<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 333-22895
---------------------------------------
PIVOT RULES, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
---------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 1998, the issuer had outstanding 2,717,788 of shares of
Common Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PIVOT RULES, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997 3
Condensed Statements of Operations for the six months ended
June 30, 1998 and 1997 (unaudited) 4
Condensed Statements of Operations for the three months ended
June 30, 1998 and 1997 (unaudited) 5
Condensed Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) 6
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS
PIVOT RULES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited) (As restated)
(Note D)
<S> <C> <C>
ASSETS
Current assets
Cash $ 67,000 $ 55,000
Funds deposited with factor 2,449,000 1,857,000
Inventories 236,000 --
Prepaid expenses and other current assets 105,000 128,000
Current assets of discontinued operations 2,058,000 4,182,000
----------- -----------
Total current assets 4,915,000 6,222,000
Property and equipment, net 529,000 500,000
Deferred costs and other assets 15,000 15,000
Assets of discontinued operations -- 414,000
----------- -----------
$ 5,459,000 $ 7,151,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current liabilities $ 1,194,000 $ 1,092,000
Deferred income taxes 9,000 9,000
----------- -----------
1,203,000 1,101,000
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock -$.01 par value; 2,000,000 authorized and no shares issued -- --
Common stock -$.01 par value; 15,000,000 authorized and 2,700,000 issued and 27,000 27,000
outstanding
Additional paid-in capital 6,404,000 6,404,000
Accumulated deficit (2,175,000) (381,000)
----------- -----------
4,256,000 6,050,000
----------- -----------
$ 5,459,000 $ 7,151,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
General and administrative expenses $ 446,000 $ 365,000
Internet business start up costs 103,000 --
Research and development 126,000 --
----------- -----------
Operating loss from continuing operations (675,000) (365,000)
Interest income 81,000 36,000
----------- -----------
Loss from continuing operations before income taxes (594,000) (329,000)
Income tax benefit -- 45,000
----------- -----------
Loss from continuing operations (594,000) (284,000)
----------- -----------
Discontinued operations - Note D
Loss from operations, net of income tax benefit of $25,000 in 1997 (934,000) (226,000)
Estimated loss on disposal, including provision for operating losses
through disposal date, less applicable income tax benefit of $0 (266,000) --
----------- -----------
Loss from discontinued operations (1,200,000) (226,000)
----------- -----------
Net loss $(1,794,000) $ (510,000)
=========== ===========
Basic and diluted loss per share
Continuing operations $(.22) $(.18)
Discontinued operations
Loss from operations (.34) (.14)
Estimated loss on disposal (.10) --
----- -----
Net loss $(.66) $(.32)
===== =====
Weighted average shares outstanding 2,700,000 1,589,503
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
General and administrative expenses $ 207,000 $ 203,000
Internet business start up costs 103,000 --
Research and development 126,000 --
----------- -----------
Operating loss from continuing operations (436,000) (203,000)
Interest income 39,000 36,000
----------- -----------
Loss from continuing operations before income taxes (397,000) (167,000)
Income tax benefit -- 25,000
----------- -----------
Loss from continuing operations (397,000) (142,000)
----------- -----------
Discontinued operations - Note D
Loss from operations, net of income tax benefit of $55,000 in 1997 (853,000) (387,000)
Estimated loss on disposal, including provision for operating losses
through disposal date, less applicable income tax benefit of $0 (266,000) --
----------- -----------
Loss from discontinued operations (1,119,000) (387,000)
----------- -----------
Net loss $(1,516,000) $ (529,000)
=========== ===========
Basic and diluted loss per share
Continuing operations $(.15) $(.07)
Discontinued operations
Loss from operations (.31) (.20)
Estimated loss on disposal (.10) --
----- -----
Net loss $(.56) $(.27)
===== =====
Weighted average shares outstanding 2,700,000 1,974,725
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
Cash flows from operating activities
Loss from Continuing Operations $ (594,000) $ (284,000)
Adjustments to reconcile loss from continuing operations to net cash (used in)
provided by operating activities:
Depreciation and amortization 40,000 6,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (236,000) --
Prepaid expenses and other current assets 23,000 (165,000)
Other assets -- (15,000)
Increase (decrease) in
Accounts payable, accrued expenses and other current liabilities 102,000 498,000
----------- -----------
Net cash (used in) provided by operating activities - Continuing Operations (665,000) 40,000
----------- -----------
Loss from Discontinued Operations (1,200,000) (226,000)
Adjustments to reconcile loss from discontinued operation to net cash used in
operating activities:
Write-down of property and equipment 245,000 --
Write-down of prepaid expenses and other current assets 90,000 --
Write-down of other assets 119,000 --
Amortization of deferred costs for bridge financing -- 286,000
Amortization of debt discount -- 104,000
Depreciation and amortization 44,000 20,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories 331,000 16,000
Non-factored receivables 14,000 12,000
Prepaid expenses and other current assets (112,000) (166,000)
Increase (decrease) in
Income taxes receivable/payable (1,000) (196,000)
----------- -----------
Net cash used in operating activities - Discontinued Operations (470,000) (150,000)
----------- -----------
Net cash used in operating activities (1,135,000) (110,000)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---- ----
(As restated)
(Note D)
<S> <C> <C>
Cash flows from investing activities - Continuing Operations
Purchase of property and equipment (69,000) (22,000)
Funds deposited with factor from initial public offering -- (4,920,000)
(Decrease) increase in funds deposited with factor (592,000) 884,000
----------- -----------
Net cash used in investing activities - Continuing Operations (661,000) (4,058,000)
----------- -----------
Cash flows from investing activities - Discontinued Operations
Purchase of property and equipment (22,000) (96,000)
Trademark costs (1,000) (6,000)
----------- -----------
Net cash used in investing activities - Discontinued Operations (23,000) (102,000)
----------- -----------
Net cash used in investing activities (684,000) (4,160,000)
----------- -----------
Cash flows from financing activities - Continuing Operations
Net proceeds from initial public offering -- 5,939,000
Deferred costs associated with initial public offering -- 53,000
----------- -----------
Net cash provided by (used in) financing activities - Continuing Operations -- 5,992,000
----------- -----------
Cash flows from financing activities - Discontinued Operations
Deferred costs associated with bridge financing -- 75,000
Net proceeds from bridge financing -- 1,215,000
Repayments of notes payable and short-term loan -- (644,000)
Repayments of bridge financing -- (1,500,000)
Net change in due to/from factor 1,831,000 (892,000)
----------- -----------
Net cash provided by financing activities - Discontinued Operations 1,831,000 (1,746,000)
----------- -----------
Net cash provided by financing activities 1,831,000 4,246,000
----------- -----------
Net increase (decrease) in cash 12,000 (24,000)
Cash balance - December 31 55,000 33,000
----------- -----------
Cash balance - June 30 $ 67,000 $ 9,000
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 28,000 $ 93,000
=========== ===========
Income taxes $ 1,000 $ 99,000
=========== ===========
Non-cash financing activities:
Issuance of warrants in connection with bridge financing $ -- $ 138,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
NOTE A - BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by Pivot
Rules, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. 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 such rules and regulations, although management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the condensed notes thereto. In the opinion of management
of the Company, the accompanying unaudited condensed financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to fairly present the results for the interim periods to which these
financial statements relate.
These financial statements should be read in conjunction with the Registration
Statement filed with the Securities and Exchange Commission on Form 8-A and
Form 8-A/A and the Annual Report filed with the Securities and Exchange
Commission on Form 10-KSB. Subsequent to the filing of documents incorporated
by reference herein, the Company discontinued the operations of its golf
sportswear division. Accordingly, financial statements, management's discussion
and analysis or plan of operation contained therein do not reflect the effect
of the discontinued operations.
On June 25, 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the golf sportswear division. The Company intends to
complete its existing sales commitments and liquidate its remaining inventory.
The condensed statements of operations for the three and six month periods
ended June 30, 1997 and for the condensed balance sheet as of December 31, 1997
have been restated. The financial statements have been prepared in accordance
with accounting standards for the presentation of discontinued operations.
The results of operations of the Company for the three and six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year.
NOTE B - THE COMPANY
The Company is building and intends to market and promote a Web site (the "Web
site") that will offer men's, women's and children's apparel and accessories at
significant discounts as well as provide information on current trends and
other fashion related content.
In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
2. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower of cost
or market. Cost is determined by the first-in, first-out ("FIFO") method.
3. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share
is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period, adjusted
to reflect potentially dilutive securities. Options and warrants were not
included in the computation of diluted earnings per share because the exercise
price was greater than the market price of the stock.
4. RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. During the three and
six month periods ending June 30, 1998, amounts charged to research and
development were $126,000.
5. START UP COSTS
During the three-month period ending June 30, 1998, the Company adopted
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities". Start-up activities include (i) one-time activities relating to
the introduction of a new product or service, conducting business in a new
territory, conducting business with a new class of customer or commencing a new
operation and (ii) organization costs. Start-up activities are expensed as
incurred. During the three and six month periods ending June 30, 1998, $103,000
of start-up costs relating to the formation of the Internet business were
incurred and charged to operations. The Company believes that there is no
cumulative effect on the amount of retained earnings at December 31, 1997
resulting from the adoption of SOP 98-5.
6. RECLASSIFICATION
The 1997 financial statements have been reclassified in order to conform with
the 1998 presentation. See Note D relating to the restatement of the financial
statements in connection with the discontinuance of the golf sportswear
division.
NOTE D - DISCONTINUED OPERATIONS
The operating loss from discontinued operations of $934,000 includes a $454,000
loss relating to the write down of the assets of the golf sportswear division.
The estimated future loss on the disposal of the discontinued operations of
$266,000 represents the provision for expected operating losses during the
phase-out period.
During the phase-out period the Company will not place any future orders with
its suppliers for additional merchandise related to the golf sportswear
division. The Company anticipates that it will ship all open customer purchase
orders for the current season's merchandise early in the fourth quarter of
1998. In addition the Company will retain the services of several staff members
during the phase-out period in an effort to liquidate any remaining inventory.
The Company anticipates that a substantial portion of these efforts will be
completed by year-end. Management believes that it has established adequate
reserves for any unrecoverable inventory costs.
During the phase-out period, the Company will continue to aggressively pursue
the collection of account receivables related to prior and future sales.
Management has historically factored a majority of its account receivables and
intends to continue this practice during the phase-out period. Management
believes that it has established adequate reserves for uncollectable account
receivables.
9
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
The Company intends to actively pursue the sale of all fixed assets and
trademarks related to the golf sportswear division (See Note G - Subsequent
Events). The sale of these assets could take several months to accomplish.
The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, the Company's net assets have been
segregated from continuing operations in the accompanying condensed balance
sheets, and its operating results are segregated and reported as discontinued
operations in the accompanying condensed statements of operations and cash
flows.
Information relating to the discontinued operations of the golf sportswear
division for the six months ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 2,387,000 $ 4,406,000
Cost of sales 2,208,000 3,229,000
----------- -----------
Gross profit 179,000 1,177,000
Selling, marketing, design and administrative 769,000 899,000
Write down of property and equipment 364,000 --
----------- -----------
Operating (loss) income (954,000) 278,000
Other income (expense) 20,000 (243,000)
Amortization and write-off of deferred costs for
bridge financing -- (286,000)
----------- -----------
Loss before provision for income taxes (934,000) (251,000)
Benefit for income taxes -- 25,000
----------- -----------
Net loss $ (934,000) $ (226,000)
=========== ===========
</TABLE>
The net assets of the golf sportswear division included in the accompanying
condensed balance sheets as of June 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited) (As restated)
<S> <C> <C>
Due from factor $ 433,000 $2,264,000
Non-factored receivables 37,000 51,000
Inventories 1,082,000 1,413,000
Prepaid expenses and other current assets 193,000 157,000
Income taxes receivable 204,000 203,000
Property and equipment, net 15,000 --
Deferred income taxes 94,000 94,000
---------- ----------
Total current assets of discontinued operations $2,058,000 $4,182,000
========== ==========
Property and equipment, net $ -- $ 274,000
Deferred costs and other assets -- 140,000
---------- ----------
Total assets of discontinued operations $ -- $ 414,000
========== ==========
</TABLE>
10
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.
NOTE E - LONG LIVED ASSETS
The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets.
The Company has identified certain long-lived assets specifically relating to
the golf sportswear division that have no future value. Accordingly, as of June
30, 1998 the Company has written-off the net book amount of these assets,
aggregating $364,000, and such amount is included in Discontinued
Operations-Loss from operations. The net book amount on the measurement date
(June 25, 1998) was:
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
----------------------
<S> <C>
Leasehold improvements $ 20,000
Concept area fixtures 270,000
Office equipment 65,000
Computer software 20,000
---------
375,000
Less accumulated depreciation 130,000
---------
$ 245,000
=========
DEFERRED COSTS AND OTHER ASSETS
-------------------------------
Trademarks $ 174,000
Less accumulated amortization 55,000
---------
$ 119,000
=========
</TABLE>
Certain assets for the discontinued operations relating to the warehouse
operations will remain in use until approximately October 31, 1998. As of June
30, 1998, the net book amount of these assets is as follows:
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
----------------------
<S> <C>
Leasehold improvements $ 12,000
Computer equipment 34,000
---------
46,000
Less accumulated depreciation 31,000
---------
$ 15,000
=========
</TABLE>
NOTE F -COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered into an employment agreement, effective June
15, 1998, with its Executive Vice President. The employment agreement expires
on July 31, 2002 and provides for a base salary and discretionary annual
bonuses. In addition, the employment agreement provides for two option grants,
one upon commencement of employment and the second on July 31, 1998.
11
<PAGE>
PIVOT RULES, INC
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30 1998 AND 1997
NOTE G -SUBSEQUENT EVENTS
In July 1998, the Company entered into an employment agreement with its
Executive Vice President of Operations, who will be subsequently appointed on
August 31, 1998 to serve as Chief Financial Officer. The employment agreement
expires on July 13, 2002 and provides for a base salary and discretionary
annual bonuses. In addition, the employment agreement provides for an option
grant upon commencement of employment.
In May 1998, the Company entered into an agreement ("Agreement") with a web
development agency ("Agency"), which was subsequently amended on August 17,
1998, to create and design its Web site. The Agreement requires total
compensation of a combination of cash and Common Stock of the Company valued at
the market price on the date of the Agreement. The Company has agreed to pay
additional cash compensation if certain performance objectives are met. On
July 1, 1998, the Company issued 17,788 shares of Common Stock valued at $2.00
per share. The remaining shares of Common Stock will vest upon the satisfaction
of certain performance objectives.
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company is building and intends to market and promote the Web site that
will offer men's, women's and children's apparel and accessories at significant
discounts as well as provide information on current trends and other fashion
related content.
The Company began the research of the Web site in March 1998, and in May 1998
the Company's Board of Directors approved the formation of the Internet
division. The Company is using its experience and relationships in the fashion
industry, knowledge of fashion trends and its marketing skills to build and
promote its Web site. The Company believes that the projected growth in the
number of Internet users (and, in particular the number of female users), the
high disposable income of today's Internet shopper, and the absence of a
dominant online apparel and fashion accessory retailer, combine to create a
highly favorable climate in which to launch the Web site.
The Company is designing its online store to combine the best traditional
retailing practices with innovative and convenient features made possible by
the Internet. As an online commerce and content provider, the Company intends
to provide a compelling and enjoyable online shopping experience that includes
a broad selection of name brand products at significant discounts to retail
prices, an intuitive store layout, friendly customer service, a visually
pleasing environment, a liberal return policy, the convenience of shopping from
home in a store that never closes, and sophisticated search technology features
which will allow customers to locate quickly the items which interest them.
In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site. The golf sportswear division had been operating at a
loss, and despite efforts to promote the brand, orders for the sportswear
collection had been significantly below the Company's business plan and even
further below the prior year's levels. As a result, the Company discontinued
the operations of this division in June 1998. The Company has accrued $266,000
for future anticipated losses relating to the discontinuation of such division.
YEAR 2000 ISSUES
The Company will be interacting with certain computer programs in connection
with credit card transactions, fulfillment operations, and programs used by the
Company's vendors and suppliers. These programs may refer to annual dates only
by the last two digits (e.g., "97" for "1997"), and could lose functionality in
the year 2000. While the Company believes that all of its internal programs are
year 2000 compliant ("Compliant"), the Company cannot guarantee that all of the
other companies with which the Company interacts has taken the year 2000
problem into account or has otherwise updated their programs. The Company does
not believe it will incur any material expenditures in connection with respect
to making its own programs Compliant but cannot predict what, if any,
expenditures will be required in the event that one or more of the companies
with which it interacts is not Compliant. Such problem could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 ("FIRST HALF OF 1998") COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997 ("FIRST HALF OF 1997")
RESULTS FOR CONTINUING OPERATIONS
General and administrative expenses increased by $81,000, or 22.2% in the First
Half of 1998 to $446,000 from $365,000 in the First Half of 1997. This increase
was primarily a result of the additional costs in operations relating to public
company filings, registration fees, and other related expenses and as a result
of an increase in depreciation expense of $32,000 and insurance expense of
$20,000 resulting from the Company's Director's and Officer's liability policy.
The Company has incurred start up costs of $103,000 in the First Half of 1998.
These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Web site reaches productive
capacity.
The Company has incurred research and development costs of $126,000 in the
First Half of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.
13
<PAGE>
The Company earned interest of $81,000 and $36,000 on the proceeds from the
Company's 1997 initial public offering ("IPO") in the First Half of 1998 and
1997, respectively.
The Company's loss from continuing operations increased by $310,000 to a net
loss of $594,000 in the First Half of 1998 from a loss of $284,000 in the First
Half of 1997. The loss in the First Half of 1997 was offset by an income tax
benefit of $45,000.
RESULTS FOR DISCONTINUED OPERATIONS
In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the First Half of
1998 reflect a loss from operations of $934,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$2,019,000, or 45.8%, to $2,387,000 in the First Half of 1998 from $4,406,000
in the First Half of 1997. Gross profit decreased by $998,000, or 84.8%, to
$179,000 in the First Half of 1998 from $1,177,000 in the First Half of 1997.
This decrease is a result of the decrease in sales volume as well as due to
approximately $250,000 in inventory markdowns that were recorded in the First
Half of 1998. The additional markdowns were recorded due to the level of
inventory on hand that the Company will have to sell in the close-out market
resulting from the discontinued operations.
THREE MONTHS ENDED JUNE 30, 1998 ("SECOND QUARTER OF 1998") COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997 ("SECOND QUARTER OF 1997")
RESULTS FOR CONTINUING OPERATIONS
General and administrative expenses increased by 4,000, or 2.0% in the Second
Quarter of 1998 to $207,000 from $203,000 in the Second Quarter of 1997. This
increase is a result of the additional costs in operations relating to the
Company completing the IPO in May 1997 and due to the increase in depreciation
expense due to the property and equipment purchased in the fourth quarter of
1997. This increase is offset by a decrease in employee's salaries from the
allocation of $52,000 to the start up costs of the Internet business.
The Company has incurred start up costs of $103,000 in the Second Quarter of
1998. These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Internet business is
operational.
The Company has incurred research and development costs of $126,000 in the
Second Quarter of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.
The Company earned interest of $39,000 and $36,000 on the proceeds from the IPO
in the Second Quarter of 1998 and 1997, respectively.
The Company's loss from continuing operations increased by $255,000 to a net
loss of $397,000 in the Second Quarter of 1998 from a loss of $142,000 in the
Second Quarter of 1997. The loss in the Second Quarter of 1997 was offset by an
income tax benefit of $25,000.
RESULTS FOR DISCONTINUED OPERATIONS
In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the Second Quarter
of 1998 reflect a loss from operations of $853,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$1,138,000, or 56.6%, to $872,000 in the Second Quarter of 1998 from $2,010,000
in the Second Quarter of 1997. Gross profit decreased by
14
<PAGE>
$383,000, or 67.8%, to $182,000 in the Second Quarter of 1998 from $565,000 in
the Second Quarter of 1997. This decrease is a result of a decrease in sales
volume as well as the lower gross margins associated with sales in the closeout
market. In the Second Quarter of 1998, approximately 48.2% of the Company's
sales were to the closeout market as compared to less than 1% in the Second
Quarter of 1997. The decrease was also attributable to approximately $150,000
in inventory markdowns that were recorded in the Second Quarter of 1998. The
additional markdowns were recorded due to the level of inventory on hand that
the Company will have to sell in the closeout market resulting from the
discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary funding requirements are to finance working capital and
the launch and marketing of the Web site. These requirements will increase as a
result of the start up costs and working capital needed for the Web site. Based
upon its current business plan, the Company believes it has sufficient
resources to finance its working capital needs for at least the next twelve
months.
The discontinued golf sportswear division has assets of $2,058,000, of which
$1,082,000 represents inventory. The Company intends to honor the sales order
commitments of its discontinued operations for its Fall 98 collection and is
liquidating all remaining inventories to the closeout market.
CASH FLOW - CONTINUING OPERATIONS
During the First Half of 1998, net cash used by operating activities was
$665,000 compared to cash provided by operating activities of $40,000 in the
First Half of 1997. The increase in cash used by operations was primarily the
result of increases in the Company's loss from continuing operations as well as
$236,000 in purchases of inventory of the Web site.
During the First Half of 1998, net cash used in investing activities was
$661,000, compared to $4,058,000 in the First Half of 1997. The cash used in
the First Half of 1998 was the result of deposits made with the Company's
factor ("Factor"). In the First Half of 1997, the Company completed the IPO.
Such funds were deposited with the Factor and invested at a rate of 1.75% below
prime. Funds are transferred into the Company's operating account as needed.
During the First Half of 1997, the Company completed the IPO and received net
proceeds of $5,939,000. The funds, net of debt repayments of approximately
$2,144,000 and deferred costs relating to the IPO were deposited with the
Factor.
Factoring Agreement: The Company is party to a Retail Collection Factoring
Agreement ("Factoring Agreement") pursuant to which the Company sells all of
its eligible accounts receivable to the Factor. The Company renegotiated such
agreement in November 1997. The Company is eligible for advances, at the
Factor's discretion, of up to 90% of the net balance due on eligible accounts
receivable. As a result of the discontinuation of the golf sportswear division,
the Company anticipates that it will have factored receivables only through
October 1998. Borrowings thereafter would require a renegotiation of the
Agreement. There can be no assurance that such agreement can be attained. At
June 30, 1998, there was approximately $2,449,000 in funds invested with the
Factor under the Factoring Agreement and approximately $433,000 in factored
receivables, net of returns and allowances. Interest on the net amount due is
payable monthly in arrears at the rate of 1% above the Chase Manhattan Bank, NA
prime rate ("Prime"). Interest on the net receivable is received monthly in
arrears at the rate of 1.75% below Prime
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by the Company with the Securities and Exchange
Commission, including Forms 8-A, 8-K, 10-QSB, and 10-KSB, and include, among
others, the following: lack of operating history of Internet business; risks
15
<PAGE>
associated with the start-up of the Internet business; limited working capital
(possible need for additional financing); recent losses and anticipated future
losses; competition; the potential for competitors with greater resources to
enter such business and the Company's lack of experience in such business; risk
of litigation for sale of unauthentic or damaged goods; dependence on third
parties and certain relationships; availability of merchandise; uncertain
acceptance of the Company's brand; risk of capacity constraints; reliance on
internally developed systems; system development risks; consumer acceptance of
the Internet as a medium for purchasing apparel; the capital intensive nature
of such business taking into account the need for advertising to promote a Web
site; seasonality and quarterly fluctuations and the Company's ability to
retain qualified personnel for the Internet business. The risks included herein
are not exhaustive. Other sections of this report may include additional
factors that could adversely impact the Company's business and financial
performance. Moreover, the Company operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors in the Company's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
16
<PAGE>
PART II
- -------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective May 15,1997, the Company completed the IPO (Commission File No.
333-22895). The representative of the underwriters of the IPO was Southeast
Research Partners, Inc. (formerly known as GKN Securities Corp). The following
table shows the title of each class of securities registered and the title of
any class of securities into which such securities may be converted, if any:
(1) Units
(2) Common Stock
(3) Warrants
(4) Representative's Unit Purchase Option
(5) Bridge Warrants
UNITS: Each Unit consists of one share of Common Stock and one Warrant.
WARRANTS: Each Warrant is exercisable into one share of Common Stock at
$5.00 per share, subject to adjustment, at any time until the close of
business on May 15, 2002.
REPRESENTATIVE'S UNIT PURCHASE OPTION: Representative's right to purchase
up to 150,000 Units for an aggregate price of $100.
BRIDGE WARRANTS: Warrants issued to certain persons in connection with the
Company's January 1997 bridge financing which were converted in May 1997
(on a one-for-one basis) into the Warrants.
The following table represents the amount and aggregate offering price of
securities registered and sold:
<TABLE>
<CAPTION>
Aggregate offering
Price of Amount Aggregate Offering
Title of Security Amount Registered Registered Amount Sold Price of Amount Sold
----------------- ----------------- ---------- ----------- --------------------
<S> <C> <C> <C> <C>
Unit 1,725,000 $8,625,000 1,500,000 $7,500,000
Representative's Unit
Purchase Option 1 $100 1 $100
</TABLE>
The net offering proceeds totaled $5,939,343 after deducting total expenses
listed below. The following amounts represent total expenses in connection with
issuance and distribution of the securities registered for each category listed
below:
Underwriting discounts and commissions $750,000
Expenses paid to or for underwriters 243,335
Other expenses 567,321
The amounts shown above represent direct or indirect payments to others.
17
<PAGE>
Based upon the Company's decision to discontinue the operations of the golf
sportswear division and build and promote its Web site, the Company has
reallocated its use of proceeds accordingly by adding to the description of
Working Capital and general corporate purposes to include costs related to the
Web site. As of June 30, 1998, the net offering proceeds of $5,939,343 were
used for the following cash expenditures:
Repayment of indebtedness and other obligations
(with interest) $2,031,580 *
Marketing and advertising 908,115
Installation of concept shops and/or concept areas 232,964
Construction of plant, building, and facilities 276,489
Working capital and general corporate purposes
including fixed assets - computer hardware and software
and costs relating to the Web site 1,785,000
* Includes $181,866 repaid to Northstar Investment Group, Ltd., a company in
which Mr. Joseph Boughton, Jr., a 16.3% shareholder prior to the IPO, served as
President. Giving effect to the sale of Common Stock in the IPO, Mr. Boughton's
percentage of ownership in the Company was reduced to 7.5%.
The balance of the proceeds have been deposited with the Company's factor and
invested at a rate of 1.75% below Prime. The amounts shown above represent
direct or indirect payments to others.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Report:
EXHIBIT NO. DESCRIPTION
----------- -----------
10.24* Employment Agreement dated as of July 13, 1998 by and
between Pivot Rules, Inc. and Patrick Barry.
10.25* Agreement dated as of June 15, 1998 by and between Pivot
Rules, Inc. and Jonathan Morris.
10.27 Agreement dated as of May 13, 1998 by and between Pivot
Rules, Inc. and Kaufman Patricof Enterprises ("KPE").
10.28 Amendment to Agreement dated August 17, 1998 between Pivot
Rules, Inc. and KPE.
27 Financial Data Schedule.
- ----------
* Exhibits to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended June 30, 1998, filed with the Securities and Exchange
Commission on August 10, 1998.
(b) Reports on Form 8-K.
There were no reports on form 8-K filed by the registrant during the three
months ended June 30, 1998.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
---------------------------
E. Kenneth Seiff
President
By: /s/ Patrick C. Barry
---------------------------
Patrick C. Barry
Chief Financial Officer
October 19, 1998
<PAGE>
AGREEMENT
AGREEMENT, dated as of May 13, 1998 (this "Agreement"), by and between
Pivot Rules, Inc., a New York corporation ("Pivot Rules") and Kaufman Patricof
Enterprises, a New York corporation ("KPE").
R E C I T A L S:
WHEREAS, KPE is in the business of constructing websites; and
WHEREAS, Pivot Rules desires to engage KPE to construct a commerce
enabled, online retail site for Pivot Rules, and KPE desires to provide such
services upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Services. KPE is hereby engaged to construct a commerce enabled,
online retail site (the "Site") for Pivot Rules in accordance with the
description, requisite functionality and timeline described on Schedule A
attached hereto. Pivot Rules shall furnish to KPE a letter of confirmation at
such time as Pivot Rules determines in its reasonable discretion that the Site
has been completed and performs with the functionality set forth on Schedule A
(the "Letter of Completion"). All services under the Agreement shall be
performed by KPE, and KPE shall not engage any other person to perform such
activities without the prior consent of Pivot Rules.
2. Timing. It is acknowledged that KPE has already commenced the
preparatory work for this engagement. KPE shall use its best efforts to
complete the Site by August 3, 1998.
3. Compensation. In consideration of the services to be rendered by
KPE hereunder, Pivot Rules shall pay to KPE the sum of $100,000 in cash and
$71,150 in consideration payable in the form of common stock, $.01 par value
("Common Stock") of Pivot Rules, valued at the last reported sales price of the
Common Stock as reported on The Nasdaq SmallCap Market on May 12, 1998. The
cash consideration shall be payable as follows: (i) $50,000 shall be payable
simultaneously with the execution of this Agreement, (ii) $42,787.50 shall be
payable on June 1, 1998 and (iii) $7,212.50 shall be payable on July 1, 1998.
The Common Stock consideration shall be delivered to KPE on the date hereof,
but half of such shares of Common Stock shall not vest until July 1, 1998 and
the remaining half of such shares of Common Stock shall not vest until the
Letter of Completion is delivered, all of which shall be forfeitable on the
terms of Section 8 hereof. Prior to vesting, KPE shall have no right to dispose
of the Common Stock and shall be voted in the same way as a majority of the
shares of Common Stock are voted on any matter put to a vote of the
shareholders of Pivot Rules.
<PAGE>
4. Representations, Warranties and Covenants.
(a) KPE represents, warrants and covenants as follows:
(i) KPE has all necessary corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of KPE. This Agreement has been
duly executed and delivered by KPE and constitutes the legal, valid and binding
obligation of KPE, enforceable against KPE in accordance with its terms, except
as may be limited by bankruptcy, reorganization, moratorium, fraudulent
conveyance and insolvency laws and by other laws affecting the rights of
creditors generally and except as may be limited by the availability of
equitable remedies.
(ii) No consent, approval, order or authorization of any
third party (including any federal, state or local governmental authority) is
required by or with respect to KPE to validly execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
(iii) KPE is an accredited investor as defined in
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act") and it is acquiring the Common Stock for its own account for investment
and not with a view to the distribution thereof or with any present intention
of distribution or selling any of the Common Stock except in compliance with
the Securities Act. KPE understands and agrees that the Common Stock has not
been registered under the Securities Act and the Common Stock may be sold only
if registered pursuant to the provisions thereunder or if an exemption from
registration is available. The Common Stock issued pursuant to this Agreement
shall be stamped or otherwise imprinted with a legend to such effect.
(iv) KPE agrees to work with Pivot Rules in identifying
and seeking to ensure Year 2000 compliance of the Site.
(b) Pivot Rules represents and warrants as follows:
(i) Pivot Rules has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Pivot Rules. This
Agreement has been duly executed and delivered by Pivot Rules and constitutes
the legal, valid and binding obligation of Pivot Rules, enforceable against
Pivot Rules in accordance with its terms, except as may be limited by
bankruptcy, reorganization,
2
<PAGE>
moratorium, fraudulent conveyance and insolvency laws and by other laws
affecting the rights of creditors generally and except as may be limited by the
availability of equitable remedies.
(ii) No consent, approval, order or authorization of any
third party (including any federal, state or local governmental authority) is
required by or with respect to Pivot Rules to validly execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
5. Registration. Pivot Rules will use its best efforts to register, at
its own expense (except for underwriting discounts or brokerage commissions and
fees of counsel to KPE, if any), the shares of Common Stock issuable to KPE
hereunder with the Securities and Exchange Commission as soon as practicable
following the vesting of the Common Stock as provided in Section 3 hereof.
Until the date of delivery of the Letter of Completion, KPE will not sell,
transfer, assign or otherwise dispose of any of its shares of Common Stock and
thereafter will not sell, transfer, assign or otherwise dispose of more than
10,000 shares of Common Stock in any calendar month without the prior written
consent of Pivot Rules unless at the time of such sale, transfer, assignment or
disposition the market price of such shares of Common Stock is less than $1.00
per share.
6. Maintenance; Future Development. Any maintenance to be performed
with regard to the Site after the delivery of the Letter of Completion shall be
at the sole responsibility and cost of Pivot Rules. KPE and Pivot Rules agree
that KPE's compensation for any subsequent development of the Site shall be
equally split between cash and shares of Common Stock.
7. Indemnification. Pivot Rules hereby agrees to indemnify and hold
harmless KPE and its officers, directors, shareholders, attorneys, agents and
successors and assigns from and against any and all damages, costs and expenses
(including legal fees) resulting from the use of the Site by Pivot Rules,
unless caused by the gross negligence or willful misconduct of KPE or the
breach by KPE of the intellectual property rights of any third party. KPE
hereby agrees to indemnify and hold harmless Pivot Rules and its officers,
directors, shareholders, attorneys, agents and successors and assigns from and
against any and all damages, costs and expenses (including legal fees)
resulting from (x) the gross negligence or willful misconduct of KPE in the
performance of its services hereunder or (y) the breach by KPE of the
intellectual property rights of any third party.
8. Termination. In the event that Pivot Rules elects to terminate this
Agreement for any reason on or prior to May 31, 1998, Pivot Rules shall not be
obligated to make any further payments to KPE, and the shares of Common Stock
issued to KPE hereunder shall immediately be forfeited by KPE and returned to
Pivot Rules. In the event of any such termination, KPE shall be entitled to
retain the $50,000 paid by Pivot Rules to KPE in accordance with Section 3 upon
the execution of this Agreement. In the event of termination of this Agreement
on or prior to such date, this Agreement shall forthwith become void and there
shall be no liability on the part of any party hereto. Neither party may
terminate this Agreement after May 31, 1998, except on the basis of a material
breach of this Agreement, which shall require notice and 10 business days to
cure.
3
<PAGE>
9. Further Assurances. Each party hereto shall perform such further
acts and execute such further documents as may be required to carry out the
provisions of this Agreement.
10. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives and successors. This Agreement shall not be assignable by KPE.
11. Relationship. In performing the services provided for hereunder,
KPE is acting as an independent contractor, and KPE shall not be deemed by
virtue of this Agreement to be the servant, agent or employee of the Company
for any purpose whatsoever.
12. Entire Agreement; Termination of Prior Agreements. This Agreement
contains the entire agreement between the parties hereto with respect to the
matters contemplated herein and supersedes all prior agreements or
understandings between the parties related to such matters.
13. Headings. The headings contained in this Agreement are intended
solely for convenience of reference and shall not affect in any way the meaning
or interpretation of this Agreement.
14. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including telecopy, telex or similar
writing) and shall be deemed given or made as of the date delivered, if
delivered personally or by telecopy (provided that delivery by telecopy shall
be followed by delivery of an additional copy personally, by mail or overnight
courier), one day after being delivered by overnight courier or three days
after being mailed by registered or certified mail (postage prepaid, return
receipt requested), to the parties at the following addresses:
if to Pivot Rules:
Pivot Rules, Inc.
42 West 39th Street
New York, New York 10018
Fax: 212-869-6923
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Richard A. Goldberg, Esq.
Fax: 212-758-9526
4
<PAGE>
if to KPE:
Kaufman Patricof Enterprises
875 Third Avenue
New York, NY 10022
Attention: Mark Patricof
Fax: 212-303-7670
or such other address or telex or telecopy number as such party may hereafter
specify for the purpose by notice to the other party hereto.
15. Severability. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
16. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and all of which together shall
constitute a single agreement.
17. Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of New York without regard to
principles of conflict of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
--------------------
Name: E. Kenneth Seiff
Title: President
KAUFMAN PATRICOF ENTERPRISES
By: /s/ Mark Patricof
--------------------
Name: Mark Patricof
Title: President
5
<PAGE>
Sent by Facsimile
- -----------------
August 17, 1998
Mr. Jonathan Morris
Pivot Rules
42 West 39th Street
New York, NY 10018
Kaufman Patricof Enterprises-Pivot Rules
----------------------------------------
Dear Jonathan:
This letter agreement (the "Agreement") is entered into between Pivot
Rules, Inc. ("Pivot Rules") and Kaufman Patricof Enterprises ("KPE") in order
to effect the launch of Bluefly.com in the most expeditious and cost-effective
manner. The parties agree that this agreement supplements that certain
agreement (the "Initial Agreement") dated as of May 13, 1998 between Pivot
Rules and KPE.
1) Site Development and Project Management: KPE shall provide continued
full time project management and site development through the date of
the launch. KPE agrees that for so long as it is providing site
development services under this Agreement that it shall make the
services of Charles Wood, Ron Kimberling, and Lisa Pruden available to
Pivot Rules. Except for the services to be provided pursuant to
paragraph 2 below, the site development and project management costs
will be billed on a time basis at the following rates:
o VP of Production (Ron) $110/hour
o Producer (Chuck) $75/hour
o Graphic Designer (Lisa) $60/hour
o HTML Engineer $50/hour
As Producer, Chuck Wood will track hours and provide Pivot Rules with
a bi-weekly summary and corresponding invoice. KPE will begin tracking
hours spent for new features on Tuesday, August 18.
KPE will be paid for all work performed under this agreement in the
form of Pivot Rules common stock based on a per share value of Two (2)
Dollars. The parties agree that the shares due KPE under this
agreement shall be delivered on the sixtieth day following the date on
which the site is launched to the public and shall otherwise be
subject to the paragraph 5 of the Initial Agreement.
[letterhead of Kaufman Patricof Enterprises]
<PAGE>
KPE agrees that all work done by its employees hereunder, our under
the initial agreement, shall include a sixty (60) day warranty from
the time that such work is incorporated in the site and made available
to the public. In the event that Pivot Rules finds any bug or error in
any of the code delivered by KPE within such sixty (60) day period,
KPE shall correct such bug or error and redeliver the source and
object code as quickly as possible and at no additional cost to Pivot
Rules.
KPE agrees to fixes bugs in work previously done by its employees,
prior to launch at no additional cost to Pivot Rules.
2) Programming: To increase the speed of development, KPE shall provide
two senior programmers for the continued backend development of the
site. KPE will utilize the same billing rates as Evolution, and the
cost will be based on feature deliverables, not time. The features
that KPE will work on will be mutually agreed upon. KPE will have the
same terms and conditions as Evolution in regards to overages, time
deadlines, and warranties for this work.
3) The following is agreed to in regards to Phase 2:
o Both parties will, on a best efforts basis, commence Phase 2
development within 4 weeks of launch.
o KPE will hold the original team of Ron, Chuck, and Lisa available
for Phase 2 work.
o KPE agrees that Evolution will be part of Phase 2, and that
their work will be negotiated, managed, and billed by KPE on
a cost basis.
o All Phase 2 work will be priced by KPE at prevailing market
prices.
4) Pivot guarantees that KPE will be the lead site developer and project
managers for new functionality to be added to the site for a period of
four months from the date work is commenced on Phase 2. There are no
guarantees made to KPE regarding the scope of Phase 2. Notwithstanding
the foregoing, nothing contained herein shall limit Pivot Rules right
to hire programmers and manage the development of the site with its
own personnel.
5) The attached language addressing "Work for Hire" ,"Confidentiality and
Exclusivity" and promotion and site credit is attached to this
Agreement and incorporated herein and in the Initial Agreement by
reference.
Your counter-signature below indicates your acceptance of these terms.
KAUFMAN PATRICOF ENTERPRISES PIVOT RULES, INC.
By: /s/ David Ricanati By: /s/ Jonathan Morris
--------------------- ----------------------
David Ricanati Jonathan Morris
Senior Vice President - Executive Vice President
Business Development
<PAGE>
WORK FOR HIRE
The following language concerning "work for hire" is added to the
Agreement and the Initial Agreement:
"KPE hereby acknowledges that all of the deliverables and any
other documentation, materials or intellectual property provided
by KPE and its subcontractors to Pivot Rules (collectively
the "Work Product") are works which have been specifically
commissioned by Pivot Rules and are "works for hire" for Pivot
Rules and Pivot Rules shall own all rights, title and interest
therein. To the extent that title to any work product does not ,
by operation of law, vest in Pivot Rules or any of the Work
Product is not considered "works made for hire", all right, title
and interest therein are hereby irrevocably assigned to Pivot
Rules. KPE agrees to give Pivot Rules and any person designated
by Pivot Rules reasonable assistance required to perfect Pivot
Rules rights in and to the Work Product.
Pivot Rules acknowledges that KPE asserts, owns, holds a license
to use and sublicense, or has all required permissions or
consents, to use certain pre-existing development tools,
routines, subroutines and other programs, data and materials not
included in the Work Product that KPE may include on the web site
developed under this agreement."
<PAGE>
CONFIDENTIALITY AND EXCLUSIVITY
The following language concerning "confidentiality" and "exclusivity" is
added to the Agreement and the Initial Agreement:
(a) All information concerning Pivot Rules' Web site, customer list,
vendor lists, sales activity, costing model, past, present and future
business, fulfillment business activities and business and promotion plans
and methods, together with all names, addresses and other customer
information relating to Pivot Rules or Pivot Rules's customers
(collectively, "Proprietary Information") are the unique and valuable
property of Pivot Rules. Unless compelled by law or directed by Pivot
Rules in writing, KPE shall not use such Proprietary Information for any
purpose other than the performance of its duties and obligation under the
Contract. KPE shall take all reasonable and customary precautions to
ensure that all Proprietary Information is protected from unauthorized
disclosure to any party not required to have access to such information.
Notwithstanding the foregoing, KPE's shall have the right in its
promotional and/or marketing materials to describe generally the work it
has performed for Pivot Rules. The terms contained in this section shall
survive the termination of the Contract.
(b) KPE acknowledges that Pivot Rules is a publicly traded company and
that the unauthorized disclosure of Pivot Rules' confidential information
could have a material adverse affect. KPE shall take all appropriate
precautions necessary to prevent its officers, directors, employees and
agents from directly or indirectly trading on any of Pivot Rules's
non-public information.
(c) KPE agrees that for a period of nine (9) months from the date
Pivot Rules' Web site is launched to the public it shall not, nor shall
any of its affiliates, officers, directors, employees, or agents render
any service to, or own any interest in, any Competitive Business. For
purposes of this Agreement, a "Competitive Business" shall mean any of the
following:
(i) a person, corporation, partnership or other entity which
sells or has plans to sell more than one brand of name
brand apparel, fashion accessories, or home furnishings
via the Internet at a discount of the manufacturer's or
designer's suggested retail price; or
(ii) May Department Stores, Federated Department Stores,
Proffitt's Inc. (other than Saks Fifth Avenue but not
Saks Off Fifth), Mercantile Department Stores, Dillard's
Inc., Nordstrom, Inc., Dayton-Hudson Corp., Spiegel Inc.,
and any subsidiary or division of, or any successor to,
any of the foregoing companies.
Without limiting the foregoing, KPE shall have the right to render
services to any full price department stores (including full price stores
which on occasion run promotional sales at discounts to retail) not listed
in clause (ii) above provided that such services are not in connection
with any off-price division or subsidiary of such department store. KPE
agrees that in the event of a breach or threatened breach of this
paragraph, Pivot Rules shall have no adequate remedy in money damages and,
accordingly, shall be entitled to appropriate injunctive relief against
such breach or threatened breach. Notwithstanding the foregoing, the
ownership of less than five percent (5%) of any publicly traded company
engaged in a Competitive Business shall not constitute a violation of this
section. Except as specifically provided in this section, KPE shall not be
restricted hereunder from furnishing any type of service to any person or
entity.
(d) For so long as KPE shall be bound by the provisions of this
section above, Pivot Rules shall:
<PAGE>
(i) maintain on its Web site a link to KPE's Web site and
KPE's corporate logo;
(ii) include a reference to KPE in all press material in which
Pivot Rules discusses the development of the Web site;
and
(iii) include a discussion of KPE's development of the Web site
in all press kits which Pivot Rules distributes.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 67,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 236,000
<CURRENT-ASSETS> 4,915,000
<PP&E> 586,000
<DEPRECIATION> 57,000
<TOTAL-ASSETS> 5,459,000
<CURRENT-LIABILITIES> 1,194,000
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 4,229,000
<TOTAL-LIABILITY-AND-EQUITY> 5,459,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 675,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (594,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (594,000)
<DISCONTINUED> (1,200,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,794,000)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
