U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER O-28690
SHOPNET.COM, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 13-3871821
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
14 EAST 60TH STREET, SUITE 402, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 688-9223
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 12
MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90
DAYS. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE: COMMON STOCK, $.001 PAR VALUE:
5,372,971 SHARES OUTSTANDING AS OF OCTOBER 18, 1999.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY BREAKING WAVES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998. 3
Consolidated Statement of Operations (unaudited) for the Three Months Ended March 31, 4
Consolidated Statement of Stockholders' Equity (unaudited) for the Three Months Ended 5
Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 6
Notes to Consolidated Financial Statements. 7-14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-21
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signatures 22
</TABLE>
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
Current assets:
<S> <C> <C>
Cash ....................................................................... $ 61,818 $ 159,526
Cash - restricted .......................................................... 1,150,000 1,150,000
Accounts receivable ........................................................ 48,582 53,228
Prepaid expenses ........................................................... 93,827 52,668
Inventory .................................................................. 1,471,815 2,663,003
Advances to officer ........................................................ 18,000 18,000
Loan receivable - affiliate ................................................ 75,000 --
DEFERRED TAX ASSET ......................................................... 55,000 55,000
----------- -----------
TOTAL CURRENT ASSETS ....................................................... 2,974,042 4,151,425
----------- -----------
FURNITURE, COMPUTER EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET .................. 79,782 78,875
----------- -----------
Advances to officer - non-current portion ...................................... 22,000 22,000
Film production and distribution costs, net .................................... 1,901,881 1,901,222
Organizational costs, net ...................................................... 43,750 50,000
Costs in excess of net assets of business acquired, net ........................ 886,903 904,641
INVESTMENTS IN JOINT VENTURE AND AFFILIATE ..................................... 835,577 1,177,270
Deferred tax asset-non current ................................................. 173,658 173,658
OTHER ASSETS ................................................................... 37,670 20,635
----------- -----------
TOTAL ASSETS ................................................................... $ 6,955,263 $ 8,479,726
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ...................................... $ 204,408 $ 610,406
Due to factor .............................................................. 1,058,330 2,063,554
Capital lease obligations .................................................. 14,579 13,589
DEFERRED TAX LIABILITY ..................................................... 50,159 50,159
----------- -----------
TOTAL CURRENT LIABILITIES ............................................. 1,327,476 2,737,708
----------- -----------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION .......................... 40,660 43,683
----------- -----------
TOTAL LIABILITIES .............................................................. 1,368,136 2,781,391
----------- -----------
Commitments and contingencies (Note 6) ......................................... -- --
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
5,373,388 shares issued and outstanding ................................... 5,374 5,374
Additional paid-in capital ................................................. 6,307,416 6,307,416
ACCUMULATED DEFICIT ........................................................ (725,663) (614,455)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................ 5,587,127 5,698,335
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 6,955,263 $ 8,479,726
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net sales ............................................................ $ 2,215,095 $ 2,933,113
COST OF SALES ........................................................ 1,330,001 1,672,913
----------- -----------
GROSS PROFIT ......................................................... 885,094 1,260,200
----------- -----------
Expenses:
Selling, general and administrative expenses ..................... 563,505 622,107
AMORTIZATION OF COSTS IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED 17,738 17,738
----------- -----------
TOTAL EXPENSES ....................................................... 581,243 639,845
----------- -----------
Income before other income (expense)
AND PROVISION FOR INCOME TAXES ...................................... 303,851 620,355
----------- -----------
Other income (expense):
EQUITY IN LOSS OF AFFILIATE ...................................... (341,693) --
Rental income .................................................... 2,000 3,007
Cancellation of stock issued in lieu of compensation ............. -- 62,500
Interest and finance expense ..................................... (78,421) (91,949)
INTEREST INCOME ...................................................... 13,055 20,868
----------- -----------
TOTAL OTHER INCOME (EXPENSE) ................................ (405,059) (5,574)
----------- -----------
(LOSS) Income before provision for
INCOME TAXES ........................................................ (101,208) 614,781
PROVISION FOR INCOME TAXES ........................................... 10,000 47,794
----------- -----------
NET (LOSS) INCOME .................................................... $ (111,208) $ 566,987
=========== ===========
Basic:
NET (LOSS) INCOME ................................................ $ (.02) $ .14
=========== ===========
.14
Weighted average number of
COMMON SHARES OUTSTANDING ........................................... 5,373,388 4,061,666
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Additional Total
COMMON STOCK Paid-in Accumulated Stockholders'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 5,373,888 $ 5,374 $ 6,307,416 $ (614,455) $ 5,698,335
NET (LOSS) for the three months
ENDED MARCH 31, 1999 - - - (111,208) (111,208)
------------- ------------- ------------- ------------- -------------
BALANCES AT MARCH 31, 1999 5,373,888 $ 5,374 $ 6,307,416 $ (725,663) $ 5,587,127
============= ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1999 1998
Cash flows from operating activities:
<S> <C> <C>
NET (LOSS) INCOME .......................................................... $ (111,208) $ 566,988
Adjustments to reconcile net income to
net cash provided by operating activities
EQUITY IN LOSS OF AFFILIATE ................................................ 341,693 --
Amortization and depreciation .............................................. 26,988 169,050
Decrease (increase) in:
Accounts receivable ................................................... 4,646 (2,141)
Cancellation of stock issued for compensation .................................. -- (62,500)
Prepaid expenses ...................................................... (41,159) 2,300
Inventory ............................................................. 1,191,188 1,064,230
Film production costs ................................................. (659) (138,787)
Increase (decrease) in:
Accounts payable and accrued expenses ................................. (405,998) (138,040)
DUE TO FACTOR ......................................................... (1,005,224) (1,361,537)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 267 99,563
----------- -----------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements ................................................... (3,907) (3,813)
Loans receivable-affiliate ..................................................... (100,000) (250,000)
Payments received on loans to affiliate .................................... 25,000 25,000
Acquisition costs .......................................................... (17,035) --
SUBSIDIARY'S REDEMPTION OF PREFERRED STOCK ................................. -- (280,000)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES ................................ (95,942) (508,813)
----------- -----------
Cash flows from financing activities:
Principal payments on capital leases ....................................... (2,033)
Sale of common stock ....................................................... -- 194,982
Repayments from (advances to) related parties .............................. -- (13,910)
OFFERING COSTS INCURRED .................................................... -- (4,000)
----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES .................. (2,033) 177,072
----------- -----------
Net decrease in cash ........................................................... (97,708) (232,178)
CASH, BEGINNING OF PERIOD ...................................................... 1,309,526 1,852,981
----------- -----------
CASH, END OF PERIOD ............................................................ $ 1,211,818 $ 1,620,803
=========== ===========
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
INTEREST .............................................................. $ 75,030 $ 124,748
=========== ===========
INCOME TAXES .......................................................... $ 6,506 $ 1,959
=========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
NOTE 1 ORGANIZATION
Shopnet.com, Inc. (the "Company") was incorporated in the
State of Delaware on December 1, 1995 under the name of
Hollywood Productions, Inc. On May 10, 1999, the Company filed
an amendment to its Articles of Incorporation to change its
name to Shopnet.com, Inc. In accordance with the name change,
the Company also changed its Nasdaq symbols from "FILM" and
"FILMW" to "SPNT" and "SPNTW," respectively. On May 12, 1999,
the Company incorporated a wholly-owned subsidiary, Hollywood
Productions, Inc., to which the Company shall assign its film
production business and act, thereafter, as a holding company.
The accompanying unaudited financial statements include the
accounts of the Company and its wholly-owned subsidiary
Breaking Waves, Inc. ("Breaking Waves") after elimination of
all significant intercompany transactions and accounts. The
Company, directly and through Breaking Waves, has investments
in a joint venture and an affiliate, which are accounted for
under the equity method.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with
instructions to Form 10-QSB. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, the interim
financial statements include all adjustments necessary in
order to make the financial statements not misleading. The
results of operations for the three months ended are not
necessarily indicative of the results to be expected for the
full year. For further information, refer to the Company's
audited financial statements and footnotes thereto at December
31, 1998, included in the Company's Annual Report on Form
10-KSB as filed with the Securities and Exchange Commission.
On January 14, 1999, the Company authorized a 100% common
stock dividend to all shareholders of record as of January 29,
1999. Such dividend was issued on February 5, 1999.
Accordingly, 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; holders of such shares
will be issued the dividend shares once they have exchanged
their old (i.e., pre-February 1998 reverse split) shares of
common stock for post-reverse split shares.
NOTE 2 ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued
100,000 shares of Common Stock in exchange for all of the
issued and outstanding capital stock of Breaking Waves. The
transaction was accounted for using the purchase method of
accounting. As a result of the transaction, excess of cost
over net assets acquired totaling $1,064,283 was recorded and
is being amortized over the useful lives of the related
assets, which is fifteen years. Amortization expense totaled
$17,738 for the three months ended March 31, 1999 and 1998,
respectively.
<PAGE>
NOTE 2 ACQUISITION OF BREAKING WAVES, INC. (cont'd.)
Prior to the consummation of the Company's IPO, in September
1996, Breaking Waves performed a re-capitalization and
exchanged all of its existing common stock for new common
stock and a series of preferred stock. Pursuant to the
Agreement, Breaking Waves issued 5,600 shares of its newly
authorized Series A Preferred Stock to its previous
stockholders in proportion to their respective holdings. The
holders of the shares of Series A Preferred Stock had the
right to redemption whereby on each of January 1, 1997 and
1998, Breaking Waves redeemed one-half of the outstanding
shares of the Series A Preferred Stock at a redemption price
of $100 per share on a pro rata basis. During each of January
1997 and 1998, 2,800 such shares of the Series A Preferred
Stock of Breaking Waves were redeemed for a total of $280,000
in each year.
NOTE 3 INVESTMENT IN JOINT VENTURE AND AFFILIATE
A) INVESTMENT IN JOINT VENTURE
Pursuant to a co-production agreement dated April 17, 1998,
the Company invested $200,000 for a 50% interest in a newly
formed entity, Battle Studies Productions, LLC ("Battle
Studies") a limited liability company. North Folk Films, Inc.
("NFF"), an unrelated party, also invested $200,000 for the
remaining 50% interest in Battle Studies. 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. As of March 31,
1999, Battle Studies had completed filming its first motion
picture which is expected to be shown at film festivals.
The Company accounts for the investment in Battle Studies on
the equity method. Accordingly, as of March 31, 1999, the
Company only recorded its initial $200,000 investment in the
joint venture since no operations have yet commenced.
B) INVESTMENT IN AFFILIATE
On November 24, 1998, pursuant to a sales agreement (the
"Sales Agreement") entered into during September 1998 by and
between Breaking Waves and Play Co. Toys & Entertainment Corp.
("Play Co.," toy retailer and a publicly traded company whose
Chairman of the Board is also the President of the Company and
Breaking Waves), Breaking Waves purchased 1,400,000
unregistered shares of Play Co. 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 accounts for its investment under the equity
method. For the three months ended MARCH 31, 1999, BREAKING
WAVES RECORDED $341,693 of equity loss for its proportionate
share in Play Co.'s loss.
Play Co.'s operations are highly seasonal with approximately
40% of its sales historically falling within the last three
months of the calendar year.
<PAGE>
NOTE 4 DUE TO FACTOR
On August 20, 1997, Breaking Waves entered into a factoring
and revolving inventory loan and security agreement (as
amended December 9, 1998) with Heller Financial, Inc.
("Heller") to sell its interest in all present and future
receivables without recourse. Breaking Waves submits all sales
offers to Heller for credit approval prior to shipment, and
pays Heller a factoring commission of 0.85% of the first
$5,000,000 of receivables sold and 0.65% of receivables sold
in excess of $5,000,000 for each year. Heller 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 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. Interest
expense related to this agreement totaled $75,030 and $86,325,
respectively, for the three months ended March 31, 1999 and
1998. Heller has a continuing interest in Breaking Wave's
inventory as collateral for the advances. As of March 31,
1999, the net advances to Breaking Waves from the factor
amounted to $1,058,330.
NOTE 5 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:
a) 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 $713. The lease is secured by the related computer
equipment.
b) 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.
<PAGE>
NOTE 5 CAPITAL LEASE OBLIGATIONS (cont'd.)
c) 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.
At March 31, 1999, the aggregate future minimum lease payments
due pursuant to the above capital lease obligations are as
follows:
<TABLE>
<CAPTION>
Year Ended
<S> <C> <C>
2000 18,757
2001 18,757
2002 13,355
------
Total minimal lease payments 64,937
LESS: AMOUNTING REPRESENTING INTEREST 9,698
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS $55,239
======
</TABLE>
At December 31, 1998, equipment and software under capital
leases is carried at a book value of $59,115.
NOTE 6 COMMITMENTS AND CONTINGENCIES
A) LEASE COMMITMENTS
The Company and Breaking Waves have entered into lease
agreements for administrative offices. The Company leases its
administrative office pursuant to a 5 year lease expiring
November 30, 2001 at a base annual rent amounting to
approximately $70,000. Breaking Waves leased administrative
offices through approximately January 1998 pursuant to a lease
requiring annual payments of approximately $64,000. Breaking
Waves cancelled such lease and simultaneously entered into a
new lease for additional space with the same landlord
requiring annual payments of $71,600 expiring December 2004.
Lastly, Breaking Waves leases an offsite office for one of its
designers on a month to month basis with annual payments
approximating $11,000.
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES (cont'd.)
The Company's and Breaking Waves' approximate future minimum
rentals under non-cancelable operating leases in effect on
March 31, 1999 are as follows:
Year ended
DECEMBER 31,
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 141,257
2000 141,257
2001 135,452
2002 71,600
2003 71,600
THEREAFTER 71,600
-----------------
$ 632,766
===================
</TABLE>
Rent expense for the three months ended March 31, 1999
and 1998 amounted to approximately $40,550 and $22,265,
respectively.
B) SIGNIFICANT VENDORS AND CUSTOMERS
Breaking Waves purchases approximately 90% of its inventory
from two vendors in Indonesia. For the three months ended
March 31, 1999 and 1998, Breaking Waves had three and four
customers, respectively, which comprise 20%, 12%, and 12% and
16%, 15%, 11%, and 10% of net sales, respectively.
C) SEASONALITY
Breaking Waves' business is considered seasonal with a large
portion of its revenues and profits being derived between
November and March. Each year from April through October,
Breaking Waves engages in the process of designing and
manufacturing the following season's swimwear lines, during
which time its incurs the majority of its production costs
with limited revenues.
D) LICENSE AGREEMENTS
i) On October 16, 1995, Breaking Waves entered into a license
agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States.
The agreement covered a term of January 1, 1996 to June
30, 1998 and contained a provision for an additional three
year extension, at the option of Breaking Waves, through
and until June 30, 2001. Breaking Waves has exercised this
option, thereby so extending the agreement. The agreement
calls for minimum annual royalties of $75,000 to $200,000
over the life of the agreement with options based on sales
levels from $1,000,000 for the first year to $4,000,000 in
the sixth year. The Company recorded royalties and
advertising under this agreement totaling $37,500 and
$30,000 during the three months ended March 31, 1999 and
1998, respectively.
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES (cont'd.)
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 March 1, 1999. The Company
recorded $784 and $2,663 in royalties under this agreement
during the three months ended March 31, 1999 and 1998,
respectively.
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 expires May 31, 1999. The Company
recorded $2,787 and $0 royalties under this agreement
during the three months ended March 31, 1999 and 1998,
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 March 31, 1999, the Company invested $2,065,273 for the
co-production and distribution of such motion picture whereas
the co-producers have invested $100,000. For the three months
ended March 31, 1999 and 1998, revenue associated with the
motion picture amounted to $0 and $120,000, respectively, and
amortized film costs amounted to $0 and $122,126,
respectively.
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES (cont'd.)
F) EMPLOYMENT AGREEMENTS
On November 27, 1996, the Company entered into two employment
agreements (as amended) with two key employees of Breaking
Waves. Such employees are responsible for the designing,
marketing and sales of Breaking Waves. The employment
agreements are for a term of three years with annual salaries
of $60,000 and $130,000 for 1998 (as amended), respectively,
and for $110,000 each for 1997. One of the employment
agreements was further amended effective January 1, 1999 with
an annual salary increase from $60,000 to $70,000. In addition
to the salaries, the Company agreed to issue on each of
November 27, 1996, 1997, and 1998, shares of common stock in
the amount equal to the fair market value of $25,000 (before
amendment) on the date of each issuance, to each employee
subject to a vesting schedule. In connection with the decrease
in salary from originally $110,000 per year to $70,000 per
year for one of the key employees, the Company reduced the
value of shares to be issued thereof to $13,636 for 1998.
During January 1999, the Company and such key employees
mutually agreed to defer the issuance of the common stock
scheduled to be issued November 27, 1998 until the second
quarter of 1999.
G) YEAR 2000
The Company has addressed and will continue to address the
year 2000 issue to ensure the reliability of its operational
system. The Company has made and will continue to make certain
investments in its software systems and applications to ensure
that it is Year 2000 compliant. These expenditures, which are
expensed as incurred, are not expected to be material. The
Company is also working with its suppliers and customers to
ensure their compliance with Year 2000 issues in order to
avoid any interruptions in its business.
NOTE 7 RELATED PARTIES TRANSACTIONS
a) For the three months ended March 31, 1999 and 1998, $12,000
and $15,500, respectively of financial consulting fees were
paid to an affiliate of the Company's President.
b) During October 1996, pursuant to two promissory notes, the
Company loaned two of its officers a total of $87,000 bearing
interest at six and one-half percent (6 1/2%) payable over
three years. During January 1997, the balance of one of the
notes amounting to $30,130 was forgiven as part of a severance
package for a previous officer. As of March 31, 1999, the
remaining note amounted to $37,000, of which $15,000 has been
classified as current and $22,000 classified as non-current.
As of March 31, 1999, the Company's President was advanced
additional funds totaling $3,000 which are non-interest bearing and
due on demand and are classified as current.
<PAGE>
NOTE 7 RELATED PARTIES TRANSACTIONS (cont'd.)
c) On March 1, 1998, Breaking Waves loaned funds to Play Co. in
return for an unsecured promissory note in the amount of
$250,000. Such note required monthly payments beginning March
31, 1998 of $25,000 plus interest at 15% per annum. The note
was repaid in full as of December 31, 1998.
d) Pursuant to an unsecured promissory note dated
February 1, 1999, the Company loaned $100,000 to Play Co.
bearing interest at 9% per annum. Play Co. agreed to repay
such note by June 15, 1999 with monthly installments.
NOTE 8 SUBSEQUENT EVENTS
ADVANCES TO PLAY CO.
Pursuant to an unsecured promissory note dated April
22, 1999, the Company loaned $100,000 to Play Co. bearing
interest at 9% per annum. Play Co. agreed to repay such note
by August 1999 with monthly installments.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
*CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts may
be considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
GENERAL
Shopnet.com, Inc. (the "Company") was incorporated in the State of
Delaware on December 1, 1995 as Hollywood Productions, Inc. On May 10, 1999, the
Company filed an amendment to its Articles of Incorporation effecting a change
in its name to Shopnet.com, Inc. On May 12, 1999, the Company incorporated a
wholly-owned subsidiary, Hollywood Productions, Inc. ("HPI"), to which the
Company shall assign its film production business, thereby rendering the Company
a holding company for HPI and its other wholly-owned subsidiary, Breaking Waves,
Inc. ("Breaking Waves"). The Company was formed initially for the purpose of
acquiring screen plays and producing motion pictures. During September 1996, in
connection with the completion of its Initial Public Offering ("IPO"), the
Company acquired all of the capital stock of Breaking Waves. Breaking Waves
designs, manufactures, and distributes private and brand name label children's
swimwear.
The consolidated financial statements at March 31, 1999 and 1998
include the accounts of the Company and its subsidiary Breaking Waves (herein
referred to as the "Companies") 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 the Company and its subsidiary, Breaking Waves, operate in
different industries, the discussion and analysis is presented by segment in
order to be more meaningful.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1998
BREAKING WAVES
For the three months ended March 31, 1999 and 1998, Breaking Waves
generated net sales of $2,215,095 and $2,813,114, respectively, with a cost of
sales amounting to $1,330,001 and $1,550,787, respectively. The gross profit for
the three months ended March 31, 1999 amounted to $885,094, or 40%, as compared
to the three months ended March 31, 1998 during which it amounted to $1,262,327,
or 45%. Sales for the quarter ended March 31, 1999 decreased by $598,019 when
compared to the quarter ended March 31, 1998. The decrease in sales is primarily
a result in the timing of orders by customers since actual orders received
during April and May 1999 and orders expected to be received through the end of
May 1999 are expected to reach approximately $1,520,000, whereas actual orders
for April and May 1998 amounted to $898,783.
The decrease in gross profit of approximately 5% is primarily a result
of customers purchasing items with a lesser gross profit margin along with the
competitive nature of the business whereby discounts on merchandise become a key
factor in maintaining existing customers and attempting to attract new ones.
Selling, general, and administrative expenses during the three months ended
March 31, 1999 and 1998 amounted to $438,910 and $459,726, respectively.
The major components of the Breaking Waves selling, general, and
administrative expenses during the quarter ended March 31, 1999 are as follows:
$114,982 of officers, office staff, and designer salaries and related benefits,
$80,380 of commission expense, $86,512 of warehousing costs, $41,071 of royalty
fees, $21,884 of rent expense, $22,385 of factor commissions, and $71,696
representing other miscellaneous general corporate overhead expenses.
The major components of selling, general, and administrative expenses
for the three months ended March 31, 1998 are as follows: $119,146 of officers,
office staff, and design salaries and related benefits, $102,231 of commission
expense, $102,595 of warehousing costs, $32,662 of royalty fees, $2,686 of rent
expense, $28,412 of factor commission and $71,994 representing other
miscellaneous general corporate overhead expenses.
Breaking Waves acquired, in November 1998, a 25.4% interest in Play Co.
Toys & Entertainment Corp. ("Play Co.") by paying $300,000 in cash and by
shipping $204,000 in merchandise. In connection with the $504,000 INVESTMENT IN
PLAY CO., REPRESENTING 25.4% OWNERSHIP THEREOF, BREAKING WAVES RECOGNIZED
$341,693 of equity loss in Play Co. for the quarter ended March 31, 1999. Play
Co.'s operations are highly seasonal with approximately 40% of its net sales
historically falling within the last three months of the calendar year.
Interest expense in connection with its factoring agreement amounted to
$75,030 and $86,324 for the three months ended March 31, 1999 and 1998
respectively.
<PAGE>
Breaking Waves generated net income of $206,573 and $668,838,
respectively, for the three months ended March 31, 1999 and 1998 after estimated
income tax provisions of $10,000 and $39,000, respectively.
THE COMPANY (SANS SUBSIDIARY BREAKING WAVES)
For the three months ended March 31, 1999 and 1998, the Company generated
sales from its motion picture "Dirty Laundry" amounting to $0 and $120,000,
respectively. Although sales have been minimal since the completion of the
motion picture, the Company expects increases in sales during 1999 and
thereafter as a result of a new release of the picture during the latter part of
1998.
The Company's selling, general, and administrative expense amounted to
$124,595 and $162,381 for the three months ended March 31, 1999 and 1998,
respectively.
The major components of the Company's expenses are as follows for the three
months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
Salaries (officer and office staff) and stock compensation
<S> <C> <C>
and related benefits $47,343 $69,669
Legal and Professional fees 10,665 2,681
Rent 18,465 17,680
Consulting fees 12,250 15,250
Other general corporate and administrative expenses 35,872 57,101
</TABLE>
The Company generated a net loss of $109,631 for the three months ended
March 31, 1999, and a net loss of $90,113 for the three months ended March 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Companies have a consolidated working capital
amounting to $1,646,566. The Companies anticipate that their current available
cash will be sufficient for the next twelve months, and they do not anticipate
any cash shortfalls.
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 $1,158,068. The Company
maintains cash deposits in accounts which are in excess of Federal Deposit
Insurance Corporation limits by approximately $1,058,000. 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 requires the Company to maintain $1,150,000 on deposit as collateral
for the letter of credit. Accordingly, such cash is designated as restricted.
<PAGE>
FOR THE THREE MONTHS ENDED MARCH 31, 1999, THE COMPANIES REPORTED A
CONSOLIDATED NET LOSS OF $111,208 after an estimated income tax expense of
$10,000 whereas for the three months ended March 31, 1998, the Companies
reported a consolidated net income of $566,987 after a provision of income taxes
amounting to $47,794.
INVESTMENT IN JOINT VENTURE
Pursuant to a co-production agreement dated April 17, 1998, the Company
invested $200,000 for a 50% interest in a newly formed entity, Battle Studies
Productions, LLC ("Battle Studies"), a limited liability company. North Folk
Films, Inc. ("NFF"), an unrelated party, also invested $200,000 for the
remaining 50% interest in Battle Studies. 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. As of March 31, 1999, Battle Studies had completed filming its
first motion picture which will be shown at various upcoming film festivals.
The Company accounts for the investment in Battle Studies on the equity
method. Accordingly, as of March 31, 1999, the Company has only recorded its
initial $200,000 investment in the joint venture since no operations have yet
commenced.
FACTORING ARRANGEMENTS
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (which was subsequently amended
in December 1998) with Heller Financial, Inc. ("Heller") pursuant to which
Heller agreed to (i) purchase all of Breaking Waves' accounts receivables, (ii)
provide advances against such accounts receivables, (iii) provide a revolving
loan, and (iv) guarantee letters of credit in excess of $1,500,000 as well as
provide certain other services. The Company is a guarantor of Breaking Waves'
obligations to Heller. The Company maintains a letter of credit with a financial
institution in support of and as a condition to its factoring agreement. The
financial institution requires the Company to maintain $1,150,000 on deposit as
collateral for such letter of credit. Breaking Waves may take advances of up to
85% of the purchase price of its eligible accounts receivable.
The factoring agreement provides (i) factoring commissions of (a) 0.85%
on the first $5 million in accounts sold and assigned to Heller during each year
and (b) 0.65% on all accounts in excess of $5 million sold and assigned to
Heller during each year, but in no event less than $3 per invoice; and (ii) on
accounts bearing terms greater than 90 days, an increase in commission by 0.25%
for each 30 days or part thereof that the terms exceed 60 days. Interest expense
related to this agreement totaled $75,030 and $86,325, respectively, for the
three months ended March 31, 1999 and 1998. Heller has a continuing interest in
Breaking Wave's inventory as collateral for the advances. As of March 31, 1999,
the net advances to Breaking Waves from the factor amounted to $1,058,330.
<PAGE>
CAPITAL LEASE OBLIGATIONS
During 1998, the Company acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the terms and
conditions set forth herein.
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 $713. 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 and Breaking Waves have entered into lease agreements for
administrative offices. The Company leases its administrative office pursuant to
a 5 year lease expiring November 30, 2001 at a base annual rent amounting to
approximately $70,000. Breaking Waves leased administrative offices through
approximately January 1998 pursuant to a lease requiring annual payments of
approximately $64,000. Breaking Waves amended such lease and rented additional
space at an annual rental of $71,600 expiring December 2004. Breaking Waves also
leases an offsite office for one of its designers on a month to month basis with
annual payments approximating $11,000.
LICENSE AGREEMENTS
On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. ("Beach") to use the trademark "Daffy Waterwear"
("Daffy"). Beach supplies prints and designs used under this agreement for the
Daffy line. Pursuant to the licensing agreement, Breaking Waves was given the
right to use those designs for a children's line under the "Daffy Waterwear"
label from January 1, 1996 to June 30, 1998. Thereafter, the agreement provided
for a three year extension, at the option of Breaking Waves, through and until
June 30, 2001. Breaking Waves has exercised this option, thereby so extending
the agreement. For its right to use the trademark, Breaking Waves agreed to pay
Beach, subject to certain variables, the greater of 5% of net sales or as
follows: (i) during the first six months, an aggregate of $75,000, (ii) during
the next twelve months, an aggregate of $85,000, (iii) during the final twelve
months, an aggregate of $100,000, and (iv) during each of the final three years
of the agreement, an aggregate of $150,000, $175,000, and $200,000,
respectively. The Company recorded royalties and advertising under this
agreement totaling $37,500 and $30,000 during the three months ended March 31,
1999 and 1998, respectively.
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. The Company recorded $784 and
$2,663 royalties under this agreement during the three months ended March 31,
1999 and 1998, respectively.
<PAGE>
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 expires May 31, 1999. Royalties paid
under the agreement during the three months ended March 31, 1999 and 1998
amounted to $2,787 and $0, respectively.
INTERNET SALES
In March 1999, Breaking Waves launched an online wholesale children's
swimwear website at www.breakingwaves.com. The website is designed to complement
the company's wholesale distribution efforts by providing retailers instant
access to more than 200 styles of Breaking Waves swimwear. The entire line of
Breaking Waves swimwear, including products marketed under the "Breaking Waves,"
"All Waves," "Daffy Waterwear," and "Jet Ski" brands, is available for online
purchase by retailers. The Breaking Waves website is being hosted by Mindspring
and incorporates e-commerce features from Cybercash and Mercantec, Inc.
Additionally, a second website was set up (www.smallwavesswimwear.com) which
features discounted styles, closeouts, over-runs, and manufacturers' specials at
highly discounted prices directly to consumers.
Management believes that these websites will fill the needs of existing
and potential customers. Through the Internet, retailers can purchase
merchandise online in a matter of minutes, at their own convenience, instead of
having to wait for a printed wholesale catalog. Management believes that the
advantages and efficiencies created by the websites will assist Breaking Waves
in increasing brand awareness as well as market share. Marketing strategies for
"driving" retailers to the site include co-op trade advertisements, tradeshow
exposure, direct mail, and including the site address on all corporate
collateral and product labels.
YEAR 2000
The Companies have addressed and will continue to address the year 2000
issue to ensure the reliability of their operational systems. The Companies have
made and will continue to make certain investments in their software systems and
applications to ensure that they are Year 2000 compliant. These expenditures,
which are expensed as incurred, are not expected to be material . The Companies
are also working with their suppliers and customers to ensure their compliance
with Year 2000 issues in order to avoid any interruptions in its business.
LOANS TO PLAY CO.
Pursuant to an unsecured promissory note dated February 1, 1999, the
Company loaned $100,000 to Play Co. bearing interest at 9% per annum. Play Co.
agreed to repay such note by June 15, 1999 in monthly installments.
<PAGE>
Pursuant to an unsecured promissory note dated April 22, 1999, the Company
loaned an additional $100,000 to Play Co. bearing interest at 9% per annum. Play
Co. agreed to repay such note by August 1999 in monthly installments.
COMMON STOCK DIVIDEND
On January 14, 1999, the Company declared a 100% Common Stock dividend to
all shareholders of record as of January 29, 1999. The dividend was paid on
February 5, 1999 whereby the Company issued 2,686,027 shares of Common Stock. An
additional 917 shares are entitled to the dividend and holders thereof will be
issued the dividend shares once they have exchanged their old (i.e.,
pre-February 1998 reverse split) shares of common stock for post-reverse split
shares.
PART II
ITEM 1. LEGAL PROCEEDINGS: The Company is not a party to any material litigation
and is not aware of any threatened litigation that would have a material adverse
effect on its business. Neither the Company's officers, directors, affiliates,
nor owners of record or beneficially of more than five percent of any class of
the Company's Common Stock is a party to any material proceeding adverse to the
Company or has a material interest in any such proceeding adverse to the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: Previously reported.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5. OTHER INFORMATION: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) NO EXHIBITS ARE FILED WITH THIS FORM 10-QSB/A for the quarter ended March
31, 1999.
(b) During the quarter ended March 31, 1999, no reports on Form 8-K were filed
with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, THIS 19TH DAY OF OCTOBER 1999.
SHOPNET.COM, INC.
BY: /S/ HAROLD RASHBAUM
Harold Rashbaum
President and Chief Executive Officer
BY: /S/ ROBERT DIMILIA
Robert DiMilia
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET, STATEMENT OF OPERATIONS, STATEMENT OF CASH FLOWS AND NOTES
THERETO INCORPORATED IN PART I, ITEM 2 OF THIS FORM 10-QSB/A AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> mar-31-1999
<CASH> 1,211,818
<SECURITIES> 0
<RECEIVABLES> 48,582
<ALLOWANCES> 0
<INVENTORY> 1,471,815
<CURRENT-ASSETS> 2,974,042
<PP&E> 79,782
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,955,263
<CURRENT-LIABILITIES> 1,327,476
<BONDS> 0
0
0
<COMMON> 5,374
<OTHER-SE> 5,581,753
<TOTAL-LIABILITY-AND-EQUITY> 6,955,263
<SALES> 2,215,095
<TOTAL-REVENUES> 0
<CGS> 1,330,001
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 581,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,421
<INCOME-PRETAX> (101,208)
<INCOME-TAX> 10,000
<INCOME-CONTINUING> (111,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (111,208)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
