets and theaters.
The Company does not expect extensive theatrical distribution of its
existing or future films. Rather, after limited theatrical distribution a film
may be distributed through public or cable television - via pay-per-view,
premium, and standard channels - and/or through the sale or rental of
videotapes. The Company may enter into agreements with different distributors
for different markets or sell all the rights to one distributor. Revenues
generated are distributed to all parties involved including the distributor, the
producers, the owners, and the talent pursuant to extensive formulas previously
agreed upon.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the United States and most foreign countries which provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company plans to take all appropriate and
reasonable measures to secure, protect, and maintain or obtain agreements from
licensees to secure, protect, and maintain copyright protection for all of the
motion pictures it distributes under the laws of all applicable jurisdictions.
The Company estimates that between 12 and 18 months will elapse between the
commencement of expenditures by the Company in the acquisition of a screenplay,
the production of a motion picture, and its release. The Company does not expect
to receive revenues, if any, from the exploitation of a film until approximately
24 to 36 weeks after its release. Notwithstanding there can be no assurance that
any completed film will ever establish distribution at any level or generate any
revenues to the Company. Billing in the industry typically occurs quarterly:
theaters pay distributors on a quarterly basis, and the Company is paid the
following quarter. In the event a distributor desires to distribute one of the
Company's films, however, such distributor may either (i) offer an initial
payment to the Company against, or in addition to, future royalties or (ii)
purchase the film outright.
Regulations
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, assigns ratings for age-group
suitability for viewing of motion pictures. While the Company will follow the
practice of submitting most of its motion pictures for such ratings, the Company
may review this policy from time to time.
United States television stations and networks, as well as foreign
governments, impose regulations on the content of motion pictures which may
restrict, in whole or in part, exhibition on television or in a particular
territory. There can be no assurance that current and future restrictions on
motion pictures released by the Company will not limit or affect the Company's
ability to exhibit such motion pictures.
Competition in the Film Industry
The film industry is immense with many well capitalized industry leaders
producing commercial films capable of wide theatrical distribution. The Company
competes, and will continue to compete, with these and other institutions which
produce, distribute, exploit and finance films, many of which have substantial
financial and human resources considerably more extensive than the Company's.
These institutions include the major film studios - including Disney, Universal,
MGM, and Sony - as well as smaller independent film companies and television and
cable networks. Industry members compete substantially for the hire or purchase
of a limited number of producers, directors, actors, and screenplays which are
able to attract major distribution in all media and all markets throughout the
world.
The motion picture business is highly competitive and has an extremely high
profile in terms of name recognition, with relatively insignificant barriers to
entry, and numerous entities compete for the same directors, producers,
actors/actresses, distributors, theaters, etc. There is intense competition
within the film industry for exhibition times at theaters, as well as for
distribution in other media, and for the attention of the movie-going public and
other viewing audiences. Competition for distribution in other media is as
intense as the competition for theatrical distribution, and not all films are
licensed in other media. Each year, numerous production companies are formed,
and numerous motion pictures are produced, all of which motion pictures seek
full distribution and exploitation. Despite the increase in the number of films,
a small number of films, those which receive widespread consumer acceptance,
account for a large percentage of total box office receipts.
Swimwear Business
General
Breaking Waves is a designer, manufacturer, and distributor of girl's
swimwear which is sold throughout the United States. In addition to swimwear,
Breaking Waves also manufactures beach cover-ups and accessories to coordinate
with its swimwear. Swimwear is made in children's sizes from 2-16 and in
pre-teen sizes.
Breaking Waves markets swimwear under private brand labels including
"Breaking Waves," "All Waves," and "Making Waves." In July 2000, Breaking Waves
added a new line of girls' swimwear which is sold under the label, "Coral Cove."
Breaking Waves also licenses rights to the name "Daffy Waterwear" and the
"Gottex" trademark in connection with the manufacture and sale of girls' swim
and related beach wear.
Products, Design, Supplies and Inventory
Breaking Waves designs, manufactures, and sells both private label and name
brand girl's swimwear and accessories. It has an office in Homestead, Florida
where its designer designs all styles for its swimwear lines and accessory
items. Each season, roughly 20-25 prints and fabrics are developed for the
"Breaking Waves" line, with generally between 10 to 20 prints and fabrics
developed for each of its other lines. For the six months ended June 30, 2001,
the "Coral Cove" line accounted for approximately one-third of Breaking Waves'
total sales volume, with the other four lines accounting for, in equal parts,
the remainder of Breaking Waves' volume for such period. Prior to the
introduction of the "Coral Cove" and "Gottex" lines, for the year ended December
31, 2000, the "All Waves" line accounted for approximately one-third of Breaking
Waves' total volume, with the remaining two lines accounting for, in equal
parts, the remainder of Breaking Waves' volume.
In designing its children's swimwear, Breaking Waves adapts certain of the
prints and styles it is provided by Beach Patrol Inc., the licensor of "Daffy
Waterwear" and Gottex Models Ltd. which management feels are appropriate for
children's wear. Of each fabric or print chosen, the Company usually
manufactures two swimsuits: a one-piece model and a two-piece model.
Once Breaking Waves has chosen the prints and colors it desires to use for
its children's swimwear, it sends the artwork for the fabric to its agent in
Korea who disseminates them to one or more clothing manufacturers for
prototyping and the knitting or weaving and printing of fabrics. The
manufacturer returns the fabrics to Breaking Waves, and upon Breaking Waves'
approval, the fabrics are sent, with the desired design, to any one or more of
several Indonesian or Korean companies where the fabric is cut and sewn into a
completed product. Finished goods are shipped from the manufacturer to a public
warehouse in the City of Industry, California. Breaking Waves has found that
this process is the most cost-effective means of operating its business. It
expects to continue its operations in this manner in the future, though it may
use other manufacturers and suppliers in different countries.
Breaking Waves' swimwear typically is produced in two blended fabrics: one
is a blend of nylon and lycra spandex, and the other is a blend of cotton,
polyester, and lycra spandex. Each product line uses different designs and
emphasizes different fabric blends.
For the six months ended June 30, 2001, 80% of Breaking Waves' finished
products were purchased from an Indonesian manufacture, with the balance
purchased from a Korean manufacturer. For the year ended December 31, 2000
Breaking Waves' finished products were purchased 80%, 15% and 5% from
Indonesian, Samoan and Korean manufacturers, respectively. Although the Company
believes that the fabrics and non-fabric sub-materials it uses are readily
available and that there are numerous manufacturers for such piece goods who
offer similar terms and prices, there can be no assurance that management is
correct in such belief. The unavailability of fabrics or the absence of
clothiers, or the availability of either at unreasonable cost, could adversely
affect the operations of Breaking Waves and the Company.
Since Breaking Waves purchases finished garments from overseas contractors,
it does not buy or maintain an inventory of sub-materials. It has not
experienced difficulty in satisfying finished garment requirements and considers
its sources of supply adequate. Breaking Waves' inventory of garments varies
depending upon its backlog of purchase orders and its financial position.
Marketing and Sales
The "Breaking Waves," "Daffy Waterwear," "Coral Cove" and "Gottex" lines
are distributed and sold through better department and specialty stores. The
"All Waves" label is sold to mass merchants and also as promotional goods in
department stores. Private label programs are supplied to several major chains
and department store groups.
Breaking Waves sells its swimwear and accessory items through its showroom
sales staff and through independent sales representatives. Over the past several
years, certain of its customers have included the Dillard and Federated
department store groups as well as Kids R Us, Sears, Wal-Mart, T.J. Maxx and
Marshalls. For the six months ended June 30, 2001, Breaking Waves had two
customers representing in the aggregate, 37% of net sales, as compared to three
customers representing in the aggregate, 46% of net sales, for the year ended
December 31, 2000.
Breaking Waves' merchandise is shipped pursuant to purchase orders sent by
its customers and is sent f.o.b. shipping point (freight on board) meaning
Breaking Waves is neither responsible for the goods during shipment nor for the
delivery charge. Payment is due 30 days after shipment. No goods are shipped on
consignment; therefore, except for non-conforming or damaged goods, all goods
shipped are considered sold.
In addition to its in-house sales and showroom personnel, approximately
twenty independent sales representatives throughout the United States sell
Breaking Waves merchandise on a non-exclusive basis. These representatives
service department stores and smaller specialty retailers. In some cases,
separate independent representatives sell the "Daffy Waterwear" line. None of
these representatives is under contract with Breaking Waves; nor does any
receive a salary. Rather, each is paid a commission based upon his sales. In
addition to showroom sales and sales representatives calling on customers,
Breaking Waves exhibits its products at major trade shows. End of season and
discontinued merchandise is sold to off-price stores.
Suspended Internet Activities
In March 1999, Breaking Waves launched an online wholesale children's
swimwear website at www.breakingwaves.com. The website was designed to
complement the company's wholesale distribution efforts by providing retailers
instant access to more than 200 styles of Breaking Waves swimwear. The Company
has determined, however, not to pursue this method of distribution, and its
website is now dormant.
Work in Progress
Breaking Waves manufactures its swimwear lines from June to December based
on its knowledge of the market and past sales. Customer orders generally start
arriving in June and July. Goods are reordered by customers on a continual basis
through the following June. The quantity of open purchase orders at any date may
be affected by, among other things, the timing and recording of orders. Breaking
Waves does not sell on consignment and accepts return of only such products as
are imperfect or shipped in error.
The major design work takes place from January to May. Goods are
manufactured, printed, and sewn overseas from June to December. Finished
garments are shipped from the factory to a public warehouse in Los Angeles for
shipments to retailers. The majority of shipments to retailers are made from
November to May, with January through March being the peak shipping time.
Trademarks
Breaking Waves relies on common law and registered trademarks for usage of
its private label swimwear lines under the names "Breaking Waves," "All Waves"
and "Coral Cove." Breaking Waves has licensed rights to the "Daffy Waterwear"
and "Gottex" names for girls swim and beach wear. See "Management's Discussion
and Analysis or Plan of Operations of - License Agreements" for a description of
each of such license arrangements.
There can be no assurance that such trademarks owned or licensed by the
Company adequately will be protected against infringement. In addition, there
can be no assurance that Breaking Waves will not be found to be infringing on
another company's trademark. In the event Breaking Waves finds another party to
be infringing upon one of its trademarks, if registered, or is found by another
company to be infringing upon such company's trademark, there can be no
assurance that Breaking Waves will be successful in any resultant litigation it
may ultimately become involved in.
Competition
There is intense competition in the swimwear apparel industry. Breaking
Waves competes with many other manufacturers in these markets, many of which are
larger and have greater resources than it does. Major competitors in the
swimwear industry include "Ocean Pacific," "Ralph Lauren," and "Speedo." In
addition, department stores and retailers have their own private label programs
which are the major competition in the mass merchant business.
Breaking Waves' business is highly competitive with relatively
insignificant barriers to entry and with numerous firms competing for the same
customers. Breaking Waves is in direct competition with local, regional, and
national clothing manufacturers, many of which have greater resources and more
extensive distribution and marketing capabilities than it does. In addition,
many large retailers have recently commenced sales of "store brand" garments
which compete with those sold by Breaking Waves. Management believes that
Breaking Waves' market share is not significant in its product lines.
Many of the national clothing manufacturers have extensive advertising
campaigns which develop and reinforce brand recognition. In addition, many of
such manufacturers have agreements with department stores and national retail
clothing chains to jointly advertise and market their products. Since Breaking
Waves does limited advertising and marketing and has no agreement with any
department store or national retail chain to advertise any of its products, it
competes with companies that have brand names that are well known to the public.
All other factors being equal, it can be expected that a retail shopper will buy
a "brand name" garment before he buys an "unknown" brand, depending on price.
Seasonality
Breaking Waves' business is seasonal. A large portion of its revenues and
profits are derived between November and March. Each year from April through
October, Breaking Waves designs and manufactures the following season's swimwear
lines. There can be no assurance that revenues received from December to June
will support Breaking Waves' operations for the rest of the year.
Employees
Mr. Harold Rashbaum, the Company's Chairman of the Board, President and
Chief Executive Officer oversees the Company's consolidated operations. The
Company has one other executive officer, a designer, controller and 3 office
personnel to oversee Breaking Wave's operations on a full-time basis, and
employs a Vice-President of Design, Merchandising and Production on a part-time
basis. Breaking Waves has approximately twenty independent sales persons
representing the Breaking Wave's lines on a non-exclusive basis. Hollywood's
operations are governed by Mr. Rashbaum. Most screenwriters, performers,
directors, and technical personnel involved in the Company's films are members
of guilds or unions which bargain collectively with producers on an
industry-wide basis from time to time. Any work stoppages or other labor
difficulties could delay the production of the films resulting in increased
production costs and delayed return of investments.
Business Risks
Film Production
The likelihood of the success of any film and the Company's ability to stay
on budget and on schedule for each film must be considered in light of the
problems, expenses, difficulties, complications, and delays frequently
encountered in connection with the production of a motion picture. Due to
unforeseen problems and delays including illness, weather, technical difficulty,
and human error, by completion, most films are considerably over budget. In
addition, the lack of experience of management in this industry, the limited
operating history and capital of the Company, and the competitive environment in
which the Company operates may cause increased expenses due to mistakes and
delays in the production of the films.
The success of a film in theatrical distribution, television, home video,
and other ancillary markets is dependent upon public taste which is
unpredictable and susceptible to change. The number and popularity of other
films being distributed may also significantly affect the theatrical success of
a film. Accordingly, it is impossible for anyone to predict accurately the
success of any film at the time it enters production. The production of a motion
picture requires the expenditure of funds based largely on a pre-production
evaluation of the commercial potential of the proposed project.
Swimwear
The apparel industry is a cyclical industry, with consumer purchases of
swimwear, accessory items, and related goods tending to decline during
recessionary periods when disposable income is low. Accordingly, a prolonged
recession would in all likelihood have an adverse effect on the operations of
Breaking Waves and the Company. Breaking Waves operates in only one segment of
the apparel industry, specifically swimwear, and is therefore dependent on the
demand for such goods. Decreases in the demand for swimwear products would have
a material adverse effect on the Company's business as a whole.
Breaking Waves believes that its success in the swimwear industry depends
in substantial part on its ability to anticipate, gauge, and respond to changing
consumer demands and fashion trends in a timely manner. Breaking Waves attempts
to anticipate consumer preferences. There can be no assurance, however, that it
will be successful in this regard, and if it misjudges the market for any of its
products, it may be faced with unsold finished goods, inventory, and work in
process, which could have an adverse effect on the Company's operations as a
whole.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 14 East 60th Street, Suite
402, New York, New York 10022, (212) 688-9223, comprising approximately 1,800
square feet. The Company leased its office space in November 1996 for a term of
five years, at an approximate base annual rental of $70,000. Upon the lease's
expiration on November 30, 2001, the executive offices will relocate to Breaking
Waves' facilities described below.
Breaking Waves maintains its executive offices and showroom at 112 West
34th Street, New York, New York 10120. Until January 1998, this space was
approximately 1,000 square feet and comprised only office space. In January
1998, Breaking Waves amended its lease and rented an additional 1,000 square
feet. The lease is for a term of seven years, expiring December 2004, at an
annual rental of $71,600. In July 2001, Breaking Waves terminated this lease,
effective August 31, 2001. A new 6-year lease for an aggregate of 2,200 square
feet expiring September 30, 2007 was signed, which becomes effective on November
1, 2001, or such later date as the landlord of such premises completes
construction. Annual rent under the new lease is $84,915 through December 31,
2004 and $95,760 for the remainder of the lease. Breaking Waves also maintains a
Florida office, comprising approximately 780 square feet, with annual payments
of approximately $11,000.
ITEM 3. 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. The Company
has responded to the complaint and denied the allegations. The Company intends
to contest this action vigorously and believes that such claims against it 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is quoted on the SmallCap Market of the
Nasdaq Stock Market and the Third Segment of the Frankfurt Stock Exchange. The
following table sets forth representative high and low sale prices as reported
by a market maker for the Company's Common Stock and Warrants, during the period
from January 1, 1999 through October 10, 2001. Sales prices reflect prices
between dealers and do not include resale mark-ups, mark-downs, or other fees or
commissions.
Common Stock Warrants
Calendar Period Low High Low High
1999(1)(2)
----
01/01/99 - 03/31/99 .50 2.78 .03 .31
04/01/99 - 06/30/99 1.06 3.09 .06 .41
07/01/99 - 09/30/99 2.06 2.75 .13 .28
10/01/99 - 12/31/99 2.06 3.44 .13 .31
2000(2)
01/01/00 - 03/31/00 2.56 7.72 .13 .72
04/01/00 - 06/30/00 2.44 5.13 .13 .47
07/01/00 - 09/30/00 2.38 3.98 .25 .31
10/01/01 - 12/31/00 .25 3.00 .16 .28
2001(2)
01/01/01 - 03/31/01 .19 .89 .09 .22
04/01/01 - 06/30/01 1.00 2.18 .14 .18
07/01/01 -10/10/01 .42 1.56 .02 .15
As of October 10, 2001, there were 47 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 900 additional beneficial owners of shares of Common Stock held in
street name. As of October 10, 2001, the number of outstanding shares of the
Company's Common Stock was 7,472,224. (This number includes an aggregate of
2,420 shares of Common Stock being held by the Company on behalf of certain
shareholders pending their submission for exchange of stock certificates
outstanding on the date of the Company's one-for-three reverse stock split, as
adjusted for the reverse stock split and subsequent stock dividends.
1 The above prices reflect the price for post-split shares and
post-adjustment Warrants.
2 The table reflects the price for post-dividend shares and post-adjustment
Warrants since February 5, 1999.
Initially, each Warrant issued in the IPO 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 February 1999 100% Common Stock
dividend, February 2000 10% Common Stock dividend and June 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 or, each Warrant, exercisable at an exercise price of $3.87 purchases 1
share of Common Stock.
In August 2001, the Company extended the term of the Warrants for an 18
month period. The current expiration date of the Warrants is March 10, 2003.
There is no current Registration Statement on file with the Securities and
Exchange Commission ("SEC") covering the shares of Common Stock issuable upon
exercise of the Warrants. Accordingly, the Warrants cannot currently be
exercised. The Company plans to file a Registration Statement with the SEC in
the future.
On April 15, 1998, the Company's Board of Directors authorized the
distribution of Distribution Warrants to all holders of shares of the Company's
Common Stock as of the May 8, 1998 Warrant Record Date. Pursuant to the
distribution, each share held on the Warrant Record Date shall generate the
issuance of one Distribution Warrant to purchase one share of Common Stock at an
exercise price of $4.00 per share. The Distribution 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 SEC. The Company
to date has not filed the registration statement.
Common Stock Dividends
20% Common Stock Dividend
On May 8, 2000, the Company's Board of Directors authorized the
issuance of a 20% stock dividend to all holders of shares of the Company's
Common Stock, par value $0.001 per share (the "Common Stock") as of May 19, 2000
payable on June 19, 2000.
10% Common Stock Dividend
On January 7, 2000, the Company's Board of Directors authorized the
issuance of a 10% stock dividend to all holders of Common Stock as of January
20, 1999, payable February 1, 2000.
100% Common Stock Dividend
On January 14, 1999, the Company's Board of Directors authorized the
issuance of a stock dividend to all holders of shares of the Company's Common
Stock as of January 29, 1999, payable on February 5, 1999.
The Company has paid no cash dividends and has no present plan to pay
any cash dividends. Payment of future dividends will be determined from time to
time by its board of directors, based upon its future earnings, if any,
financial condition, capital requirements, and other factors. The Company is not
presently subject to any contractual or similar restriction on its present or
future ability to pay such dividends.
Recent Sales of Unregistered Securities
In February 1998, in private transactions, the Company sold an
aggregate of 792,000 shares of Common Stock to three entities at a price of
$0.295 per share for an aggregate price of $195,000. These shares were purchased
by the following accredited investors: Full Moon Development, Inc., Volcano
Trading, Inc., and American Telecom Corp. See "Security Ownership of Certain
Beneficial Owners and Management." The private offering was conducted in
reliance upon Rule 506 of the General Rules and Regulations under the Act. The
proceeds from these sales were used by the Company for general working capital
and to fund the Company's interest in Battle Studies. No underwriter was used in
connection with this offering.
In April 1998, in private transactions, the Company sold an aggregate
of 924,000 shares of Common Stock to three entities at a price of $0.73 per
share for an aggregate price of $560,000. These shares were purchased by the
following accredited investors: Amir Overseas Capital, Ltd., HDS Capital Corp.
(whose secretary is related to the Company's President), and Galit Capital, Ltd.
See "Security Ownership of Certain Beneficial Owners and Management." The
private offering was conducted in reliance upon Rule 506 of the General Rules
and Regulations under the Act. The proceeds from these sales were used by the
Company for general working capital and to fund the Company's interest in Battle
Studies. No underwriter was used in connection with this offering.
In February 2000, in a private transaction, the Company sold 120,000
shares of Common Stock to Value Management & Research, AG for an aggregate price
of $300,000. The private offering was conducted in reliance upon Rule 506 of the
General Rules and Regulations under the Act. The proceeds from the sale were
used by the Company for general corporate purposes. No underwriter was used in
connection with this offering.
ITEM 6. 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 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 wholly-owned subsidiary, Hollywood to which
it assigned its motion picture business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, 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 IPO, it acquired all of the capital stock of Breaking Waves which
designs, manufactures, and distributes private and brand name label children's
swimwear. As of June 30, 2001, the Company changed its year end from December 31
to June 30.
The consolidated financial statements at June 30, 2001 and 2000 and at
December 31, 2000 and 1999 include the accounts of Shopnet and its wholly owned
subsidiaries, Breaking Waves and Hollywood (collectively referred to as the
"Company") except where otherwise indicated 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 entity in order to be more
meaningful.
Six months ended June 30, 2001 as compared to the six months ended June
30, 2000
Breaking Waves
For the six months ended June 30, 2001 and 2000, Breaking Waves
generated net sales of $4,728,948 and $3,673,770, respectively, with related
cost of sales amounting to $3,303,919 and $2,491,788, respectively. The increase
in sales amounting to $1,055,178, or approximately 29%, from 2000 to 2001 was
primarily attributable to the new Gottex and Coral Cove lines. The gross profit
for the six months ended June 30, 2001 amounted to $1,425,029, or 30%, as
compared to the six months ended June 30, 2000 during which it amounted to
$1,181,982, or 32%. The decrease of 2% is due to higher production costs.
Selling, general, and administrative expenses during the six months
ended June 30, 2001 and 2000 amounted to $1,216,127 and $813,416, respectively.
The increase amounting to $402,711 or approximately 50%, is primarily
attributable to higher warehousing costs and royalty and consulting expense
related to the Gottex license agreement. As a percentage of sales, selling,
general and administrative expenses increased to 26% from 22% for the six months
ended June 30, 2001 and 2000, respectively.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the six months ended June 30:
2001 2000
---------------- -------------------
Officers, office staff and
designer salaries and related benefits $ 225,242 $ 262,061
Commission expense 149,992 64,484
Warehousing costs 240,858 151,221
Royalty fees 176,610 99,113
Rent expense 44,200 40,909
Factor commissions 55,166 39,994
Miscellaneous general corporate
overhead expenses 324,059 155,634
Interest expense in connection with its factoring agreement amounted to
$256,429 and $168,115, for the six months ended June 30, 2001 and 2000,
respectively. The increase is due to the increase in sales.
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 initial
purchase, Breaking Waves owned 25.4% of the outstanding common stock of Play Co.
During the six months ended June 30, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play
Co.'s common stock thereby diluting Breaking Waves' ownership interest in Play
Co. The percentage ownership of Breaking Waves' investment was diluted to
approximately 1.5% of June 30, 2001. Breaking Waves accounted for its investment
in Play Co. in accordance with the equity method of accounting to the point it
maintained at least a 20% ownership interest. Once its investment was below 20%,
Breaking Waves accounted for the investment in accordance with the cost method
of accounting which valued the investment at $- 0 - due to the prior equity
losses in Play Co.'s operations. In accordance with SFAS No. 115 "Accounting for
certain investments in debt and equity securities," since such securities are
classified as available for sale, the value of such investment was revalued and
recorded at the fair market value which was approximately $6,350 and $267,000 as
of June 30, 2001 and 2000, respectively. Accordingly, Breaking Waves recorded an
unrealized (loss) gain of ($101,600) and $266,700 for the six months ended June
30, 2001 and 2000, respectively, which has been recorded as a component of
comprehensive income (loss) in the statements of operations.
Breaking Waves generated net (loss) income of ($84,561) and $180,246
for the six months ended June 30, 2001 and 2000, respectively. The loss
generated during the six months ended June 30, 2001 is primarily attributable to
a lower gross profit percentage, higher interest expense and warehousing costs
and a new consulting agreement.
Breaking Waves' comprehensive loss was $186,161 for the six months
ended June 30, 2001 versus comprehensive income of $446,946 for the six months
ended June 30, 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 six months ended June 30, 2001 and 2000, Hollywood generated no
sales from its motion picture "Dirty Laundry". Although sales prior to and
including the six months ended June 30, 2001 were minimal, the Company expects
to effect increased sales during the fiscal year ending June 30, 2002 and
thereafter as a result of the implementation of a new marketing strategy which
among other things, emphasizes the development of new marketing and distribution
arrangements for "Dirty Laundry." There can be no assurance that the Company's
new marketing and distribution strategies will be successful in generating sales
from "Dirty Laundry." Upon a review of the net realizable value of the movie
costs, management has determined that a $145,272 and $100,000 write down was
necessary as of June 30, 2001 and 2000, respectively. Accordingly, Hollywood
generated a loss of $149,270 and $100,000 for the six months ended June 30, 2001
and 2000.
Subsequent to "Dirty Laundry," Hollywood also has invested in other
movie ventures, some of which have generated revenue to date. See "Investment in
Joint Ventures."
Shopnet.com
For the six months ended June 30, 2001 and 2000, Shopnet generated
minimal income comprised of interest from its money market and other ancillary
revenue from its corporate office.
Shopnet's selling, general, and administrative expense amounted to
$283,581 and $283,244 for the six months ended June 30, 2001 and 2000,
respectively. This represents an increase of $337, or less than 1%.
The major components of the Company's expenses are as follows for the
six months ended June 30:
2001 2000
----------- --------------------
Salaries (officer and office staff) and stock
compensation and related benefits $ 93,454 $ 105,037
Rent 39,286 38,171
Legal and professional fees 54,529 40,964
Consulting fees 15,750 17,080
Other general corporate and administrative expenses 80,562 81,992
Shopnet generated a net loss of $285,838 and $283,692 for the six
months ended June 30, 2001 and 2000, respectively. These net losses include on a
consolidated basis amortization of goodwill of $35,476 in each period.
Year ended December 31, 2000 as compared to the year ended December 31,
1999
Breaking Waves
For the years ended December 31, 2000 and 1999, Breaking Waves
generated net sales of $5,713,133 and $4,756,497, respectively, with related
cost of sales amounting to $3,764,258 and $3,214,704, respectively. The increase
in sales amounting to $956,636, or approximately 20%, from 1999 to 2000 was
primarily attributable to the introduction of the new Coral Cove product line.
The gross profit for the year ended December 31, 2000 amounted to $1,948,875, or
34%, as compared to the year ended December 31, 1999 during which it amounted to
$1,541,793, or 32%.
Selling, general, and administrative expenses during the years ended
December 31, 2000 and 1999 amounted to $1,638,809 and $1,503,993, respectively.
The increase, amounting to $134,816 or approximately 9%, is primarily
attributable to factoring and warehousing costs. As a percentage of sales,
selling, general, and administrative expenses decreased to 29% from 32% for the
years ended December 31, 2000 and 1999.
The major components of the Breaking Waves' selling, general, and
administrative expenses are as follows for the years ended December 31:
2000 1999
------------------ ------------------
Officers, office staff and
designer salaries and related benefits $ 535,137 $ 499,642
Commission expense 94,489 112,475
Warehousing costs 228,934 178,479
Royalty fees 171,869 173,700
Rent expense 87,690 96,404
Factor commissions 56,683 50,956
Miscellaneous general corporate
overhead expenses 464,007 392,337
Interest expense in connection with its factoring agreement amounted to
$305,309 and $228,772, for the years ended December 31, 2000 and 1999,
respectively. The increase is due to the increase in sales.
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.
For the year ended December 31, 1999, Breaking Waves recognized
$994,305 of equity loss (non-cash loss) in Play Co. in connection with the
equity method of accounting.
During the year ended December 31, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play Co's
common stock thereby diluting Breaking Waves ownership interest in Play Co. The
percentage ownership of Breaking Waves' investment was diluted to approximately
1.5% as of December 31, 2000. Breaking Waves accounted for its investment in
Play Co. in accordance with the equity method of accounting to the point it
maintained at least a 20% ownership interest. Once its investment was below 20%,
Breaking Waves accounted for the investment in accordance with the cost method
of accounting which valued the investment at $-0- due to the prior equity losses
in Play Co.'s operations. In accordance with SFAS No. 115 "Accounting for
certain investments in debt and equity securities," since such securities are
classified as available for sale, the value of such investment was revalued and
recorded at the fair market value which was approximately $108,000 as of
December 31, 2000. Accordingly, Breaking Waves recorded an unrealized gain of
approximately $108,000 for the year ended December 31, 2000, which has been
recorded as a component of comprehensive income (loss) in the statements of
operations.
Breaking Waves generated a net income (loss) of $663 and ($1,025,449),
for the years ended December 31, 2000 and 1999, respectively. The net loss
generated for the year ended December 31, 1999 includes an equity loss (non -
cash loss) of $994,305 from Play Co.
Breaking Waves' comprehensive income was $108,613 for the year ended
December 31, 2000 versus a comprehensive (loss) of $1,025,449 for the year ended
December 31, 1999. The comparisons of the comprehensive net income (loss) for
the two years excluding the affect of the investment in Play Co. are $663 for
2000 and ($31,144) for 1999.
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 years ended December 31, 2000 and 1999, Hollywood generated no
sales from its motion picture "Dirty Laundry". Although sales prior to, and
including, the year ended December 31, 1999 were minimal, the Company expects to
effect increased sales during 2001 and thereafter as a result of a new marketing
strategy which, among other things, emphasizes the development of new marketing
and distribution arrangements for "Dirty Laundry." There can be no assurance
that the Company's new marketing and distribution strategies will be successful
in generating sales from "Dirty Laundry." Upon a review of the net realizable
value of the movie costs, management determined that a $308,564 and $261,000
write down was necessary as of December 31, 2000 and 1999, respectively.
Accordingly, Hollywood generated a loss of $314,064 and $265,153 for the years
ended December 31, 2000 and 1999, respectively. Subsequent to "Dirty Laundry,"
Hollywood also has invested in other movie ventures, none of which have
generated revenue to date. See "Investment in Joint Ventures."
Shopnet.com
For the years ended December 31, 2000 and 1999, Shopnet generated
minimal income comprised of interest from its money market and other ancillary
revenue from its corporate office.
Shopnet's selling, general, and administrative expense amounted to
$554,434 and $630,014 for the years ended December 31, 2000 and 1999,
respectively. This represents a decrease of $75,580, or approximately 12%.
The major components of the Company's expenses are as follows for the
years ended December 31:
2000 1999
--------------- -----------
Salaries (officer and office staff) and stock
compensation and related benefits $ 192,135 $ 231,631
Rent 76,234 74,907
Legal and professional fees 99,610 61,634
Consulting fees 27,080 45,824
Other general corporate and administrative expenses 159,375 204,018
Shopnet generated a net loss of $593,575 and $685,477 after an income
tax (benefit) expense of ($8,140) and $53,369 for the years ended December 31,
2000 and 1999, respectively. Those net losses include on a consolidated basis
amortization of goodwill of $70,952 in each year. The income tax expense in
1999 was primarily a result of an increase in the valuation allowance associated
with some of the Company's federal net operating losses. The Company has a
consolidated net operating loss carryforward of approximately $2,148,000 for
federal tax purposes which is expected to be utilized in the future as a result
of filing consolidated federal income taxes with its subsidiaries, Breaking
Waves and Hollywood.
Liquidity and Capital Resources
At June 30, 2001, the Company's consolidated working capital amounted
to $159,203. 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
approximately 1.5% as of June 30, 2001 as evidenced by the 1,270,000 shares of
common stock it currently owns. As of June 30, 2001, Breaking Waves' investment
in Play Co. decreased to $6,350 based on the fair market value of its common
stock holdings. On March 28, 2001, Play Co. and certain of its subsidiaries all
filed for protection under Title 11 of the United States Code with the United
States Bankruptcy Court for the Southern District of New York. In August 2001,
the case was converted to a Chapter 7 filing.
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 approximately $750,000. The Company
maintains cash deposits in accounts which are in excess of Federal Deposit
Insurance Corporation limits by approximately $665,000. The Company believes
that such risk is minimal. The Company maintains a letter of credit with a
financial institution as a condition of its factoring agreement. The financial
institution initially required the Company to maintain $1,150,000 as collateral
for the letter of credit. In September 2001, this was increased to 1,450,000. At
June 30, 2001, the $750,169 of the Company's certificates of deposit represented
a portion of the $1,150,000 required collateral. Subsequent to September 15,
2001, approximately $400,000 of the Company's certificates of deposit
represented a portion of the $1,450,000 required collateral.
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 six months ended June 30, 2001 and 2000 and for the years ended
December 31, 2000 and 1999, the Company reported consolidated net income (loss)
of ($519,669),($203,446), ($906,976) and ($1,976,079) after an income tax
(benefit) provision of ($456), $10,970, ($6,004) and $12,273 and a comprehensive
net (loss) income of ($621,269), $63,254, ($799,026), and ($1,976,079),
respectively.
Investment in Joint Ventures
Battle Studies Productions, LLC
In April 1998, the Company entered into a co-production agreement with
North Fork for "Machiavelli Rises." The Company and North Fork formed Battle
Studies to finance, produce and distribute the film. 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. Total production costs to date have
aggregated approximately $425,000 of which the Company has funded approximately
$218,500. In accordance with the terms of the co-production 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
the Company. The film was shown in January 1999 in both New York and at the
Brussels Film Festival.
The Company accounts for the investment in Battle Studies on the equity
method. For the six months ended June 30, 2001 and 2000 and for the years ended
December 31, 2000 and 1999, the Company recorded $1,473, $-0-, $4,290 and $-0-,
respectively, equity losses for its proportionate share of Battle Studies. No
revenues have been derived from this film as of June 30, 2001 and December 31,
2000.
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 revenue 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, to distribute and promote Battle Studies' motion picture
("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, LLC
Pursuant to an agreement dated July 1, 1999 with ALF for the production
of a film entitled "The Girl," Hollywood invested through June 30, 2001 $35,000
for a 22.533% interest in a new entity, The Girl, LLC, a limited liability
company ("Girl LLC"). In return for its participation in Girl LLC, Hollywood
shall be entitled to receive a non-contested, non-dilutable 22.533% ownership
interest in 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 Girl LLC. Girl LLC retains all rights to the
motion pictures, the screenplays, and all ancillary rights attached thereto.
"The Girl" is completed and has been exhibited at several film festivals. Girl
LLC is in the process of attempting to secure video and foreign distribution
arrangements for the film.
Hollywood accounts for the investment in Girl LLC under the equity
method. As of June 30, 2001, the Company has recorded its investment at $33,702.
This represents its initial investment of $35,000 less $1,298 of equity loss for
its proportionate share of Girl LLC.
Factoring Arrangements
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. Interest expense related to this agreement totaled $204,821 and $228,772
for the years ended December 31, 2000 and 1999, respectively. As of June 30,
2001 and December 31, 2000, the net due to Breaking Waves from CIT amounted to
$-0- and $312, respectively. 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").
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. In September 2001, Century required the Company to
increase the amount of collateralized standby letters of credit by $300,000,
raising such amount to $1,450,000.
To date, standby letters of credit in the aggregate amount of
$1,050,000 secured by assets of third parties have been provided to the Company.
This has enabled the Company to reduce the amount of cash in the segregated
account, enabling it to utilize such funds for operations. Such assets are
available to Breaking Waves for a ten year term, subject to earlier termination
in the event of default. Breaking Waves is obligated to make an annual payment
to each of the two entities which provided such assets, equal to an aggregate of
1-1/4% of net sales of Breaking Waves through June 30, 200l, and an aggregate of
1-3/4% of net sales of Breaking Waves for each year the letter of credit is
available thereafter, payable 45 days after the end of each fiscal quarter. On
the closing date, such entities received funds in the aggregate amount of
$36,750 reflecting advance payment of such amounts. See "Certain Relationships
and Related Transactions" for a more complete description of such transactions
and the Company's related financial obligations.
In September 2001, the Company and Breaking Waves retained Arc
Financial Corp. ("ARC") , a British Virgin Islands company, for a ten year term
to provide financial consulting services. Pursuant to the terms of a consulting
agreement ("Arc Consulting Agreement"), ARC was retained to assist the company
in the acquisition of financing to acquire inventory and for other corporate
purposes ("Financing"), as well as consult with the Company with regard to its
ongoing operations, including systems to control expenses, methods to enhance
and promote sales of Breaking Waves' products and improving production. Pursuant
to the terms of the Arc Consulting Agreement, the Company and Breaking Waves
agreed to compensate Arc (i) an annual fee of $20,000 ("Base Fee") and (ii) a
percentage of annual net sales in the amount of 1-1/4% through June 30, 2001 and
1-3/4% of net sales for each year of the term thereafter ("ARC Percentage Fee"),
payable 45 days after the closing of each fiscal quarter. On the closing date of
the financing of the assets in the amount of $1,050,000, ARC received (i) a lump
sum payment of $209,000 reflecting full advance payment of the Base Fee and (ii)
$36,750 reflecting advance payment of the Arc Percentage Fee. The Company and
Breaking Waves are entitled to terminate the ARC Consulting Agreement any time
after September 30, 2006, in which event all prepaid fees are forfeited.
Interest expense related to the factoring agreement totaled $256,429
and $100,488 for the six months ended June 30, 2001 and for the year ended
December 31, 2000, respectively. Century has a continuing interest in Breaking
Waves' inventory as collateral for the advances. As of June 30, 2001 and
December 31, 2000, the net advances to Breaking Waves from Century amounted to
$1,700,337 and $3,165,597.
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
The Company's executive offices are located at 14 East 60th Street,
Suite 402, New York, New York 10022, (212) 688-9223, compromising approximately
1,800 square feet. The Company leased its office space in November 1996 for a
term of five years, at an approximate base annual rental of $70,000. Upon the
lease's expiration on November 30, 2001, the executive offices will relocate to
Breaking Waves' facilities described below.
Breaking Waves maintains its executive offices and showroom at 112 West
34th Street, New York, New York 10120. Until January 1998, this space was
approximately 1,000 square feet and compromised only office space. In January
1998, Breaking Waves amended its lease and rented an additional 1,000 square
feet. The lease is for a term of seven years, expiring December 2004, at an
annual rental of $71,600. In July 2001, Breaking Waves terminated this lease,
effective August 31, 2001. A new 6-year lease for an aggregate of 2,200 square
feet expiring September 30, 2007 was signed, which becomes effective on November
1, 2001, or such later date as the landlord of such premises completes
construction. Annual rent under the new lease is $84,915 through December 31,
2004 and $95,760 for the remainder of the lease. Breaking Waves also maintains a
Florida office, comprising approximately 780 square feet, with annual payments
of approximately $11,000.
License Agreements
On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. 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 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 and advertising under this agreement totaling $150,000,
$99,113, $163,009 and $162,501 during the six months ended June 30, 2001 and
2000 and during the years ended December 31, 2000 and 1999, respectively.
On October 31, 1996, Breaking Waves entered into a license agreement
with North-South Books, Inc. for the exclusive use of certain artwork and text
in the making of swimsuits and accessories in the United States and Canada. The
agreement expired on March 1, 1999. Breaking Waves recorded royalties totaling
$784 under this agreement during the year ended December 31, 1999.
On October 17, 1997, Breaking Waves entered into a license agreement
with Kawasaki Motors Corp., U.S.A. with an effective date of July 1, 1997 for
the exclusive use of certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is five percent (5%)
of net sales. The agreement expired May 31, 1999 and was not renewed. Breaking
Waves recorded royalties under this agreement totaling $10,415 during the year
ended December 31, 1999.
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, subject
to certain exceptions. The license agreement also requires the Company to expend
certain minimum amounts on advertising each year. The license agreement is for a
term of three years, subject to earlier termination in accordance with its
terms. Breaking Waves recorded royalties under this agreement totaling $26,610
and $8,859 for the six months ended June 30, 2001 and for the year ended
December 31, 2000, respectively.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Officers and Directors
The following table sets forth the names, ages, and titles of all
directors and officers of the Company:
Name Age Position
Harold Rashbaum 73 President, CEO, and Director
Jeanne Falletta 43 Secretary and Director
Alain Le Guillou, M.D. 43 Director
James B. Frakes 44 Director
Michael Friedland 63 Director
Debra Riggs 47 Director
The Directors of the Company are elected annually by the stockholders,
and the Officers of the Company are appointed annually by the Board of
Directors. Vacancies on the Board of Directors may be filled by the remaining
Directors. Each current Director and Officer will hold office until the next
annual meeting of stockholders or until his successor is elected and qualified.
The outside Directors do not receive a Director's fee for their participation as
Directors. The outside Directors are Alain Le Guillou, M.D. (Until recently
Harold Rashbaum was the father-in-law of Alain Le Guillou, M.D.), James B.
Frakes and Debra Riggs. The Corporation does not have key man insurance on the
lives of any of its Officers or Directors.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, shareholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
Harold Rashbaum, age 73, has been the President, Chief Executive Officer
and a Director of the Company since January 1997. Since September 1996, he has
also been the President, Secretary, and sole Director of Breaking Waves, Inc.
("Breaking Waves"), a New York company which is a wholly-owned subsidiary of the
Company. From May 1996 to January 1997, Mr. Rashbaum served as Secretary and
Treasurer of the Company. Since September 1996, Mr. Rashbaum has been the
Chairman of the Board of Directors of Play Co. Toys & Entertainment Corp. ("Play
Co."), a public entity whose Common Stock, Series E Stock and Series E Warrants
are quoted on the over-the-counter market on the OTC Bulletin Board. Mr.
Rashbaum was a management consultant to Play Co. from July 1995 to September 10,
1996. In May 1998, he was elected as a Director of Toys International, Inc.
("Toys"), a majority-owned subsidiary of Play Co. whose Common stock is traded
on the SMAX segment of the Frankfurt Stock Exchange. On March 28, 2001, Play
Co., Toys and Play Co. Toys Canyon Country, Inc. ("Play Co. Toys Canyon") each
filed for protection under Title 11 of the United States Code with the United
States Bankruptcy Court for the Southern District of New York. In August 2001,
the case was converted to a Chapter 7 filing. Since February 1996, Mr. Rashbaum
has also been the President and a Director of H.B.R. Consultant Sales Corp.
("HBR"), of which his wife is the sole shareholder.
Jeanne Falletta, age 43, was elected a director of the Company in May
2000 and has been its Secretary since February 2000. Since October 1997, Ms.
Falletta has been the controller of Breaking Waves where she has been employed
since February 1997, initially having been hired as a bookkeeper. From January
1996 to February 1997, Ms. Falletta consulted with various companies as a
freelance accountant.
Alain Le Guillou, M.D., age 44, has been a Director and a consultant of
the Company since 1996. Since July 1995, Dr. Le Guillou has been a doctor of
pediatrics at Montefiore Medical Group. Until recently, Dr. Le Guillou was the
son-in-law of Harold Rashbaum.
James Frakes, age 45, has been a Director of the Company since January
1998 and was appointed Chairman of the Company's Audit Committee in June 2000.
Since May 2001, Mr. Frakes has been Chief Financial Officer of NTN
Communications, Inc. a public company whose common stock trades on the American
Stock Exchange, Inc. From July 1997 to May 2001, Mr. Frakes served as Chief
Financial Officer and Secretary of Play Co. In August 1997, he was elected as a
Director of Play Co. In January 1998, Mr. Frakes was appointed Secretary and
Chief Financial Officer of Toys. He was elected as a Director of Toys in May
1998. On March 28, 2001, Play Co., Toys and Play Co. Toys Canyon each filed for
protection under Title 11 of the United States Code with the United States
Bankruptcy Court for the Southern District of New York. In August 2001, the case
was converted to a Chapter 7 filing. From June 1990 to March 1997, Mr. Frakes
was Chief Financial Officer of Urethane Technologies, Inc. ("UTI") and two of
its subsidiaries, Polymer Development Laboratories, Inc. ("PDL") and BMC
Acquisition, Inc. These were specialty chemical companies, which focused on the
polyurethane segment of the plastics industry. Mr. Frakes was also Vice
President and a Director of UTI during this period. In March 1997, three
unsecured creditors of PDL filed a petition for the involuntary bankruptcy of
PDL. From 1985 to 1990, Mr. Frakes was a manager for Berkeley International
Capital Corporation, an investment banking firm specializing in later stage
venture capital and leveraged buyout transactions.
Michael Friedland, age 63, has been a Director of the Company since May
2000. Mr. Friedland has been the Vice President of Design, Marketing and Sales
of Breaking Waves since its inception in 1991. Mr. Friedland has over 40 years
experience in the children's swimwear industry. Prior to joining Breaking Waves,
Mr. Friedland co-founded Making Waves, Inc., a manufacturer of children's
swimwear.
Debra Riggs, age 46, has been a Director of the Company since June 2000
when she was also appointed to the Company's Audit Committee. In September 2001,
Ms. Riggs joined Premier Food Services Incorporated as a branch controller. Ms.
Riggs was the Controller of Play Co. since February, 1999 until September 2001.
On March 28, 2001, Play Co., Toys and Play Co. Toys Canyon each filed for
protection under Title 11 of the United States Code with the United States
Bankruptcy Court for the Southern District of New York. In August 2001, the case
was converted to a Chapter 7 filing. From June, 1998 through January, 1999, Ms.
Riggs was Controller of National Customer Engineering, a private company. Prior
to NCE, Ms. Riggs was Assistant Controller of Factory 2-U Inc., a public company
with over 200 retail stores in the business of selling discount clothing.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
to file reports of securities ownership and changes in such ownership with the
SEC. Officers, directors, and greater than ten percent beneficial owners also
are required by rules promulgated by the Securities and Exchange Commission
("SEC") to furnish the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the six months ended June
30, 2001 was a director, officer, or beneficial owner of more than ten percent
of the Company's Common Stock which is the only class of equity securities of
the Company registered under ss.12 of the Securities Exchange Act of 1934, as
amended, failed to file on a timely basis reports required by ss.16 of the Act
except that, to the Company's knowledge, each of Mr. Michael Friedland and Ms.
Falletta and Riggs, all directors of the Company, filed their Forms 3 late in
March 2001. In addition, to the Company's knowledge, Mr. Rashbaum and Mr. Di
Milia (a former officer of the Company) did not file Forms 4 or Forms 5, and EVC
did not file a Form 5 for the year ended December 31, 1999. The foregoing is
based solely upon a review by the Company of (i) Forms 3 and 4 during the most
recent fiscal year as furnished to the Company under Rule 16a-3(e) under the
Act, (ii) Forms 5 and amendments thereto furnished to the Company with respect
to its most recent fiscal year, and (iii) any representation received by the
Company from any reporting person that no Form 5 is required, except as
described herein.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash And Certain Other Compensation
The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation
awarded to, earned by, or paid to the named executive officer during the periods
ended December 31, 2000, 1999 and 1998 and the six month period ended June 30,
2001.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
Harold Rashbaum
President, CEO,
And Director 2000 160,000 -- -- -- -- -- --
1999 162,000 -- -- -- 44,000(1) -- --
1998 156,000 -- -- -- -- -- --
========================= ======== =========== ========= ============ ============== =============== ============ ============
(1) Represents an aggregate of 44,000 shares of Common Stock underlying options
exercisable at $1.38 per share, granted in April 1999.
(2) Mr. Rashbaum received $70,000 of salary during the six month period ended
June 30, 2001.
Stock Options
The following table contains information regarding options to purchase
Common Stock held at June 30, 2001 and December 31, 2000 by the Company's
executive officer named in the Executive Compensation Table above.
===============================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
--------------------------------------------------------- --------------------------------- -----------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Options at Fiscal Year End
Year End
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------- --------------- --------------- ---------------- ---------------- ---------------- ------------------
Harold Rashbaum (1) (1) 132,000(2) -- (3) --
========================= =============== =============== ================ ================ ================ ==================
(1) No options were exercised in the six month period ended June 30, 2001
or the years ended December 31, 1999 or 2000.
(2) Represents an aggregate of 88,000 shares of Common Stock underlying
options granted in March 1997 under the Company's Senior Management Incentive
Plan, currently exercisable at $1.46 per share, and an aggregate of 44,000
shares of Common Stock underlying options granted in April 1999, currently
exercisable at $1.38 per share.
(3) The options had no value at either June 30, 2001 or December 31, 2000,
since as of such dates the aggregate exercise price of the options exceeded the
aggregate market value of the underlying shares (based on the closing sales
prices of the Company's Common Stock.)
Employment and Consulting Agreements
ShopNet.com, Inc.
Before he became an officer and director of the Company, Harold
Rashbaum provided consulting services to the Company through HBR, a company of
which he is an officer and director and of which his wife is the sole
shareholder. HBR entered into an oral consulting agreement with the Company
whereby it will receive 5% of the net profits received by the Company from the
distribution of "Dirty Laundry." To date, HBR has not received any fees as a
result of the distribution of "Dirty Laundry" not generating any net profits.
See "Certain Relationships and Related Transactions."
Breaking Waves, Inc.
In November 1996, Breaking Waves entered into employment agreements
with each of Malcolm Becker and Michael Friedland; these agreements expired in
November 1999. The agreements initially provided that Messrs. Becker and
Friedland each would be compensated at a salary of $110,000 per annum during the
term of his agreement and that each would be issued restricted shares of Common
Stock, subject to a vesting schedule, annually during the term of his agreement.
In November 1996, 3,667 shares of the Company's Common Stock were
issued to each of Messrs. Becker and Friedland, subject to the vesting schedule.
In November 1997, 15,888 shares of the Company's Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.
In January 1998, Mr. Friedland's employment agreement was amended to
provide for an increase in salary to $130,000 per annum, and Mr. Becker's
employment agreement was amended to reflect a reduction in the amount of time
Mr. Becker would be required to devote to the business of Breaking Waves, a
concomitant reduction in salary to $60,000 per annum, and a reduction in the
number of shares of Common Stock to be issued. In January 1999, Mr. Becker's
employment agreement was further amended to reflect an increase in the amount of
time Mr. Becker would be required to devote to the business of Breaking Waves
and a concomitant increase in salary to $70,000 per annum.
In each of May and November 2000, pursuant to their respective
employment agreements, Messrs. Becker and Friedland received their final share
issuances. Mr. Becker received an aggregate of 91,289 shares of Common Stock,
45,644 in May 2000 and 45,645 in November 2000. Mr. Friedland received an
aggregate of 167,365 shares of Common Stock, 83,683 in May 2000 and 83,683 in
November 2000. Messrs. Becker and Friedland each granted an option to BBC
Capital Corp. ("BBC"), of which Ilan Arbel is President, to purchase an
aggregate of 76,074 shares of common stock in the case of Mr. Becker and 139,471
shares in the case of Mr. Friedland, at an exercise price of $4.50 per share.
Such options expired to the extent of 1/2 of the underlying shares on May 27,
2001. The balance of the options scheduled to expire in November 2001 were
terminated by BBC in August 2001.
Breaking Waves entered into a one-year consulting agreement in August
2000 with Larry Nash, Inc. ("Consultant") a New York corporation, whereby Mr.
Nash, the Consultant's sole stockholder provides sales and consulting services
in connection with Breaking Waves' 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. The agreement is automatically extended
from year to year thereafter unless cancelled by either party on thirty (30)
days' prior written notice. Pursuant to such agreement, the Consultant is
compensated a percentage of net sales (as such term is defined) on all orders
exclusively procured by him, ranging from 2.5 to 5%. He is entitled to
additional compensation ranging from 1.5% to 3% of net sales for the Coral Cove,
Gottex and Breaking Waves lines, generated by Company sales personnel he
introduces to the Company.
See "Management's Discussion and Analysis or Plan of
Operations--Factoring Agreements-Century Business Credit Corporation" for a
description of the Arc Consulting Agreement.
Senior Management Incentive Plan
General
In May 1996, the Board of Directors adopted the Senior Management
Incentive Plan (the "Management Plan") which was adopted by shareholder consent.
The Management Plan provides for the issuance of an aggregate of 750,000 shares
of Common Stock in connection with the issuance of stock options and other stock
purchase rights to executive officers, key employees, and consultants.
The Management Plan was adopted to provide the Board of Directors with
sufficient flexibility regarding the forms of incentive compensation which the
Company will have at its disposal for rewarding executive officers, employees,
and consultants (of either the Company or a subsidiary of same) who render
significant services to the Company or its subsidiary with equity in the Company
through the grant of stock options and other rights. The Management Plan was
adopted to enable the Company to attract and retain qualified personnel without
unnecessarily depleting the Company's cash reserves (by offering those persons
who provide significant services a personal interest in the Company's growth and
success) and to augment the Company's existing compensation programs.
The Management Plan is intended also to help the Company attract and
retain key executive management personnel whose performance is expected to have
a substantial impact on the Company's long-term profit and growth potential by
encouraging and assisting those persons to acquire equity in the Company. It is
contemplated that only persons who perform services of special importance to the
Company will be eligible to participate under the Management Plan. A total of
shares of Common Stock have been reserved for issuance under the Management
Plan. It is anticipated that awards made under the Management Plan will be
subject to three-year vesting periods, although the vesting periods are subject
to the discretion of the Administrator (as defined below).
The Management Plan is to be administered by the Board of Directors or
a committee of the Board if one is appointed for this purpose (the Board or such
committee, as the case may be, will be referred to in the following description
as the "Administrator"). Members of the Board of Directors who are eligible for
awards or have been granted awards may not vote on any matters affecting the
administration of the Management Plan or the grant of any award thereunder.
Subject to the specific provisions of the Management Plan, the Administrator
will have the discretion to determine the recipients of the awards, the nature
of the awards to be granted, the dates such awards will be granted, the terms
and conditions of awards, and the interpretation of the Management Plan, except
that any award granted to any employee of the Company who is also a director of
the Company will also be subject - in the event the Administrator of such plan
at the time such award is proposed to be granted does not satisfy the
requirements regarding the participation of "disinterested persons" set forth in
Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") - to the approval of an auxiliary committee
consisting of not less than three individuals (all of whom qualify as
"disinterested persons" as defined under Rule 16b-3. In the event the Board of
Directors deems the formation of an auxiliary committee impractical, the Board
is authorized to approve any award under the Management Plan. As of the date
hereof, the Company has not yet determined who will serve on such auxiliary
committee, if one is required. The Management Plan generally provides that
unless the Administrator determines otherwise, each option or right granted
under the plan will become exercisable in full upon certain "change of control"
events as described therein.
If any change is made in respect of the Common Stock subject to the
Management Plan or subject to any right or option granted under the Management
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, or dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Administrator will make appropriate adjustments to
the Management Plan and the number of shares and price per share of Common Stock
subject to outstanding rights or options. Generally, the Management Plan may be
amended by action of the Board of Directors except that any amendment which
would change the class of securities subject to the plan, increase the total
number of shares subject to such plan, extend the duration of such plan,
materially increase the benefits accruing to participants under such plan, or
change the category of persons who can be eligible for awards under such plan
must be approved by the affirmative vote of the owners of a majority of the
Common Stock entitled to vote. The Management Plan permits awards to be made
thereunder until November 2004.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for four types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights), and
restricted shares.
Incentive Stock Options ("ISOs" and "non-ISOs")
The Management Plan may be either incentive stock options which qualify
as such under the Internal Revenue Code ("ISOs") or options which do not qualify
under the Internal Revenue Code as ISOs ("non-ISOs"). ISOs may be granted at an
option price of not less than 100% of the fair market value of the Common Stock
on the date of grant except that an ISO granted to any person who owns Common
Stock representing more than 10% of the total combined voting power of all
classes of Common Stock of the Company ("10% Shareholder") must be granted at an
exercise price of at least 110% of the fair market value of the Common Stock on
the date of the grant. The exercise price of non-ISOs may not be less than 85%
of the fair market value of the Common Stock on the date of grant. The
Administrator will determine the exercise period of the options granted which
shall be no less than one year from the date of grant. Non-ISOs may be
exercisable for a period of up to 13 years from the date of grant. ISOs granted
to persons other than 10% Shareholders may be exercisable for a period of up to
10 years from the date of grant; ISOs granted to 10% Shareholders may be
exercisable for a period of up to five years from the date of grant. The
aggregate fair market value (determined at the time an ISO is granted) of shares
of Common Stock that are subject to ISOs held by a plan participant that may be
exercisable for the first time during each calendar year may not exceed
$100,000.
Payment for shares of Common Stock purchased pursuant to exercise of
stock options may be remitted in cash or by certified check or at the discretion
of the Administrator (i) by promissory note, (ii) promissory note combined with
cash, (iii) by shares of Common Stock having a fair market value equal to the
total exercise price, or (iv) by a combination of items (i)-(iii) above. The
provision that permits the delivery of already owned shares of stock as payment
for the exercise of an option may permit "pyramiding." In general, pyramiding
enables a holder to use shares of Common Stock owned in order to pay for the
exercise of the stock option. This is done by transferring such shares to the
Company as payment of the exercise price for the shares purchased pursuant to
the exercise of the Option. The value of such shares shall be determined by the
market value of the shares at the time of transfer. Thereafter, the shares
received upon the exercise of the option could then be used to do the same.
Thereby, the holder may start with as little as one share of Common Stock and
use the shares of Common Stock acquired in successive, simultaneous exercises of
the option to exercise the entire option, regardless of the number of shares
covered thereby, with no additional cash or investment other than the original
share of Common Stock used to exercise the option.
Upon termination of employment, an optionee will be entitled to
exercise the vested portion of an option for a period of up to three months
after the date of termination except that if the reason for termination was a
discharge for cause, the option shall expire immediately, and if the reason for
termination was death or permanent disability of the optionee, the vested
portion of the option shall remain exercisable for a period of 12 months
thereafter.
In March 1997, the Company granted to Mr. Rashbaum an option to
purchase 88,000 shares of Common Stock at an exercise price of $1.46 per share,
pursuant to the Management Plan.
Incentive Stock Rights
Incentive stock rights consist of incentive stock units each of which
is equivalent to one share of Common Stock and may be awarded in consideration
for services performed for the Company or any subsidiary. Each incentive stock
unit shall entitle the holder thereof to receive, without payment of cash or
property to the Company, one share of Common Stock in consideration for services
performed for the Company or any subsidiary by the employee, subject to the
lapse of the incentive periods, at which time the Company will issue one share
of Common Stock for each unit awarded upon the completion of each specified
period. If the employment with the Company of the holder of the incentive stock
units terminates prior to the end of the incentive period relating to the units
awarded, the rights will thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, will be entitled to receive a pro rata portion of the shares represented
by the units, based upon that portion of the incentive period which has elapsed
prior to the death or disability.
Stock Appreciation Rights (SARs)
SARs may be granted to recipients of stock options under the Management
Plan. In the discretion of the Board of Directors, SARs may be granted
simultaneously with, or subsequent to, the grant of a related stock option and
may be exercised to the extent that the related option is exercisable, except
that no general SAR (as hereinafter defined) may be exercised within a period of
six months of the date of grant of such SAR, and no SAR granted with respect to
an ISO may be exercised unless the fair market value of the Common Stock on the
date of exercise exceeds the exercise price of the ISO. An option holder may be
granted general SARs ("general SARs"), limited SARs ("limited SARs"), or both.
General SARs permit the holder thereof to receive - without payment of cash or
property to the Company - cash, shares of Common Stock, or a combination of both
in an amount determined by dividing (i) that portion, elected by the option
holder, of the total number of shares which the holder is eligible to purchase
multiplied by the amount, if any, by which the fair market value of a share of
Common Stock (on the exercise date) exceeds the option exercise price of the
related option by (ii) the fair market value of a share of Common Stock on the
exercise date. Limited SARs are similar to general SARs except that, unless the
Administrator determines otherwise, limited SARs may be exercised only during a
prescribed period following the occurrence of one or more of the following
"change of control" transactions: (i) the approval of the Board of Directors and
shareholders of the Company of a consolidation or merger in which the Company is
not the surviving corporation, the sale of all or substantially all of the
assets of the Company, or the liquidation or dissolution of the Company, (ii)
the commencement of a tender or exchange offer for the Company's Common Stock
(or securities convertible into Common Stock) without the prior consent of the
Board, (iii) the acquisition of beneficial ownership by any person or other
entity (other than the Company or any employee benefit plan sponsored by the
Company) of securities of the Company representing 25% or more of the voting
power of the Company's outstanding securities, or (iv) in the event, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board cease to constitute a majority of the
Board, unless the election, or the nomination for election, of each new director
is approved by at least a majority of the directors then still in office.
An SAR holder may exercise his SAR rights by giving written notice of
such exercise to the Company, which specifies the number of shares of Common
Stock involved. The exercise of any portion of either the related stock option
or the tandem SARs will cause a corresponding reduction in the number of shares
remaining subject to the option or the tandem SARs, thus maintaining a balance
between outstanding options and SARs. SARs have the same termination provisions
as the underlying stock options (as described above) in the event an SAR holder
ceases to be an employee of the Company.
Restricted Stock Purchase Agreements
Restricted share agreements provide for the issuance of restricted
shares of Common Stock to eligible participants under the Management Plan. The
Board of Directors may determine the price to be paid by the participant for the
shares or that the shares may be issued for no monetary consideration. The
shares issued shall be subject to restrictions for a stated restricted period
during which the participant must remain in the Company's employ in order to
retain the shares. Payment may be made in cash, by promissory note, or via a
combination of both.
Restricted shares awarded under the Management Plan will be subject to
a period of time, designated by the Administrator as the "restricted period,"
during which the holder has limited rights with respect to such shares. The
Administrator may also impose other restrictions, terms, and conditions that
must be fulfilled before the restricted shares may vest. Upon the grant of
restricted shares, stock certificates registered in the name of the recipient
will be issued, and such shares will constitute issued and outstanding shares of
Common Stock for all corporate purposes. The holder will have the right to vote
the restricted shares and to receive all regular cash dividends (and such other
distributions as the Administrator may designate, other than distributions made
solely with respect to the restricted shares ("retained distributions"), if any,
which are paid or distributed on the restricted shares and, generally, to
exercise all other rights as a holder of Common Stock except that until the end
of the restricted period: (i) the holder will not be entitled to take possession
of the stock certificates representing the restricted shares or receive retained
distributions, and (ii) the holder will not be entitled to sell, transfer, or
otherwise dispose of the restricted shares. A breach of any restrictions, terms,
or conditions established by the Administrator with respect to any restricted
shares will cause a forfeiture of such restricted shares.
Upon expiration of the applicable restricted period(s) and the
satisfaction of any other applicable conditions, the restricted shares and any
dividends or other distributions not distributed to the holder (the "retained
distributions") thereon will become vested. Any restricted shares and any
retained distributions thereon which do not so vest will be forfeited to the
Company. If prior to the expiration of the restricted period a holder's employ
is terminated without cause or because of a total disability (in each case as
defined in the Management Plan) or the holder dies, unless otherwise provided in
the restricted share agreement providing for the award of restricted shares, the
restricted period applicable to each award of restricted shares will thereupon
be deemed to have expired. Unless the Administrator determines otherwise, if a
holder's employment terminates prior to the expiration of the applicable
restricted period for any reason other than as set forth above, all restricted
shares and any retained distributions thereon will be forfeited. Upon forfeiture
of any restricted shares, the Company will repay to the holder thereof any
amount the holder originally paid for such shares.
Acceleration of all awards under the Management Plan shall occur,
pursuant to the provisions of Section 13 the Management Plan, on the first day
following the occurrence of any of the following: (a) the approval by the
shareholders of the Company of an "Approved Transaction," (b) a "Control
Purchase," or (c) a "Board Change."
An "Approved Transaction" is defined as (i) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted into
cash, securities, or other property other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger, (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (iii) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation, or other entity (other than the Company or any employee benefit
plan sponsored by the Company) (i) shall purchase any Common Stock of the
Company (or securities convertible into the Company's Common Stock) for cash,
securities, or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board of Directors or (ii) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities).
A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's shareholders, of each new director was approved by a vote of at least
a majority of the directors then still in office.
Non-Executive Director Stock Option Plan
The Company terminated its Non-Executive Director Stock Option Plan on
December 31, 1998, in accordance with the terms thereof.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 10, 2001 with
respect to the beneficial ownership of shares of Common Stock by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director or director nominee of the Company (iii)
each executive officer of the Company for whom information is given in the
Summary Compensation Table in this proxy statement and (iv) all officers and
directors as a group. Except to the extent indicated in the footnotes to the
following table or otherwise as specified in this Proxy Statement, each of the
individuals/entities listed below possesses sole voting power with respect to
the shares of Common Stock listed opposite his/its name.
[Table on next page]
Name and Address Number of Shares Percent of Common Stock Beneficially
of Beneficial Owner (1) Beneficially Owned (1) Owned (1)(2)
----------------------- ---------------------- ------------
European Ventures Corp.
P.O. Box 47 Road Town 1,783,836(3)(7) 23.9%
Tortola, BVI
Fiduciara Biaggini
Via Vanoni # 6 1,577,396(10) 21%
Lugano, Switzerland
CH 6901
American Telecom Corp.
C/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town 594,000(4)(5)(6)(7) 8.0%
Tortola, BVI
HDS Capital Corp.
C/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town 330,000(6)(7) 4.4%
Tortola, BVI
Amir Capital Overseas Ltd.
P.O. Box 47 Road Town 303,600(8) 4.1%
Tortola, BVI
Volcano Trading Inc.
C/o Valor Invest
Via Cantalone 16 250,800 (8) 3.4%
6900 Lugano, Switzerland
Full Moon Development Corp.
C/o Valor Invest
Via Cantalone 16 277,200(8) 3.7%
6900 Lugano, Switzerland
Galit Capital, Ltd.
Via Vanoni #6 290,400(8) 3.9%
Lugano, Switzerland CH 6901
Harold Rashbaum 252,000(9) 3.4%
Jeanne Falletta -- --
Alain Le Guillou, M.D. -- --
James Frakes -- --
Michael Friedland 167,720 2.3%
Debra Riggs -- --
All Officers and Directors as a Group 419,720(9) 5.5%
(six persons)
* Less than 1% of the outstanding common stock.
(1) Unless otherwise indicated, the address for each listed director or officer
is c/o ShopNet.Com, Inc., 14 East 60th Street, New York, New York 10022. As
used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. For the purposes of this table, a person is deemed to be the
beneficial owner of securities that can be acquired within 60 days from
February 1, 2001 through the exercise of any option or warrant. Shares of
Common Stock subject to options or warrants that are currently exercisable
or exercisable within 60 days are deemed outstanding for computing the
ownership percentage of the person holding such options or warrants, but
are not deemed outstanding for computing the ownership percentage of any
other person. The amounts and percentages are based upon 7,472,224 shares
of common stock outstanding as of October 10, 2001.
(2) Does not give effect to the issuance of (i) 3,379,200 shares of Common
Stock issuable upon exercise of the 3,840,000 outstanding Warrants (the
exercise of each warrant at an exercise price of $3.41 purchases .88 of a
share of Common Stock) or (ii) 128,333 shares of Common Stock reserved for
issuance under the Company's Senior Management Incentive Plan.
(3) Includes an aggregate of 2,112 shares of common stock underlying 2,400
warrants. Each warrant is exercisable at a purchase price of $3.41 for .88
of a share of Common Stock. European Ventures Corp. ("EVC") is formed under
the laws of the British Virgin Islands. Mr. Ilan Arbel, son-in-law of
Harold Rashbaum, President, Chief Executive Officer and a director of the
Company, was President of EVC until May 2001, when he resigned.
(4) American Telecom Corp. ("ATC") is a corporation organized under the
laws of the British Virgin Islands which is wholly-owned by Europe American
Capital Foundation ("EACF"), a Liechtenstein Trust with an address at
Pradafont Street #7, Vaduz Liechtenstein, c/o Dr. Wohlwerd. Mr. Arbel
controlled EACF through October 2000 and has been President of ATC since
July 2000. By virtue of his position with ATC, Mr. Arbel has voting and
dispositive control over shares of the Company beneficially owned by ATC
and therefore may be deemed to beneficially own such shares.(5) Includes
330,000 shares owned by HDS Capital Corp. ("HDS"), a Company organized
under the laws of the British Virgin Islands, which is wholly-owned by ATC.
(6) Mr. Arbel is President of HDS and by virtue of such position and his
control over ATC (see footnote (4) above), Mr. Arbel has voting and
dispositive control over shares of the Company beneficially owned by HDS
and therefore may be deemed to beneficially own such shares.
(7) Shares of the Company beneficially owned by EVC, ATC and HDS are held of
record in the name of "Fiduciara Biaggini, as trustee" ("Fiduciara
Biaggini"), on behalf of such respective entities which have retained
beneficial ownership of such shares. Fiduciara Biaggini is a fiduciary
company with an address at via Vanoni #6, Lugano, Switzerland CH 6901.
(8) Shares of the Company beneficially owned by each of Amir Capital Overseas
Ltd. ("Amir"), Volcano Trading Inc. ("Volcano"), Full Moon Development
Corp. ("Full Moon") and Galit Capital Ltd ("Galit"), all companies
organized under the laws of the British Virgin Islands, are held of record
in the name of "Fiduciara Biaggini, as trustee," on behalf of such
respective entities. Fabio Rossi, a manager of Fiduciara Biaggini, is the
President and sole director of each such entity. Accordingly, Mr. Rossi by
virtue of such positions, may have voting and dispositive control over
shares of the Company owned by each of Amir, Volcano, Full Moon and Galit
and therefore may be deemed to be the beneficial owner of such shares,
representing in the aggregate 15.1% of the Company's outstanding Common
Stock.
(9) Includes an aggregate of 132,000 shares of Common Stock underlying options
granted to Mr. Rashbaum, the Chairman of the Board, President and Chief
Executive Officer of the Company. See "Executive Compensation.
(10) Does not include shares of Common Stock identified in footnotes (7) or (8).
By virtue of Mr. Arbel's voting and dispositive control of shares of
the Company owned by each of ATC and HDS (see footnotes 4, 5 and 6 above), Mr.
Ilan Arbel may be deemed to beneficially own 8% of the Company's outstanding
Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Breaking Waves' Loan and Security Agreement with Century Business
Credit Corporation ("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. Pursuant to the terms of a Reimbursement and
Compensation Agreement ("Reimbursement and Compensation Agreement"), a trust
("Trust"), the beneficiary of which is the granddaughter of Harold Rashbaum, the
Company's Chairman of the Board, President and Chief Executive Officer, and the
daughter of Mr. Arbel, a principal stockholder, provided the security underlying
a letter of credit in the amount of $250,000 issued by a bank to replace a
portion of a letter of credit previously provided by the Company. 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 the
issuing bank makes payment and then 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.
On May 3, 2001, the Company, Breaking Waves and the Trust entered into
a First Amendment to Reimbursement and Compensation Agreement ("Amendment")
pursuant to which the Trust increased the amount of security an additional
$150,000 for a total of $400,000, including the original $250,000. The Trust
conditioned the additional $150,000 of security upon the receipt of an
additional Guaranty from a party satisfactory to it. Gal Capital Corp. ("Gal")
provided a Guaranty agreeing to pay all obligations of Breaking Waves as
contained in the original Reimbursement and Compensation Agreement and all
related expenses in enforcing same. Gal received a fee of $42,500 for the
issuance of such guaranty. Mr. Arbel is President of Gal.
In September, 2001, Century increased the required security in the form
of letters of credit from $1,150,000 to 1,450,000. The Company also sought to
raise additional funds to secure the letter of credit in order to have available
to it additional working capital.
Pursuant to an Amended and Restated Reimbursement and Compensation
Agreement dated as of September 15, 2001, between the Trust and Breaking Waves,
which superceded the original Reimbursement and Compensation Agreement, the
Trust agreed to provide additional security to a bank in return for the issuance
of a letter of credit from such bank to Century in the amount of $350,000 (in
addition to the original $400,000) to replace a portion of a letter of credit
previously provided by Shopnet in a similar amount. The Trust agreed to continue
such letter of credit for a period of ten years, absent any default. The terms
include the same reimbursement, guarantee and security provisions as in the
original Reimbursement and Compensation Agreement. As compensation, the Trust is
entitled to .83 percent of net sales of Breaking Waves through June 30, 2001,
and 1.16% of net sales of Breaking Waves for each year thereafter ("Trust L/C
Fees"). Such amounts are payable 45 days after the close of each fiscal quarter.
On the closing date, Breaking Waves paid $24,500 to the Trust as an advance of
future Trust L/C Fees and reimbursed the Trust for all related professional
fees.
In addition, Breaking Waves entered into a Reimbursement Agreement
dated as of September 15, 2001 with Rivka and Yair Arbel ("RAYA") (Mr. Arbel's
brother and sister-in-law), pursuant to which RAYA agreed to provide security to
a bank in return for a letter of credit from such bank to Century in the amount
of $300,000 reflecting the increase of security required by Century. RAYA agreed
to continue such letter of credit for a period of ten years, absent any default.
The Reimbursement Agreement includes reimbursement provisions in favor of the
Trust in the event the letter of credit is called by Century and is paid by the
bank. All of Breaking Waves obligations are guaranteed by Shopnet and secured by
Shopnet's assets. As compensation, RAYA is entitled to a fee equal to .42
percent of net sales of Breaking Waves through June 30, 2001 and .58 percent of
net sales of Breaking Waves thereafter ("RAYA L/C Fees"). Such amounts are
payable forty-five days after the close of each fiscal quarter. On the closing
date, Breaking Waves paid $12,250 to RAYA as an advance of future RAYA L/C Fees
and reimbursed RAYA for all related professional fees.
In August 2000, Breaking Waves received an $80,000 advance from Play
Co. against future orders of merchandise. No orders were received against this
advance and in December 2000 Breaking Waves repaid the full $80,000 to Play Co.
In November 1999, Breaking Waves borrowed $400,000 from Play Co. with
such loan bearing interest at 9% per annum. Breaking Waves repaid $100,000 of
the loan in January 2000 and the balance in April 2000.
In October 1999, the Company borrowed $50,000 from Play Co. and
Breaking Waves borrowed $200,000 from Play Co. The loans bore interest at 9% and
were repaid in March 2000.
In February 1999, the Company loaned $100,000 to Play Co. with such
loan bearing interest at 9% per annum. In each of April and May 1999, the
Company loaned an additional $100,000 to Play Co. at an interest rate of 9% per
annum. All such loans have been repaid.
In November 1998, pursuant to a sales agreement entered into between
Breaking Waves and Play Co., Breaking Waves purchased 1.4 million unregistered
shares of Play Co.'s common stock in a private transaction, which was
subsequently reduced to 1,270,000 shares. The shares purchased represented
approximately 25.4% of the outstanding common stock of Play Co. immediately
after the transaction. Such percentage has since been reduced to approximately
1.5% of Play Co.'s outstanding common stock. Pursuant to the agreement which
bore an initial term of one year and automatically extended for an additional
one year term since it was not terminated by either of the parties - Play Co.
agreed to purchase (on a wholesale basis) a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods. Breaking Waves had previously sold a limited number of pieces
of its swimwear to Play Co. As consideration for the stock, Breaking Waves
remitted $504,000, which represented an approximate price of $0.36 per share:
$300,000 of the consideration was remitted in cash, and the remaining $204,000
was provided in the form of merchandise, primarily girls' swimsuits.
In October 1996, pursuant to a promissory note, the Company loaned
Harold Rashbaum its President and Chief Executive Officer a total of $50,000
bearing interest at 6 1/2% payable over three years. As of June 30, 2001, the
unpaid portion, which is due on demand, amounted to $37,000, which has been
classified as current. In 1998, 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.
Before he became an Officer and Director of the Company, Mr. Rashbaum
provided consulting services to the Company through HBR, a company of which he
is an officer and director and of which his wife is the sole shareholder. In
1996, HBR entered into an oral consulting agreement with the Company providing
for the payment to HBR of 5% of the net profits received by the Company from the
distribution of "Dirty Laundry." To date, HBR has not received any fees as a
result of the distribution of "Dirty Laundry" not generating any net profits.
Alain Le Guillou, a director of the Company, has been a consultant to
the Company since 1996. Prior to July, 2001, he received $12,000 per annum for
such services which was subsequently reduced to $6,000 per annum. Until
recently, Dr. Le Guillou was the son-in-law of Harold Rashbaum.
During the six months ended June 30, 2001 and years ended December 31,
2000 and 1999 the Company paid $24,000, $49,080 and $24,000 respectively, in
financial consulting fees to DRA Consulting, Inc., a company whose president is
the daughter of the Company's Chairman of the Board, President, Chief Executive
Officer.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part II, Item 8:
Index to Financial Statements F
Independent Auditor's Report F-1
Independent Accountants' Report F-2
Balance Sheets F-3
Statements of Operations F-4 to F-5
Statement of Stockholders' Equity F-6 to F-7
Statements of Cash Flows F-8 to F-11
Notes to Financial Statements F-12 to F-35
(b) On July 9, 2001, the Company filed a Form 8-K changing the Company's
fiscal year-end to June 30.
(c) The following exhibits which are designated by an asterisk (*) are
to be filed by amendment. Exhibits not so designated previously were
filed with the Securities and Exchange Commission with either (i) the
Registration Statement on Form SB-2, file no. 333-5098-NY, (ii) the
Registration Statement on Form SB-2, file no. 333-5098-NY, Post-
Effective Amendment No. 1, (iii) the Registration Statement on Form
SB-2, file no. 333-5098-NY, Post-Effective Amendment No. 2, or (iv)
such other documents as the Company has filed with the Securities and
Exchange Commission. Pursuant to 17 C.F.R. 230.411, each exhibit filed
by the Company is incorporated by reference herein.
3.1 Certificate of Incorporation of the Company
3.2 Amendment to Certificate of Incorporation of the Company, filed in June 7, 1996
3.4 By-Laws of the Company
3.6 Certificate of Incorporation of Breaking Waves, Inc.
3.7 By-Laws of Breaking Waves, Inc.
3.8 Certificate of Amendment to Certificate of Incorporation
4.1 Specimen Common Stock Certificate
4.2 Specimen Warrant Certificate
4.4 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock
Transfer & Trust Company
4.5 Form of Restricted Stock Agreement
10.2 The Company's Senior Management Incentive Plan
10.4 Consulting Agreement between Breaking Waves, Inc. and Dan Stone
10.5 Lease for premises at 112 West 34th Street, New York, New York
10.6 Lease for premises at 8410 N.W. 53rd Terrace, Miami, Florida
10.6(a) Amendment to lease at 8410 N.W. 53rd Terrace, Miami, Florida
10.7 Stock Purchase Agreement between the Company, European Ventures Corp., Breaking Waves,
Inc., and the shareholders of Breaking Waves, Inc., dated May, 1996
10.9 Property Acquisition Agreement between the Company and Rogue Features, Inc., dated March,
1996
10.10 Co-production agreement between the Company and Rogue Features, Inc., dated March, 1996
and all amendments thereto
10.11 Right of First Refusal Agreement with principals of Rogue Features, Inc.
10.13 Shippers Agency Agreement between Hollywood Productions, Inc., and Third Party
Enterprises, Inc.
10.14 License Agreement between Breaking Waves, Inc. and Beach Patrol, Inc.
10.16 Employment Agreement with Michael Friedland (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.17 Employment Agreement with Malcolm Becker (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.18 Termination of Employment Agreement with Robert Melillo
(incorporated by reference to the indicated exhibit in
the Company's 10-KSB for the year ended December 31,
1996)
10.19 Trident Releasing, Inc. License Agreement (incorporated by reference to the indicated
exhibit in the Post-Effective Amendment No. 1)
10.20 Cyclone Option Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No. 1)
10.21 Cyclone Co-Writer Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No.)
10.22 Heller Financial Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No. 2)
10.23 Non-Executive Director Stock Option Plan (incorporated by reference to Appendix B in the
Proxy Statement for the Company's June 1997 Annual Meeting)
10.24 Kawasaki Motors Corp., USA "Jet Ski" License Agreement (incorporated by reference to the
indicated exhibit in the Company's 10-KSB for the year ended December 31, 1997)
10.25 Amendment to lease at 112 West 34th Street, New York,
New York (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1997)
10.26 Form of Subscription Agreement used in connection with the Company's February 1998 Private
Placement (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1997)
10.27 Form of Subscription Agreement used in connection with the Company's May 1998 Private
Placement (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1998)
10.28 Amendment to Employment Agreement with Michael Friedland dated January 1, 1998
(incorporated by reference to the indicated exhibit in the Company's 10-KSB for the year
ended December 31, 1998)
10.29 Amendment to Employment Agreement with Malcolm Becker dated January 1, 1998 (incorporated
by reference to the indicated exhibit in the Company's 10-KSB for the year ended December
31, 1998)
10.30 Second Amendment to Employment Agreement with Malcolm Becker dated January 1, 1999
(incorporated by reference to the indicated exhibit in the Company's 10-KSB for the year
ended December 31, 1998)
10.31 Lease for premises at 14 East 60th Street, Room 402, New York, New York (incorporated by
reference to the indicated exhibit in the Company's 10-QSB for the quarter ended June 30,
1999)
10.32 Option Agreement - Robb Peck McCooey Clearing
Corporation (incorporated by reference to the indicated
exhibit in the Company's 10-QSB for the quarter ended
September 30, 1999)
10.33 License Agreement with Gottex Models Ltd, dated November 1, 2000
10.34 Factoring Agreement with Century Business Credit Corp. dated September 12, 2000
10.35 Supplement to factoring or Security Agreement with Century Business Credit Corporation,
dated August 14, 2000
10.36 Corporate Guaranty unlimited between Century Business Credit Corporation and ShopNet,
dated August 14, 2000
10.37 Trademark Collateral Security Agreement between Century Business Credit Corporation and
Breaking Waves, dated August 14, 2000.
10.38 Consulting Agreement with Larry Nash, Inc., dated August 5, 2000
10.39* Lease between 112 West 34th Street Company, as landlord, and Breaking Waves, Inc., as
tenant, dated August 8, 2001.
16.1 Letter from Scarano & Tomaro, P.C. regarding dismissal of Scarano & Tomaro, P.C. as the
Company's auditors (incorporated by reference to the indicated exhibit in the Company's
Form 8-K/A filed on November 24, 1998)
21.1 Subsidiaries of the Registrant
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
Undersigned hereunto duly authorized on the 12th day of October, 2001.
ShopNet.Com, Inc.
By: /s/ Harold Rashbaum
-----------------------------------------
Harold Rashbaum
Chairman of the Board, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
/s/ Harold Rashbaum Chairman of the Board,
Harold Rashbaum Chief Executive Officer, 10/12/01
President, and Director Date
/s/ Jeanne Falleta Secretary and Director, 10/12/01
Jeanne Falletta Date
/s/ Alain Le Guillou, MD Director 10/15/01
Alain Le Guillou, M.D. Date
/s/ James B. Frakes Director 10/15/01
James B. Frakes Date
/s/ Michael Friedland Director 10/12/01
Michael Friedland Date
/s/ Debra Riggs Director 10/12/01
Debra Riggs Date
SHOPNET. COM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
SHOPNET.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
number
---------------------------------------------------------------------------------------------------------
Independent auditors' report F-1
Independent accountants' report F-2
Consolidated balance sheets at June 30, 2001 and December 31, 2000 F-3
Consolidated statements of operations for the six months ended
June 30, 2001 and June 30, 2000 (unaudited) F-4
Consolidated statements of operations for the years ended
December 31, 2000 and 1999 F-5
Consolidated statement of stockholders' equity for the six months
ended June 30, 2001 and for the years ended December 31, 2000 and 1999 F-6 - F-7
Consolidated statements of cash flows for the six months ended
June 30, 2001 and June 30, 2000 (unaudited) F-8 - F-9
Consolidated statements of cash flows for the years ended
December 31, 2001 and 1999 F-10 - F-11
Notes to consolidated financial statements F-12 - F-35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shopnet.com, Inc.
We have audited the accompanying consolidated balance sheet of Shopnet.com,
Inc. and subsidiaries (the "Company"), as of June 30, 2001 and December 31,
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for the six months ended June 30, 2001 and for the
years ended December 31, 2000 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of the Company as of June 30, 2001 and December 31, 2000 and the
consolidated results of its operations and cash flows for the six months
ended June 30, 2001 and for the years ended December 31, 2000 and 1999 in
conformity with accounting principles generally accepted in the United
States of America.
Massella, Tomaro & Co., LLP
Jericho, New York
July 31, 2001, except for Notes 14 and 16, as to which the date is
September 15, 2001
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Shopnet.com, Inc.
We have reviewed the accompanying consolidated statements of
income and cash flows of Shopnet.com, Inc. and subsidiaries (the
"Company"), for the six months ended June 30, 2000 in accordance
with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
All information included in these consolidated financial
statements is the representation of the management of the Company.
A review consists principally of inquiries of Company personnel
and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion
regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements in order for them to be in conformity with
accounting principles generally accepted in the United States of
America.
Massella, Tomaro & Co., LLP
Jericho, New York
August 10, 2000
F - 2
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
ASSETS
June 30, 2001 December 31, 2000
---------------------------- -----------------
Current assets:
Cash $ 24,703 $ 107,734
Cash - restricted 969,582 1,114,572
Accounts receivable, net 77,706 47,966
Other receivables 62,734 27,922
Inventory 796,538 3,464,229
Prepaid expenses 70,762 107,632
Advances to officer 40,000 40,000
--------------------- ---------------------
Total current assets 2,042,025 4,910,055
--------------------- ---------------------
Furniture, computer equipment, and leasehold improvements, net 72,137 61,708
Film production and distribution costs, net 1,204,728 1,350,000
Costs in excess of net assets of business acquired 727,261 762,737
Investments in movie ventures 246,439 248,210
Deferred tax asset - non-current 202,500 202,500
Other assets 20,635 20,635
Marketable securities - affiliate 6,350 107,950
--------------------- ---------------------
Total assets $ 4,522,075 $ 7,663,795
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor $ 1,700,337 $ 3,165,909
Accounts payable 138,218 1,095,490
Accrued expenses 21,965 99,843
Capital lease obligations 17,953 17,074
Other taxes payable 743 11,051
Deferred tax liability 3,606 4,704
--------------------- ---------------------
Total current liabilities 1,882,822 4,394,071
--------------------- ---------------------
Capital lease obligations, net of current portion 3,758 12,960
--------------------- ---------------------
Total liabilities 1,886,580 4,407,031
--------------------- ---------------------
Commitments and contingencies (Note 12) - -
--------------------- ---------------------
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 (4,017,179)
(3,497,510)
Accumulated other comprehensive income 6,350 107,950
----------------- -----------------
Total stockholders' equity 2,635,495 3,256,764
----------------- -----------------
Total liabilities and stockholders' equity $ 4,522,075 $ 7,663,795
================= =================
See accompanying notes to consolidated financial statements
F - 3
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
2000
2001 (unaudited)
------------------- --------------------
Net sales $ 4,728,948 $ 3,673,770
Cost of sales 3,303,919 2,491,788
------------------- --------------------
Gross profit 1,425,029 1,181,982
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 1,500,707 1,096,660
Amortization of costs in excess of net assets of business
acquired 35,476 35,476
------------------- --------------------
Total expenses 1,536,183 1,132,136
------------------- --------------------
(Loss) income before other income (expense)
and provision for income taxes (111,154) 49,846
-------------------- --------------------
Other income (expense):
Equity in earnings (loss) of affiliate (2,771) -
Write down of film costs (145,272) (100,000)
Rental and other income 14,400 11,100
Interest and finance expense (300,273) (189,327)
Interest income 24,945 35,905
------------------- --------------------
Total other income (expense) (408,971) (242,322)
-------------------- ---------------------
Loss before (benefit of) provision for
income taxes (520,125) (192,476)
(Benefit of) provision for income taxes (456) 10,970
-------------------- --------------------
Net loss (519,669) (203,446)
Other items of comprehensive (loss) income (101,600) 266,700
-------------------- --------------------
Comprehensive net (loss) income $ (621,269) $ 63,254
-------------------- --------------------
Basic and diluted loss per share: $ (.07) $ (.03)
==================== ====================
Weighted average number of
common shares outstanding - basic and diluted 7,472,244 6,717,491
=================== ====================
See accompanying notes to consolidated financial statements
F - 4
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------------- --------------------
Net sales $ 5,713,133 $ 4,756,497
Cost of sales 3,764,258 3,214,704
------------------- --------------------
Gross profit 1,948,875 1,541,793
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 2,208,724 2,137,895
Amortization of costs in excess of net assets of business
acquired 70,952 70,952
------------------- --------------------
Total expenses 2,279,676 2,208,847
------------------- --------------------
Loss before other income (expense)
and provision for income taxes (330,801) (667,054)
-------------------- ---------------------
Other income (expense):
Equity in earnings (loss) of affiliate (4,290) (994,305)
Write down of film costs (308,564) (261,153)
Gain on sale of equity investment in affiliate - 130,093
Rental and other income 22,271 15,549
Interest and finance expense (371,752) (243,148)
Interest income 80,156 56,212
------------------- --------------------
Total other income (expense) (582,179) (1,296,752)
-------------------- ---------------------
Loss before (benefit of) provision for
income taxes (912,980) (1,963,806)
(Benefit of) provision for income taxes (6,004) 12,273
-------------------- --------------------
Net loss (906,976) (1,976,079)
Other items of comprehensive income 107,950 -
------------------- --------------------
Comprehensive net loss $ (799,026) $ (1,976,079)
-------------------- ---------------------
Basic and diluted loss per share: $ (.13) $ (.33)
==================== =====================
Weighted average number of
common shares outstanding 7,021,917 5,983,188
=================== ====================
See accompanying notes to consolidated financial statements
F - 5
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
Balances at December 31, 1998 .. 2,686,944 $ 2,687 $ 6,310,103 $ (614,455) $ -- $ 5,698,335
Issuance of common stock in
connection with January 1999
stock dividend ............... 2,686,944 2,687 (2,687) -- -- --
Stock issued for compensation in
accordance with employment
agreements ................... 215,732 216 38,420 -- -- 38,636
Net loss for the year ended
December 31, 1999 ............ -- -- -- (1,976,079) -- (1,976,079)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 .. 5,589,620 5,590 6,345,836 (2,590,534) -- 3,760,892
Issuance of common stock in
connection with January 2000
stock dividend ............... 537,389 537 (537) -- -- --
Sale of common stock in February
2000, net of costs .......... 100,000 100 294,798 -- -- 294,898
Issuance of common stock in
connection with May 2000
stock dividend ............... 1,245,235 1,245 (1,245) -- -- --
Unrealized gain on mark to
market securities .......... -- -- -- -- 107,950 107,950
Net loss for the year ended
December 31, 2000 ............ -- -- -- (906,976) -- (906,976)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 .. 7,472,244 7,472 6,638,852 (3,497,510) 107,950 3,256,764
(carried forward)
See accompanying notes to consolidated financial statements
F - 6
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
Balances at December 31, 2000
(From previous page) .......... 7,472,244 7,472 6,638,852 (3,497,510) 107,950 3,256,764
Unrealized loss on securities ... -- -- -- -- (101,600) (101,600)
Net loss for the six months ended
June 30, 2001 ................. -- -- -- (519,669) -- (519,669)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 2001 ....... 7,472,244 $ 7,472 $ 6,638,852 $(4,017,179) $ 6,350 $ 2,635,495
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F - 7
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
2000
2001 (unaudited)
------------------- ----------------------
Cash flows from operating activities:
Net loss $ (519,669) $ (203,446)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Equity in earnings (loss) of affiliate 2,771 -
Amortization and depreciation 49,473 57,352
Deferred income tax (benefit) expense (1,098) -
Write down of film costs 145,272 100,000
Decrease (increase) in:
Accounts receivable (29,740) 18,948
Other receivables (34,812) -
Inventory 2,667,691 2,294,207
Prepaid expenses 36,870 (7,366)
Other assets - 54
Increase (decrease) in:
Due to factor (1,465,572) (738,332)
Accounts payable (957,272) (223,274)
Accrued expenses (77,878) (869,616)
Other taxes payable (10,308) -
-------------------- ---------------------
Net cash (used for) provided by operating activities (194,272) 428,527
-------------------- ---------------------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements (24,426) (13,197)
Loan repayments to affiliate - (650,000)
Investment in movie ventures (1,000) -
-------------------- ---------------------
Net cash used in investing activities (25,426) (663,197)
-------------------- ---------------------
Cash flows from financing activities:
Proceeds from sale of common stock - 294,898
Proceeds from line of credit - 225,000
Repayments of line of credit - (11,106)
Principal payments on capital lease obligations (8,323) (7,529)
-------------------- ---------------------
Net cash (used in) provided by financing activities (8,323) 501,263
-------------------- ---------------------
Net (decrease) increase in cash (228,021) 266,593
Cash, beginning of period 1,222,306 1,376,239
-------------------- ---------------------
Cash, end of period $ 994,285 $ 1,642,832
==================== =====================
See accompanying notes to consolidated financial statements
F - 8
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
2000
2001 (unaudited)
----------------- ------------------
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 300,273 $ 184,965
================= ==================
Income taxes $ - $ -
================= ==================
See accompanying notes to consolidated financial statements
F - 9
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------------- ----------------------
Cash flows from operating activities:
Net loss $ (906,976) $ (1,976,079)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Equity in earnings (loss) of affiliate 4,290 994,305
Amortization and depreciation 117,328 114,974
Deferred income tax (benefit) expense (10,336) (8,961)
Write down of film costs 308,564 261,153
Stock issued for services rendered - 38,636
Decrease (increase) in:
Accounts receivable (16,862) 22,124
Other receivables (27,922) -
Inventory (602,176) (199,050)
Prepaid expenses (36,973) (17,991)
Film production and distribution costs - (18,495)
Increase (decrease) in:
Due to factor 1,389,635 (287,280)
Accounts payable (33,340) 209,516
Accrued expenses 40,598 368,153
Other taxes payable 11,051 -
------------------- --------------------
Net cash provided by (used for) operating activities 236,881 (498,995)
------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of equity investment in affiliate - 130,093
Acquisition of furniture, computer equipment, and
leasehold improvements (15,267) (7,964)
Acquisition costs - (17,035)
Investment in movie ventures (5,000) (47,500)
------------------- --------------------
Net cash (used for) provided by investing activities (20,267) 57,594
------------------- --------------------
Cash flows from financing activities:
Proceeds from sale of common stock 294,898 -
Proceeds from line of credit 250,000 -
Repayments of line of credit (250,000) -
Advances from related parties - 650,000
Repayments to related parties (650,000) (130,000)
Principal payments on capital lease obligations (15,445) (11,886)
------------------- --------------------
Net cash (used for) provided by financing activities (370,547) 508,114
------------------- --------------------
Net (decrease) increase in cash (153,933) 66,713
Cash, beginning of period 1,376,239 1,309,526
------------------- --------------------
Cash, end of period $ 1,222,306 $ 1,376,239
=================== ====================
See accompanying notes to consolidated financial statements
F -10
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 379,802 $ 235,098
================= ==================
Income taxes $ - $ -
================= ==================
In connection with the issuance of compensation,
215,732 shares of common stock were issued $ - $ 38,636
================= ==================
See accompanying notes to consolidated financial statements
F -11
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 1 - ORGANIZATION
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, it
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. As of June 30, 2001, Shopnet and all of
its subsidiaries changed their financial year end from
December 31 to June 30.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Shopnet and its wholly owned subsidiaries, Breaking
Waves and Hollywood (the "Company"), after elimination of all
significant intercompany transactions and accounts. Affiliated
companies which are 20 to 50 percent owned are accounted for
under the equity method.
b) Cash and cash equivalents
The Company considers highly liquid investments with maturities
of three months or less at the time of purchase to be cash and
cash equivalents. Included in these amounts are certificates of
deposit of approximately $750,000. The Company maintains
balances in accounts which are in excess of Federal Deposit
Insurance Corporation limits by approximately $665,000. The
Company believes that such risk is minimal based on the
reputation of the financial institution. At June 30, 2001 the
Company has classified $969,582 as restricted cash which is
comprised of approximately $750,200 on deposit with a bank and
$219,400 with its factor as collateral pursuant to its factoring
agreement.
c) Accounts receivables
The Company utilizes the allowance method for recognizing the
collectibility of its accounts receivables. The allowance method
recognizes bad debt expense based on a review of the individual
accounts outstanding based on the surrounding facts. As of June
30, 2001 and December 31, 2000, no allowance was deemed
necessary by management.
F - 12
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
d) Marketable securities
All the Company's marketable securities are classified as
available for sale and recorded at current market value. Net
unrealized gains and losses on marketable securities available
for sale are credited or charged to other comprehensive income.
Marketable securities were classified as non-current as a result
of being pledged pursuant to the factoring agreements.
e) Inventory
Inventory consists of finished goods and is valued at the lower
of cost (using the first-in, first-out method) or market. All
inventory is pledged as collateral for factored receivables
pursuant to a factoring agreement with a financial institution.
f) Furniture, computer equipment, and leasehold improvements
Furniture, computer equipment, and leasehold improvements are
recorded at cost less accumulated depreciation and amortization
which is provided on the straight line basis over the estimated
useful lives of the assets which range between five and seven
years. Expenditures for maintenance and repairs are expensed as
incurred.
g) Film production and distribution costs
The Company follows industry standards in capitalizing film
production and distribution costs. Film production and
distribution costs include all costs associated with the
writing, producing, and distribution of the film. Film costs
include the costs of production, prints, pre-release, and other
advertising expected to benefit future periods. These costs, as
well as participation and talent residuals, are charged against
earnings on an individual film basis in the ratio that the
current year's gross film revenues bear to management's estimate
of total remaining ultimate gross film revenues from all
sources.
Film costs are stated at the lower of cost or estimated net
realizable value on an individual film basis. Revenue and cost
forecasts are continually reviewed by management and revised
when warranted by changing conditions. Estimates of total gross
revenues can change significantly due to the level of market
acceptance of film products. Accordingly, revenue estimates are
reviewed periodically and amortization is adjusted. Such
adjustments could have a material effect on the results of
operations in future periods. When estimates of total revenue
and costs indicate that a feature film will result in an
ultimate loss, additional amortization is recognized to the
extent required to produce a zero gross margin over the
remaining life of the film.
F - 13
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
g) Film production and distribution costs (cont'd)
For the six months ended June 30, 2001 and 2000 and for the
years ended December 31, 2000 and 1999, the Company has written
down film production and distribution costs by $145,272,
$100,000, $308,564 and $261,153, respectively, in order to
reduce the balance to its estimated net realizable value.
h) Intangible assets
At each balance sheet date, the Company evaluates the period of
amortization of intangible assets. The factors used in
evaluating the period of amortization include: (i) current
operating results, (ii) projected future operating results, and
(iii) other material factors that affect the continuity of the
business.
i) Equity method of accounting
Investments in significantly (20 to 50 percent) owned affiliates
are accounted for by the equity method of accounting, whereby
the investment is carried at cost of acquisition, plus the
Company's equity percentage in undistributed earnings or losses
since acquisition. Reserves are provided where management
determines that the investment or equity in earnings is not
realizable.
j) Income taxes
The Company accounts for income taxes in accordance with the
"liability method" of accounting for income taxes. Accordingly,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Current income taxes are based on the respective periods'
taxable income for federal, state and city income tax reporting
purposes.
k) Revenue and cost recognition
The terms of Breaking Waves' sales are FOB shipping point
thereby revenue is recognized upon shipment from the warehouse.
Sales returns are recorded upon acceptance of the goods by the
warehouse. Duty costs, which are a component of cost of sales,
are recorded upon the clearance of such goods through customs.
F - 14
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
k) Revenue and cost recognition (cont'd)
Revenues from the theatrical distribution of motion pictures are
recognized when motion pictures are exhibited. Revenues from
video sales are recognized, together with related costs, on the
date that video units are made widely available for sale by
retailers. Revenues from the licensing of feature films,
together with related costs, are recorded when the material is
available for telecasting by the licensee and when certain other
conditions are met. Film production and distribution costs are
stated at the lower of unamortized cost or estimated net
realizable value. In accordance with Financial Accounting
Standards Board's Statement of Financial Accounting Standards
("SFAS") No. 53, "Financial Reporting by Producers and
Distributors of Motion Pictures Films," the individual film
forecast method is used to amortize film costs.
l) Earnings per share
Earnings per common share is computed pursuant to SFAS No. 128
"Earnings Per Share." Basic earnings per share is computed as
net income (loss) available to common shareholders divided by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through
stock options, warrants and convertible preferred stock.
m) Use of estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions which
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the
reporting period. The most significant estimate with regard to
these financial statements is the estimate of projected income
of motion pictures which is the basis used in amortizing film
production and distribution costs. Actual results could differ
from those estimates.
n) Fair value disclosure at June 30, 2001 and December 31, 2000
The carrying value of cash, accounts receivable, inventory,
marketable securities, accounts payable, accrued expenses, and
capital lease obligations are a reasonable estimate of their
fair value.
o) Reclassifications
Certain prior period accounts have been reclassified to conform
to the current year presentation.
F - 15
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
p) Costs in excess of net assets of business acquired
Costs in excess of net assets of business acquired in connection
with the acquisition of Breaking Waves are being amortized on a
straight line basis over the estimated useful life of the
related assets acquired for a period of fifteen years.
q) Accounting for stock-based compensation
The Company elected to continue to measure compensation cost
using Accounting Principles Board Opinion ("APB") No.
25,"Accounting for Stock Issued to Employees," as is permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the
options issued under the Incentive Plan as the exercise price
and market value at the date of grant were the same.
For companies that choose to continue applying APB No. 25, SFAS
No. 123 requires certain pro forma disclosures as if the fair
value method had been utilized. Had compensation cost for the
Company's stock-based compensation plan been determined based on
the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's net
income (loss) and earnings per share would have been reduced to
the pro forma amounts indicated below utilizing the Black-Sholes
option pricing model:
June 30,
2000 December 31,
2001 (unaudited) 2000 1999
Net income (loss)-
as reported $ (519,669) $ (203,446) $ (906,976) $ (1,976,079)
================= ================== =============== =============
pro forma $ (519,669) $ (203,446) $ (906,976) $ (1,988,329)
================== ================== =============== =============
Basic and Diluted EPS -
as reported $ (.07) $ (.03) $ (.13) $ (.33)
================== ================== =============== =============
pro forma $ (.07) $ (.03) $ (.13) $ (.33)
================== ================== =============== =============
F - 16
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
q) Accounting for stock-based compensation (cont'd)
The fair market value of each option grant is estimated at the
date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
Dividend yield 0.00%
Expected volatility 30%
Risk-free interest rate 6%
Expected life 1-5 years
r) Effect of new accounting standards
The Company does not believe that any recently issued accounting
standards, not yet adopted by the Company, will have a material
impact on its financial position and results of operations when
adopted.
NOTE 3 - FURNITURE, COMPUTER EQUIPMENT & LEASEHOLD IMPROVEMENTS
Furniture, computer equipment, and leasehold improvements
are as follows:
June 30, 2001 December 31, 2000
Furniture & fixtures $ 38,727 $ 38,727
Computer equipment and software 104,070 79,645
Leasehold improvements 13,415 13,415
--------------------- ----------------------
156,212 131,787
Less: accumulated depreciation
and amortization 84,075 70,079
--------------------- ----------------------
$ 72,137 $ 61,708
===================== ======================
Computer equipment and software amounting to $61,506 is pledged
in connection with capital lease obligations.
Depreciation and amortization expense for the six months ended
June 30, 2001 and 2000 and for the years ended December 31, 2000
and 1999 amounted to $13,997, $21,876, $21,376 and $19,023,
respectively.
F - 17
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 4 - 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 $35,476 for each of the six
months ended June 30, 2001 and 2000 and $70,952 for each of the
years ended December 31, 2000 and 1999, respectively.
NOTE 5 - 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 June 30,
2001 and December 31, 2000 $217,500 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 six months ended June 30, 2001 and
2000 and for the years ended December 31, 2000 and 1999, the
Company recorded $1,473, $-0-, $4,290 and $-0-, respectively,
equity losses for its proportionate share of Battle Studies. No
revenues have been derived from this film as of June 30, 2001
and December 31, 2000.
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.
F - 18
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 5 - INVESTMENTS IN MOVIE VENTURES (cont'd)
b) The Girl
Pursuant to an agreement dated July 1, 1999 with Artistic
License Films Inc., Hollywood invested through June 30, 2001 and
December 31, 2000 $35,000 for a 22.533% interest in a new
entity, The Girl, LLC a limited liability company ("The Girl").
In return for its participation in The Girl, Hollywood is
entitled to receive a non-contested, non-dilutable 22.533%
ownership interest in The Girl, 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. The Girl retains all rights to the motion
pictures, the screenplays and all ancillary rights attached
thereto.
Hollywood accounts for the investment in The Girl under the
equity method. During the six months ended June 30, 2001, The
Girl began to generate revenues resulting in a net equity loss
to the Company of $1,298, resulting in an investment balance of
$33,702 as of June 30, 2001.
NOTE 6 - MARKETABLE SECURITIES - AFFILIATE
On November 24, 1998, pursuant to a 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.
Breaking Waves accounted for its investment under the equity
method. For the year ended December 31, 1999 Breaking Waves
recorded $994,305 of equity loss for its proportionate share of
Play Co's loss for that year.
As of December 31, 1999, the Company's investment in Play Co.
was reduced to $-0- since its share of Play Co.'s losses
exceeded its cost basis. In addition, as of December 31, 1999,
as a result of Play Co.'s issuance of additional common stock
and the Company's sale of 130,000 shares of Play Co.'s common
stock, the Company's percentage ownership was reduced to 22.88%.
F - 19
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 6 - MARKETABLE SECURITIES - AFFILIATE (cont'd)
During the year ended December 31, 2000, Play Co. converted a
portion of its series E preferred stock into common stock,
thereby reducing Breaking Waves' ownership percentage to
approximately 1.5%. Accordingly, upon this event the accounting
method for the investment in Play Co. was changed to the
requirements of SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities." 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
June 30, 2001 and December 31, 2000 which amounted to $6,350 and
$107,950, respectively. 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 8 (b)).
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
filing was converted into a Title Seven filing on August 28,
2001. The Company is in the process of developing a plan for the
orderly liquidation of the Company's operations through
discussions with representatives of its secured lender, other
creditors, landlords and others under the supervision of the
Bankruptcy Court.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2001 December 31, 2000
----------------------- -----------------------
Commissions $ - $ 33,610
Professional fees 18,827 17,500
Other corporate overhead 3,138 48,733
--------------------- ---------------------
$ 21,965 $ 99,843
===================== =====================
NOTE 8 - 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.
F - 20
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 8 - DUE TO FACTOR (cont'd)
a) CIT Group (cont'd)
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 June 30, 2001 and December 31, 2000, a
balance of $-0- and $312 was due CIT, respectively. Interest
expense related to this agreement totaled $204,821 and $228,772
for the years ended December 31, 2000 and 1999.
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 (the "Agreement"), a trust ("Trust"), the beneficiary
of which is a relative of the Company's President and Chief
Executive Officer ("CEO") and a relative of a principal
stockholder, pledged assets as collateral for securing a
$250,000 letter of credit to replace a portion of the collateral
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. See
Note 16.
F - 21
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 8 - DUE TO FACTOR (cont'd)
b) Century Business Credit Corporation (cont'd)
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. On December 20, 2000, 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.
On May 3, 2001, the Agreement was amended so that the letter of
credit secured by the Trust was increased to $400,000. As a
condition of the amendment, the Company entered into a guarantee
agreement with Gal Capital Corp, whose President is a relative
of the Company's President and CEO and a principal stockholder
of the Company to act as guarantor of the obligation to the
Trust up to $400,000 in exchange for a fee of $42,500 which the
Company paid on May 3, 2001. The amended letter of credit
expired on September 1, 2001 and was subsequently amended. See
Note 16.
Interest expense related to the factor agreement totaled
$256,429 for the six months ended June 30, 2001 and $100,488 for
the year ended December 31, 2000. Century has a secured interest
in Breaking Waves' inventory as collateral for the advances. As
of June 30, 2001 and December 31, 2000 the net advances to
Breaking Waves from Century amounted to $1,700,337 and
$3,165,597, respectively.
NOTE 9 - 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 10 - CAPITAL LEASE OBLIGATIONS
During the year ended December 31, 1998, the Company acquired
computer equipment and proprietary software for its subsidiary,
Breaking Waves, pursuant to the following terms and conditions:
i) 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.
F - 22
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 10 - CAPITAL LEASE OBLIGATIONS (cont'd)
ii) 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.
At June 30, 2001, the aggregate future minimum lease payments
due pursuant to the above capital lease obligations are as
follows:
Year ended
June 30:
------------------
2002 $ 19,344
2003 9,672
------------------
Total minimal lease payments 29,016
------------------
Less: Amounting representing interest 7,305
------------------
Present value of net minimum
lease payments $ 21,711
==================
At June 30, 2001 and December 31, 2000 equipment and software
under capital leases is carried at a book value of $24,606 and
$30,750, respectively.
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES
(Benefit of) provision for income taxes is comprised of the
following:
June 30,
(unaudited) December 31,
2001 2000 2000 1999
Current:
Federal $ - $ - $ - $ -
State and local 642 10,970 4,332 21,234
-------------- -------------- -------------- ----------------
642 10,970 4,332 21,234
-------------- -------------- -------------- ----------------
Deferred:
Federal - - (6,150) -
State and local (1,098) - (4,186) (8,961)
--------------- -------------- --------------- -----------------
(1,098) - (10,336) (8,961)
--------------- -------------- --------------- -----------------
Total (benefit of) provision
for income taxes $ (456) $ 10,970 $ (6,004) $ 12,273
=============== ============== =============== ================
F - 23
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)
A reconciliation of the provision for income taxes on income
per the federal statutory rate to the reported income tax
expense is as follows:
June 30,
(unaudited) December 31,
2001 2000 2000 1999
--------------- ----------- --------------- -------------
Federal statutory rate applied to
pretax loss $ - $ - $ - $ -
State and local income taxes, net of
federal income tax benefit, applied
to pretax loss - - - -
Permanent differences - - - -
Increase in valuation allowance - - 865,023 34,298
Current provision for state and local taxes 642 10,970 4,332 21,234
(Increase) in deferred tax assets - - - -
Increase (decrease) in deferred tax liability (1,098) - (875,359) (43,259)
--------------- ----------- --------------- -------------
Total provision (benefit) for income taxes $ (456) $ 10,970 $ (6,004) $ 12,273
=============== ============ =============== =============
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related to difference
between the financial statement and income tax bases of assets
and liabilities for financial statements and income tax
reporting purposes. Deferred tax assets and liabilities
represent the future tax return consequences of these
temporary differences, which will either be taxable or
deductible in the year when the assets or liabilities are
recovered or settled. Accordingly, measurement of the deferred
tax assets and liabilities attributable to the book-tax basis
differential are computed at a rate of 34% federal and 11%
state and local pursuant to SFAS No. 109.
The tax effect of significant items comprising the Company's
net non-current deferred tax assets and liability are as
follows:
June 30, 2001 December 31, 2000
------------------- -----------------
Net operating loss carryforwards $ 1,167,919 $ 966,552
Inventory capitalization 166,995 7,530
Write down of film costs 392,380 256,373
Valuation allowance (1,524,794) (1,027,955)
--------------------- -----------------------
Deferred non-current tax asset 202,500 202,500
--------------------- ----------------------
Equity earnings of affiliate 2,858 12,430
Depreciable assets 748 (7,726)
--------------------- ----------------------
Deferred non-current tax liability 3,606 4,704
--------------------- ----------------------
Net non-current deferred tax asset $ 198,894 $ 197,796
===================== ======================
F - 24
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)
Shopnet and its subsidiaries have a tax year end of December
31 and file a consolidated tax return for federal tax
purposes. For state and local purposes, Shopnet and its
subsidiaries file separate tax returns. As such, each entity
computes its state and local tax based on it own taxable
income or loss.
At June 30, 2001 and December 31, 2000, the Company had a net
operating loss carryforward (NOL) of approximately $2,072,000
for federal tax purposes and $2,172,000 for state tax
purposes, all of which expire between 2010 and 2020.
Management believes it is more likely than not that the
results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
Shopnet and Breaking Waves have entered into lease agreements
for their 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 leased its
administrative offices pursuant to a lease requiring annual
payments of $71,600 expiring December 2004. Lastly, Breaking
Waves terminated its lease effective November 30, 2001. A new
6 year lease expiring September 30, 2007 was signed in July
2001 and is effective beginning December 1, 2001. Annual rent
under the new lease is $84,915 through December 31, 2004 and
$95,760 for the remainder of the lease. 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
June 30, 2001 (including Breaking Waves' new lease) are as
follows:
2002 $ 111,861
2003 84,915
2004 84,915
2005 90,338
2006 95,760
Thereafter 119,700
---------------
$ 587,489
===============
Rent expense for the six months ended June 30, 2001 and 2000 and
for the years ended December 31, 2000 and 1999 amounted to
approximately $83,500, $79,500, $163,900 and $172,700,
respectively.
F - 25
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont'd)
b) Significant vendors and customers
Breaking Waves purchases 100% of its inventory from two
vendors, one in Indonesia and the other from Samoa. Breaking
Waves believes other sources and vendors are available and
that it is not dependent exclusively on these vendors. For the
six months ended June 30, 2001 and 2000 and for the years
ended December 31, 2000 and 1999, Breaking Waves had two, two,
three and four customers, respectively, which comprised 37%,
54%, 46% and 52%, 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 it 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 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 $150,000, $99,113, $163,009 and $162,501
during the six months ended June 30, 2001 and 2000 and
during the years ended December 31, 2000 and 1999,
respectively.
ii) On October 31, 1996, Breaking Waves entered into a
license agreement with North-South Books, Inc. ("N-S") for
the exclusive use of certain art work and text in the making
of swimsuits and accessories in the United States and
Canada. The agreement expired on March 1, 1999. Breaking
Waves recorded $-0- and $784 of royalties under this
agreement during the years ended December 31, 2000 and 1999,
respectively.
F - 26
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont'd)
d) License agreements (cont'd)
iii) On October 17, 1997, Breaking Waves entered into a
license agreement with Kawasaki Motors Corp., U.S.A. ("KMC")
with an effective date of July 1, 1997 for the exclusive use
of certain trademarks in the making of swimwear in the
United States. The fee for the exclusive use of certain
trademarks is five percent (5%) of net sales. The agreement
expired on May 31, 1999 and was not renewed. Breaking Waves
recorded royalties under this agreement totaling $-0- and
$10,415 during the years ended December 31, 2000 and 1999,
respectively.
iv) 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 the agreement
totaling $26,610 and $8,859 for the six months ended June
30, 2001 and for the year ended December 31, 2000,
respectively.
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 June 30, 2001 and December 31, 2000, the Company invested
$1,971,956 for the co-production and distribution of such motion
picture whereas the co-producers have invested $100,000. For the
six months ended June 30, 2001 and 2000 and for the years ended
December 31, 2000 and 1999, the Company derived no revenues from
the motion picture and amortized no film costs.
For the six months ended June 30, 2001 and 2000 and for the year
ended December 31, 2000 and 1999, the Company has written down
its film production and distribution costs by $145,272,
$100,000, $308,564 and $261,153, respectively, in order to
reduce the asset to its estimated net realizable value.
F - 27
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont'd)
f) Employment agreements
On November 27, 1996, Breaking Waves entered into two
employment agreements (as amended) with two key employees.
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 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 June 30, 2001, the
employees are still employed and all prior arrangements are in
effect.
Effective July 2001, Breaking Waves and the employees agreed
to decrease the annual salaries from $130,000 to $105,000 and
$70,000 to $50,000, respectively.
g) Litigation
On or about June 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
disallowing the exercise of these options). The plaintiff
seeks, among other things, compensatory damages in the amount
of $497,500 and punitive damages in the amount of $995,000,
together with costs and attorney's fees. The Company has
responded to the complaint and denied the allegations. The
Company intends to contest the action vigorously and believes
that such claims against it are baseless and without merit.
NOTE 13 - STOCKHOLDERS' 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. After the effect of stock dividends these shares are
2,420 at June 30, 2001 and December 31, 2000.
F - 28
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDERS' EQUITY (cont'd)
a) Stock Dividends (cont'd)
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.
c) 1996 Senior Management Incentive Plan
The shareholders approved the 1996 Senior Management Incentive
Plan ("Incentive Plan") in May 1996. Officers, key employees and
non-employees, who in the judgment of the Company render
significant service to the Company, are eligible to participate.
The Incentive Plan provides for the award of a broad variety of
stock-based compensation alternatives such as non-qualified
stock options, incentive stock options, restricted stock,
performance awards and stock appreciation rights. The Incentive
Plan provided 750,000 shares of common stock to be offered from
either authorized and unissued shares or issued shares, which
have been reacquired by the Company.
On March 14, 1997, the Company granted 132,000 options to
purchase shares of common stock pursuant to the Company's
Incentive Plan consisting of 88,000 options to the Company's
President and 44,000 options to another officer. The exercise
price of each option was fixed at $1.46 (as revised) per share
and the options expire March 2002. The terms of the options
state that in the event of termination of optionee's employment
the vested portion of the options shall remain exercisable for
six months after termination, at which time the options expire.
The officer granted the 44,000 options has resigned as an
officer of the Company and is currently performing consulting
services for the Company. Based on the terms of the option
agreement his options should have terminated. The Company has
agreed to extend the expiration date of such options to December
2001.
F - 29
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDERS' EQUITY (cont'd)
c) 1996 Senior Management Incentive Plan
During April 1999, the Company granted its President 44,000
stock options. The exercise price of each option is a $1.38 per
share and the options expire April 16, 2004.
A summary of the status of the Company's stock options
outstanding as of December 31, 2000 and changes during the six
months ended June 30, 2001 and during the years ended December
31, 2000 and 1999 are as follows:
Number of Exercise
Options Price
---------- ----------
Outstanding at December 31, 1998 132,000 1.46
Granted ..................... 44,000 1.38
Exercised ................... -- --
Cancelled ................... -- --
---------- ----------
Outstanding at December 31, 1999 176,000 1.46 - 1.38
Granted ..................... -- --
Exercised ................... -- --
Cancelled ................... -- --
---------- ----------
Outstanding at December 31, 2000 176,000 $1.46 - 1.38
Granted ..................... -- --
Exercised ................... -- --
Cancelled ................... -- --
---------- ----------
Outstanding at June 30, 2001 ... 176,000 $1.46- 1.38
=========== ==========
d) 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 August 31, 2001, the Company extended the term of its
warrants by eighteen months, the Warrants will now expire on
March 10, 2003. 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.
F - 30
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDERS' EQUITY (cont'd)
d) Warrants (cont'd)
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.
e) Grant of Stock Options
In connection with a consulting and option agreement entered on
September 1, 1999, the Company granted 400,000 options to
purchase shares of the Company as follows; 100,000 shares at an
exercise price of $2.50 per share, 100,000 shares at an exercise
of $3.00 per share, 100,000 shares at an exercise price of $3.50
per share and 100,000 shares at an exercise price of $4.00 per
share. No consulting expenses were recorded in connection with
such options based on the underlying value of the stock on the
grant date. As of September 2000, the options expired and no
options were ever exercised.
NOTE 14 - RELATED PARTIES TRANSACTIONS
a) During November 1998, the Company agreed to issue 215,732 shares
of common stock in the amount equal to the fair market value of
$38,636, to two key employees of Breaking Waves in connection
with their employment agreements. The shares vested in November
1999 and the Company recorded compensation expense amounting to
$38,636 during the year ended December 31, 1999. The employees
agreed to postpone the issuance of such shares of common stock
as follows fifty percent of the shares in May 2000 and fifty
percent of the shares in November 2000.
b) For the six months ended June 30, 2001 and 2000 and for the
years ended December 31, 2000 and 1999, financial consulting
fees were paid to a corporation and an individual who are
related to the Company's President and CEO amounting to $24,000,
$29,000, $51,080 and $36,000, respectively.
c) 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 June 30, 2001 and December 31,
2000, one Promissory note remains amounting to $37,000 and has
been classified as current. As of June 30, 2001 and December 31,
2000, the Company's President and CEO was also advanced
additional funds totaling $3,000 which are non-interest bearing
and due on demand and are classified as current.
F - 31
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 14 - RELATED PARTIES TRANSACTIONS (cont'd)
d) 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.
e) 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 due and repaid January 30,
2000 and the second installment of $300,000 was due and repaid
April 30, 2000. Interest accrued at 9% per annum.
f) During October 1999, Play Co. loaned funds to the Shopnet
in return for an unsecured promissory note in the amount of
$50,000. Such note is due in full and was repaid on March
29, 2000 plus interest at 9% per annum.
g) On December 20, 2000, the Company entered into the Agreement
with the Trust, the beneficiary of which is a relative of the
Company's President and CEO and a relative of a principal
stockholder. The Trust pledged assets as collateral for securing
a $250,000 letter of credit to replace a portion of the
collateral previously pledged by the Company in connection with
its factoring agreement with Century. The Company paid $42,500
to the Trust in connection with the Agreement.
On May 3, 2001, the Agreement was amended so that the letter of
credit secured by the Trust was increased to $400,000. As a
condition of the amendment, the Company entered into a guarantee
agreement with Gal Capital Corp, whose President is a relative
of the Company's President and CEO and a principal stockholder
of the Company to act as guarantor of the obligation to the
Trust up to $400,000 in exchange for a fee of $42,500 which the
Company paid on May 3, 2001. The amended letter of credit
expired on September 1, 2001.
On September 15, 2001, the Agreement was further amended so that
the letter of credit secured by the Trust was increased to
$750,000. The amended letter of credit expires on September 1,
2001 but can be extended year to year at the Company's option
for a period of ten years.
On September 15, 2001, the Company entered into a new
Reimbursement Agreement with relatives of a principal
stockholder who is related to the President and CEO of the
Company ("RAYA") who pledged assets as collateral for securing a
$300,000 letter of credit as additional collateral in connection
with Breaking Waves' factoring agreement with Century. Absent
any default, the letter of credit will remain in effect for ten
years.
In exchange for the above letters of credit, the Trust and RAYA
will proportionately, based on the total outstanding letters of
credit, receive a fee of one and one quarter percent (1-1/4%) of
net sales of Breaking Waves through June 30, 2002 and thereafter
one and three quarters percent (1-3/4%) of net sales through
September 30, 2011. Upon the signing of the Agreement, the Trust
and RAYA received advance payments to be applied towards future
fees of $24,500 and $12,250, respectively. All future payments
are payable forty five days after the close of each fiscal
quarter. See Note 16.
F - 32
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 15 - INDUSTRY SEGMENTS
The Company's operations have been classified into two
segments: swimwear sales and film productions. Information about
the two segments is as follows:
Six months ended June 30,
2001 2000
------------------------------- -----------------------------
Segment Consolidated Segment Consolidated
Sales:
Swimwear sales $ 4,728,948 $ 3,673,770
Film production - -
------------- -------------
Total sales $ 4,728,948 $ 3,673,770
============= ==============
Operating income (loss):
Swimwear sales $ 208,902 $ 368,566
Film production (145,272) (100,000)
-------------- ---------------
Total operating income 63,630 268,566
Corporate:
General and administrative
expense (284,580) (283,244)
(Loss) equity in earnings of affiliate (2,771) -
Amortization expense (35,476) (35,476)
Interest income 24,945 35,905
Interest and finance expense (300,273) (189,327)
Other 14,400 11,100
------------- ----------------
Loss from operations before (benefit)
provision for income tax (520,125) (192,476)
(Benefit) provision for income tax (456) 10,970
------------- ----------------
Net (loss) income $ (519,669) $ (203,446)
============== ==================
Identifiable assets:
Swimwear sales $ 1,313,223 $ 1,207,122
Film productions 1,451,167 1,806,064
Corporate 1,757,685 2,497,729
------------- ----------------
Total assets $ 4,522,075 $ 5,510,915
============= =================
F - 33
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 15 - INDUSTRY SEGMENTS (cont'd)
Years ended December 31,
2000 1999
------------------------------- -----------------------------
Segment Consolidated Segment Consolidated
Sales:
Swimwear sales $ 5,713,133 $ 4,756,497
Film production - -
------------- -------------
Total sales $ 5,713,133 $ 4,756,497
============= ==============
Operating income (loss):
Swimwear sales $ 310,068 $ 37,800
Film production (314,135) (268,880)
-------------- ---------------
Total operating income (4,067) (231,080)
Corporate:
General and administrative
expense (564,346) (626,175)
(Loss) equity in earnings of affiliate (4,290) (994,305)
Gain on sale of equity investment - 130,093
Amortization expense (70,952) (70,952)
Interest income 80,156 56,212
Interest and finance expense (371,752) (243,148)
Other 22,271 15,549
------------- ----------------
Loss from operations before (benefit)
provision for income tax (912,980) (1,963,806)
(Benefit) provision for income tax (6,004) 12,273
------------- ----------------
Net (loss) income $ (906,976) $ (1,976,079)
============== ==================
Identifiable assets:
Swimwear sales $ 4,072,174 $ 3,219,328
Film productions 1,598,210 1,906,064
Corporate 1,993,411 2,302,228
------------- ----------------
Total assets $ 7,663,795 $ 7,427,620
============= =================
Operating profit is total revenue less cost of sales and operating expenses and
excludes general corporate expenses, interest expense and income taxes.
Identifiable assets are those used by each segment of the Company's operations.
Corporate assets are primarily cash and investments.
F - 34
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 16 - SUBSEQUENT EVENT
On September 15, 2001, Century required the Company to
increase the amount of collateralized standby letters of
credit by $300,000 raising such amount to $1,450,000.
On September 15, 2001, the Amended and Restated
Reimbursement and Compensation Agreement (See Note 8b) was
further amended so that the letter of credit secured by the
Trust was increased to $750,000. The amended letter of
credit expires on September 1, 2002 but can be extended year
to year at the Company's option for a period of ten years.
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.
On September 15, 2001, the Company entered into a new
Reimbursement Agreement with relatives of a principal
stockholder who is related to the President and CEO of the
Company ("RAYA") who pledged assets as collateral for securing
a $300,000 letter of credit as additional collateral to secure
Breaking Waves' Loan and Security Agreement with Century.
Absent any default, the letter of credit will remain in effect
for ten years. The agreement is guaranteed by Shopnet under a
separate Security Agreement dated September 15, 2001.
In exchange for the letters of credit, the Trust and RAYA will
proportionately, based on the total outstanding letters of
credit, receive a fee of one and one quarter percent (1-1/4%)
of net sales of Breaking Waves through June 30, 2002 and
thereafter one and three quarters percent (1-3/4%) of net
sales through September 30, 2011. Upon the signing of the
Agreement, the Trust and RAYA received advance payments to be
applied towards future fees of $24,500 and $12,250,
respectively. All future payments are payable forty five days
after the close of each fiscal quarter.
In exchange for facilitating the financing arrangements for
both the Amended and Restated Reimbursement and Compensation
Agreement and the Reimbursement Agreement dated September 15,
2001, Arc Financial Corp. ("Arc") received a consulting fee of
i)$209,500 on September 15, 2001 ($20,000 per year for ten
years payable in advance plus costs) and ii) one and one
quarter percent (1-1/4%) of net sales of Breaking Waves
through June 30, 2002 and one and three quarters (1-3/4%)
percent of net sales through September 30, 2011. On September
15, 2001, Arc received advance payments to be applied towards
future fees of $36,750. All payments are payable forty five
days after the close of each fiscal quarter. The agreement
with Arc expires September 30, 2011.
F - 35