U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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:
7,212,067 shares outstanding as of August 10, 2000.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999. 3
Consolidated Statements of Operations (unaudited) for the Three Months Ended June 30, 4
2000 and 1999.
Consolidated Statement of Operations (unaudited) for the Six Months Ended June 30, 5
2000 and 1999.
Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months Ended 6
June 30, 2000.
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 7
2000 and 1999.
Notes to Consolidated Financial Statements. 8-16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17-26
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
27
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 27
Item 3. DEFAULTS UPON SENIOR SECURITIES 27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
Item 5. OTHER INFORMATION 27
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 28
Signatures 29
</TABLE>
2
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999
Current assets:
<S> <C> <C>
Cash ......................................................................... $ 285,867 $ 24,479
Cash - restricted .............................................................. 1,356,965 1,351,760
Accounts receivable, net ....................................................... 12,156 31,104
Prepaid expenses ............................................................... 78,025 70,659
Inventory ...................................................................... 567,846 2,862,053
Advances to officer ............................................................ 40,000 40,000
Investment Securities available for sale ....................................... 266,700 --
Deferred tax asset ............................................................. 55,000 55,000
----------- -----------
Total current assets ...................................................... 2,662,559 4,435,055
----------- -----------
Furniture, computer equipment, and leasehold improvements, net ..................... 71,638 67,817
Film production and distribution costs, net ........................................ 1,593,564 1,693,564
Costs in excess of net assets of business acquired ................................. 798,213 833,689
Investment in joint venture ........................................................ 212,500 212,500
Organizational costs, net .......................................................... 12,500 25,000
Deferred tax asset - non current ................................................... 139,360 139,360
Other assets ....................................................................... 20,581 20,635
----------- -----------
Total assets .............................................................. $ 5,510,915 $ 7,427,620
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 56,444 $ 279,718
Accrued expenses ............................................................... 38,741 908,357
Due to factor .................................................................. 1,037,942 1,776,274
Due to related party .......................................................... -- 650,000
Line of credit payable ......................................................... 213,894 --
Capital lease obligations ...................................................... 12,568 16,359
Deferred tax liability ......................................................... 6,900 6,900
----------- -----------
Total current liabilities ................................................. 1,366,489 3,637,608
----------- -----------
Capital lease payables, net of current portion ..................................... 25,382 29,120
----------- -----------
Total liabilities ......................................................... 1,391,871 3,666,728
----------- -----------
Commitments and contingencies (Note 8) ............................................. -- --
----------- -----------
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
7,472,411 and 7,352,411 shares issued and outstanding, respectively............ 7,472 7,352
Additional paid-in capital ..................................................... 6,638,852 6,344,074
Accumulated deficit ............................................................ (2,793,980) (2,590,534)
----------- -----------
Accumulated other comprehensive income ......................................... 266,700 --
----------- -----------
Total stockholders' equity ................................................ 4,119,044 3,760,892
----------- -----------
Total liabilities and stockholders' equity ......................................... $ 5,510,915 $ 7,427,620
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
3
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
June 30, June 30,
2000 1999
<S> <C> <C>
Net sales $ 952,788 $ 1,399,992
Cost of sales 720,311 1,245,350
------------------- --------------------
Gross profit 232,477 154,642
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 458,582 523,589
Write off of film costs 100,000 -
Amortization of costs in excess of net assets of business
acquired 17,738 17,738
------------------- --------------------
Total expenses 576,320 541,327
------------------- --------------------
Loss before other income (expense)
and provision for income taxes (343,843) (386,685)
-------------------- ---------------------
Other income (expense):
Equity in loss of affiliate - (530,879)
Rental income 5,550 -
Interest and finance expense (82,691) (52,985)
Interest income 18,034 15,193
------------------- --------------------
Total other income (expense) (59,107) (568,671)
-------------------- ---------------------
Loss before provision for
income taxes (402,950) (955,356)
Provision for income taxes 5,504 -
------------------- --------------------
Net loss
(408,454) (955,356)
Other items of comprehensive income (loss) (431,800) -
-------------------- --------------------
Comprehensive net loss $ (840,254) $ (955,356)
---------------------- ---------------------
Basic:
Net loss $ (.05) $ (.13)
==================== =====================
Weighted average number of
common shares outstanding 7,472,411 7,092,322
==================== =====================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
4
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Net sales $ 3,673,770 $ 3,615,087
Cost of sales 2,491,788 2,575,351
------------------- -------------------
Gross profit 1,181,982 1,039,736
------------------- -------------------
Expenses:
Selling, general, and administrative expenses 1,096,660 1,087,094
Write off of film costs 100,000 -
Amortization of costs in excess of net assets of business
acquired 35,476 35,476
------------------- -------------------
Total expenses 1,232,136 1,122,570
------------------- -------------------
Income (loss) before other income (expense)
and provision for income taxes 49,846 (82,834)
------------------- --------------------
Other income (expenses):
Equity in loss of affiliate - (872,572)
Rental income 11,100 4,500
Interest and finance expense (189,327) (131,406)
Interest income 35,905 28,248
------------------- -------------------
Total other income (expense) (142,322) (971,230)
------------------- --------------------
Loss before provision for
income taxes (192,476) (1,054,064)
------------------- --------------------
Provision for income taxes 10,970 -
------------------- --------------------
Net loss (203,446) (1,054,064)
Other items of comprehensive income 266,700 -
------------------- --------------------
Comprehensive net income (loss) $ 63,254 $ (1,054,064)
------------------- --------------------
Basic:
Net (loss) $ (.03) $ (.15)
=================== ====================
Weighted average number of
common shares outstanding shares 7,451,971 7,092,322
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
5
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 .... 6,127,009 $ 6,127 $ 6,345,299 $ (2,590,534) $ -- $ 3,760,892
Sale of common stock, net of costs 100,000 100 294,798 -- -- 294,898
Issuance of Common Stock in
Connection with Stock Dividend
(Note 9(B)) ..................... 1,245,402 1,245 (1,245) -- -- --
Unrealized gain on securities .... -- -- -- -- 266,700 266,700
Net loss for the six months
ended June 30, 2000 ............. -- -- -- (203,446) -- (203,446)
----------- ----------- ----------- ----------- ----------- -----------
7,472,411 $ 7,472 $ 6,638,852 $(2,793,980) $ 266,700 $ 4,119,044
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
6
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, 2000 June 30, 1999
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (203,446) $ (1,054,064)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Write off of film costs 100,000 -
Issuance of stock options to officers - 12,250
Equity in loss of affiliate - 872,572
Amortization and depreciation 57,352 53,367
Decrease (increase) in:
Accounts receivable 18,948 41,294
Prepaid expenses (7,366) (58,707)
Inventory 2,294,207 2,387,407
Other assets 54 -
Increase (decrease) in:
Accounts payable (223,274) (513,273)
Accrued expenses (869,616)
Due to factor (738,332) (1,562,942)
--------------- -----------------
Net cash provided by operating activities 428,527 177,904
--------------- -----------------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements (13,197) (3,907)
Loan repayments to affiliate (650,000) (300,000)
Investment acquisition costs - (17,035)
Investment in joint venture - (12,500)
Proceeds from affiliate - 75,000
--------------- -----------------
Net cash used for investing activities (663,197) (258,442)
---------------- ------------------
Cash flows from financing activities:
Proceeds from sale of common stock 294,898 -
Proceeds from line of credit 225,000 -
Repayments to line of credit (11,106) -
Principal payments of capital leases (7,529) (5,482)
---------------- ------------------
Net cash provided by (used for) financing activities 501,263 (5,482)
--------------- ------------------
Net increase (decrease) in cash 266,593 (86,020)
Cash, beginning of period 1,376,239 1,309,526
--------------- -----------------
Cash, end of period $ 1,642,832 $ 1,223,506
=============== =================
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 184,965 $ 131,406
=============== =================
Income taxes $ 16,879 $ 6,506
=============== =================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
7
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
Shopnet.com, Inc. (the "Company") was incorporated in the
State of Delaware on December 1, 1995 under the name of
Hollywood Productions, Inc. The Company was formed for the
purpose of acquiring screenplays and producing motion
pictures. On May 10, 1999, the Company filed an amendment to
its Articles of Incorporation to change its name to
Shopnet.com, Inc. 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 new wholly owned subsidiary,
Hollywood Productions, Inc. ("Hollywood"), to which the
Company has assigned all of its film rights. Accordingly, the
Company is considered a holding Company. During September
1996, simultaneously with the completion of its Initial Public
Offering ("IPO"), the Company acquired all of the capital
stock of Breaking Waves, Inc. ("Breaking Waves"). Breaking
Waves designs, manufactures, and distributes private and brand
name labels of children's swimwear nationally.
NOTE 2 - INTERIM RESULTS AND BASIS OF PRESENTATION
The unaudited consolidated financial statements as of June 30,
2000 and for the three and six month periods ended June 30,
2000 and 1999 have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Items
303 and 310(B) of Regulation S-B. In our opinion, the
unaudited financial statements have been prepared on the same
basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position as of June
30, 2000 and the results of our operations and cash flows for
the three and six month periods ended June 30, 2000 and 1999.
The results for the three and six month periods ended June 30,
2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or the entire fiscal year
ending December 31, 2000. The balance sheet at December 31,
1999 has been derived from the audited financial statements at
that date.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and
regulations. It is suggested that these unaudited financial
statements be read in conjunction with our audited financial
statements and notes thereto for the year ended December 31,
1999 as included in our report on Form 10-KSB filed on April
10, 2000.
8
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued
110,000 shares of common stock in exchange for all of the
issued and outstanding capital stock of Breaking Waves. The
transaction was accounted for using the purchase method of
accounting. As a result of the transaction, excess of cost
over net assets acquired totaling $1,064,283 was recorded and
is being amortized over the useful lives of the related assets
which is fifteen years. Amortization expense totaled $17,738
for each of the three months ended June 30, 2000 and 1999,
respectively.
NOTE 4 - INVESTMENTS IN JOINT VENTURE AND AFFILIATE
a) Investment in Joint Venture
Pursuant to a co-production agreement dated April 17, 1998,
the Company invested $212,500 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 $212,500 for the
remaining 50% interest in Battle Studies. Battle Studies is
treated as a joint venture in order to co-produce motion
pictures and to finance the costs of production and
distribution of such motion pictures. The joint venture
retains all rights to the motion pictures, the screenplays,
and all ancillary rights attached thereto.
The Company accounts for the investment in Battle Studies on
the equity method. As of June 30, 2000, the Joint Venture has
no operations.
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," a 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.'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.
For the year ended December 31, 1999, Breaking Waves accounted
for its investment under the equity method. For the three and
six months ended June 30, 1999, Breaking Waves recorded a
$530,879 and $872,572,
9
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - INVESTMENT IN JOINT VENTURE AND AFFILIATE (cont'd)
b) Investment in Affiliate (cont'd)
--------------------------------
respectively, of equity loss for its proportionate share of
Play Co.'s losses for those periods.
As of December 31, 1999, Breaking Waves' investment in Play
Co. was reduced to $-0- since its share of Play Co.'s loss for
1999 exceeded its cost basis. In addition, during the year
ended December 31, 1999, as a result of Play Co.'s issuance of
additional common stock, and Breaking Waves' sale of 130,000
shares of Play Co.'s common stock, Breaking Waves' ownership
percentage of Play Co's common stock was reduced to 22.88%.
During the six months ended June 30, 2000, Play Co. converted
a portion of its series E preferred stock into common stock,
thereby reducing Breaking Waves' ownership percentage to
approximately 3%. Accordingly, the investment in Play Co. is
accounted for under the requirements of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Carrying value is based on fair market value at
the end of the quarter which amounted to $266,700. At June 30,
2000, which if accounted for as investment available for sale,
the change in unrealized gain or loss has been recorded as a
component of comprehensive income.
NOTE 5 - 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 CIT Group (formerly, Heller
Financial, Inc. "CIT") to sell their interest in all present
and future receivables without recourse. Breaking Waves
submits all sales offers to CIT for credit approval prior to
shipment, and pays 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. CIT 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. In addition, during 1999, the Company was
required to transfer an additional $200,000 of cash as
collateral deposited with CIT. Interest expense related to
this agreement totaled $75,923 and $52,863, respectively, for
the three months ended June 30, 2000 and 1999, respectively.
CIT has a continuing interest in Breaking Wave's inventory as
collateral for the advances. As of June 30, 2000, the net
advances to Breaking Waves from CIT amounted to $1,037,942.
10
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - 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 borrowing under the line
as of June 30, 2000 is $213,894, including interest. The
outstanding balance must be repaid in monthly installments
including 9% interest. As a condition of the line of credit,
the Company was required to deposit $250,000 in a certificate
of deposit as collateral with the bank. The certificate of
deposit has been classified as restricted cash. Subsequent to
June 30, 2000, the line of credit was repaid in full.
NOTE 7 - CAPITAL LEASE OBLIGATIONS
During 1998, the Company acquired computer equipment and
proprietary software for its subsidiary, Breaking Waves,
pursuant to the following terms and conditions:
i) On August 13, 1998, the Company acquired various computer
and related components for $28,583 by entering into a capital
lease obligation with interest at approximately 9.2% per
annum, requiring 48 monthly payments of principal and interest
of $762. The lease is secured by the related computer
equipment.
ii) On September 13, 1998, the Company acquired
proprietary software for $32,923 by entering into a capital
lease obligation with interest at approximately 10.9% per
annum, requiring 48 monthly payments of principal and interest
of $850. The lease is secured by the related software.
At December 31, 1999, the aggregate future minimum lease
payments due pursuant to the above capital lease obligations
are as follows:
11
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - CAPITAL LEASE OBLIGATIONS (cont'd)
<TABLE>
<CAPTION>
Year Ended
December 31:
<S> <C> <C>
2000 $ 19,335
2001 19,335
2002 13,486
------
Total minimal lease payments $ 52,156
------
Less: Amounting representing interest $6,677
------
Present value of net minimum
lease payments $ 45,479
======
</TABLE>
At June 30, 2000 equipment and software under capital leases
is carried at a book value of approximately $38,600.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
The Company and its subsidiary have entered into lease
agreements for administrative offices. The Company leases its
administrative office pursuant to a 5 year lease expiring
November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leased
administrative offices through January 1998 pursuant to a
lease requiring annual payments of 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. The Company and Breaking Waves'
approximate future minimum rentals under non-cancelable
operating leases in effect on December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 141,257
2001 135,452
2002 71,600
2003 71,600
2004 71,600
Thereafter -
--------------
$ 491,509
</TABLE>
12
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
a) Lease commitments (cont'd)
--------------------------
Rent expense for the three months ended June 30, 2000 and 1999
amounted to approximately $37,500 and $29,400, respectively,
and approximately $79,500 and $81,600 for the six months ended
June 30, 2000 and 1999, respectively.
b) Significant vendors and customers
---------------------------------
Breaking Waves purchased 100% of its inventory from one vendor
in Indonesia. For the three months ended June 30, 2000
Breaking Waves had two customers, which comprised of 38%, and
16% of net sales, respectively. For the three months ended
June 30, 1999, Breaking Waves had two customers which
compromised 32% and 21% of net sales, respectively.
c) Seasonality
Breaking Waves' business is considered seasonal with a large
portion of its revenues and profits being derived between
November and March. Each year from April through October,
Breaking Waves engages in the process of designing and
manufacturing the following season's swimwear lines, during
which time its incurs the majority of its production costs
with limited revenues.
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a license
agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States.
The agreement covered a term from January 1, 1996 to June
30, 1998 and contained a provision for an additional three
year extension, at the option of Breaking Waves, through
and until June 30, 2001. Breaking Waves has exercised this
option, thereby so extending the agreement. The agreement
calls for minimum annual royalties of $75,000 to $200,000
over the life of the agreement with options based on sales
levels from $1,000,000 for the first year to $4,000,000 in
the sixth year. The Company recorded royalties and
advertising under this agreement totaling $39,915 and
$37,500 during the three months ended June 30, 2000 and
1999, respectively, and $99,113 and $75,000 during the six
months ended June 30, 2000 and 1999.
13
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
d) License agreements (cont'd)
---------------------------
ii) 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. The
Company recorded royalties under this agreement totaling $
10,415 during the six months ended June 30, 1999.
iii)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 a minimum guaranteed annual
royalties of $70,000 to $140,000 over the life of the
agreement.
In connection with such licensing agreement,
Breaking Waves entered into a consulting agreement with
Larry Nash, Inc. ("Consultant") a New York Corporation,
whereby the Consultant shall provide sales and consulting
services in connection with, and be in charge of sales of
Breaking Waves' new Gottex line.
This agreement is effective August 5, 2000 and
shall continue to August 5, 2001 and from year to year
thereafter unless cancelled by either party on thirty (30)
days prior written notice.
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, 2000, the Company invested $2,006,956 for the
co-production and distribution of such motion picture whereas
the co-producers have
14
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
e) Co-production and property purchase agreements (cont'd)
-------------------------------------------------------
invested $100,000. For the three and six months ended June 30,
2000 and 1999, no revenue was generated with the motion
picture.
For the three and six months ended June 30, 2000, the Company
has written down its film production and distribution costs by
$100,000 in order to reduce the balance to its estimated net
realizable value.
f) Employment agreements
On November 27, 1996, the Company entered into two employment
agreements (as amended) with two key employees of Breaking
Waves. Such employees are responsible for the designing,
marketing and sales of Breaking Waves. The employment
agreements are for a term of three years with annual salaries
of $110,000 each for 1997 and $60,000 and $130,000 for 1998
(as amended), respectively. One of the employment agreements
was further amended effective January 1, 1999 with an annual
salary increase from $60,000 to $70,000. In addition to the
salaries, the Company agreed that the employees are entitled
to receive on each of November 27, 1996, 1997, and 1998,
shares of common stock in the amount equal to the fair market
value of $25,000 (before amendment) to each employee subject
to a vesting schedule. In connection with the decrease in
salary from originally $110,000 per year to $70,000 per year
for one of the key employees, the Company reduced the value of
shares to be issued to $13,636 for November 27, 1998. The
shares the employees were entitled on November 27, 1998 did
not vest until during the year ended December 31, 1999.
Although the shares have not yet been issued, the Company
recorded compensation expense amounting to $38,636 during the
year ended December 31, 1999, since the shares vested as of
May 1999.
As of June 30, 2000, the Company has not renegotiated the
employment agreements with the two key employees of Breaking
Waves and accordingly, all prior arrangements are in effect.
15
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY
a) 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 transaction with an unrelated party.
b) Stock Dividends
On January 7, 2000, the Company declared a 10% stock dividend
to all shareholders of record as of January 20, 2000 amounting
to 557,000 shares of common stock. Such stock dividend was
issued on February 1, 2000.
On May 8, 2000, the Company declared a 20% stock divided to
all shareholders of record as of May 19, 2000. Such stock
dividend was distributed on June 19, 2000.
NOTE 10 - RELATED PARTIES TRANSACTIONS
a) For each of the three months ended June 30, 2000 and 1999,
$12,000 of financial consulting fees were paid to an affiliate
of the Company's President. Such fees were $29,080 and $24,000
for the six months ended June 30, 2000 and 1999, respectively.
b) During October 1996, pursuant to a promissory note, the
Company loaned its President a total of $50,000 bearing
interest at six and one-half percent (6 1/2) payable over
three years. As of June 30, 2000, the unpaid portion, which is
due on demand, amounted to $37,000, which has been classified
as current. As of June 30, 2000, 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.
c) On November 29, 1999, Play Co. loaned funds to Breaking Waves
in return for an unsecured promissory note in the amount of
$400,000. Such note was 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.
16
<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. ("Shopnet" or the "Company") was incorporated in the
State of Delaware on December 1, 1995 as Hollywood Productions, Inc. On May 10,
1999, Shopnet filed an amendment to its Articles of Incorporation effecting a
change in its name to its current one. On May 12, 1999, it incorporated a
wholly-owned subsidiary, Hollywood Productions, Inc. ("Hollywood"), to which it
assigned its film production business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, Breaking Waves, Inc.
("Breaking Waves"). Shopnet was formed initially for the purpose of acquiring
screenplays and producing motion pictures. In September 1996, in connection with
the completion of its Initial Public Offering ("IPO"), it acquired all of the
capital stock of Breaking Waves which designs, manufactures, and distributes
private and brand name label children's swimwear.
The consolidated financial statements at June 30, 2000 include the accounts
of Shopnet and its wholly owned subsidiaries, Breaking Waves and Hollywood
(collectively referred to as the "Company" except where specific delineation is
required), after elimination of all significant intercompany transactions and
accounts.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related footnotes which provide
additional information concerning the Company's financial activities and
condition. Since Shopnet and its subsidiaries operate in different industries,
the discussion and analysis is presented by segment in order to be more
meaningful.
17
<PAGE>
Three months ended June 30, 2000 as compared to the three months ended June 30,
1999
Breaking Waves
For the three months ended June 30, 2000 and 1999, Breaking Waves generated
net sales of $952,788 and $1,399,992, respectively with a cost of sales
amounting to $720,311 and $1,245,350, respectively. The decrease in sales
amounting to $447,203, or approximately 32%, from 1999 to 2000 was primarily
attributable to the timing of orders between the first and second quarters. The
gross profit for the three months ended June 30, 2000 amounted to $232,478, or
24%, as compared to the three months ended June 30, 1999 during which it
amounted to $154,642, or 11%. The low gross profit for the three months ended
March 31, 1999 is primarily a result of Breaking Waves's selling off it's
discontinued Jet Ski line at cost or slightly below cost during 1999.
Selling, general, and administrative expenses during the three months ended
June 30, 2000 and 1999 amounted to $316,156 and $362,589, respectively,
representing a decrease of 46,433 or 13%.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the three months ended June 30:
<TABLE>
<CAPTION>
2000 1999
---- -----
<S> <C> <C>
Officers, office staff and
designer salaries and related benefits $ 148,552 $ 147,686
Commission expense 7,072 16,880
Warehousing costs 29,349 54,350
Royalty fees 39,915 45,128
Rent expense 18,340 22,226
Factor commissions 14,659 15,058
Miscellaneous general corporate
overhead expenses 58,269 61,261
</TABLE>
The overall expense decrease of approximately $46,433 is directly
associated with a) certain expenses which are directly associated or are a
function of sales, ie. supplies, shipping, travel, UPC coding and b) general
expenses associated with the discontinued line of Jet Ski during 1999.
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 quarter ended June 30, 1999, Breaking Waves recognized $530,879 of
equity loss (non-cash loss) in Play Co. in connection with the equity method of
accounting.
18
<PAGE>
Breaking Waves generated a net loss of $167,481 and $781,690, for the three
months ended June 30, 2000 and 1999 respectively. The net loss generated for the
three months ended June 30, 1999 includes an equity loss pick up (non cash loss)
of $530,879 from 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
3% as of June 30, 2000. Breaking Waves accounted for its investment in Play Co
pursuant to the equity method through the point it maintained at least a 20%
ownership interest. Once its investment fell below 20%, it used the cost method
of accounting which was - 0 - as a result of writing the investment down as a
result of the equity loss pick up 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 $267,000 as of June 30, 2000 as compared to a fair market value of
$698,500 as of March 31, 2000. Accordingly, Breaking Waves recorded an
unrealized loss of $431,500 for the three months ended June 30, 2000 which has
been recorded as a component of comprehensive income (loss) on the statements of
operations.
Interest expense in connection with its factoring agreement amounted to
$75,923 and $52,863 for the three months ended June 30, 2000 and 1999,
respectively.
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary, Hollywood,
to which it assigned its film production business. All film related operations
for 1998 and prior to May 12, 1999 were conducted by Shopnet under its former
name.
For the three months ended June 30, 2000 and 1999, Hollywood generated no sales
from its motion picture "Dirty Laundry." Although sales have been minimal since
the completion of the motion picture, the Company expects increases in sales
during 2000 and thereafter as a result of a new marketing strategy. Upon a
review of the net realizable value of the movie costs, management has determined
that a $100,000 writedown was necessary as of June 30, 2000. Accordingly,
Hollywood generated a loss for the three months in the amount of $100,000.
Shopnet.com
For the three months ended June 30, 2000 and 1999, Shopnet generated
minimal revenue comprised of interest from its money market and sublet rental
income from its corporate office.
Shopnet's selling, general, and administrative expense amounted to $142,425
and $161,122 for the three months ended June 30, 2000 and 1999, respectively.
This represents a decrease of $18,697, or approximately 12%.
19
<PAGE>
The major components of the Company's expenses are as follows for the three
months ended June 30:
<TABLE>
<CAPTION>
2000 1999
---- -----
<S> <C> <C>
Salaries (officer and office staff) and stock compensation
and related benefits $ 60,837 $ 59,317
Rent 18,769 16,148
Legal and professional fees 22,447 18,857
Consulting fees 6,000 9,600
Other general corporate and administrative expense 34,372 57,200
</TABLE>
Shopnet generated a net loss of $126,235 for the three months ended June
30, 2000 and a net loss of $143,429 for the three months ended June 30, 1999.
Six months ended June 30, 2000 as compared to the six months ended June 30, 1999
Breaking Waves
For the six months ended June 30, 2000 and 1999, Breaking Waves generated
net sales of $3,673,771 and $3,615,087, respectively with a cost of sales
amounting to $2,491,788 and $2,575,351, respectively. The increase in sales
amounted to $58,684, or approximately 2%, from 1999 to 2000. The gross profit
for the six months ended June 30, 2000 amounted to $1,181,982, or 32%, as
compared to the six months ended June 30, 1999 during which it amounted to
$1,039,736, or 29%.
Selling, general, and administrative expenses during the six months ended
June 30, 2000 and 1999 amounted to $813,416 and $801,499, respectively,
representing an increase of $11,917 or 1%.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the six months ended June 30:
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
Officers, office staff and
designer salaries and related benefits $ 262,061 $ 243,252
Commission expense 64,484 96,880
Warehousing costs 151,221 140,862
Royalty fees 99,113 86,198
Rent expense 40,909 44,111
Factor commissions 39,994 37,443
Miscellaneous general corporate
overhead expenses 155,634 152,753
</TABLE>
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.
20
<PAGE>
For the six months ended June 30, 1999, Breaking Waves recognized $872,572
of equity loss in Play Co. in connection with the equity method of accounting.
Breaking Waves generated net income of $180,246 for the six months ended
June 30, 2000, after a tax provision of $10,000. Breaking Waves generated a net
loss of $765,528, for the six months ended June 30, 1999. The net loss generated
for the six months ended June 30, 1999 includes an equity loss pick up (non cash
loss) of $872,572 from 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
3% as of June 30, 2000. Breaking Waves accounted for its investment in Play Co
pursuant to the equity method through the point it maintained at least a 20%
ownership interest. Once its investment fell below 20%, it used the cost method
of accounting which was - 0 - as a result of writing the investment down as a
result of the equity loss pick up 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 $267,000 as of June 30, 2000 as compared to a book value of $- 0 -
as accounted for under the equity method through December 31, 1999. Accordingly,
Breaking Waves recorded an unrealized gain of $266,700 for the three months
ended June 30, 2000 which has been recorded as a component of comprehensive
income (loss) on the statements of operations.
Interest expense in connection with its factoring agreement amounted to
$168,115 and $128,712 for the six months ended June 30, 2000 and 1999,
respectively.
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary, Hollywood,
to which it assigned its film production business. All film related operations
for 1998 and prior to May 12, 1999 were conducted by Shopnet under its former
name.
For the six months ended June 30, 2000 and 1999, Hollywood generated no
sales from its motion picture "Dirty Laundry." Although sales have been minimal
since the completion of the motion picture, the Company expects increases in
sales during 2000 and thereafter as a result of a new marketing strategy. Upon a
review of the net realizable value of the movie costs, management has determined
that a $100,000 write down was necessary as of June 30, 2000. Accordingly,
Hollywood generated a loss for the six months in the amount of $100,000
21
<PAGE>
Shopnet.com
For the six months ended June 30, 2000 and 1999, Shopnet generated minimal
revenue comprised of interest from its money market and sublet rental income
from its corporate office.
Shopnet's selling, general, and administrative expense amounted to $283,244
and $285,648 for the six months ended June 30, 2000 and 1999, respectively. This
represents a decrease of $2,404, or approximately 1%.
The major components of the Company's expenses are as follows for the six
months ended June 30:
<TABLE>
<CAPTION>
2000 1999
---- -----
<S> <C> <C>
Salaries (officer and office staff) and stock compensation
and related benefits $ 105,037 $ 106,661
Rent 38,171 34,812
Legal and professional fees 40,964 37,321
Consulting fees 17,080 21,850
Other general corporate and administrative expense 81,992 85,004
</TABLE>
Shopnet generated a net loss of $248,216 for the six months ended June 30,
2000 and a net loss of $253,060 for the six months ended June 30, 1999.
Liquidity and Capital Resources
At June 30, 2000, the Company has a consolidated working capital amounting
to $1,029,370. 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 3% as of June 30, 2000 as evidenced by the 1,270,000 shares of
common stock it currently owns. As of June 30, 2000, Breaking Waves has
decreased its investment in Play Co. to $266,700 based on fair market value of
its common stock holdings.
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Included in cash
are certificates of deposit of $1,400,874. Shopnet maintains cash deposits in
accounts which are in excess of Federal Deposit Insurance Corporation limits by
approximately $1,301,000. Shopnet believes that such risk is minimal. Shopnet
maintains a letter of credit with a financial institution as a condition of
Breaking Wave's factoring agreement. The financial institution requires Shopnet
to maintain $1,150,000 on deposit as collateral for the letter of credit. In
addition, during 1999, Breaking Waves was required to transfer a $200,000 cash
collateral deposit to its factoring agent. Accordingly, both cash amounts are
designated as restricted.
22
<PAGE>
For the three months ended June 30, 2000, the Company reported consolidated
net loss of $408,454 after an income tax expense of $5,504 whereas for the three
months ended June 30, 1999, the Company reported consolidated net loss of
$955,356 after an equity loss pick up (non-cash loss) in Play Co. amounting to
$530,879. In addition, for the three months ended June 30, 2000, the Company
reported comprehensive net loss of $431,800, which represents an unrealized loss
on the investment in Play Co's common stock.
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 borrowings under the line as of June 30, 2000 is $213,894,
including interest. The outstanding balance must be repaid in monthly
installments including 9% interest. As a condition of the line of credit, the
Company was required to deposit $250,000 in a certificate of deposit as
collateral. Subsequent to June 30, 2000, the line was repaid in full.
Investment in Joint Venture
Pursuant to a co-production agreement dated April 17, 1998, the Company
invested $212,500 for a 50% interest in a newly formed entity, Battle Studies
Productions, LLC ("Battle Studies"), a limited liability company. North Folk
Films, Inc., an unrelated party, also invested $212,500 for the remaining 50%
interest in Battle Studies. Battle Studies is treated as a joint venture in
order to co-produce motion pictures and to finance the costs of production and
distribution of such motion pictures. The joint venture retains all rights to
the motion pictures, the screenplays, and all ancillary rights attached thereto.
Total production costs to date have aggregated approximately $425,000 of which
the Company has funded 50%. 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.
More recently, 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 on April 28, 2000. The Company hopes that
its recent exposure and award will result in increased interest from the
distribution community.
Additionally, Machiavelli Rises was also chosen as one of fifty films from
over 1000 films reviewed by the Independent Feature Film Makers for a showing in
mid September 2000 in New York at the Angelika Theatre.
The Company accounts for the investment in Battle Studies on the equity
method. Accordingly, as of June 30, 2000, the Company has only recorded its
initial $212,500 investment in the joint venture since operations have not yet
commenced.
23
<PAGE>
Factoring Arrangements
On August 20, 1997, Breaking Waves entered into a factoring and revolving
inventory loan and security agreement (as amended December 9, 1998) with CIT
(formerly Heller Financial, Inc.) pursuant to which CIT 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.
Shopnet is a guarantor of Breaking Waves' obligations to CIT. Shopnet maintains
a letter of credit with a financial institution in support of and as a condition
to its factoring agreement. The financial institution requires Shopnet to
maintain $1,150,000 on deposit as collateral for such letter of credit. During
1999, Breaking Waves collateralized $200,000 of cash in order to remain in
compliance with its factoring agreement. 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 CIT during each year and
(b) 0.65% on all accounts in excess of $5 million sold and assigned to CIT
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 $75,923 and $52,863, respectively, for the three
months ended June 30, 2000 and 1999. CIT has a continuing interest in Breaking
Wave's inventory as collateral for the advances. As of June 30, 2000, the net
advances to Breaking Waves from the factor amounted to $1,037,942.
Capital Lease Obligations
During 1998, the Company acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:
On August 13, 1998, the Company acquired various computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum, requiring 48 monthly payments of principal and
interest of $762. The lease is secured by the related computer equipment.
On September 13, 1998, the Company acquired proprietary software for
$32,923 by entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments of principal and
interest of $850. The lease is secured by the related software.
Lease Commitments
Shopnet and Breaking Waves have entered into lease agreements for
administrative offices. Shopnet leases its administrative office pursuant to a 5
year lease expiring November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leased administrative offices
through 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. Breaking Waves also leases an
offsite office for one of its designers on a month to month basis with annual
payments approximating $11,000.
24
<PAGE>
Rent expense for the three months ended June 30, 2000 and 1999 amounted to
approximately $37,100 and $29,400, respectively.
License Agreements
On October 16, 1995, Breaking Waves entered into a license agreement with
Beach Patrol, Inc. ("Beach"). Pursuant to the licensing agreement, Breaking
Waves was given the right to use certain designs for its children's line under
the "Daffy Waterwear" label from January 1, 1996 to June 30, 1998. Thereafter,
the agreement provided for a three year extension, at the option of Breaking
Waves, through and until June 30, 2001. Breaking Waves has exercised this
option, thereby so extending the agreement. 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 $39,915 and $37,500 during the three months ended June
30, 2000 and 1999, respectively.
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 May 31, 1999. The Company recorded royalties
under this agreement totaling $7,628 during the three months ended June 30,
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 swimwear.
The agreement calls for a royalty fee of 7% of net sales with a guaranteed
minimum annual royalties of $70,000 to $140,000 over the life of the agreement.
In connection with such licensing agreement, Breaking Waves entered into a
consulting agreement with Larry Nash, Inc. ("Consultant") a New York
Corporation, whereby Mr. Nash, the Consultant's sole stockholder shall provide
sales and consulting services in connections with Breaking Waves' new Gottex
line. Mr. Nash has provided similar services for the past twelve years with
another company for which he represented the Gottex children swimwear line.
25
<PAGE>
This agreement is effective August 5, 2000 and shall continue to August 5,
2001 and from year to year thereafter unless cancelled by either party on thirty
(30) days prior written notice.
Internet Sales
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 entire
line of Breaking Waves swimwear, including products marketed under the "Breaking
Waves," "All Waves," "Daffy Waterwear," and "Jet Ski" brands, was available for
online purchase by retailers. The Breaking Waves website is hosted by Mindspring
and incorporates e-commerce features from CyberCash Inc. and Mercantec, Inc.
Management believed that the website would fill the needs of existing and
potential customers since, through the Internet, retailers can purchase
merchandise online in a matter of minutes, at their own convenience, instead of
having to wait for delivery of a printed wholesale catalog. Management believed
that the advantages and efficiencies created by the website also would assist
Breaking Waves in increasing brand awareness as well as market share. The
Company expected to utilize marketing strategies for "driving" retailers to the
site including co-op trade advertisements, tradeshow exposure, direct mail, and
inclusion of the website address on all corporate collateral and product labels.
The Company has since found that most individual consumers do not purchase
swimwear until April or May and that the Company's website thus is ineffective,
for the Company has sold all of its merchandise to retailers by March, leaving
nothing for internet consumers to purchase. Accordingly, at present, the
www.breakingwaves.com website and the two others created by the Company in May
1999 (www.usa-shopnet.com and www.smallwavesswimwear.com) lie dormant.
Also dormant at present are the two websites developed by the Company last
fall (www.videonostalgia.com and www.videooncall.com) for the purpose of selling
full length motion pictures and short subjects on video cassette and DVD. These
sites were developed with the intention of offering up to 5,000 motion pictures:
from musicals, action and horror films, and vintage motion pictures to more
contemporary, collector, out of print, genre, and foreign films and film
memorabilia. In mid-1999, after extensive consideration of the costs required to
market and advertise these sites and to purchase the films, the Company decided
to delay the launch of these e-commerce websites.
Loans from Play Co.
In November 1999, Breaking Waves borrowed $400,000 from Play Co. pursuant
to a promissory note bearing interest at 9% per annum. Breaking Waves has repaid
the amount in full as of April 30, 2000 pursuant to the terms.
26
<PAGE>
Common Stock Dividend
On May 8, 2000, the Company declared a 20% common stock dividend to all
shareholders of record as of May 19, 2000. The dividend was paid on June 19,
2000.
27
<PAGE>
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: In February 2000, in a
private transaction, the Company sold 100,000 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 Act. The proceeds from the sale are being used by the Company
for general corporate purposes. No underwriter was used in connection with this
offering.
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) The following exhibits are filed herewith:
27.1 Financial Data Schedule
(b) During the quarter ended June 30, 2000, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
28
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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 14th day of August, 2000.
SHOPNET.COM, INC.
By: /s/ Harold Rashbaum
Harold Rashbaum
President and Chief Executive Officer
29
