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 September 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: 7,341,387 shares outstanding as of November 17, 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 September 30, 2000 (unaudited) and December 31, 1999. 3
Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) for 4
the Three Months Ended September 30, 2000 and 1999.
Consolidated Statement of Operations and Comprehensive Income (Loss) (unaudited) for 5
the Nine Months Ended September 30, 2000 and 1999.
Consolidated Statement of Stockholders' Equity (unaudited) for the Nine Months Ended 6
September 30, 2000.
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 7
30, 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>
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30,
2000 December 31,
(unaudited) 1999
Current assets:
<S> <C> <C>
Cash $ 24,833 $ 24,479
Cash - restricted 1,364,072 1,351,760
Accounts receivable, net 7,414 31,104
Prepaid expenses 78,624 70,659
Inventory 287,436 2,862,053
Advances to officer 40,000 40,000
Investment in securities available for sale 337,312 -
Deferred tax asset 55,000 55,000
----------------- -----------------
Total current assets 2,194,691 4,435,055
----------------- -----------------
Furniture, computer equipment, and leasehold improvements, net 67,644 67,817
Film production and distribution costs, net 1,543,564 1,693,564
Costs in excess of net assets of business acquired 780,475 833,689
Investment in joint venture 217,500 212,500
Organizational costs, net 6,250 25,000
Deferred tax asset - non current 139,360 139,360
Other assets 20,581 20,635
----------------- -----------------
Total assets $ 4,970,065 $ 7,427,620
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,218 $ 279,718
Accrued expenses 50,949 908,357
Due to factors 1,220,509 1,776,274
Due to related party - 650,000
Customer deposits - related party 80,000 -
Capital lease obligations 16,729 16,359
Deferred tax liability 6,900 6,900
----------------- -----------------
Total current liabilities 1,445,305 3,637,608
----------------- -----------------
Capital lease payables, net of current portion 16,629 29,120
----------------- -----------------
Total liabilities 1,461,934 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 7,472 7,352
Additional paid-in capital 6,638,852 6,344,074
Accumulated deficit (3,475,505) (2,590,534)
Accumulated other comprehensive income 337,312 -
----------------- -----------------
Total stockholders' equity 3,508,131 3,760,892
----------------- -----------------
Total liabilities and stockholders' equity $ 4,970,065 $ 7,427,620
================= =================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the thre For the three
months ended months ended
September 3, September 30,
2000 1999
<S> <C> <C>
Net sales $ 253,243 $ 72,604
Cost of sales 298,135 49,016
------------------- --------------------
Gross (loss) profit (44,892) 23,588
-------------------- --------------------
Expenses:
Selling, general, and administrative expenses 554,043 500,274
Write off of film costs 50,000 -
Amortization of costs in excess of net assets of business acquired 17,738 17,738
------------------- --------------------
Total expenses 621,781 518,012
------------------- --------------------
Loss before other income (expense)
and provision for income taxes (666,673) (494,424)
-------------------- ---------------------
Other income (expense):
Equity in loss of affiliate - (121,733)
Other income 5,550 3,700
Interest and finance expense (42,588) (38,733)
Interest income 27,596 13,806
------------------- --------------------
Total other income (expense) (9,442) (142,960)
-------------------- ---------------------
Loss before provision for
income taxes (676,115) (637,384)
Provision for income taxes 5,410 -
------------------- --------------------
Net loss (681,525) (637,384)
Other items of comprehensive income (loss) 70,612 -
------------------- --------------------
Comprehensive net loss $ (610,913) $ (637,384)
-------------------- ---------------------
Basic:
Net loss $ (.09) $ (.12)
==================== ======================
Weighted average number of
common shares outstanding 7,472,411 5,372,971
=================== =====================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 2000 September 30, 1999
<S> <C> <C>
Net sales $ 3,927,013 $ 3,687,691
Cost of sales 2,789,923 2,624,367
------------------- ---------------------
Gross profit 1,137,090 1,063,324
------------------- ---------------------
Expenses:
Selling, general, and administrative expenses 1,650,703 1,587,368
Write off of film costs 150,000 -
Amortization of costs in excess of net assets of business acquired 53,214 53,214
------------------- ---------------------
Total expenses 1,853,917 1,640,582
------------------- ---------------------
Loss before other income (expense)
and provision for income taxes (716,827) (577,258)
-------------------- ----------------------
Other income (expenses):
Equity in loss of affiliate - (994,305)
Other income 16,650 8,200
Interest and finance expense (231,915) (170,139)
Interest income 63,501 42,054
------------------- ---------------------
Total other income (expense) (151,764) (1,114,190)
------------------- ---------------------
Loss before provision for
income taxes (868,591) (1,691,448)
Provision for income taxes 16,380 -
------------------- ---------------------
Net loss (884,971) (1,691,448)
Other items of comprehensive income 337,312 -
------------------- ---------------------
Comprehensive net loss $ (547,659) $ (1,691,448)
-------------------- ----------------------
Basic:
Net (loss) $ (.12) $ (.31)
==================== ======================
Weighted average number of
common shares outstanding shares 7,459,078 5,372,971
=================== =====================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 January 7, 2000
stock dividend (Note 9(b) (i)) 557,000 557 (557) -- -- --
Issuance of common stock in
connection with May 8, 2000
stock dividend (Note 9(b) (ii)) 688,402 688 (688) -- -- --
Unrealized mark to market
gain on securities ............. -- -- -- -- 337,312 337,312
Net loss for the nine months
ended September 30, 2000 ........ -- -- -- (884,971) -- (884,971)
----------- ----------- ----------- ----------- ----------- -----------
7,472,411 $ 7,472 $ 6,638,852 $(3,475,505) $ 337,312 $ 3,508,131
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
For the nine For the nine
months ended months ended
September 30, 2000 September 30, 1999
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (884,971) $ (1,691,448)
Adjustments to reconcile net (loss) to net
cash provided by (used for) operating activities:
Write off of film costs 150,000 -
Issuance of stock options to officers - 12,250
Equity in loss of affiliate - 994,305
Amortization and depreciation 86,028 81,714
Decrease (increase) in:
Accounts receivable 23,690 41,628
Prepaid expenses (7,965) (86,716)
Inventory 2,574,617 1,203,931
Other assets 54 500
Increase (decrease) in:
Accounts payable (209,500) (107,909)
Accrued expenses (857,408) -
Due to factor (555,765) (554,221)
Customer deposits 80,000 -
------------------- -----------------------
Net cash provided by (used for) operating activities 398,780 (105,966)
------------------- -----------------------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements (13,891) (6,399)
Loan repayments to affiliate (650,000) -
Investment acquisition costs - (17,035)
Investment in joint venture (5,000) (12,500)
Proceeds from affiliate - 200,000
------------------- ----------------------
Net cash (used for) provided by investing activities (668,891) 164,066
-------------------- ----------------------
Cash flows from financing activities:
Proceeds from sale of common stock 294,898 -
Proceeds from line of credit 212,907 -
Repayments of line of credit (212,907) -
Principal payments on capital leases (12,121) (7,288)
-------------------- -----------------------
Net cash provided by (used for) financing activities 282,777 (7,288)
------------------- -----------------------
Net increase in cash 12,666 50,812
Cash, beginning of period 1,376,239 1,309,526
------------------- ----------------------
Cash, end of period $ 1,388,905 $ 1,410,338
=================== ======================
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 208,638 $ 142,658
=================== ======================
Income taxes $ 16,879 $ 6,506
=================== ======================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
<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. 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 September 30,
2000 and for the three and nine month periods ended September 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 the opinion of management, the unaudited
financial statements have been prepared on the same basis as the
annual financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present
fairly the financial position as of September 30, 2000 and the
results of our operations and cash flows for the three and nine
month periods ended September 30, 2000 and 1999. The results for
the three and nine month periods ended September 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 have been condensed or omitted pursuant to
the Securities and Exchange Commission's rules and regulations. It
is suggested that these unaudited financial statements be read in
conjunction with our audited financial statements and notes thereto
for the year ended December 31, 1999 as included in our report on
Form 10-KSB filed on April 10, 2000.
<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 September 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 through September 30, 2000, $217,500 for a 50%
interest in Battle Studies Productions, LLC ("Battle Studies") a
limited liability company. North Folk Films, Inc. ("NFF"), an
unrelated party, also invested $217,500 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 September 30, 2000, the joint venture had 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 in Play Co under the equity method. For the
three and nine months ended September 30, 1999, Breaking Waves
recorded $121,733 and $994,305, respectively, of equity loss for
its proportionate share of Play Co.'s losses for those periods.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - INVESTMENTS IN JOINT VENTURE AND AFFILIATE (cont'd)
b) Investment in Affiliate (cont'd)
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 nine months ended September 30, 2000, Play Co.
converted a portion of its series E preferred stock into common
stock, thereby reducing Breaking Waves' ownership percentage to
approximately 1.5%. Accordingly, the investment in Play Co. is
accounted for under the requirements of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The
securities are considered available for sale and therefore the
carrying value is based on the fair market value at the end of
the quarter which amounted to $337,312. The change in unrealized
gain or loss has been recorded as a component of comprehensive
income. The Company has pledged such shares as additional
collateral in connection with Breaking Waves entering into a new
factoring agreement with Century Business Credit Corporation
("Century") (See Note 5(b)).
NOTE 5 - DUE TO FACTOR
a) CIT Group
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended
December 9, 1998) with CIT Group (formerly, Heller Financial,
Inc. "CIT") to sell their interest in all present and future
receivables without recourse. Breaking Waves paid CIT a
factoring commission of .85% of the first $5,000,000 of
receivables sold and .65% of receivables sold in excess of
$5,000,000 for each year. Breaking Waves took advances of up to
85% of the receivable, with interest at the rate of 1 3/4% over
prime. In connection with the factoring agreement, the Company
agreed to maintain $1,150,000 of cash in a segregated account in
order to collateralize standby letters of credit. In addition,
during 1999, the Company was required to transfer an additional
$200,000 of cash as collateral for the standby letter of credit.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - DUE TO FACTOR (cont'd)
a) CIT Group (cont'd)
Interest expense related to this agreement totaled $33,686 and
$38,733 for the three months ended September 30, 2000 and 1999,
respectively. CIT had a continuing interest in Breaking Wave's
inventory as collateral for the advances. As of September 30,
2000, there was a balance due CIT for the net advances to
Breaking Waves which amounted to $24,921. On or about September
12, 2000 the agreement with CIT was cancelled and a new
factoring agreement was entered into with Century.
b) Century Business Credit Corporation
On September 12, 2000, Breaking Waves entered into a Factoring
Agreement with Century to sell their interest in all present and
future receivables without recourse. Breaking Waves submits all
sales orders to Century for credit approval prior to shipment,
and pays a factoring commission of .75% of receivables sold.
Century retains from the amount payable to Breaking Waves a
reserve for possible obligations such as customer disputes and
possible credit losses on unapproved receivables. Breaking Waves
may take advances of up to 85% of the receivables, with interest
at the rate of 1 3/4% over prime. In connection with the
factoring agreement, the Company agreed to maintain $1,150,000
of cash in a segregated account in order to collateralize
standby letters of credit for the Company. Additionally,
Breaking Waves was required to deposit as additional collateral
$200,000 of cash and pledge its investment in Play Co., which is
represented by 1,270,000 shares of Play Co's common stock as
collateral. Interest expense related to this agreement totaled
$6,870 for the three months ended September 30, 2000. Century
has continuing secured interest in Breaking Wave's inventory as
collateral for the advances. As of September 30, 2000, the net
advances to Breaking Waves from Century amounted to $1,195,588.
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 was $250,000. The outstanding balance was payable
in monthly installments including 9% interest. As a condition of
the line of credit, the Company was required to deposit $250,000
in a certificate of deposit as collateral with the bank. The
line of credit was repaid in full and closed as of July 12,
2000.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
<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 September 30, 2000 equipment and software under capital leases
is carried at a book value of approximately $35,500 and the
present value of net minimum lease payments was $33,358.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 totaling
approximately $11,000. The Company and Breaking Waves'
approximate future minimum rentals under non-cancelable
operating leases in effect as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
For the
year ended
December 31,
<S> <C> <C>
2000 $ 134,000
2001 135,452
2002 71,600
2003 71,600
2004 71,600
Thereafter -
--------------
$ 484,252
==============
</TABLE>
Rent expense for the three months ended September 30, 2000 and
1999 amounted to approximately $41,300 and $40,800,
respectively, and approximately $120,800 and $122,400 for the
nine months ended September 30, 2000 and 1999, respectively.
b) Significant vendors and customers
Breaking Waves purchased 100% of its inventory from one vendor
in Indonesia although other sources and vendors are available.
For the three months ended September 30, 2000 Breaking Waves had
two customers, which comprised 80% and 20% of net sales,
respectively. For the three months ended September 30, 1999,
Breaking Waves had one customer which compromised 87% of net
sales.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
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 based on sales levels from $1,000,000 for the first
year to $4,000,000 in the sixth year. The Company recorded
selling expenses for royalties and advertising under this
agreement totaling $63,897 and $43,750 during the three
months ended September 30, 2000 and 1999, respectively, and
$163,010 and $118,750 during the nine months ended September
30, 2000 and 1999.
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 through May
31, 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 guaranteed minimum annual royalties of
$70,000 to $140,000 over the life of the agreement.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
d) License agreements (cont'd)
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 annually 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 September 30, 2000, the Company
invested $1,971,956 for the co-production and distribution of
such motion picture whereas the co-producers have invested
$100,000. For the three and nine months ended September 30, 2000
and 1999, no revenue was generated from the motion picture.
For the three and nine months ended September 30, 2000, the
Company has written down its film production and distribution
costs by $50,000 and $150,000, respectively, 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.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont'd)
f) Employment agreements (cont'd)
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.
As of September 30, 2000, the employees are still employed
however 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 - 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
i)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.
ii)On May 8, 2000, the Company declared a 20% stock divided to
all shareholders of record as of May 19, 2000 amounting to
688,402 shares of common stock. Such stock dividend was
distributed on June 19, 2000.
NOTE 10 - RELATED PARTIES TRANSACTIONS
a) The Company paid to an affiliate of the Company's President
$10,000 and $12,000 of financial consulting fees during the three
months ended September 30, 2000 and 1999, and $36,000 and $36,000
for the nine months ended September 30, 2000 and 1999,
respectively.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - RELATED PARTIES TRANSACTIONS (cont'd)
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
September 30, 2000, the unpaid portion, which is due on demand,
amounted to $37,000, which has been classified as current. As of
September 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.
d) During August 2000, Breaking Waves received an $80,000 advance
from Play Co against future orders of merchandise. Accordingly, as
of September 30, 2000, such advance has been classified as a
liability since no orders were yet received.
NOTE 11 - SUBSEQUENT EVENT
On or about October 12, 2000, Battle Studies entered into a
distribution agreement with Raven Pictures International ("Raven
Pictures") to distribute Battle Studies motion picture
("Machiavelli Rises") to foreign countries. Battle Studies has
granted rights under the agreement for the theatrical, video,
non-theatrical and television markets.
The term of the agreement is for twenty - four months for all
portions of territory outside of the United States and English
speaking Canada.
Battle Studies expects to realize 75% (which is net of a 25% fee
to Raven Pictures) of the expected estimated gross revenues
derived from foreign countries less $20,000 for marketing and
advertising expenses.
<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 September 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.
<PAGE>
Three months ended September 30, 2000 as compared to the three months ended
September 30, 1999
Breaking Waves
For the three months ended September 30, 2000 and 1999, Breaking Waves
generated net sales of $253,232 and $72,604, respectively with a cost of sales
amounting to $298,135 and $49,016, respectively. The increase in sales amounting
to $180,628, or approximately 249%, from 1999 to 2000 was primarily attributable
to timing of orders between the second and third quarters. The gross loss for
the three months ended September 30, 2000 amounted to $44,903, or 18%, as
compared to a gross profit for the three months ended September 30, 1999, which
amounted to $23,588, or 32%. The gross loss for the three months ended September
30, 2000 was primarily attributable to Breaking Waves clearing out its left over
inventory at below cost towards the end of the third quarter in order to make
room for new merchandise, and certain unanticipated charge backs from previous
quarter sales.
Selling, general, and administrative expenses during the three months ended
September 30, 2000 and 1999 amounted to $415,393 and $344,011, respectively,
representing an increase of $71,382 or 21%.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the three months ended September 30:
2000 1999
---- ----
Officers, office staff and
designer salaries and related benefits $128,904 $125,004
Warehousing costs ........................ 598 5,536
Royalty fees ............................. 63,897 43,752
Rent expense ............................. 22,784 22,105
Factor commissions ....................... 2,006 4,000
Miscellaneous general corporate
overhead expenses ................... 197,204 143,614
The overall increase in miscellaneous general corporate and overhead
expenses of approximately $53,590 is primarily associated with a consulting fee
agreement for the Company's new line, legal and professional fees associated
with the change in factors, and advertising costs.
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 September 30, 1999, Breaking Waves recognized
$121,733 of equity loss (non-cash loss) in Play Co. in connection with the
equity method of accounting.
<PAGE>
During the nine months ended September 30, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play Co's
common stock thereby diluting Breaking Waves ownership interest in Play Co. The
percentage ownership of Breaking Waves' investment was diluted to approximately
1.5% as of September 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%, Breaking Waves used
the cost method of accounting. At the time that Breaking Waves shifted from the
equity to the cost method of accounting its basis in Play Co. was $-0- since its
share of Play Co's loss for 1999 exceeded its cost basis. 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 $337,000 as of September 30, 2000 as compared to a fair market
value of $267,000 as of June 30, 2000. Accordingly, Breaking Waves recorded an
unrealized gain of approximately $70,000 for the three months ended September
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
$40,556 and $38,733 for the three months ended September 30, 2000 and 1999,
respectively.
Breaking Waves generated a net loss of $503,510 and $481,901, for the three
months ended September 30, 2000 and 1999 respectively. The net loss generated
for the three months ended September 30, 1999 includes an equity loss pick up
(non cash loss) of $121,733 from Play Co
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary, Hollywood,
to which it assigned its film production business. All film related operations
prior to May 12, 1999 were conducted by Shopnet under its former name.
For the three months ended September 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 an additional $50,000 writedown was necessary as
of September 30, 2000. Hollywood generated a net loss for the three months in
the amount of $50,200.
Shopnet.com
Shopnet's selling, general, and administrative expense amounted to $138,650
and $156,263 for the three months ended September 30, 2000 and 1999,
respectively. This represents a decrease of $17,613, or approximately 11%.
The major components of the Company's expenses are as follows for the three
months ended September 30:
<PAGE>
<TABLE>
<CAPTION>
2000 1999
---- ----
Salaries (officer and office staff) and stock compensation
<S> <C> <C>
and related benefits .................................................. $50,792 $50,746
Rent .................................................................. 18,945 18,656
Legal and professional fees ........................................... 31,146 13,092
Consulting fees ....................................................... 4,000 5,785
Other general corporate and administrative expense .................... 33,767 67,984
</TABLE>
Shopnet generated a net loss of $110,076 for the three months ended
September 30, 2000 and a net loss of $105,232 for the three months ended
September 30, 1999.
Nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999
Breaking Waves
For the nine months ended September 30, 2000 and 1999, Breaking Waves
generated net sales of $3,927,003 and $3,687,691, respectively with a cost of
sales amounting to $2,789,923 and $2,624,367, respectively. The increase in
sales amounted to $239,312, or approximately 6%, from 1999 to 2000. The gross
profit for the nine months ended September 30, 2000 amounted to $1,137,080, or
29%, as compared to the nine months ended September 30, 1999 during which it
amounted to $1,063,324, or 29%.
Selling, general, and administrative expenses during the nine months ended
September 30, 2000 and 1999 amounted to $1,228,809 and $1,145,510, respectively,
representing an increase of $83,299 or 7%.
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the nine months ended September 30:
<TABLE>
<CAPTION>
2000 1999
------------- ----------
<S> <C> <C>
Officers, office staff and
designer salaries and related benefits $381,965 $368,256
Commission expense ...................... 54,207 89,437
Warehousing costs .................... 151,819 146,398
Royalty fees ............................ 163,010 129,950
Rent expense ............................ 63,693 66,216
Factor commissions ...................... 42,000 41,443
Miscellaneous general corporate
overhead expenses ................. 372,115 303,810
</TABLE>
The overall increase in miscellaneous general corporate and overhead
expenses of approximately $68,305 is primarily associated with a consulting fee
agreement for the Company's new line, legal and professional fees associated
with the change in factors, and additional advertising costs.
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.
<PAGE>
For the nine months ended September 30, 1999, Breaking Waves recognized
$994,305 of equity loss (a non-cash loss) in Play Co. in connection with the
equity method of accounting.
During the nine months ended September 30, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play Co's
common stock thereby diluting Breaking Waves ownership interest in Play Co. The
percentage ownership of Breaking Waves' investment was diluted to approximately
1.5% as of September 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. At the time that Breaking Waves shifted from the equity to
the cost method of accounting its basis in Play Co. was $-0- since its share of
Play Co's loss for 1999 exceeded its cost basis. 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
$337,000 as of September 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 $337,312 for the nine months ended
September 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
$208,671 and $170,139 for the nine months ended September 30, 2000 and 1999,
respectively.
Breaking Waves generated a net loss of $323,264 for the nine months ended
September 30, 2000, after a tax provision of $15,000. Breaking Waves generated a
net loss of $1,247,430, for the nine months ended September 30, 1999. The net
loss generated for the nine months ended September 30, 1999 includes an equity
loss pick up (non cash loss) of $994,305 from Play Co.
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary, Hollywood,
to which it assigned its film production business. All film related operations
and prior to May 12, 1999 were conducted by Shopnet under its former name.
For the nine months ended September 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 $150,000 write down was necessary as of
September 30, 2000. Hollywood generated a net loss for the nine months in the
amount of $150,200.
<PAGE>
Shopnet.com
Shopnet's selling, general, and administrative expense amounted to $421,693
and $441,858 for the nine months ended September 30, 2000 and 1999,
respectively. This represents a decrease of $20,165, or approximately 5%.
The major components of the Company's expenses are as follows for the nine
months ended September 30:
<TABLE>
<CAPTION>
2000 1999
---- ----
Salaries (officer and office staff) and stock compensation
<S> <C> <C>
and related benefits .................................... $155,829 $157,407
Rent ...................................................... 57,116 55,977
Legal and professional fees ............................... 72,110 30,904
Consulting fees ........................................... 21,080 27,635
Other general corporate and administrative expense ........ 115,558 169,935
</TABLE>
Shopnet generated a net loss of $358,292 for the nine months ended
September 30, 2000 and a net loss of $390,803 for the nine months ended
September 30, 1999.
Liquidity and Capital Resources
At September 30, 2000, the Company has a consolidated working capital
amounting to $749,386. The Company anticipates that its current available cash
will be sufficient for the next twelve months and does not anticipate any cash
shortfalls. Breaking Waves' ownership interest in Play Co. amounted to
approximately 1.5% as of September 30, 2000 as evidenced by the 1,270,000 shares
of common stock it currently owns. As of September 30, 2000, Breaking Waves has
increased its investment in Play Co. to $337,312 based on the 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 $1,153,674. Shopnet maintains cash deposits in
accounts which are in excess of Federal Deposit Insurance Corporation limits by
approximately $1,077,00. 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, Breaking Waves is required to maintain a $200,000 cash collateral
deposit with its factoring agent. Accordingly, both cash amounts are designated
as restricted.
For the three months ended September 30, 2000, the Company reported
consolidated net loss of $681,525 after an income tax expense of $5,410 whereas
for the three months ended September 30, 1999, the Company reported consolidated
net loss of $637,384 after an equity loss pick up (non-cash loss) in Play Co.
amounting to $121,733. In addition, for the three months ended September 30,
2000, the Company reported comprehensive net income of $70,612, which represents
an unrealized gain 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 was
$250,000. The outstanding balance was 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 line of credit
was repaid in full and closed as of July 2000.
<PAGE>
Investment in Joint Venture
Pursuant to a co-production agreement dated April 17, 1998, the Company
invested $217,500 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 $217,500 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 $435,000 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 September 30, 2000, the Company has only recorded its
initial $217,500 investment in the joint venture since operations have not yet
commenced.
On or about October 12, 2000, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures") to distribute
Battle Studies motion picture ("Machiavelli Rises") to foreign countries. Battle
Studies has granted rights under the agreement for the theatrical, video,
non-theatrical and television markets.
The term of the agreement is for twenty - four months for all portions of
territory outside of the United States and English speaking Canada.
Battle Studies expects to realize 75% (which is net of a 25% fee to Raven
Pictures) of the expected estimated gross revenue derived from foreign counties
less $20,000 for marketing and advertising expenses.
<PAGE>
Factoring Arrangements
CIT Group
On August 20, 1997, Breaking Waves entered into a factoring and revolving
inventory loan and security agreement (as amended December 9, 1998) with CIT
Group (formerly, Heller Financial, Inc. "CIT") to sell their interest in all
present and future receivables without recourse. Breaking Waves paid CIT a
factoring commission of .85% of the first $5,000,000 of receivables sold and
.65% of receivables sold in excess of $5,000,000 for each year. Breaking Waves
took advances of up to 85% of the receivable, with interest at the rate of 1
3/4% over prime. In connection with the factoring agreement, the Company agreed
to maintain $1,150,000 of cash in a segregated account in order to collateralize
standby letters of credit. In addition, during 1999, the Company was required to
transfer an additional $200,000 of cash as collateral for the standby letter of
credit. Interest expense related to this agreement totaled $33,686 and $38,733
for the three months ended September 30, 2000 and 1999, respectively. CIT had a
continuing interest in Breaking Wave's inventory as collateral for the advances.
As of September 30, 2000, the net advances to Breaking Waves from CIT amounted
to $24,921. On or about September 12, 2000 the agreement with CIT was cancelled
and a new factoring agreement was entered into with Century Business Credit
Corporation ("Century").
Century Business Credit Corporation
On September 12, 2000, Breaking Waves entered into a Factoring Agreement
with Century to sell its interest in all present and future receivables without
recourse. Breaking Waves submits all sales orders to Century for credit approval
prior to shipment, and pays a factoring commission of .75% of receivables sold.
Century retains from the amount payable to Breaking Waves a reserve for possible
obligations such as customer disputes and possible credit losses on unapproved
receivables. Breaking Waves may take advances of up to 85% of the 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. Additionally,
Breaking Waves was required to deposit as additional collateral $200,000 of cash
and pledge its investment in Play Co., which is represented by 1,270,000 shares
of Play Co's common stock as collateral. Interest expense related to this
agreement totaled $6,870 for the three months ended September 30, 2000. Century
has a continuing secured interest in Breaking Wave's inventory as collateral for
the advances. As of September 30, 2000, the net advances to Breaking Waves from
Century amounted to $1,195,589.
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.
<PAGE>
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.
Rent expense for the three months ended September 30, 2000 and 1999
amounted to approximately $41,730 and $52,243, 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 $63,897 and $43,750 during the three months ended
September 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 and was not renewed. The
Company recorded no royalties under this agreement during the three months ended
September 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's swimwear.
The agreement calls for a royalty fee of 7% of net sales with guaranteed minimum
annual royalties of $70,000 to $140,000 over the life of the agreement.
<PAGE>
In connection with such licensing agreement, Breaking Waves entered into a
consulting agreement with Larry Nash, Inc. ("Consultant") a New York
Corporation, whereby Mr. Nash, the Consultant's sole stockholder shall provide
sales and consulting services in connection with Breaking Waves' new Gottex
line. Mr. Nash has provided similar services for the past twelve years with
another company for which he represented the Gottex children's swimwear line.
This agreement is effective August 5, 2000 and shall continue to August 5,
2001 and from year to year thereafter unless cancelled by either party on thirty
(30) days prior written notice.
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.
<PAGE>
Loans and Advances 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 repaid the
amount in full as of April 30, 2000 pursuant to the terms.
During August 2000, Breaking Waves received an $80,000 advance from Play Co
against future orders of merchandise. Accordingly, as of September 30, 2000,
such advance has been classified as a liability since no orders were yet
received.
<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 September 30, 2000, no reports on Form 8-K
were filed with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 17th day of November, 2000.
SHOPNET.COM, INC.
By: /s/ Harold Rashbaum
Harold Rashbaum
President and Chief Executive Officer
