U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
Delaware 13-3871821
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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: 6,683,144 shares outstanding as of May 11, 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 March 31, 2000 (unaudited)
and December 31, 1999. 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Stockholders' Equity (unaudited)
for the Three Months Ended March 21, 2000 5
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements. 7-12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13-18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 19
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
Item 3. DEFAULTS UPON SENIOR SECURITIES 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 5. OTHER INFORMATION 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
</TABLE>
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31,
2000 December 31,
(Unaudited) 1999
Current assets:
<S> <C> <C>
Cash $39,001 $ 24,479
Cash - restricted 1,604,647 1,351,760
Accounts receivable, net 40,165 31,104
Prepaid expenses 73,926 70,659
Inventory 1,284,343 2,862,053
Advances to officer 40,000 40,000
Deferred tax asset 55,000 55,000
----------------- -----------------
Total current assets 3,137,082 4,435,055
----------------- -----------------
Furniture, computer equipment, and leasehold improvements, net 75,606 67,817
Film production and distribution costs, net 1,693,564 1,693,564
Costs in excess of net assets of business acquired 815,951 833,689
Investments in common stock and joint venture 911,000 212,500
Organizational costs, net 18,750 25,000
Deferred tax asset - non current 139,360 139,360
Other assets 20,581 20,635
----------------- -----------------
Total assets $ 6,811,894 $ 7,427,620
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 120,947 $ 279,718
Accrued expenses 104,997 908,357
Due to factor 1,178,638 1,776,274
Due to related party 300,000 650,000
Line of credit 100,000 -
Capital lease obligations 14,499 16,359
Deferred tax liability 6,900 6,900
----------------- -----------------
Total current liabilities 1,825,981 3,637,608
----------------- -----------------
Capital lease obligations, net of current portion 26,615 29,120
----------------- -----------------
Total liabilities 1,852,596 3,666,728
----------------- -----------------
Commitments and contingencies (Note 8) - -
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
6,227,009 shares issued, outstanding and subscribed 6,227 6,127
Additional paid-in capital 6,640,097 6,345,299
Accumulated deficit (2,385,526) (2,590,534)
Accumulated other comprehensive income 698,500 -
----------------- -----------------
Total stockholders' equity 4,959,298 3,760,892
----------------- -----------------
Total liabilities and stockholders' equity $ 6,811,894 $ 7,427,620
================= =================
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, 2000 March 31, 1999
------------------- --------------------
<S> <C> <C>
Net sales $ 2,720,982 $ 2,215,095
Cost of sales 1,771,477 1,330,001
------------------- --------------------
Gross profit 949,505 885,094
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 638,078 563,505
Amortization of costs in excess of net assets of business
acquired 17,738 17,738
------------------- --------------------
Total expenses 655,816 581,243
------------------- --------------------
Income before other income (expense)
and provision for income taxes 293,689 303,851
------------------- --------------------
Other income (expense):
Equity in loss of affiliate - (341,693)
Rental income 5,550 2,000
Interest and finance expense (106,636) (78,421)
Interest income 17,871 13,055
------------------- --------------------
Total other income (expense) (83,215) (405,059)
-------------------- ---------------------
Income (loss) before provision for
income taxes 210,474 (101,208)
Provision for income taxes 5,466 10,000
------------------- --------------------
Net income 205,008 (111,208)
Other items of comprehensive income 698,500 -
------------------- --------------------
Comprehensive net income $ 903,508 $ (111,208)
Basic:
Net income $ .03 $ (.02)
=================== ====================
Weighted average number of
common shares outstanding 6,192,943 5,910,72
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Defic it Income Equity
----------- ------ ----------- ------------- --------- ------------
<S> <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 100,000 100 294,798 - - -
costs
Unrealized gain on securities - - - - 698,500 698,500
Net income for the three - - - 205,008 205,008
months ended March 31, 2000
----------- ------ ----------- ------------- --------- ------------
6,227,009 6,227 6,640,097 (2,385,526) 698,500 4,959,298
=========== ====== =========== ============= ========= ============
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 903,508 $ (111,208)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Equity in loss of affiliate - 341,693
Unrealized gain on securities (698,500) -
Amortization and depreciation 28,676 26,988
Decrease (increase) in:
Accounts receivable (9,061) 4,646
Prepaid expenses (3,267) (41,159)
Inventory 1,577,710 1,191,188
Film production costs - (659)
Other 54 -
Increase (decrease) in:
Accounts payable (158,771) (405,998)
Accrued expenses (803,360) -
Due to factor (597,636) (1,005,224)
---------------- ----------------
Net cash provided by operating activities 239,353 267
---------------- ----------------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements (12,477) (3,907)
Advance to affiliate - (100,000)
Acquisition costs - (17,035)
Payments received on advance to affiliate - 25,000
---------------- ----------------
Net cash used for investing activities (12,477) (95,942)
---------------- ----------------
Cash flows from financing activities:
Proceeds from sale of common stock 294,898 -
Proceeds from line of credit 100,000 -
Repayments to related parties (350,000) -
Principal payments on capital leases (4,365) (2,033)
---------------- ----------------
Net cash provided by (used for) financing activities 40,533 (2,033)
---------------- ----------------
Net increase (decrease) in cash 267,409 (97,708)
Cash, beginning of period 1,376,239 1,309,526
---------------- ----------------
Cash, end of period $ 1,643,648 $ 1,211,818
============== ================
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 103,261 $ 75,030
============== ================
Income taxes $ 16,698 $ 6,506
============== ================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
6
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(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 March
31, 2000 and for the three month periods ended March 31, 2000
and 1999 have been prepared by us and are unaudited. 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 March 31, 2000 and the results of our
operations and cash flows for the three month periods ended
March 31, 2000 and 1999. The financial data and other
information disclosed in these notes to the interim financial
statements related to these periods are unaudited. The results
for the three month period ended March 31, 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 principals 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.
NOTE 3 - ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued
110,000 shares of common stock in exchange for all of the
issued and outstanding capital stock of Breaking Waves. The
transaction was accounted for using the purchase method of
accounting. As a result of the transaction, excess of cost
over net assets acquired totaling $1,064,283 was recorded and
is being amortized over the useful lives of the related assets
which is fifteen years. Amortization expense totaled $17,738
for each of the three months ended March 31, 2000 and 1999.
7
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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 March 31, 2000, the Company has only
recorded its initial $212,500 investment in the joint venture
since no operations have yet begun.
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.
During 1999, Breaking Waves accounted for its investment under
the equity method. For the three months ended March 31, 1999,
Breaking Waves recorded a $341,693 equity loss for its
proportionate share of Play Co.'s loss for that quarter.
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' percentage
of Play Co's common stock was reduced to 22.88% as of December
31, 1999.
During the quarter ended March 31, 2000, and subsequent
thereto Play Co. converted a portion of its series E preferred
stock into common stock thereby reducing Breaking Waves'
percentage. As of March 31, 2000, Breaking Waves' common stock
percentage was approximately 11% which was subsequently
reduced to approximately 6%. Accordingly, the investment in
Play Co. is accounted for under the requirements of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." Carrying value is based on fair market value
during the quarter. The unrealized gain which amounted to
$698,500 has been recorded as a component of comprehensive
income.
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 Heller Financial, Inc.
("Heller") to sell their interest in all present and future
receivables without recourse. Breaking Waves submits all sales
offers to Heller for credit approval prior to shipment, and
8
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
pays Heller 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. 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. In addition, during 1999, the Company was
required to transfer an additional $200,000 cash collateral
deposit to Heller. Interest expense related to this agreement
totaled $92,192 and $75,030, respectively, for the three
months ended March 31, 2000 and 1999. Heller has a continuing
interest in Breaking Wave's inventory as collateral for the
advances. As of March 31, 2000, the net advances to Breaking
Waves from the factor amounted to $1,178,638.
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 March 31, 2000 is $100,000. 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.
The certificate of deposit has been classified as restricted
cash.
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 March 31, 2000, the aggregate future minimum lease
payments due pursuant to the above capital lease obligations
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31:
<S> <C> <C>
2000 $14,499
2001 19,335
2002 13,486
-------
Total minimal lease payments .... 47,320
-------
Less: Amounting representing interest 6,206
-------
Present value of net minimum ........ $41,114
lease payments ................... =======
</TABLE>
9
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
At March 31, 2000 equipment and software under capital leases is carried at
a book value of approximately $41,700.
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 March 31, 2000 are as follows:
2000 $105,944
2001 135,452
2002 71,600
2003 71,600
2004 71,600
Thereafter --
--------
$456,196
========
Rent expense for the three months ended March 31, 2000 and
1999 amounted to approximately $41,971 and $40,550,
respectively.
b) Significant vendors and customers
Breaking Waves purchases 100% of its inventory from two
vendors in Indonesia and one in Samoa. For the three months
ended March 31, 2000 Breaking Waves had three customers, which
comprise 12% 11% and 20%, of net sales, respectively. For the
three months ended March 31, 1999, Breaking Waves had three
customers which compromised 20%, 12%, and 12% 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
10
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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 $59,198 and
$37,500 during the three months ended March 31, 2000 and
1999, respectively.
ii) On October 31, 1996, Breaking Waves entered into a license
agreement with North-South Books, Inc. ("N-S") for the
exclusive use of certain art work and text in the making
of swimsuits and accessories in the United States and
Canada. The agreement expired on March 1, 1999 and was not
renewed. The Company recorded royalties totaling $784
under this agreement during the three months ended March
31, 1999.
iii)On October 17, 1997, Breaking Waves entered into a license
agreement with Kawasaki Motors Corp., U.S.A. ("KMC") with
an effective date of July 1, 1997 for the exclusive use of
certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain
trademarks is five percent (5%) of net sales. The
agreement expired on May 31, 1999 and was not renewed. The
Company recorded royalties under this agreement totaling $
2,787 during the three months ended March 31, 1999.
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, 2000, the Company invested $2,006,956 for the
co-production and distribution of such motion picture whereas
the co-producers have invested $100,000. For the three months
ended March 31, 2000 and 1999, no revenue was associated with
the motion picture and amortized film costs amounted to $-0.
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
11
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
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 March 31, 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.
NOTE 9 - STOCKHOLDER'S EQUITY
a) Sale of common stock
On February 1, 2000, the Company sold 100,000 shares of common
stock for $300,000 (before certain offering costs) pursuant to
a transaction with an unrelated party.
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. The stock dividend has been
retroactively reflected in the financial statements.
NOTE 10 - RELATED PARTIES TRANSACTIONS
a) For the three months ended March 31, 2000 and 1999,
$11,080 and $12,000, respectively of financial consulting
fees were paid to an affiliate of the Company's President.
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 (61/2) payable over
three years. As of March 31, 2000, the unpaid portion
amounted to $37,000, which has been classified as current.
As of March 31, 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) During October 1999, Play Co. loaned funds to
Breaking Waves in return for an unsecured promissory note in
the amount of $200,000. Such note was due and was repaid in
full on March 29, 2000 plus interest at 9% per annum.
d) On November 29, 1999, Play Co. loaned additional
funds to Breaking Waves in return for an unsecured
promissory note in the amount of $400,000. Such note is due
in two installments. The first installment of $100,000 was
due January 30, 2000 (which was repaid) and the second
installment of $300,000 is due April 30, 2000. Interest
accrues at 9% per annum.
e) During October 1999, Play Co. loaned funds to the
Company in return for an unsecured promissory note in the
amount of $50,000. Such note was due and repaid in full on
March 29, 2000 plus interest at 9% per annum.
NOTE 11 - SUBSEQUENT EVENT
On May 8, 2000, the Company declared a 20% stock dividend to
all shareholders of record as of May 19, 2000. Such stock
dividend will be distributed on June 19, 2000. Such stock
dividend has not yet been reflected retroactively in the
financial statements.
12
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts may
be considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
General
Shopnet.com, Inc. ("Shopnet" or the "Company") was incorporated in the
State of Delaware on December 1, 1995 as Hollywood Productions, Inc. On May 10,
1999, Shopnet filed an amendment to its Articles of Incorporation effecting a
change in its name to its current one. On May 12, 1999, it incorporated a
wholly-owned subsidiary, Hollywood Productions, Inc. ("Hollywood"), to which it
assigned its film production business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, Breaking Waves, Inc.
("Breaking Waves"). Shopnet was formed initially for the purpose of acquiring
screenplays and producing motion pictures. In September 1996, in connection with
the completion of its Initial Public Offering ("IPO"), it acquired all of the
capital stock of Breaking Waves which designs, manufactures, and distributes
private and brand name label children's swimwear.
The consolidated financial statements at March 31, 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.
Three months ended March 31, 2000 as compared to the
three months ended March 31, 1999
Breaking Waves
For the three months ended March 31, 2000 and 1999, Breaking Waves
generated net sales of $2,720,982 and $2,215,095, respectively with a cost of
sales amounting to $1,771,477 and $1,330,001, respectively. The increase in
sales amounting to $505,887, or approximately 23%, from 1999 to 2000 was
primarily attributable to the late arrival of goods caused by material delays at
ports as of December 31, 1999. These delays resulted from companies having
accelerated their shipments and receipts of goods in order to avoid any
disruption anticipated by the year 2000 issue. Breaking Waves was unable to
receive its goods and ship its orders on a timely basis since a majority of such
goods remained on board one such ship which was delayed. The delayed shipments
were received during January 2000. The gross profit for the three months ended
March 31, 2000 amounted to $949,505, or 35%, as compared to the three months
ended March 31, 1999 during which it amounted to $885,094, or 40%.
Selling, general, and administrative expenses during the three months ended
March 31, 2000 and 1999 amounted to $497,260 and $438,910, respectively,
representing an increase of $58,350 or 13%.
13
<PAGE>
The major components of the Breaking Waves selling, general, and administrative
expenses are as follows for the three months ended March 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Officers, office staff and designer salaries and related benefits $113,508 $114,982
Commission expense .............................................. 57,412 80,380
Warehousing costs ............................................... 121,872 86,512
Royalty fees .................................................... 59,198 41,071
Rent expense .................................................... 22,569 21,884
Factor commissions .............................................. 25,335 22,385
Miscellaneous general corporate overhead expenses ............... 97,365 71,696
</TABLE>
The overall expense increase of approximately $58,000 is directly associated
with the sale increase for the quarter as compared to the prior quarter.
In November 1998, Breaking Waves purchased 1,400,000 shares of Play Co.
Toys & Entertainment Corp. ("Play Co.") for a total of $504,000 comprised of
$300,000 in cash and by shipping $204,000 in merchandise. After the purchase,
Breaking Waves owned 25.4% of the outstanding common stock of Play Co.
For the quarter ended March 31, 1999, Breaking Waves recognized $341,693 of
equity loss in Play Co. in connection with the equity method of accounting.
Breaking Waves generated net income of $344,726 and $16,162, for the three
months ended March 31, 2000 and 1999, respectively, after an estimated income
tax provision of $5,000 and $10,000, respectively, for the three months ended
March 31, 2000 and 1999. The net income generated for the three months ended
March 31, 1999 includes an equity loss pick up (non cash loss) of $341,693 from
Play Co.
During the quarter ended March 31, 2000, and subsequent thereto Play Co.'s
converted a portion of its series E preferred stock into common stock, thereby
reducing Breaking Waves' percentage. As of March 31, 2000, Breaking Waves'
common stock percentage was approximately 11% which was subsequently reduced to
approximately 6%. Accordingly, the investment in Play Co. is accounted for under
the requirements of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Carrying value is based on fair market value during the
quarter. The unrealized gain which amounted to $698,500 has been recorded as a
component of comprehensive income.
Interest expense in connection with its factoring agreement amounted to
$92,192 and $75,030 for the three months ended March 31, 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 March 31, 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.
Shopnet.com
For the three months ended March 31, 2000 and 1999, Shopnet generated
minimal revenue comprised of interest from its money market and minimal sublet
rental income from its corporate office.
14
<PAGE>
Shopnet's selling, general, and administrative expense amounted to
$140,819 and $124,595 for the three months ended March 31, 2000 and 1999,
respectively. This represents an increase of $16,224, or approximately 13%.
The major components of the Company's expenses are as follows for the
years ended December 31:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Salaries (officer and office staff) and stock compensation and $44,200 $47,343
related benefits
Rent ......................................................... 19,402 17,665
Legal and professional fees .................................. 18,517 18,465
Consulting fees .............................................. 11,080 12,250
Other general corporate and administrative expense ........... 47,620 28,872
</TABLE>
Shopnet generated a net loss of $121,980 for the three months ended March 31,
2000 and a net loss of $109,631 for the three months ended March 31, 1999.
Liquidity and Capital Resources
At March 31, 2000, the Company has a consolidated working capital
amounting to $1,311,101. 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 11% as of March 31, 2000 as evidenced by the 1,270,000 shares of
common stock it currently owns. As of March 31, 2000, Breaking Waves has
increased its investment in Play Co. to $698,500 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.
For the three months ended March 31, 2000, the Company reported
consolidated net income of $205,008 after an income tax expense of $5,466
whereas for the three months ended March 31, 1999, the Company reported
consolidated net loss of $111,208 after an income tax expense of $10,000 and an
equity loss pick up (non-cash loss) in Play Co. amounting to $341,693. In
addition, for the three months ended March 31, 2000, the Company reported
comprehensive net income of $903,508, which includes an unrealized gain on the
investment in Play Co. of $698,500.
On February 1, 2000, the Company sold 100,000 shares of common stock
for $300,000 (before certain offering costs) pursuant to a transaction with an
unrelated party.
On March 30, 2000, the Company entered into a revolving line of credit
agreement with a bank. Total available credit under the line of credit is
$250,000. Total borrowings under the line as of March 31, 2000 is $100,000. 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. The certificate of
deposit has been classified as restricted cash.
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.
15
<PAGE>
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. The film was shown in January 1999 in both New York
and at the Brussels Film Festival.
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.
The Company accounts for the investment in Battle Studies on the equity
method. Accordingly, as of March 31, 2000, the Company has only recorded its
initial $212,500 investment in the joint venture since operations have not yet
commenced.
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 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. Shopnet is a guarantor of Breaking Waves' obligations to Heller.
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 collateralize $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 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 $92,192 and $75,030, respectively, for the
three months ended March 31, 2000 and 1999. Heller has a continuing interest in
Breaking Wave's inventory as collateral for the advances. As of March 31, 2000,
the net advances to Breaking Waves from the factor amounted to $1,178,638.
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.
16
<PAGE>
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.
Rent expense for the three months ended March 31, 2000 and 1999
amounted to approximately $41,971 and $40,550, 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 $59,198 and $37,500 during the three months ended March
31, 2000 and 1999, 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 royalties
totaling $784 under this agreement during the three months ended March 31, 1999.
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 $2,787 during the three months
ended March 31, 1999.
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.
17
<PAGE>
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 October 1999, the Company borrowed $50,000 from Play Co., and
Breaking Waves borrowed $200,000 from Play Co. The loans bore interest at 9% and
were repaid in March 2000.
In 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.
Common Stock Dividend
On January 7, 2000, the Company declared a 10% common stock dividend to
all shareholders of record as of January 20, 2000. The dividend was paid on
February 1, 2000.
On May 8, 2000, the Company declared a 20% common stock dividend to all
shareholders of record as of May 19, 2000. The dividend will be paid on June 19,
2000.
18
<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 March 31, 2000, no reports on Form 8-K were
filed with the Securities and Exchange Commission.
19
<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 15th day of May 2000.
SHOPNET.COM ,INC.
By: /s/ Harold Rashbaum
Harold Rashbaum
President and
Chief Executive Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
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 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-2000
<PERIOD-END> mar-31-2000
<CASH> 1,643,648
<SECURITIES> 698,500
<RECEIVABLES> 40,165
<ALLOWANCES> 0
<INVENTORY> 1,284,343
<CURRENT-ASSETS> 3,137,082
<PP&E> 75,606
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,811,894
<CURRENT-LIABILITIES> 1,825,981
<BONDS> 0
0
0
<COMMON> 6,227
<OTHER-SE> 4,953,071
<TOTAL-LIABILITY-AND-EQUITY> 6,811,894
<SALES> 2,720,982
<TOTAL-REVENUES> 0
<CGS> 1,771,477
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 655,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,636
<INCOME-PRETAX> 210,474
<INCOME-TAX> 5,466
<INCOME-CONTINUING> 205,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,008
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
