<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-36215
1,300,000 SHARES
[LOGO OF SHOPPING.COM]
COMMON STOCK
----------------
All of the shares of common stock, no par value per share (the "Common
Stock"), offered hereby are being offered by Shopping.com ("Shopping.com" or
the "Company"). Prior to this offering, there has been no public market for
the Common Stock and there can be no assurance that such a market will develop
after this offering or, if developed, that it will be sustained. The initial
public offering price of the shares of Common Stock offered hereby has been
determined by negotiation between the Company and Waldron & Co., Inc. (the
"Representative"), as representative of the several underwriters (the
"Underwriters."). See "Underwriting" for information relating to the
determination of the initial public offering price.
The Company has applied and been accepted for inclusion of the Common Stock
on the NASD OTC Electronic Bulletin Board (the "Bulletin Board") under the
symbol IBUY, although there can be no assurance that an active trading market
will develop. The Company's application for inclusion of the Common Stock on
the NASDAQ SmallCap Market has been withdrawn, although the Company received
an indication that such application would be denied. The Company intends to
pursue such inclusion. No assurance can be given that the Company's shares of
Common Stock will ever be included for quotation on the NASDAQ SmallCap
Market. See "Risk Factors--No Assurance of Public Market for the Common Stock;
No Assurance of NASDAQ Listing" and "Description of Securities--Certain Market
Information."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<CAPTION>
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................... $9.00 $0.81 $8.19
- -----------------------------------------------------------------------------------------
Total(3)....................... $11,700,000 $1,053,000 $10,647,000
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Does not include (a) a non-accountable expense allowance payable to the
Representative and (b) the value of five-year warrants granted to the
Representative to purchase up to 122,000 shares of Common Stock at 160% of
the initial public offering price per share of Common Stock (the
"Representative's Warrants"). For indemnification and contribution
arrangements with the Underwriters, see "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $682,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 195,000 additional shares of Common Stock, solely to cover over-
allotments (the "Over-Allotment Option"), if any. See "Underwriting." If
all such shares of Common Stock are purchased, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$13,455,000, $1,210,950 and $12,244,050, respectively.
The Common Stock is offered by the Underwriters when, as and if delivered to
and accepted by them and subject to their right to withdraw, cancel or modify
the offering and reject any order in whole or in part. It is expected that
delivery of the certificates for the shares of Common Stock will be made at
the offices of Waldron & Co., Inc., Irvine, California, or through the
facilities of Depository Trust Company, on or about December 1, 1997.
----------------
WALDRON & CO., INC.
The date of this Prospectus is November 25, 1997
<PAGE>
COVER GATEFOLD
Caption: Shopping.com offers a 24-hour on-line store located at
http://www.shopping.Com on the Internet's World Wide Web.
Picture: The picture on the first page shows what a person might see when
he/she visits Shopping.Com's Web site on the World Wide Web. It
displays various files that a customer can use to bid on products
that are being offered, plus two Shopping.com advertising logos.
Information contained on the Company's Web site or online services does not
constitute part of this Prospectus.
The Company has filed for U.S. trademark registration for the Shopping.com logo
design. All other trademarks or service marks appearing in this Prospectus are
trademarks or service marks of the respective companies that utilize them.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING".
LEFT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Graphic: Computer mouse of customer.
Caption: How Shopping.com works.
Caption: From their home or office computer, customers can access the Web site
online at www.shopping.com, 24 hours a day, 365 days a year.
Graphic: Variety of products, such as saw, screw driver, masking tape, ruler.
Caption: Customers can choose from thousands of brand name items, with millions
more on the way, at the lowest prices anywhere. They then put the
selections into their online shopping cart.
Graphic: Picture of two customer service department employees.
Caption: When finish shopping, customers have the option of paying either
online or by telephone by calling the 24-hour customer service
department 1-888-LOVE-2-SHOP.
Graphic: Customer using computer keyboard.
Caption: Customers' orders are placed with Shopping.com electronically and
securely through Verisign, a leading online secure payment
verification technology company.
Graphic: Inside of computer, various electronic connectors.
Caption: Customers are then notified via e-mail of the status of their orders.
Once confirmed, the orders are sent
<PAGE>
electronically to each vendor by Shopping.com either over a Wide Area
Network or the Internet.
Graphic: Picture of plane and truck.
Caption: Merchandise is never stored by Shopping.com but instead is shipped
directly to customers from each vendor's warehouse, thereby passing
the cost savings along to its customers.
Graphic: Two story family dwelling.
Caption: Merchandise arrives at each customer's door. Customers never need to
leave the house or office to shop our online Web site.
RIGHT SIDE OF GATEFOLD TO INSIDE FRONT COVER.
Graphic: List of characteristics of shopping.com's program.
Caption: Program is user friendly, has extensive vendor relationships,
proprietary, state-of-the-art systems architecture, retail company run
by industry experienced retailers, and has the largest selection of
top brand names organized by category . . . online.
Graphic: List of directors.
Caption: Bill Gross, Chairman, Director, Idealab!, Robert J. McNulty, Director,
Chief Executor Officer, Douglas A. Hay, Director, Executive Vice
President, Edward Bradley, Director, Chairman/President, Cannon
Industries and Paul J. Hill, Director, Chairman, Crown Life Insurance
Company
Graphic: Serving huge and growing consumer market.
Caption: The Internet use is projected to grow over 100% in 1997. Over 175
million people use the Internet by the year 2001. Over 160 million
people will use computers, 60 million use e-mail and 28 million
currently use the Internet.
Graphic: Chart showing World wide use of Web.
Caption: The years 1996 to 2001 will witness over 175 million people using the
Internet.
Graphic: Chart showing amount of online commerce.
Caption: From the year 1996 through the year 2001 on-line use will rise to $220
billion.
Graphic: Shopping.com's advertising slogan.
Caption: Concept is so POWERFUL because of its product mix, demand creation and
everyday low prices.
PAGE OPPOSITE GATEFOLD TO INSIDE FRONT COVER.
Graphic: Displayed are various products that can be purchased through
Shopping.com system, such as computers, books, bikes, cosmetics.
Graphic: Shopping.com's advertising logo.
BACKSIDE OF GATEFOLD
LEFTSIDE OF BACK PAGE
RIGHT SIDE OF BACK PAGE
Graphic: Description of number of shares
Caption: 1,300,000 shares. Shown also is Shopping.com's advertising logo,
reference to "common stock", "prospectus", and listing of company
name: Waldron & Co., Inc., November 25, 1997
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and related
Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
noted, all information in this Prospectus (i) gives effect to the conversion of
all of the outstanding shares of preferred stock into 1,286,500 shares of
common stock, (ii) gives effect to the reverse stock split of one share of
Common Stock for two shares of existing Common Stock, effective upon the
closing of this offering, (iii) assumes no exercise of the Over-Allotment
Option, (iv) assumes no exercise of warrants issued and outstanding to purchase
1,226,000 shares of Common Stock, (v) assumes no exercise of the
Representative's Warrants and (vi) assumes no exercise of the 250,000 shares of
Common Stock reserved for issuance upon exercise of options outstanding or
available for future grant under the Company's Stock Option Plan of 1997 (the
"Plan"). See "Certain Transactions," "Description of Securities" and
"Underwriting." This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in these forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those set forth in the section entitled "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Shopping.com is an innovative Internet-based electronic wholesaler/retailer
("wholetailer") specializing in retail marketing a broad range of products and
services at wholesale prices to both consumer and trade customers. Utilizing
proprietary technology, the Company has designed a fully-scalable systems
architecture for the Internet shopping marketplace. Shopping.com's system is
designed to fully integrate all aspects of retail transaction processing
including, order placement, secure payment verification, inventory control,
order fulfillment and vendor invoicing, in one seamless and automated process.
The Company believes that the principal competitive factors in its market are
price, speed of fulfillment, brand name recognition, wide selection,
personalized services, ease of use, 24-hour accessibility, customer service,
convenience, reliability, quality of search engine tools, and quality of
editorial and other site content. The Company has developed a creative
wholetailing format on the World Wide Web ("Web") that combines a highly
automated infrastructure with a user-friendly interface designed to enhance the
convenience and ease of online shopping.
The Company employs specialized information systems to provide its customers
with access to an automated marketplace of products and services, which consist
of the inventories of multiple manufacturers and distributors, price
comparisons, detailed product descriptions, product availability, available
delivery times, delivery status of products ordered and back-order information.
Product categories currently available on the Company's Web site include:
automotive, books, cigars, collectibles, computer hardware and software,
consumer electronics, cutlery, fragrances, furniture, gifts, gourmet foods,
health and beauty care, home improvements, marine supplies, music CDs, sporting
goods and watches. The Company has, and will continue to enter into,
arrangements with a number of manufacturers and distributors who will ship
their products directly to its customers, avoiding the expense and delay of
inventory maintenance. Although the Company only commenced selling on the
Internet on July 11, 1997, Shopping.com currently offers more than 900,000
Stock Keeping Units ("SKUs") and expects the number of SKUs to increase to over
2,000,000 by March 1998.
Customers order products and services on Shopping.com's Web site and provide
secure payment by either credit card over the Internet through Verisign or by
calling 1-888-LOVE-2-SHOP. Shipments are then made by the manufacturer or
distributor directly to the customer after verification by Shopping.com that
the payment has been properly credited. Because transactions are accomplished
without the need to maintain either inventory, warehouse facilities, retail
store space or attendant personnel, the Company believes it will be able to
obtain market share by passing cost savings along to its customers as a result
of selling its products and services at a discount to typical retail and
warehouse/discount prices. For the same reasons, the Company is also able to
provide a broader merchandise mix than retail stores, warehouse/discount stores
and mail order catalogue operators.
3
<PAGE>
Shopping.com's strategy is to become a dominant low-price leader in
wholetailing on the Internet by utilizing the warehousing, purchasing and
distribution strengths of multiple manufacturers and distributors, rather than
to assume those roles for itself. The Company believes this approach allows
Shopping.com to eliminate many of the risks and costs associated with
maintaining inventory, including the cost of leasing warehouse space, inventory
obsolescence, inventory tracking systems, as well as the increased costs
associated with employing large numbers of personnel for stocking and shipping
duties. By having access to the inventories of multiple manufacturers and
distributors, Shopping.com believes it is able to offer its customers a
competitive combination of price, product availability, order fulfillment and
delivery services and still obtain profitability. Beyond the benefits of a wide
selection, purchasing from Shopping.com can be done conveniently, 24 hours a
day, without requiring a trip to a store.
International Data Corporation ("IDC") estimates that the number of users
accessing the Web will grow from 28 million in 1996 to 175 million in 2001 and
that the amount of commerce conducted over the Web will increase from
approximately $2.6 billion in 1996 to $220 billion in 2001. Growth in Internet
usage has been fueled by a number of factors, including the large and growing
base of personal computers installed in the workplace and home, advances in the
performance and speed of personal computers and modems, improvements in network
infrastructure, easier and cheaper access to the Internet and increased
awareness of the Internet among consumer and trade customers.
The emergence of the Internet as a significant communications medium is
driving the development and adoption of Web content and commerce applications
that offer both convenience and value to consumers, as well as unique marketing
opportunities and reduced operating costs to businesses. A growing number of
consumer and trade customers have begun to conduct business on the Internet
including paying bills, booking airline tickets, trading securities and
purchasing consumer goods (e.g., personal computers, consumer electronics,
compact disks, books, groceries and vehicles). Moreover, online transactions
can be faster, less expensive and more convenient than transactions conducted
through a human intermediary.
The Company commenced operations in February 1996, incorporated in California
on November 22, 1996, and began selling products and services on its Web site
on July 11, 1997. The Company's executive offices are located at 2101 East
Coast Highway, Garden Level, Corona del Mar, California 92625 and the telephone
number is (714) 640-4393. The Company's Web site address is
http://www.shopping.com. Information contained on the Company's Web site or
online services does not constitute part of this Prospectus.
4
<PAGE>
RECENT DEVELOPMENTS
On August 19, 1997 Shopping.com signed an agreement with CitySearch, a market
innovator in providing community-based online information services for the Web,
to provide necessary back office transactions support for CitySearch's new
electronic commerce pilot program. According to the agreement, Shopping.com
will provide "shopping cart" tools, customer credit authentication and
verification, coordination with the merchant that an order has been placed,
communication with the customer when the order will be shipped, collection of
payment from the user and disbursement of payments to the merchant. CitySearch
plans to develop, manage, and monitor the electronic commerce program, select
customers for participation in the pilot program, as well as market the program
through its Austin CitySearch Web site. The pilot program will be launched in
early September and will run for a minimum of two months.
On September 15, 1997, Shopping.com signed an agreement with En Pointe
Technologies, Inc. ("En Pointe"), an electronic online provider of computer
hardware and software products, pursuant to which En Pointe granted
Shopping.com an unlimited world wide license for five years to use the En
Pointe's proprietary EPIC software in connection with the Company's Internet
shopping operations for a consideration of 125,000 shares of Common Stock
valued at $6.00 per share. The license has a five year renewal option. During
the term of the license, the Company will pay En Pointe an annual maintenance
and upgrade fee of $100,000. Further, En Pointe has agreed to provide
customization services to the EPIC software at additional cost to the Company.
En Pointe also loaned the Company $600,000. Such loan is evidenced by a
Promissory Note which is due on the earlier of nine months from its date of
issuance or on the closing of this offering. In connection with such loan, the
Company issued to En Pointe five-year warrants to purchase an aggregate of
199,800 shares of the Company's Common Stock at an exercise price of $4.50 per
share. See "Note 9 to the Company's Financial Statements."
5
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THE OFFERING
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<C> <S>
Common Stock Offered by the Company............. 1,300,000 shares(1)
Common Stock Outstanding after the Offering..... 4,002,000(1)(2)
Use of Proceeds................................. For (i) advertising and
marketing, (ii) repayment of
Promissory Notes, (iii)
general and administrative
expenses, (iv) capital
expenditures and systems
architecture development,
(v) personnel (recruiting,
hiring, training),
(vi) facilities, and (vii)
working capital and other
general corporate purposes.
Proposed Symbol................................. IBUY
</TABLE>
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(1)Does not include 195,000 shares subject to the Over-Allotment Option.
(2) Based on the number of shares outstanding as of September 19, 1997.
Includes the conversion of the Series A and Series B Preferred Stock into
1,286,500 shares of Common Stock. Does not include (i) 250,000 shares of
Common Stock reserved for issuance upon exercise of options outstanding or
available for future grant under the Plan; (ii) 1,226,000 shares of Common
Stock reserved for issuance upon exercise of the Company's warrants; and
(iii) up to 122,000 shares of Common Stock reserved for issuance upon
exercise of the Representative's Warrants.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
FOR YEAR SIX MONTHS QUARTERS ENDED
ENDED ENDED ------------------
JANUARY 31, JULY 31, APRIL 30, JULY 31,
1997 1997 1997 1997
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STATEMENTS OF OPERATIONS DATA:
Net sales............................. $ -- $ 56 $ -- $ 56
Cost of sales......................... -- 51 -- 51
Gross profit.......................... -- 5 -- 5
Operating expenses.................... 202 1,070 346 724
Loss from operations.................. (202) (1,065) (346) (719)
Other expenses........................ -- (7) -- (7)
Net loss.............................. $ (202) $(1,072) $ (346) $ (726)
Net loss per share.................... $(0.06) $ (0.31) $(0.10) $(0.21)
Weighted average shares outstanding... 3,405 3,405 3,405 3,405
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
-------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 289 $1,348 $ 9,569
Working capital (deficit)....................... (990) (731) 9,240
Total assets.................................... 1,443 3,566 11,787
Promissory Notes................................ 950 1,750 --
Long-term liabilities........................... 74 74 74
Total shareholders' equity (deficit)............ (26) 1,297 11,268
</TABLE>
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(1) Treats the issuance of an additional 193,167 shares of Series B Preferred
Stock, the issuance of an additional 133,000 shares of Common Stock and the
issuance of $800,000 in Promissory Notes in August and September 1997 as if
such issuances took place on July 31, 1997.
(2) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock
offered by the Company hereby at the initial public offering price of $9.00
per share after deducting the estimated underwriting discount and offering
expenses, and the receipt of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, investors
should carefully consider the following risk factors before making an
investment decision concerning the Common Stock. All statements, trend
analysis and other information contained in this Prospectus relative to
markets for the Company's products and trends in net sales, gross margin and
anticipated expense levels, as well as other statements including words such
as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other
similar expressions, constitute forward-looking statements. These forward-
looking statements are subject to business and economic risks, and the
Company's actual results of operations may differ materially from those
contained in such forward-looking statements.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES; ABILITY TO
CONTINUE AS A GOING CONCERN
The Company commenced operations in February 1996, was incorporated on
November 22, 1996 and began selling products on its Web site on July 11, 1997.
Accordingly, the Company has a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks, the Company must, among other things, obtain a customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology and transaction-processing systems, improve
its Web site, provide superior customer service and order fulfillment, respond
to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results
of operations.
Since inception, the Company has incurred significant losses, and as of July
31, 1997 had an accumulated deficit of approximately $1.3 million. The Company
believes that its success will depend in large part on its ability to (i)
obtain a brand name position, (ii) provide its customers with outstanding
value and a superior shopping experience through the extensive retail
background of its management team, (iii) achieve sufficient sales volume to
realize economies of scale, and (iv) successfully coordinate the fulfillment
of customer orders without the need to maintain expensive real estate
warehousing facilities and personnel. Accordingly, the Company intends to
invest heavily in marketing and promotion, site development and technology and
operating infrastructure development. The Company also intends to offer
attractive pricing programs, which will reduce its gross margins. Because the
Company has relatively low gross margins, achieving profitability depends upon
the Company's ability to generate and sustain substantially increased sales
levels. As a result, the Company believes that it will incur substantial
operating losses for the foreseeable future, and that the rate at which such
losses will be incurred will increase significantly from current levels.
The Company expects to use a portion of the net proceeds of this offering to
fund its operating losses. If such net proceeds, together with cash generated
by operations, are insufficient to fund future operating losses, the Company
may be required to raise additional funds. There can be no assurance that such
financing will be available, if at all, in amounts or on terms acceptable to
the Company. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company incurred a net loss of $201,697 and had negative cash flows from
operations during the year ended January 31, 1997, and had a shareholders'
deficit of $78,647 as of January 31, 1997. The Company's independent certified
public accountants have included an explanatory paragraph in their report
stating that these factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1 to the Financial Statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related Notes thereto and other
financial information included herein.
7
<PAGE>
IMPACT UPON FUTURE NET INCOME OR LOSS OF THE COMPANY BY CURRENT ACCOUNTING FOR
DEBT ISSUANCE COSTS
In September 1997, the Company issued a Promissory Note to En Pointe in the
amount of $600,000. In connection with this financing, the Company also issued
to En Pointe 199,800 warrants to purchase the Company's Common Stock for $4.50
per share. The Company has determined that additional financing expense of
$299,700 needs to be recognized in connection with the issuance of these
warrants. The $299,700 of additional financing cost is currently being
amortized over nine months, the term of the Promissory Note. However, upon
completion of the initial public offering, the $600,000 Promissory Note will
be repaid and the unamortized amount of the additional financing costs will be
charged to earnings as an extraordinary loss on debt extinguishment and will
significantly impact the net income or loss of the Company in the quarter in
which the initial public offering is completed.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to
accurately forecast its revenues. The Company's current and future expense
levels are based largely on its investment plans and estimates of future
revenues. Sales and operating results generally depend on the volume of,
timing of, and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures could
have an immediate adverse effect on the Company's business, prospects,
financial condition and results of operations. Further, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing, service or marketing decisions that could have a
material adverse effect on its business, prospects, financial condition and
results of operations. See "Business--Competition."
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include: (i) the Company's ability to obtain and
retain customers, attract new customers at a steady rate, maintain customer
satisfaction and establish consumer confidence in conducting transactions on
the Internet environment, (ii) the Company's ability to manage fulfillment
operations electronically and without warehouse facilities and to establish
competitive gross margins, (iii) the announcement or introduction of new Web
sites, services and products by the Company and its competitors, (iv) price
competition or higher vendor prices, (v) the level of use and consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (vii) the level of traffic on the
Company's Web site, (viii) technical difficulties, systems downtime or
Internet brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (x) delays in revenue recognition at the end of a fiscal
period as a result of shipping or logistical problems, (xi) the level of
merchandise returns experienced by the Company, (xii) governmental regulation,
(xiii) economic conditions specific to the Internet and online commerce, and
(xiv) general economic conditions.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of
Internet growth may be expected to decline during the summer. Further, sales
in the traditional retail industry are significantly higher in the quarter of
each year ending January 31 than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters, the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
8
<PAGE>
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its Web site. Accordingly, the satisfactory
performance, reliability and availability of the Company's Web site,
transaction-processing systems and network infrastructure are critical to the
Company's reputation and its ability to attract and retain customers, as well
as maintain adequate customer service levels. The Company's revenues depend on
the number of visitors who shop on its Web site and the volume of orders it
fulfills. Any system interruptions that result in the unavailability of the
Company's Web site or reduced order fulfillment performance would reduce the
volume of goods sold and the attractiveness of the Company's product and
service offerings. The Company may experience periodic system interruptions
from time to time. Any substantial increase in the volume of traffic on the
Company's Web site or the number of orders placed by customers will require
the Company to expand and upgrade further its technology, transaction-
processing systems and network infrastructure. There can be no assurance that
the Company will be able to accurately project the rate or timing of
increases, if any, in the use of its Web site or timely expand and upgrade its
systems and infrastructure to accommodate such increases.
The Company uses an internally developed system for its Web site, search
engine and substantially all aspects of transaction processing, including
order management, cash and credit card processing, purchasing, shipping,
accounting and financial systems. Any substantial disruptions or delays in any
of its systems would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See "Business--
Technology."
RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE
The Company's success, in particular its ability to successfully receive and
fulfill orders and provide high-quality customer service, largely depends on
the efficient and uninterrupted operation of its computer and communications
hardware systems. Substantially all of the Company's computer and
communications hardware is located at a single leased facility in Corona del
Mar, California. Although the Company has redundant and back-up systems onsite
and a disaster recovery plan, the Company's systems and operations may be
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. The
Company does not carry business interruption insurance sufficient to
compensate fully for any or all losses from any or all such occasions. Despite
the implementation of network security measures by the Company, including a
proprietary firewall, its servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence of any of the foregoing risks could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Business-- Facilities" and "--
Technology."
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM; LIMITED SENIOR MANAGEMENT
RESOURCES
The Company has rapidly and significantly expanded its operations, and
anticipates that further significant expansion will be required to address
potential growth in its customer base and market opportunities. This expansion
has placed, and is expected to continue to place, a significant strain on the
Company's management, operations and financial resources. From January 31,
1997 to July 31, 1997, the Company expanded from 4 to 44 employees,
respectively. The majority of the Company's senior management joined the
Company within the last several months, and some officers have no prior senior
management experience at public companies. The Company's new employees include
a number of key managerial, technical and operations personnel who have not
yet been fully integrated into the Company's operations and the Company
expects to add additional key personnel in the near future. To manage the
expected growth of its operations and personnel, the Company will be required
to improve existing, and implement new, transaction-processing, operational
and financial systems, procedures and controls, and to expand, train and
manage its already growing employee base. The Company may also be required to
expand its finance, administrative and operations staff. Further, the
Company's management will be required to maintain and expand its relationships
with various manufacturers, distributors,
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freight companies, other Web sites, other Internet Service Providers and other
third parties necessary to the Company's operations. There can be no assurance
that the Company's current and planned personnel, systems, procedures and
controls will be adequate to support the Company's future operations, that
management will be able to hire, train, retain, motivate and manage required
personnel or that the Company's management will be able to successfully
identify, manage and exploit existing and potential market opportunities. If
the Company is unable to manage growth effectively, its business, prospects,
financial condition and results and operations would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Employees."
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth
in the use of and interest in the Web, the Internet and other online services
is a recent phenomenon, and there can be no assurance that acceptance and use
will continue to develop or that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and other online services as a medium
of commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty and
there exist few proven services and products. The Company relies, and will
continue to rely, on consumers who have historically used traditional means of
commerce to purchase merchandise. For the Company to be successful, these
consumers must accept and utilize novel ways of conducting business and
exchanging information.
In addition, the Internet and other online services may not be accepted as a
viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the
extent that the Internet and other online services continue to experience
significant growth in the number of users, their frequency of use or an
increase in their bandwidth requirements, there can be no assurance that the
infrastructure for the Internet and other online services will be able to
support the demands placed upon them. In addition, the Internet or other
online services could lose their viability due to delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet or other online service activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet or other online services also could result in
slower response times and adversely affect usage of the Internet and other
online services generally and Shopping.com in particular. If use of the
Internet and other online services does not continue to grow or grows more
slowly than expected, if the infrastructure for the Internet and other online
services does not effectively support growth that may occur, or if the
Internet and other online services do not become a viable commercial
marketplace, the Company's business, prospects, financial condition and
results of operations would be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the Shopping.com online store.
The online commerce industry is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's
existing Web site and proprietary technology and systems obsolete. The
Company's future success will depend, in part, on its ability to license
leading technologies useful in its business, enhance its existing services,
develop new services and technologies that address the increasingly
sophisticated and varied needs of its prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of a Web site and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully use new technologies
effectively or adapt its Web site, proprietary technology and transaction-
processing systems to customer requirements or emerging industry standards. If
the Company is unable, for technical, legal, financial or other reasons, to
adapt in a timely manner in response to changing market
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conditions or customer requirements, its business, prospects, financial
condition and results of operations would be materially adversely affected.
See "Business--Technology."
The Company may be interacting with certain computer programs in connection
with credit card transactions 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." Problems are anticipated to arise for many of
these programs in the year 2000. While the Company has taken this problem into
account with respect to its own internal programs, other programs with which
the Company may interact may not have corrected this problem. Such problem
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operation.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel, particularly Robert J. McNulty, its President and Chief Executive
Officer, and Mark S. Winkler, its Chief Information and Technology Officer.
The Company's performance also depends on the Company's ability to retain and
motivate its other officers and key employees. The loss of the services of any
of its executive officers or other key employees could have a material adverse
effect on the Company's business, prospects, financial condition and results
of operations. The Company has recently entered into written employment
agreements with Mr. McNulty for five years and with Mr. Winkler for a period
ending May 20, 1998. Additionally, a $1,000,000 "key person" life insurance
policy on the life of Mr. McNulty has been issued to the Company. The
Company's future success depends on its ability to identify, attract, hire,
train, retain and motivate other highly skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to successfully attract, assimilate and retain
sufficiently qualified personnel. In particular, the Company may encounter
difficulties in attracting a sufficient number of qualified software
developers for its Web site and transaction-processing systems, and there can
be no assurance that the Company will be able to retain and attract such
developers. The failure to retain and attract the necessary technical,
managerial, editorial, merchandising, marketing and customer service personnel
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Business--Employees" and
"Management."
ONLINE COMMERCE SECURITY RISKS
A significant barrier to online commerce and communications is the need for
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card
numbers. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data. A party who is able to circumvent the
Company's security measures could misappropriate confidential information or
cause interruptions in the Company's operations. The Company may be required
to expend significant capital and other resources to protect against such
security breaches or to alleviate problems caused by such breaches. If any
such compromise of the Company's security were to occur, it could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Concerns over the security of transactions conducted on the Internet and
other online services as well as user's desires for privacy may also inhibit
the growth of the Internet and other online services generally, and the Web in
particular, especially as a means of conducting commercial transactions. The
activities of the Company and third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers and other
confidential information. Any such security breaches could damage the
Company's reputation and expose the Company to a risk of loss, litigation
and/or possible liability. There can be no assurance that the Company's
security measures will prevent security breaches or that failure to prevent
such security breaches will
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not have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Business--Technology."
Merchants on the Internet are subject to the risk of credit card fraud and
other types of theft and fraud perpetrated by hackers and on-line thieves.
Credit card companies may hold merchants fully responsible for any fraudulent
purchases made when the signature cannot be verified. Although credit card
companies and others are in the process of developing anti-theft and anti-
fraud protections, and while the Company itself is continually monitoring this
problem and developing internal controls, at the present time the risk from
such activities could have a material adverse effect on the Company's
business, prospects, financial condition and results of operation.
COMPETITION
The online commerce industry, particularly on the Internet, is new, rapidly
evolving and intensely competitive, which the Company expects to intensify in
the future. Barriers to entry are minimal, allowing current and new
competitors to launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies. These
competitors include: (i) various online vendors of other consumer and trade
products and services such as CUC International, Amazon.com., ONSALE, Peapod,
NetGrocer, iMALL, Internet Shopping Network, Micro Warehouse, CD Now, QVC and
Home Shopping Network, (ii) a number of indirect competitors that specialize
in online commerce or derive a substantial portion of their revenues from
online commerce, including America Online, Microsoft Network, Prodigy and
Compuserve, (iii) mail order catalogue operators such as Speigel, Lands End,
and Sharper Image, (iv) retail and warehouse/discount store operators such as
Wal-Mart, Home Depot, Target and Price/Costco, and (v) other international
retail or catalogue companies which may enter the online commerce industry.
Both Wal-Mart and Home Depot have announced their intention to devote
substantial resources to online commerce at discount prices, which if
successful, could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. However, the Company
believes that retail and warehouse/discount operators will be somewhat
restricted in their ability to lower prices by the need to protect their own
pricing strategy to avoid cannibalizing their store margins.
The Company believes that the principal competitive factors in its market
are price, speed of fulfillment brand name recognition, wide selection,
personalized services, ease of use, 24-hour accessibility, customer service,
convenience, reliability, quality of search engine tools, and quality of
editorial and other site content. Many of the Company's current and potential
competitors have longer operating histories, larger customer bases, greater
brand name recognition and significantly greater financial, marketing and
other resources than the Company. In addition, online retailers may be
acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Certain of the Company's
competitors may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss
of market share and a diminished franchise value. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors, and competitive pressures faced by the Company may have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to
changes in the competitive environment, the Company may, from time to time,
make certain pricing, service or marketing decisions or acquisitions that
could have a material adverse effect on its business, prospects, financial
condition and results of operations. New technologies and the expansion of
existing technologies may increase the competitive pressures on the Company.
In addition, companies that control access to transactions through network
access or Web browsers could promote the Company's competitors or charge the
Company a substantial fee for inclusion. See "Business--Competition."
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RELIANCE ON CERTAIN SUPPLIERS AND SHIPPERS
Unlike retail and warehouse/discount store operators and certain online
commerce providers, the Company, as a wholetailer, carries no inventory, has
no warehouse employees or facilities, and relies on rapid fulfillment from its
vendors. The Company has no long-term contracts or arrangements with any of
its vendors or shippers that guarantee the availability of merchandise, the
continuation of particular payment terms, the extension of credit limits or
shipping schedules. There can be no assurance that the Company's current
vendors will continue to sell merchandise to, or that shippers will be able to
provide delivery service for, the Company on current terms or that the Company
will be able to establish new, or extend current, vendor and shipper
relationships to insure acquisition and delivery of merchandise in a timely
and efficient manner and on acceptable commercial terms. If the Company were
unable to develop and maintain relationships with vendors and shippers that
would allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, or in the event of labor disputes or natural catastrophes,
its business, prospects, financial condition and results of operations would
be materially adversely affected. See "Business--Customer Service and Order
Fulfillment."
AVAILABILITY OF MERCHANDISE; VENDOR CREDIT FOR THE COMPANY
Although the Company's merchandising division maintains past relationships
with vendors which it believes will offer competitive sources of supply, and
believes that other sources are available for most merchandise it will sell or
may sell in the future, there can be no assurance that Shopping.com will be
able to obtain the quantity or brand quality of items that management believes
are optimum. The unavailability of certain product lines could adversely
impact the Company's operating results. Given its lack of operating history,
certain vendors of products sold by the Company may not be prepared to advance
normal levels of credit to the Company. An unwillingness to extend credit may
increase the amounts of capital required to finance the Company's operations
and reduce returns, if any, on invested capital.
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS
The Company may choose to expand its operations by developing new Web sites,
promoting new or complementary products or sales formats, expanding the
breadth and depth of products and services offered or expanding its market
presence through relationships with third parties. Although it has no present
understandings, commitments or agreements with respect to any material
acquisitions or investments, the Company may pursue the acquisition of new or
complementary businesses, products or technologies. There can be no assurance
that the Company would be able to expand its efforts and operations in a cost-
effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site launched by the
Company that is not favorably received by consumer or trade customers could
damage the Company's reputation or the Shopping.com brand name. Expansion of
the Company's operations in this manner would also require significant
additional expenses and development, operations and editorial resources and
would strain the Company's management, financial and operational resources.
The lack of market acceptance of such efforts or the Company's inability to
generate satisfactory revenues from such expanded services or products could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its Shopping.com brand name and related technology as
proprietary and relies primarily on a combination of copyright, trademark,
trade secret and confidential information laws as well as employee and third-
party non-disclosure agreements and other methods to protect its proprietary
rights. There can be no assurance that these protections will be adequate to
protect against technologies that are substantially equivalent or superior to
the Company's technologies. The Company does not currently hold any patents or
have any patent applications pending for itself or its products and has not
obtained Federal registration for any of its trademarks. The Company enters
into non-disclosure and invention assignment agreements with certain of its
employees and also enters into non-disclosure agreements with certain of its
consultants and subcontractors. However, there can be no assurance that such
measures will protect the Company's proprietary technology, or
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that its competitors will not develop software with features based upon, or
otherwise similar to, the Company's software or that the Company will be able
to prevent competitors from developing similar software.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. The Company
has been displaying its Web site on the Internet without receiving claims from
third parties that its products or names infringe on any proprietary rights of
other parties. However, the Company is a recent entrant in the sale of
merchandise on the Internet, and there can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products, trademarks or other Company works. Such
assertion may require the Company to enter into royalty arrangements or result
in costly litigation. The Company is also dependent upon obtaining additional
technology related to its operations. To the extent new technological
developments are unavailable to the Company on terms acceptable to it, or at
all, the Company may be unable to continue to implement its business and any
such inability would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. See "Business--
Intellectual Property."
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet
and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services.
Furthermore, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations may decrease the growth of the Internet
or other online services, which could, in turn, decrease the demand for the
Company's products and services and increase the Company's cost of doing
business, or otherwise have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet and other online services of existing laws
in various jurisdictions governing issues such as property ownership, sales
and other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Permits or licenses may be required from federal, state or local government
authorities to operate or to sell certain products on the Internet. No
assurances can be made that such permits or licenses will be obtainable. The
Company may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all
or specific countries throughout the world. No assurances can be made that the
Company will be able to comply with such legislation or statutes. See
"Business--Governmental Regulation."
SALES AND OTHER TAXES
The Company does not currently collect sales or other similar taxes with
respect to shipments of goods to consumers into states other than California.
However, one or more states may seek to impose sales tax collection
obligations on out-of-state companies such as the Company which engage in
online commerce. In addition, any new operation in states outside California
could subject shipments into such states to state sales taxes under current or
future laws. A successful assertion by one or more states or any foreign
country that the Company should collect sales or other taxes on the sale of
merchandise could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
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CONTROL OF COMPANY
Following this offering, the current officers and directors of the Company
and their affiliates will beneficially own or have voting control over
approximately 47.48% of the outstanding shares of Common Stock. Accordingly,
these individuals will have the ability to influence the election of the
Company's Board of Directors and effectively to control corporate decisions.
This concentration of ownership may also have the effect of delaying,
deterring or preventing a change in control of the Company. See "Principal
Shareholders."
CONTINUING PUBLICITY
The Company may receive a high degree of media coverage, including coverage
that is not directly attributable to statements by the Company's officers and
employees. Neither the Company, nor any of the Underwriters, have confirmed,
endorsed or adopted any statement for utilization by, or distribution to,
prospective purchasers in this offering. To the extent any statements in any
article, publication or other media report are inconsistent with, or conflict
with, the information contained in this Prospectus, or relate to information
not contained in this Prospectus, they are disclaimed by the Company and the
Underwriters. Accordingly, prospective investors should not rely on the
statements, or any other information not contained in this Prospectus.
POSSIBLE NEED FOR ADDITIONAL CAPITAL; ALLOCATION OF FUNDS
The Company believes, based on currently-proposed plans and assumptions
relating to its operations, that the net proceeds from this offering, together
with existing capital and anticipated funds from operations, should be
sufficient to sustain current operations and finance planned expansion for at
least 15 months after consummation of this offering. However, in the event
that the Company's plans change or its assumptions and estimates change or
prove to be inaccurate, the Company could be required to seek additional
financing in order to sustain operations or achieve planned expansion. There
can be no assurance that such additional funds will be available or that, if
available, such additional funds will be on terms acceptable to the Company.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BROAD DISCRETION OF APPLICATION OF PROCEEDS OF OFFERING
A substantial portion of the proceeds from this offering will be used for
general working capital. Management will have broad discretion as to the use
of such proceeds and management reserves the right to reallocate all proceeds
from this offering to working capital. See "Use of Proceeds."
NO ASSURANCE OF PUBLIC MARKET FOR THE COMMON STOCK; NO ASSURANCE OF NASDAQ
LISTING.
Prior to this offering, there was no public market for the Common Stock, and
there can be no assurance that such market will develop or, if developed, will
be sustained after completion of this offering. While the Representative has
informed the Company that it will endeavor to make a market in the Common
Stock, there can be no assurance that a trading market will develop or be
sustained or that the Common Stock offered hereby will be saleable at or near
the public offering price. In the event the Representative, for any reason,
ceases making a market in the Company's Common Stock, the trading market in
the Company's Common Stock will likely be materially adversely affected. See
"Underwriting." The Company's Common Stock is not presently included for
trading on the NASDAQ system, and there can be no assurances that the Company
will ultimately qualify for inclusion within that system. In order for an
issuer to be included in the NASDAQ system, it is required, among other
things, to have total tangible assets of at least $4,000,000 or a market
capitalization of $50 million, a minimum price per share of not less than
$4.00, have publicly-held shares with a market value of at least $5,000,000 as
well as certain other criteria. In addition to quantitative standards, the
staff of NASDAQ may also consider other factors including but not limited to
the nature and scope of a Company's operations in conjunction with any and all
conditions and/or circumstances surrounding an entity's operations. The
Company's initial application for inclusion in the NASDAQ system has been
withdrawn, although the application was being considered for denial, based
primarily upon the Company's President and Chief Executive Officer consenting,
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without admitting or denying the allegations of a complaint, to a final decree
in U.S. District Court on October 10, 1995, enjoining him from violating
certain provisions of the federal securities laws. See "Certain Transactions--
Previous Legal Proceedings." The Company does not agree with the concerns of
the staff of the NASDAQ SmallCap Market and intends to pursue obtaining
quotation of its Common Stock on the NASDAQ SmallCap Market, including filing
an appeal and attending a hearing if necessary. See "Description of
Securities--Certain Market Information." No assurance can be given that the
Common Stock of the Company will ever qualify for inclusion on the NASDAQ
system. Until the Company's shares of Common Stock qualify for inclusion in
the NASDAQ system, the Company's shares of Common Stock may be traded in the
over-the-counter markets through "pink" sheets or on the Bulletin Board. As a
result, an investor may find it more difficult to dispose of, or to obtain
adequate quotations as to the price of, the Common Stock offered hereby.
While the Company believes that eventually the Common Stock will be included
for quotation on NASDAQ, no assurance can be given that the Common Stock ever
will be so quoted, and even if quoted that an active and liquid trading market
for the Common Stock will develop or, if developed, will be sustained.
Moreover, no assurance can be given that the Company will meet the criteria
for maintaining a listing on NASDAQ. Currently, the NASDAQ maintenance
criteria will require the Company to have, among other things: (i) two
registered and active market makers, (ii) total tangible assets of at least $2
million or a market capitalization of $35 million, (iii) minimum bid price per
share of $1, (iv) a market value of public float of $4 million, (v) 300
stockholders, and (vi) 500,000 shares held by non-insiders. If the Company is
unable to satisfy NASDAQ's maintenance requirements, the Company's securities
may be removed from the NASDAQ System. In such event, trading, if any, in the
shares of Common Stock would thereafter be conducted in the over-the-counter
markets in the so-called "pink" sheets or the Bulletin Board. Consequently,
the liquidity of the Company's Common Stock could be significantly impaired,
not only in the number of shares of Common Stock which could be bought and
sold, but also through delays in the timing of transactions, reductions in
securities analysts' and the news media's coverage of the Company, and lower
prices for the Company's shares of Common Stock than might otherwise result.
ARBITRARY OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE
The initial public offering price has been determined by negotiations
between the Company and the Representative, and may not be indicative of the
market price of the Common Stock after this offering. The trading price of the
Common Stock could also be subject to significant fluctuation in response to
variations in quarterly results of operations, announcements of technological
innovations or new products by the Company or its competitors, developments or
disputes with respect to proprietary rights, general trends in the industry
and overall market conditions and other factors. The market for securities of
early-stage, small-market capitalization companies has been highly volatile in
recent years, often as a result of factors unrelated to a Company's
operations. In addition, the stock market in general, and the Bulletin Board,
Nasdaq National and SmallCap Markets and the market for Internet-related and
high technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many high
technology companies' stocks are at or near historical highs and reflect price
earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price earnings ratios will be
sustained. These broad market and industry factors may materially and
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against such company. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, 4,002,000 shares of Common Stock will be
issued and outstanding, assuming no exercise of (i) the Over-Allotment Option,
(ii) 250,000 options available for grant pursuant to the Plan, (iii) warrants
to purchase 1,226,000 shares of Common Stock, or (iv) the Representative's
Warrants. The 2,702,000 shares of Common Stock issued by the Company prior to
this offering, including 1,286,500 shares of
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Common Stock issued on the conversion of the Series A and Series B Preferred
Stock, will be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act, and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144. Each officer, director or key
employee of the Company, each shareholder of the Common Stock, and each holder
of the warrants issued on the sale of the Preferred Stock and the Promissory
Notes has entered into a "lock-up" agreement providing that such shareholder
will not offer, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of the Company's
Common Stock or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for shares of the Company's
Common Stock for a period of 12 months after the date of this Prospectus
without the prior written consent of the Representative.
Sales of substantial amounts of shares in the public market following the
expiration of the lock-up agreement or restrictions imposed by Rule 144, or
the prospect of such sales, could adversely affect the market price of the
Common Stock. The Company has also entered into registration rights agreements
with certain shareholders. See "Certain Transactions" and "Description of
Securities--Registration Rights."
EXERCISE OF WARRANTS AND OPTIONS
To the extent that the Representative's Warrants, any options granted under
the Plan, or any other warrants or options are exercised, the ownership
interests of the Company's shareholders may be diluted proportionately. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--Employee Benefit Plans" and "Underwriting."
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Preferred or
Common Stock and anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of the Company's
business. See "Dividend Policy."
DILUTION
After giving effect to the sale of 1,300,000 shares of Common Stock offered
by the Company hereby at the initial public offering price of $9.00 per share,
the issuance of an additional 193,167 shares of Series B Preferred Stock and
133,000 shares of Common Stock subsequent to July 31, 1997 and the receipt of
the estimated net proceeds therefrom, and the conversion of the Series A and
Series B Preferred Stock and the issuance of 1,286,500 shares of Common Stock
upon conversion thereof, the Company's existing shareholders will experience
an immediate increase in net tangible book value of $2.43 per share and
purchasers of Common Stock in this offering will experience immediate dilution
in net tangible book value of $6.37 per share or approximately 70.8% of their
investment. See "Dilution."
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Articles of Incorporation, By-Laws and Indemnification
Agreements substantially limit the liability of the Company's directors to the
Company and its shareholders for breach of fiduciary and other duties to the
Company. See "Management--Limitation of Liability and Indemnification
Matters."
RISKS RELATED TO REPRESENTATIVE'S AGREEMENTS WITH THE COMPANY
The Company has agreed to appoint Waldron & Co., Inc. as Representative of
the several underwriters in this offering. In connection with such engagement,
the Company has agreed to appoint the Representative, for a period of three
years, as its exclusive advisor for the purpose of identifying and developing
future merger and acquisition candidates. If, during the term of this
appointment, the Company participates in any merger, acquisition or other
transaction, whether as acquiror or acquiree, including acquisitions of assets
or stock and in
17
<PAGE>
which it pays for the acquisition, in whole or in part, with shares of the
Company's Common Stock, then it will be obligated to pay the Representative a
fee for such services which will vary depending upon the size of the
transaction. In addition, the Representative will have the right for a period
of three years following the date of this Prospectus to receive notice of, and
to have an observer present at, meetings of the Board of Directors and
shareholders of the Company, and the Company is obligated to reimburse the
Representative for the costs and expenses reasonably incurred by such observer
in attending such meetings. See "Underwriting."
LACK OF EXPERIENCE OF WALDRON & CO., INC.
While Waldron & Co., Inc. has been in the investment banking business and a
registered NASD member since 1939, it has only recently participated as a
managing underwriter in its first public offering of securities. Prospective
purchasers of shares of Common Stock in this offering should consider the lack
of experience of Waldron & Co., Inc. in evaluating an investment in the
Company. See "Underwriting."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
It is anticipated that a significant number of the shares of Common Stock
being offered hereby will be sold to clients of the Representative. Although
the Representative has advised the Company that it currently intends to make a
market in the Common Stock following this offering, it has no legal
obligation, contractual or otherwise, to do so. The Representative, if it
becomes a market maker, could be a dominating influence in the market for the
Common Stock, if one develops. The prices and the liquidity of the Common
Stock may be significantly affected by the degree, if any, of the
Representative's participation in such market. There can be no assurance that
any market activities of the Representative, if commenced, will be continued.
RISK OF LOW-PRICE STOCKS
Since the Company's securities have not been included for quotation on the
Nasdaq SmallCap Market, they could become subject to Rule 15g-9 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
imposes additional sales practice requirements on broker-dealers which sell
such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses).
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of purchasers in the offering
to sell any of the securities acquired hereby in the secondary market.
Securities and Exchange Commission (the "Commission") regulations define a
"penny stock" to be any non-Nasdaq equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to
be made about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are included on the Nasdaq SmallCap
Market and have certain price and volume information provided on a current and
continuing basis or meet certain public float minimum net tangible assets and
revenue criteria. There can be no assurance that the Company's securities will
qualify for exemption from these restrictions. In any event, even if the
Company's securities were exempt from such restrictions, it would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the Commission
the authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the
18
<PAGE>
public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
FORWARD-LOOKING STATEMENTS
When used in this Prospectus and the documents incorporated herein by
reference, the words "plan," "estimate," "anticipate," "believe," "intend,"
"expect" and other similar expressions are intended to identify in certain
circumstances, forward-looking statements. Such statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those projected, including the risks described in this "Risk
Factors" section. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such statements. The Company
undertakes no obligation to update these forward-looking statements.
The forward-looking statements, which appear in this Prospectus, are based
on the following underlying assumptions. These, in turn, are based upon facts
which management has assumed and amounts it has estimated. All of these are
believed by management to be reasonable based on their current understanding
and best judgment. Notwithstanding this belief, there can be no assurance that
these are either correct under current facts or that the facts upon which
these assumptions are founded will not change. The accuracy of these forward-
looking statements is therefore dependent upon the factors upon which they are
based. Given the subjective nature of those assumptions, each prospective
investor should carefully review each of the underlying assumptions and apply
his own judgment regarding each of those assumptions.
Each prospective investor should further understand that these forward-
looking statements are necessarily based on the limited knowledge currently
available to everyone concerned. Given the fact that many of the assumptions
in this Prospectus will vary from what will actually occur, the prospective
investor should treat the forward looking statements only as illustrations
based upon the assumptions made, and not as the operating results of the
Company as they will probably occur. Among such assumptions are the following:
Products. It is anticipated that the management team of Shopping.com will
use their contacts from previous business dealings with vendors with whom they
have had a previous working relationship, to secure its initial product base.
It is also anticipated that with presentations to additional vendors, the
Company will be able to demonstrate the opportunities for the vendors to
conduct business with the Company on the Internet. Additional vendors will be
contacted by Shopping.com's marketing/merchandising division with a formal
demonstration of the sales, operating procedures and rewards from being a
major value added reseller on the Internet. It is assumed that from these
demonstrations, a sufficient interest and understanding will be obtained which
will produce and establish additional vendor representation by the Company on
its Web site.
Market Penetration. The Company believes that it can secure a substantial
share of the mass merchandise business currently being generated on the
Internet. Because of the experience and retail background of the Company's
officers and the technical team organized, the Company believes that it will
have generated a substantial lead over any other mass merchandiser planning to
conduct business on the Internet.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock offered hereby, at the initial public offering price of $9.00 per
share, are estimated to be approximately $10.0 million (approximately
$11.5 million if the Underwriters' Over-Allotment Option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The Company intends to utilize the net proceeds from the Offering
approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR PERCENTAGE OF
AMOUNT NET PROCEEDS
----------- -------------
<S> <C> <C>
Advertising and marketing......................... $ 4,000,000 40.0%
Repayment of Promissory Notes(1).................. 1,750,000 17.5%
General and administrative expenses............... 2,200,000 22.0%
Capital expenditures and systems architecture
development...................................... 700,000 7.0%
Personnel (recruiting, hiring, training and other
associated costs)................................ 200,000 2.0%
Facilities (rent, capital improvements)........... 100,000 1.0%
Working capital and other general corporate
purposes......................................... 1,050,000 10.5%
----------- -----
TOTAL........................................... $10,000,000 100.0%
=========== =====
</TABLE>
- --------
(1) The interest rate on Company's said Promissory Notes is 10% per annum.
Such Promissory Notes mature commencing on March 25, 1998 through June 30,
1998 or the closing of this offering, if earlier. The net proceeds raised
by the Company were used for working capital.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the offering, based on the expected utilization of funds
necessary to finance the Company's existing activities in accordance with
management's current objectives and market conditions. The amounts actually
expended by the Company for each purpose will vary significantly depending on
a number of factors, such as the amount of cash used or generated by the
Company's operations and management's assessment of the Company's specific
needs. The Company may also use a portion of the net proceeds of this offering
to acquire new technologies, businesses or vendors which will result in a
reallocation of the estimated amounts set forth in the table above (which
reallocation may be substantial). While the Company from time to time may
evaluate such potential acquisitions, the Company has no present agreements or
commitments with respect to any such possible acquisition, nor are any
negotiations regarding any such possible acquisitions currently ongoing.
Pending such uses, the Company intends to invest the net proceeds of the
offering in short-term investment grade, interest bearing obligations. See
"Risk Factors--Limited Operating History; Accumulated Deficit; Anticipated
Losses; Ability to Continue as a Going Concern," "--Possible Need for
Additional Capital; Allocation of Funds," "--Broad Discretion of Application
of Proceeds of Offering," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Preferred or
Common Stock and does not expect to declare or pay dividends for the
foreseeable future. The Company currently intends to retain future earnings,
if any, to finance the development and operation of its business. Any future
declarations and payments of dividends shall be at the sole discretion of the
Company's Board of Directors. Payment of dividends on the Common Stock would
be subject to the prior payment of all accrued and unpaid dividends on any
shares of Preferred Stock the Company may issue in the future in its sole
discretion. See "Risk Factors--Dividend Policy" and "Description of
Securities."
20
<PAGE>
CAPITALIZATION
The following table sets forth at July 31, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company giving effect to the issuance, after July 31, 1997, of an additional
193,167 shares of Series B Preferred Stock at $3.00 per share, the issuance of
an additional 133,000 shares of Common Stock for software licensing rights and
consulting services valued at $6.00 per share, and the issuance of an
additional $800,000 in Promissory Notes after July 31, 1997. Further, the pro
forma capitalization of the Company gives effect to the conversion of the
Series A and Series B Preferred Stock into 1,286,500 shares of Common Stock
upon the closing of this offering and gives effect to the reverse stock split
of one share of common stock for two shares of existing common stock,
effective upon the closing of this offering, and (iii) the pro forma
capitalization as adjusted to reflect the issuance and sale of 1,300,000
shares of Common Stock offered by the Company at the initial public offering
price of $9.00 per share, less estimated underwriting discounts and
commissions and offering expenses, payable by the Company, and the application
of the estimated net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
-----------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Promissory Notes................................ $ 950 $ 1,750 $ --
Shareholders' equity:(1)
Series A Preferred Stock, no par value
(1,500,000 shares authorized; 750,000 issued
and outstanding actual; 0 shares issued and
outstanding Pro Forma; and 0 shares issued and
outstanding Pro Forma As Adjusted.............. 300 -- --
Series B Preferred Stock, no par value
(4,000,000 shares authorized; 343,333 shares
issued and outstanding actual; 0 shares issued
and outstanding Pro Forma; and 0 shares issued
and outstanding Pro Forma As Adjusted)......... 916 -- --
Common Stock, no par value
(8,000,000 shares authorized; 1,282,500 shares
issued and outstanding actual; 2,702,000 shares
issued and outstanding Pro Forma; 4,002,000
shares issued and outstanding Pro Forma As
Adjusted....................................... 31 2,618 12,889
Deficit accumulated during development stage.... (1,273) (1,321) (1,621)
Total Shareholders' equity (deficit).......... (26) 1,297 11,268
------- ------- --------
Total capitalization........................ $ 924 $ 3,047 $ 11,268
======= ======= ========
</TABLE>
- --------
(1) Excludes (i) 195,000 shares of Common Stock reserved for issuance subject
to the Over-Allotment Option plan; (ii) 250,000 shares of Common Stock
reserved for issuance upon exercise of options outstanding or available
for future grant under the Plan; (iii) 1,226,000 shares of Common Stock
reserved for issuance on exercise of outstanding warrants; and (iv)
122,000 shares of Common Stock reserved for issuance upon exercise of the
Representative's Warrants.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of July 31, 1997,
after giving effect to the issuance of an additional 193,167 shares of Series
B Preferred Stock and 133,000 shares of Common Stock subsequent to July 31,
1997 and the conversion of the Series A and B Preferred Stock, was $547,421 or
approximately $0.20 per share of Common Stock. Pro forma net tangible book
value per share of Common Stock is equal to the Company's total pro forma
tangible assets less total liabilities, divided by the total number of shares
of Common Stock outstanding assuming the conversion of the Series A and B
Preferred Stock. After giving effect to the sale of the 1,300,000 shares of
Common Stock offered by the Company hereby at the initial public offering
price of $9.00 per share, after deducting the estimated underwriting discounts
and commissions and offering expenses payable by the Company, the pro forma as
adjusted net tangible book value of the Company at such date would have been
approximately $10,518,421 or approximately $2.63 per share. This represents an
immediate increase in tangible book value of $2.43 per share to existing
shareholders and an immediate dilution of $6.37 per share to new purchasers of
shares in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $9.00
Pro forma net tangible book value per share of Common Stock
before the Offering.......................................... $0.20
Increase per share attributable to new investors.............. 2.43
-----
Pro forma as adjusted net tangible book value per share of
Common Stock after the Offering................................ 2.63
-----
Dilution per share to new investors............................. $6.37
=====
</TABLE>
The following table summarizes as of July 31, 1997, on a pro forma adjusted
basis after giving effect to the conversion of the Series A and B Preferred
Stock and the Offering, the difference between existing shareholders and new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total cash or other consideration paid to the Company, and
the average price per share paid by existing shareholders and by the
purchasers of the shares offered by the Company hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders........ 2,702,000 67.5% $ 2,738,550 19.0% $1.01
New Investors................ 1,300,000 32.5 11,700,000 81.0 9.00
--------- ----- ----------- -----
Total...................... 4,002,000 100.0% $14,438,550 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of (i) 195,000 shares of Common
Stock reserved for issuance subject to the Over-Allotment Option; (ii) 250,000
shares of Common Stock reserved for issuance upon exercise of options
outstanding or available for future grant under the Plan; (iii) 1,226,000
shares of Common Stock reserved for issuance on exercise of outstanding
warrants and (iv) 122,000 shares of Common Stock reserved for issuance upon
exercise of the Representative's Warrants.
22
<PAGE>
SELECTED FINANCIAL DATA
The data set forth below is qualified by reference to, and should be read in
conjunction with, the Financial Statements of the Company and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The following
selected financial data of the Company for the fiscal year ended January 31,
1997 are derived from the financial statements of the Company audited by
Singer Lewak Greenbaum & Goldstein LLP, independent certified public
accountants. The balance sheet at January 31, 1997 and the related statements
of operations, shareholders' equity (deficit) and cash flows for the fiscal
year ended January 31, 1997 and notes thereto are included elsewhere in this
Prospectus. The selected financial data as of July 31, 1997, and for the six-
month period ended July 31, 1997 have been derived from the Company's
unaudited financial statements which, in the opinion of management, reflect
all adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the results of operations for such periods. The results of the
interim periods are not necessarily indicative of the results of a full year.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS QUARTERS ENDED
YEAR ENDED ENDED ------------------
JANUARY 31, JULY 31, APRIL 30, JULY 31,
1997 1997 1997 1997
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................. $ -- $ 56 $ -- $ 56
Cost of sales......................... -- 51 -- 51
------ ------- ------ ------
Gross profit.......................... -- 5 -- 5
Operating expenses:
Advertising and marketing........... -- 12 -- 12
Product development................. 83 265 57 208
General and administrative.......... 119 793 289 504
------ ------- ------ ------
Total operating expenses.......... 202 1,070 346 724
------ ------- ------ ------
Loss from operations.................. (202) (1,065) (346) (719)
Other expenses........................ -- (7) -- (7)
------ ------- ------ ------
Net loss.............................. $ (202) $(1,072) $ (346) $ (726)
====== ======= ====== ======
Net loss per share.................... $(0.06) $ (0.31) $(0.10) $(0.21)
====== ======= ====== ======
Weighted average shares outstanding... 3,405 3,405 3,405 3,405
====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
--------------------------------
AS PRO
FORMA
ACTUAL PRO FORMA(1) ADJUSTED(2)
------ ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 289 $1,348 $ 9,569
Working capital (deficit)...................... (990) (731) 9,240
Total assets................................... 1,443 3,566 11,787
Promissory Notes............................... 950 1,750 --
Long-term liabilities.......................... 74 74 74
Total shareholders' equity (deficit)........... (26) 1,297 11,268
</TABLE>
- --------
(1) Treats the issuance of an additional 193,167 shares of Series B Preferred
Stock, the issuance of an additional 133,000 shares of Common Stock and
the issuance of $800,000 in Promissory Notes in August and September 1997
as if such issuances took place on July 31, 1997.
(2) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock
offered hereby by the Company at the initial public offering price of
$9.00 per share after deducting the estimated underwriting discount and
offering expenses, and the receipt of the net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes thereto appearing elsewhere herein.
OVERVIEW
Shopping.com began operations in February 1996, was incorporated on November
22, 1996 and commenced selling on the Internet on July 11, 1997. The Company
is an innovative Internet-based electronic wholetailer specializing in retail
marketing a broad range of products and services at wholesale prices to both
consumer and trade customers. Utilizing proprietary technology, the Company
has designed a fully-scalable systems architecture for the Internet shopping
marketplace.
The Company has assembled an experienced management team to design, develop
and implement the Company's strategic business plan. This group combines the
experiences of:
. Executives with extensive background in both retail and
warehouse/discount store formats.
. Executives who have experience in computer and information systems
design and development.
. Directors with entrepreneurial skills who currently oversee and manage
their own existing companies.
The Company has only recently begun generating sales, thus making an
evaluation of the Company and its prospects difficult to calculate. The
Company anticipates that sales from the Company's Web site will constitute
substantially all of the Company's sales. Over the next twelve months, the
Company intends to increase its revenues by pursuing an aggressive advertising
and marketing campaign aimed at attracting customers to shop on its Web Site
and to co-brand with other commercial partners which will help increase the
Company's brand name recognition as well as increase traffic on the Company's
Web Site. The Company believes, based on currently proposed plans and
assumptions relating to its operations, that the net proceeds from this
offering, together with existing capital and anticipated funds from
operations, should be sufficient to sustain current operations and finance
planned expansion for at least 15 months after consummation of this offering.
However, in the event that the Company's plans change or its assumptions and
estimates change or prove to be inaccurate, the Company could be required to
seek additional financing in order to sustain operations or achieve planned
expansion. There can be no assurance that such additional funds will be
available or that, if available, such additional funds will be on terms
acceptable to the Company. See "Risk Factors--Possible Need for Additional
Capital; Allocation of Funds" and "Use of Proceeds."
Since the Company anticipates that its operations will incur significant
operating losses for the foreseeable future, the Company believes that its
success will depend upon its ability to obtain sales on its Web site, which
cannot be assured. The Company's ability to generate sales is subject to
substantial uncertainty. The Company's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as online commerce. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business model and the
management of growth. To address these risks, the Company must, among other
things, obtain a customer base, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, improve its Web site, provide
superior customer service and order fulfillment, respond to competitive
developments, and attract, retain and motivate qualified personnel. There can
be no assurance that the Company will be successful in addressing such risks,
and the failure to do so could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Additionally, the Company's lack of an operating history makes predictions of
future operating results difficult to ascertain. Accordingly, there can be no
assurance that the Company will be able to generate sales, or that the Company
will be able to achieve or maintain profitability. Since inception, the
24
<PAGE>
Company has incurred significant losses and, as of July 31, 1997, had an
accumulated deficit of approximately $1.3 million. Upon completion of this
offering, the Company intends to substantially increase its operating expenses
in order to, among other things, fund increased advertising and marketing
efforts, expand and improve its Internet operations and user support
capabilities, and develop new Internet content and applications. The Company
expects to continue to incur significant operating losses on a quarterly and
annual basis for the foreseeable future. To the extent such increases in
operating expenses are not offset by revenues, the Company will incur greater
losses than anticipated. See "Risk Factors--Limited Operating History;
Accumulated Deficit; Anticipated Losses; Ability to Continue as a Going
Concern" and "Use or Proceeds."
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors many of which are outside of the Company's
control. Factors that may adversely affect the Company's quarterly operating
results include: (i) the Company's ability to obtain and retain customers,
attract new customers at a steady rate, maintain customer satisfaction and to
establish consumer confidence in conducting transactions on the Internet
environment, (ii) the Company's ability to manage fulfillment operations
electronically and without warehouse facilities and establish competitive
gross margins, (iii) the announcement or introduction of new Web sites,
services and products by the Company and its competitors, (iv) price
competition or higher vendor prices, (v) the level of use and consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (vii) the level of traffic on the
Company's Web site, (viii) technical difficulties, systems downtime or
Internet brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (x) delays in revenue recognition at the end of a fiscal
period as a result of shipping or logistical problems, (xi) the level of
merchandise returns experienced by the Company, (xii) governmental regulation,
(xiii) economic conditions specific to the Internet and online commerce, (xiv)
the risk associated with the year 2000 in connection with computer programs
with which the Company may interact that read only the last two digits of an
annual date, (xv) the risk of credit card fraud and other types of fraud and
theft which may be perpetrated by computer hackers and on-line thieves, and
(xvi) general economic conditions. In seeking to effectively implement its
business plan, the Company may elect, from time to time, to make certain
marketing or acquisition decisions that could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. The Company believes that period-to-period comparisons of its
results of operations are not meaningful and should not be relied upon for an
indication of future performance. Due to all of the foregoing factors, it is
likely that in some future quarters, the Company's results of operations may
be below the expectations of securities analysts and shareholders. In such
event, the price of the Company's Common Stock could be materially adversely
affected. See "Risk Factors-- Unpredictability of Future Revenues; Potential
Fluctuations in Quarterly Operating Results; Seasonality."
RESULTS OF OPERATIONS
The following is a discussion of the results of operations from the date of
inception through July 31, 1997. The Company is not providing any comparisons
of its results of operations because the Company was in an early stage of
development, and such comparisons would not be meaningful.
Net Sales
Although the Company commenced operations in February 1996, it did not begin
selling products and services on its Web site until July 11, 1997 prior to
which time it was still in the process of evaluating the technical features of
its Web site. From the date of inception through July 31, 1997, the Company
has generated limited sales. The Company records sales at the time products
are shipped to customers which includes the retail sales price of the product
and any shipping and handling charges billed to its customers. The Company
estimates its sales return and allowance at the end of each reporting period
based on historical amounts of product returns. The sole source of funds for
the Company from the date of inception through July 31, 1997, other than the
sale of equity and debt securities, has been from sales of products in the
amount of $55,541. See "Risk Factors--Limited Operating History; Accumulated
Deficit; Anticipated Losses; Ability to Continue as a Going Concern."
25
<PAGE>
Cost of Sales
Cost of sales include the actual cost the Company pays its vendors for the
products and the actual shipping and handling charges incurred by the Company
to ship products to its customers. The cost of sales from the date of
inception through July 31, 1997 was $50,509, or approximately 90.9% of net
sales. The Company's gross profit margin was approximately 9.1% of net sales
from the date of inception through July 31, 1997. The failure to generate
sales with sufficient margins to cover its operating expenses will result in
losses and could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Advertising and Marketing Expenses
Advertising and marketing expenses consist primarily of public relations,
media advertising, travel and costs of marketing literature. Advertising and
marketing expenses incurred by the Company from the date of inception through
July 31, 1997 were $11,603, or approximately 20.9% of net sales. The Company
intends to significantly increase its advertising and marketing expenses in
future periods. See "Use of Proceeds."
Product Development Expenses
Product development expenses consist primarily of expenses incurred by the
Company during the initial development and creation of its Web site. Product
development expenses include compensation and related expenses, depreciation
and amortization of computer hardware and software, and the cost of acquiring,
designing, developing and editing Web site content. All of the costs from the
date of inception through July 31, 1997 in connection with the development of
the Company's Web site have been expensed. Product development expenses
incurred by the Company from the date of inception through July 31, 1997 were
approximately $348,050 or approximately 627% of net sales. The Company
believes that significant investments in enhancing its Web site will be
necessary to become and remain competitive. As a result, the Company may
continue to incur, or increase the level of, product development expenses. See
"Use of Proceeds."
General and Administrative Expenses
General and administrative expenses not otherwise attributable to product
development and advertising and marketing expenses consist primarily of
compensation, rent expense, fees for professional services and other general
corporate purposes. General and administrative expenses incurred by the
Company from the date of inception through July 31, 1997 were $912,252, or
approximately 1,642% of net sales. The Company expects general and
administrative expenses to significantly increase in future periods as a
result of, among other things, increased hiring and expansion of facilities.
See "Use of Proceeds."
Interest Expense
Interest expense from the date of inception through July 31, 1997 was
$6,538, or 11.8% of net sales and is primarily attributable to the Promissory
Notes issued by the Company in May through July 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity were cash and cash equivalents
derived from private sales of the Company's equity and debt securities. See
"Use of Proceeds," "Certain Transactions" and "Description of Securities."
Capital expenditures from the date of inception through July 31, 1997 were
approximately $735,862. The Company has no material commitments for capital
expenditures other than a capital lease obligation for certain office
equipment as of July 31, 1997, the aggregate amount of which is $90,193. The
Company anticipates a substantial increase in its capital expenditures in 1998
consistent with its anticipated growth. See "Use of Proceeds."
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The Company currently believes that available funds, cash flows (if any)
expected to be generated from operations and the net proceeds of this offering
will be sufficient to fund its working capital requirements for the 15 months
following completion of this offering. Thereafter, the Company may need to
raise additional funds. The Company's ability to grow will depend in part on
the Company's ability to expand and improve its Internet user support
capabilities and develop new Web site content material. In connection
therewith, the Company may need to raise additional capital in the foreseeable
future from public or private equity or debt sources in order to finance such
possible growth. In addition, the Company may need to raise additional funds
in order to avail itself of unanticipated opportunities (such as more rapid
expansion, acquisitions of complementary businesses or the development of new
products or services), to react to unforeseen difficulties (such as the loss
of key personnel or the rejection by Internet users of the Company's Web site
content) or to otherwise respond to unanticipated competitive pressures. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company's then existing shareholders will be
reduced. Moreover, shareholders may experience additional and significant
dilution, and such equity securities may have rights, preferences or
privileges senior to those of the Company's Common Stock. There can be no
assurance that additional financing will be available on terms acceptable to
the Company. The Company may be unable to implement its business, sales or
marketing plan, respond to competitive forces or take advantage of perceived
business opportunities, which inability could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. See "Risk Factors--Possible Need for Additional Capital;
Allocation of Funds."
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BUSINESS
GENERAL
Shopping.com is an innovative Internet-based electronic wholetailer
specializing in retail marketing a broad range of products and services at
wholesale prices to both consumer and trade customers. Utilizing proprietary
technology, the Company has designed a fully-scalable systems architecture for
the Internet shopping marketplace. Shopping.com's system is designed to fully
integrate all aspects of retail transaction processing including, order
placement, secure payment verification, inventory control, order fulfillment
and vendor invoicing, in one seamless and automated process. The Company
believes that the principal competitive factors in its market are price, speed
of fulfillment, brand name recognition, wide selection, personalized services,
ease of use, 24-hour accessibility, customer service, convenience,
reliability, quality of search engine tools, and quality of editorial and
other site content. The Company has developed a creative wholetailing format
on the Web that combines a highly automated infrastructure with a user-
friendly interface designed to enhance the convenience and ease of online
shopping.
The Company employs specialized information systems to provide its customers
with access to an automated marketplace of products and services, which
consist of the inventories of multiple manufacturers and distributors, price
comparisons, detailed product descriptions, product availability, available
delivery times, delivery status of products ordered and back-order
information. Product categories currently available on the Company's Web site
include: automotive, books, cigars, collectibles, computer hardware and
software, consumer electronics, cutlery, fragrances, furniture, gifts, gourmet
foods, health and beauty care, home improvements, marine supplies, music CDs,
sporting goods and watches. The Company has, and will continue to enter into,
arrangements with a number of manufacturers and distributors who will ship
their products directly to its customers, avoiding the expense and delay of
inventory maintenance. Although the Company only commenced selling on the
Internet on July 11, 1997, Shopping.com currently offers more than 900,000
Stock Keeping Units ("SKUs") and expects the number of SKUs to increase to
over 2,000,000 by March 1998.
Shopping.com generates revenues similar to a retail store when its customers
purchase goods from its Web site. The Company has arrangements including the
price of the goods with manufacturers and distributors to furnish the goods.
There are no written contracts and the arrangements can be terminated by the
Company or the vendor at will. There is no material vendor such that the
termination of any arrangement would materially adversely affect the Company's
business or results of operations. The Company marks up the cost of the goods
which mark-up is not set by the vendor. The experience of the Company's
management as retailers enables them to negotiate the vendors' costs and to
make and adjust the mark-ups, thereby creating the gross profit margin for the
sale of goods or services. When a product is purchased by a customer on the
Company's Web site, the Company receives payment from the customer's credit
card through a financial institution intermediary usually within two to four
business days. The amount received is net of any credit card transaction fees
deducted by the financial institution intermediary. In turn, the Company then
pays its vendors for the cost of goods sold. Shopping.com's vendors are paid
within five to thirty business days. Additionally, the Company generates
revenues from the shipping and handling charges added to each customer's
order.
Customers order products and services on Shopping.com's Web site and provide
secure payment by either credit card over the Internet through Verisign or by
calling 1-888-LOVE-2-SHOP. Shipments are then made by the manufacturer or
distributor directly to the customer after verification by Shopping.com that
the payment has been properly credited. Because transactions are accomplished
without the need to maintain either inventory, warehouse facilities, retail
store space or attendant personnel, the Company believes it will be able to
obtain market share by passing cost savings along to its customers as a result
of selling its products and services at a discount to typical retail and
warehouse/discount prices. For the same reasons, the Company is also able to
provide a broader merchandise mix than retail stores, warehouse/discount
stores and mail order catalogue operators.
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The Company intentionally has not entered into any exclusive supplier
contracts with its vendors except for En Pointe who is the Company's exclusive
vendor for computer hardware, software and network peripherals for the next
five years. The strategic advantage by not entering into exclusive supplier
agreements is that the Company retains its position to source several of the
same products from different vendors who offer the same products in order to
offer the lowest price possible for its customers.
Shopping.com's strategy is to become a dominant low-price leader in
wholetailing on the Internet by utilizing the warehousing, purchasing and
distribution strengths of multiple manufacturers and distributors, rather than
to assume those roles for itself. The Company believes this approach allows
Shopping.com to eliminate many of the risks and costs associated with
maintaining inventory, including the cost of leasing warehouse space,
inventory obsolescence, inventory tracking systems, and the increased costs
associated with employing large numbers of personnel for stocking and shipping
duties. By having access to the inventories of multiple manufacturers and
distributors, Shopping.com believes it is able to offer its customers a
competitive combination of price, product availability, order fulfillment and
delivery services and still obtain profitability. Beyond the benefits of a
wide selection, purchasing from Shopping.com can be done conveniently, 24
hours a day, without requiring a trip to a store.
INDUSTRY BACKGROUND
IDC estimates that the number of users accessing the Web will grow from 28
million in 1996 to 175 million in 2001 and that the amount of commerce
conducted over the Web will increase from approximately $2.6 billion in 1996
to $220 billion in 2001. Growth in Internet usage has been fueled by a number
of factors, including the large and growing base of personal computers
installed in the workplace and home, advances in the performance and speed of
personal computers and modems, improvements in network infrastructure, easier
and cheaper access to the Internet and increased awareness of the Internet
among consumer and trade customers.
The emergence of the Internet as a significant communications medium is
driving the development and adoption of Web content and commerce applications
that offer both convenience and value to consumers, as well as unique
marketing opportunities and reduced operating costs to businesses. A growing
number of consumer and trade customers have begun to conduct business on the
Internet including paying bills, booking airline tickets, trading securities
and purchasing consumer goods (e.g., personal computers, consumer electronics,
compact disks, books, groceries and vehicles). Moreover, online transactions
can be faster, less expensive and more convenient than transactions conducted
through a human intermediary.
THE SHOPPING.COM SOLUTION
Shopping.com focuses on exploiting an existing and expanding customer base
that is and will become Internet connected. The Shopping.com solution is based
on eliminating the retail store intermediary and passing along associated cost
savings to both consumer and trade customers in the form of lower pricing on
comparable goods and services. The Company provides its solution because
transactions are accomplished without the need to maintain inventory,
warehouse establishments, retail or discount store buildings and attendant
personnel.
Key to the success of Shopping.com will be the rapid implementation of an
advertising and marketing program that will introduce the availability of
Shopping.com as an entertaining, intelligent and cost-effective alternative to
traditional shopping venues. Selection of initial product offerings, pricing,
delivery mechanisms, customer service philosophy and a number of other factors
are integrally related to the success of the Company. Unlike other retail and
warehouse/discount stores which risk showcasing new products which may not
achieve market acceptance, the Company is not as much "at risk" when
introducing new products and services or when creating consumer demand because
it is able to do so without maintaining expensive inventory. Further, the
Company is able to create increased consumer demand by showcasing related
products and services to its customers and more accurately gauging their
market acceptance. Shopping.com will base its success on its commitment to
providing excellence at all operating levels and aggressively bringing its
advantages to the attention of the consumer and vendor.
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BUSINESS STRATEGY
The Company's objective is to become a dominant wholetailer on the Internet
by pursuing the following key strategies:
Increase Market Awareness and Brand Recognition. The Company believes that
Shopping.com is well positioned to become a leading brand name in Internet
commerce due to its management team's strong background and experience
operating large retail and discount store formats combined with its expertise
in information systems programming. The Company operates in a market in which
its brand name franchise is critical to attracting high quality vendors and a
high level of customer traffic. Accordingly, the Company's strategy is to
promote, advertise and increase its visibility through a variety of marketing
and promotional techniques, including advertising on leading Internet sites
and in printed media, conducting an ongoing public relations campaign and
obtaining links from other Web sites.
Provide Compelling Wholetailing Experience for Customers. The Company
believes buyers are attracted by bargain prices and desired merchandise in a
user-friendly and entertaining environment. Accordingly, the Company intends
to continue offering its customers a wide array of opportunities to buy
desired merchandise at low prices through a visually stimulating and user-
friendly interface which is rich in both product SKUs and product description
content.
Expand and Strengthen Long-Term Vendor Relationships. The Company's ability
to attract, secure and obtain large quantities of branded merchandise for its
Web site is key to its success. The Company is aggressively building its
merchandising staff to facilitate securing long-term relationships with a
variety of vendors. The Company intends to strengthen its vendor relationships
by offering better purchasing terms and more convenient services through
automated order processing and superior logistics. The Internet provides a
low-cost venue to test new products and concepts, which the Company believes
will appeal to vendors who may wish to showcase new products via the Internet.
Relationships with such vendors for showcasing and introducing new product
lines may offer Shopping.com additional revenue opportunities, and may provide
an innovative and entertaining aspect to its merchandise mix that can
potentially enhance general consumer appeal and help to differentiate
Shopping.com from its competitors.
Leverage Low Cost Structure. The Company is not required to pay the expenses
necessary to support a traditional retail operation which requires inventory,
warehouse facilities, retail store space and attendant personnel. The Company
establishes its vendor relationships where it acts as a principal and arranges
the order fulfillment, payment verification, shipping functions and customer
support, which enables it to take advantage of the savings from eliminating
those traditional retail expenses. By purchasing merchandise and undertaking
these functions, the Company believes it will be able to control its gross
margins, monitor its customer service and reduce its costs.
Develop Incremental Revenue Opportunities. The Company believes that a
significant opportunity exists to develop incremental revenue opportunities,
including expanding its product mix with other products and enabling vendors
to showcase new products that are well suited for its Web site. The Company
also believes that the anticipated high level of traffic on its Web site will
provide an attractive alternative for other companies advertising on its Web
site. In addition, the Company is considering expanding its sales to
international customers.
Build on Leading Technology. The Company believes that one of its
competitive advantages is its internally developed proprietary technology,
which enables the Company to conduct automated sales with thousands of
customers simultaneously, process orders, record payments, coordinate order
fulfillment and provide customer support functions integrated with the
Company's accounting and financial systems. The Company intends to further
enhance its proprietary technology to provide an even more compelling shopping
experience, as well as to streamline its order processing, distribution, and
customer support functions as new technology develops.
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MERCHANDISING STRATEGY
Shopping.com's merchandising strategy is designed to appeal to all classes of
consumer and trade customers. Shopping.com intends to become a one-stop
shopping service by virtue of its broad merchandise mix and expects to provide
the Internet shopper with a selection of variety and pricing unmatched by
other current retail leaders. With effective user-friendly search engine
tools, the Shopping.com customer enjoys a wide array of categories and
specialty products and services not typically offered to the general public
under one store roof, while at the same time allowing its customers the
virtual ease of shopping from either home or office, as well as substantial
price discounts.
Shopping.com's merchandise strategy also emphasizes what the Company
believes to be a competitive advantage--the combination of identifiably low
pricing with broad product selection. The Shopping.com merchandise strategy
builds upon the proven-as-effective broader selection/lower price method of
retailing initiated in the warehouse/discount market of the 1980's and early
1990's. Shopping.com's strategy is designed to allow the Company to compete
with major retail leaders including warehouse/discount stores, traditional
retail chains, and mail order catalog operators by:
. offering lower prices;
. offering a broader merchandise mix;
. providing a low cost venue for vendors to test market acceptance of new
products and services; and
. eliminating the expenses of inventory, warehouse facilities, retail
store space and attendant personnel.
Shopping.com has made arrangements with a number of manufacturers and
distributors represented in its "Key Product Category List." Building upon the
previous business relationships of Shopping.com's management team, the
Company's vendors include those who can offer regional warehouse shipping
points to meet customers' shipping needs and thereby reduce long-haul shipping
costs. In addition to meeting the criteria of product selection within a
product category, any potential Shopping.com vendor must also meet stringent
standards for quality control, product selection, packaging and shipping
logistics.
The following represent Shopping.com's "Key Product Category List":
Current Product Categories available on Shopping.com's Web site:
<TABLE>
<S> <C> <C>
Automotive Cutlery Home Improvements
Books Fragrances Marine Supplies
Cigars Furniture Music CDs
Collectibles Gifts Sporting Goods
Computer Hardware & Software Gourmet Foods Watches
Consumer Electronics Health & Beauty Care
Future Product Categories expected to be offered on the Shopping.com's Web
site:
Appliances Medical Supplies Pet Supplies
Baby/Nursery Motorcycle Supplies Photography
Housewares Musical Instruments Tools/Equipment
Kitchen & Bath Office Supplies Videos
Lawn & Garden Outdoor Living Vitamins
</TABLE>
MARKETING AND PROMOTION
The Company believes that an immediate and rapidly expanding market
opportunity exists for Internet-based providers who can offer the consumer and
trade customer an almost limitless selection of products and services at low
prices via online venues. Although retail stores, warehouse/discount stores,
mail order catalogue
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operators and other providers using alternate forms of media to sell products
and services all represent significant market segments, no single distribution
channel of consumer products and services presently dominates the entire
market.
Shopping.com's marketing strategy is designed to promote the Shopping.com
brand name, increase customer traffic to its Web site, build strong customer
loyalty, maximize repeat purchases and develop incremental revenue
opportunities.
Shopping.com intends to build strong customer loyalty through the use of
customized offering to its customers through the use of extensive customer
preference and behavioral data obtained as a result of monitoring its
customers' activities online. The Company's proprietary technology allows for
rapid product experimentation, customer buying pattern analysis, instant user
feedback and customized data-based marketing for each of its customers, all of
which the Company incorporates in its merchandising. In contrast to
traditional direct-marketing efforts, Shopping.com's personalized notification
services send customers information updating its prices as well as its new
product and service offerings. By offering customers a compelling and
personalized value proposition, the Company seeks to increase the number of
visitors who make a purchase, encourage repeat visits and purchases and extend
customer retention. Loyal, satisfied customers also generate word-of-mouth
advertising and awareness and are able to reach thousands of other customers
and potential customers because of the reach of online communication.
The Company employs a variety of media, product development, business
development and promotional activities to achieve the following goals:
Online Service and Internet Advertising. The Company intends to place
advertisements on various high-profile and high-traffic Web sites. These
advertisements usually take the form of banners that encourage readers to
click through directly to Shopping.com's Web site.
Traditional Advertising and Public Relations. The Company will engage in a
coordinated program of print advertising in both specialized industry trade
magazines and general circulation newspapers and magazines including The New
York Times, Los Angeles Times, Chicago Tribune, and U.S.A. Today. In the
future, the Company may begin advertising in other media such as radio and
television.
Link Program. The Link Program is a hyperlink automatically connecting
another company's Web site to Shopping.com's Web site. The Company may extend
its market presence through the Link Program enabling other Web sites to offer
products and services for fulfillment by Shopping.com such as CitySearch's new
electronic commerce pilot program and En Pointe's Information Connection
system. See "Summary--Recent Developments."
Personalized Shopping Services. The Company offers personalized notification
and shopping services and intends to add a collaborative filtering service to
its personalized service offerings in the future.
Customer Gifts. The Company may in the future send gifts to its customers.
These gifts will be designed to increase customer loyalty and provide
customers with a continuing reminder of the Shopping.com Web site.
CUSTOMER SERVICE AND ORDER FULFILLMENT
Retail shopping as currently conducted requires significant investments of
time, effort and associated costs on the part of the consumer, generally
requiring the consumer to opt for either (1) limited selection/lower price or
(2) broad selection/higher price. The Company believes that the provider who
can offer the consumer a broad selection/lower price alternative should be
well positioned to capture a significant portion of the online shopping
market.
The Company believes that traditional retail concepts apply to online
retailing. Consumers expect online shopping to be entertaining, compelling and
enjoyable. To be successful, the Company believes that an online store must
also be fast, offer a wide product selection targeted to each individual
customer and provide excellent customer service.
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The Company enjoys the cost benefits generally achieved by mail order
catalogue operators and other types of media providers, without the associated
limitations of narrow selection and product information. The Company enjoys a
significant cost advantage over typical retail providers by eliminating many
of the major costs associated with store facilities (including rent,
utilities, employees and inventory), requiring only a reliable and rapid
product delivery service that can closely approximate the consumer appeal of
the "carry-out" aspect of retail and discount store shopping.
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in part, on the strength of its customer support and service
operations and staff. Shopping.com encourages frequent communication with, and
feedback from, its customers in order to continually improve its product and
service offerings. Shopping.com offers an e-mail address to enable customers
to request information, and to encourage feedback and suggestions. The team of
customer support and service personnel are responsible for handling general
customer inquiries, answering customer questions about the ordering process,
and investigating the status of orders, shipments and payments. Shopping.com
also offers a toll-free line for customers (1-888-LOVE-2-SHOP) who are
reluctant to enter their credit card numbers over the Internet. The Company
has automated the tools used by its customer support and service staff and
intends to actively pursue enhancements to, and further the automation of, its
customer support and service systems and operations.
Shopping.com's immediate goal is to exploit the market opportunity for
online shopping by establishing itself as a dominant low-price leader
providing a broad range of products and services over the Internet prior to
the arrival of competitors marketing similar offerings. While the Internet
presently offers an increasing amount of products, these offerings are
generally limited to specialty providers offering limited product and service
categories (e.g., airline tickets, books, music CDs, flowers and groceries).
In addition, the Company believes that its proprietary technology will afford
a major advantage over existing and potential Internet providers. Once
established, the Company will seek to dominate online shopping by being
"first" in price, selection, delivery and service, thus making future
competitor market entry more difficult. See "Risk Factors--Competition."
The transmission, data presentation and shipping of the vast merchandise
categories wholetailed by the Company involves the maintenance, continued
development and efficient use of the Company's proprietary technology and well
trained customer service associates. Since the delivery of merchandise sold to
the customer is not within the direct control of the Company, logistics in
securing, transmitting and finalizing information necessary for delivery in a
manner which will satisfy the Shopping.com customer is important to the
success of the Company. The Company utilizes automated interfaces for sorting
and organizing its orders to enable it to achieve the most rapid and economic
purchase and delivery terms possible. The Company's proprietary systems
architecture selects the orders that can be filled quickly via electronic
interfaces with vendors. Under the Company's arrangements with its
manufacturers and distributors, electronically ordered products often are
shipped by the vendor within days and sometimes within hours of receipt of an
order from Shopping.com. The Company has also developed customized information
systems and dedicated ordering personnel that specialize in searching special
orders for customers.
TECHNOLOGY
Shopping.com brings to the Internet commerce industry a combination of (i)
strong retail management experience and (ii) computer and information systems
design, development, implementation and operation expertise.
Shopping.com's operating system offers the Internet shopper the ability to
browse dynamically, securely select and purchase a number of products and
services offered in Shopping.com's Key Product Category List. Management has
also addressed any anticipated or potential systems downtime by developing and
implementing a back-up response to all of its information systems. The
developed and designed systems architecture accommodates peak transaction
loads and will "scale up" appropriately as transaction volume increases with
the expected growth in online shopping. The system possesses a sophisticated
back-end system which processes
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and tracks orders quickly and efficiently with a minimum of human
intervention. Receipt confirmation logic is built into all its modules to
ensure delivery of all transactions. In addition, the database-oriented design
allows for new media technologies to be quickly introduced into the system
without the need for extensive programming.
Shopping.com's database engines search the database for items that meet an
individual customer's search criteria, and then builds a Web page "on the fly"
to present the desired products. The information systems allow for the
capturing and storing of the Company's online customer activity for the
purpose of monitoring such activity.
Shopping.com employs a client/server based suite of financial systems to
perform the functions of accounts receivable, accounts payable, general ledger
and fixed assets. Interfaces exist from the transaction server to track all
sales by individual vendor and produce the necessary settlement documents and
reports as well as required financial documents.
The technology and systems are protected by sophisticated methods
specifically designed to assure continuity of operation in the event of
natural catastrophes or local shutdown of power or communications. Internally
the Shopping.com employs protective equipment for its systems. In addition,
on-site back-up and redundancy is provided. A disaster plan has been
formulated. Daily, the information is downloaded and stored in locked
containers off-site. For security, a firewall with special protection has been
created to avoid invasion by hackers or competitors. Security is also afforded
the customers through the use of a Secured Socket Layer (S.S.L.) key with
Verisign to protect credit card information. See "Risks--Capacity Constraints;
Reliance or Internally Develops Systems; System Development Risks"; "--Risk of
System Failure; Single Site and Order Interface"; "--Online Commerce Security
Risks."
INTELLECTUAL PROPERTY
The Company regards its Shopping.com brand name and related software as
proprietary and relies primarily on a combination of copyright, trademark,
trade secret and confidential information laws and employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect
against technologies that are substantially equivalent or superior to the
Company's technologies. The Company does not currently hold any patents or
have any patent applications pending for itself or its products and has not
obtained Federal registration for any of its trademarks. The Company enters
into non-disclosure and invention assignment agreements with certain of its
employees and enters into non-disclosure agreements with certain of its
consultants and subcontractors. However, there can be no assurance that such
measures will protect the Company's proprietary technology, or that its
competitors will not develop software with features based upon, or otherwise
similar to, the Company's software or that the Company will be able to prevent
competitors from developing similar software.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. The Company
has been displaying its Web site on the Internet without receiving claims from
third parties that its products or names infringe on any proprietary rights of
other parties. However, the Company is a recent entrant in the sale of
merchandise on the Internet, and there can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products, trademarks or other Company works. Such
assertion may require the Company to enter into royalty arrangements or result
in costly litigation. The Company is also dependent upon obtaining existing
technology related to its operations. To the extent new technological
developments are unavailable to the Company on terms acceptable to it, or at
all, the Company may be unable to continue to implement its business which
would have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Risk Factors--Limited
Protection of Intellectual Property and Proprietary Rights."
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COMPETITION
The online commerce industry, particularly on the Internet, is new, rapidly
evolving and intensely competitive, which the Company expects to intensify in
the future. Barriers to entry are minimal, allowing current and new
competitors to launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies. These
competitors include: (i) various online vendors of other consumer and trade
products and services including CUC International, Amazon.com., ONSALE,
Peapod, NetGrocer, iMALL, Internet Shopping Network, Micro Warehouse, CD Now,
QVC and Home Shopping Network, (ii) a number of indirect competitors that
specialize in online commerce or derive a substantial portion of their
revenues from online commerce, including America Online, Microsoft Network,
Prodigy and Compuserve, (iii) mail order catalogue operators such as Speigel,
Lands End, and Sharper Image, (iv) retail and warehouse/discount store
operators such as Wal-Mart, Home Depot, Target and Price/Costco, and (v) other
international retail or catalogue companies which may enter the online
commerce industry. Both Wal-Mart and Home Depot have announced their intention
to devote substantial resources to online commerce at discount prices, which
if successful, could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. However, the Company
believes that retail and warehouse/discount operators will be somewhat
restricted in their ability to lower prices by the need to protect their own
pricing strategy to avoid cannibalizing their store margins.
The Company believes that the principal competitive factors in its market
are price, speed of fulfillment, brand name recognition, wide selection,
personalized services, ease of use, 24-hour accessibility, customer service,
convenience, reliability, quality of search engine tools, and quality of
editorial and other site content. Many of the Company's current and potential
competitors have longer operating histories, larger customer bases, greater
brand name recognition and significantly greater financial, marketing and
other resources than the Company. In addition, online retailers may be
acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Certain of the Company's
competitors may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than the
Company. Increased competition may result in reduced operating margins, loss
of market share and a diminished franchise value. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors, and competitive pressures faced by the Company may have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to
changes in the competitive environment, the Company may, from time to time,
make certain pricing, service or marketing decisions or acquisitions that
could have a material adverse effect on its business, prospects, financial
condition and results of operations. New technologies and the expansion of
existing technologies may increase the competitive pressures on the Company.
In addition, companies that control access to transactions through network
access or web browsers could promote the Company's competitors or charge the
Company a substantial fee for inclusion. See "Risk Factors--Competition."
GOVERNMENTAL REGULATION
The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet
and other online services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services.
Furthermore, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations may decrease the growth of the Internet
or other online services, which could, in turn, decrease the demand for the
Company's products and services and increase the Company's cost of doing
business, or otherwise have a material adverse
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effect on the Company's business, prospects, financial condition and results
of operations. Moreover, the applicability to the Internet and other online
services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Permits or licenses may be required from federal, state or local government
authorities to operate or to sell certain products on the Internet. No
assurances can be made that such permits or licenses will be obtainable. The
Company may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all
or specific countries throughout the world. No assurances can be made that the
Company will be able to comply with such legislation or statutes. See "Risk
Factors--Governmental Regulation and Legal Uncertainties."
FACILITIES
The Company's principal administrative, engineering, marketing and customer
service facilities are located in an office building in Corona del Mar,
California encompassing approximately 8,000 square feet. The Company expects
to outgrow its current space within the next two years. In such event, the
Company expects it will be able to find suitable facilities at commercially
reasonable prices, although no assurances can be given. The space occupied by
the Company is under a triple net lease which will expire on February 28,
2002. The lease provides for monthly rental of approximately $9,690 for the
first year with annual increases.
EMPLOYEES
As of July 31, 1997, the Company employed 34 full time and 10 part time
employees, including nine in Management Information Systems and Research and
Development, two in Marketing and five in Accounting and Administration. Two
employees hold doctorate degrees in science, engineering or other disciplines.
Two additional employees hold masters degrees. The Company believes that its
future success will depend in part on its ability to attract hire and maintain
qualified personnel. Competition for such personnel in the on line industry is
intense. None of the Company's employees is represented by a labor union, and
the Company has never experienced a work stoppage. The Company believes its
relationship with its employees to be good. See "Risk Factors--Dependence on
Key Personnel; Need for Additional Personnel."
LEGAL PROCEEDINGS
In July 1997, a former consultant filed a lawsuit seeking damages for
termination of an alleged contractual relationship. The complaint against the
Company and a senior manager alleges breach of consulting agreement, breach of
employment agreement, breach of implied covenant of good faith and fair
dealing, violation of the California Labor Code and prays for economic damages
in the amount of $592,500. The Company intends to cause certain claims for
damages to be stricken and to vigorously defend against the remaining claims.
The Company commenced an action in the Superior Court for Orange County,
California on July 1997 against C-Systems, Inc., a software consulting firm
for breach of contract, fraud and damages. The Company's complaint seeks
economic damages of $1.6 million and punitive damages against C-Systems, Inc.
Thereafter, in August 1997, C-Systems, Inc. filed a lawsuit in federal court
in Massachusetts for breach of contract, copyright infringement and fraud. The
complaint seeks injunctive relief and damages in an amount to be determined at
trial. The amount in dispute on the contract claim is alleged to be $74,500.
The Company's attorneys are moving to remove the Massachusetts case to
California. In October 1997 Platinum Software Corporation, a computer software
company, filed suit against the Company alleging breach of contract to provide
a software accounting package. The Company rejected the package for failure to
perform and breach of contract. The complaint prays for damages in the amount
of $103,670.38. The Company and the Company's senior management may in the
future be involved in other suits and actions incidental to the Company's
business. The Company does not believe that the resolution of the current
suits will result in any material adverse effect on the financial condition,
results of operations or cash flows of the Company.
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MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers, directors, and certain significant employees of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
EXECUTIVE OFFICERS AND
DIRECTORS:
Bill Gross(1)(2)............... 38 Chairman of the Board
Robert J. McNulty.............. 51 President, Chief Executive Officer and
Director
Kristine E. Webster............ 28 Senior Vice President, Chief Financial
Officer and Secretary
Mark S. Winkler................ 38 Chief Information and Technology
Officer
Douglas Hay.................... 43 Executive Vice President and Director
Paul J. Hill(1)................ 51 Director
Edward F. Bradley(2)........... 57 Director
CERTAIN SIGNIFICANT EMPLOYEE:
Ogden M. Forbes, Ed.D. ........ 40 Chief of Knowledge and Research
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
BILL GROSS. Mr. Gross joined Shopping.com on February 1, 1997 as its
Chairman of the Board. He is also Founder and Chairman of Bill Gross' idealab!
("idealab!"), an incubator established to start, fund and build innovative,
cutting-edge Internet technology companies. From October 1991 to January 1997,
he was Chairman of the Board of Knowledge Adventure, an educational software
company which was sold to CUC International in January 1997. In October 1995,
Mr. Gross co-founded CitySearch, a web-based city directory which operates in
eight cities, and has served on its Board since such time. Since December 1994
Mr. Gross has also founded various software companies and serves on the Board
of many of them. In 1995, Mr. Gross was elected to the Board of Trustees of
the California Institute of Technology as the first Young Alumni Trustee. He
received a Bachelor of Science degree in Engineering and Applied Science from
the California Institute of Technology in 1981.
ROBERT J. MCNULTY. In November 1996 Mr. McNulty founded Shopping.com and has
been its President, Chief Executive Officer and a member of its Board of
Directors since its inception, and devotes substantially all of his business
time to the Company. Mr. McNulty founded Cyber Depot, Shopping.com's
predecessor of Internet shopping, in February 1996. From September 1992 until
November 1994, Mr. McNulty held senior management positions with Auto Expo
Inc., a privately held corporation which operated retail auto parts stores in
California and Nevada. After his resignation in June of 1994, until March
1995, he continued in an advisory position as a consultant to that company.
The subsequent management, which did not include Mr. McNulty and was
unassociated with Mr. McNulty, filed an assignment for the benefit of
creditors in California on November 22, 1995. In 1983 Mr. McNulty founded and
served as Chief Executive Officer of HomeClub (now known as Home Base), until
its merger with Zayre Corp. in 1986. He also serves as Chairman of the Board
of Directors of U.S. Forest Industries, Inc., a forest products company. Mr.
McNulty has also founded and been involved with several other retail
companies, both public and private, in a broad range of merchandise categories
including sporting goods, home improvement, hardware, office products and
automotive. Without admitting or denying the allegations of a complaint, Mr.
McNulty consented to an entry of a final decree in the U.S. District Court on
October 10, 1995, instructing him to not violate certain provisions of the
federal securities laws. See "Certain Transactions--Previous Legal
Proceedings."
KRISTINE E. WEBSTER. Ms. Webster joined the Company in July 1997 as its
Senior Vice President, Chief Financial Officer and Secretary. From July 1995
to August 1997, Ms. Webster served as an Assistant
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Professor of Accounting at La Sierra University, a private four year
university and as an adjunct professor at California State University, San
Bernardino. From April 1993 to July 1995 Ms. Webster served as the Controller
of National Xpress Logistics, a transportation logistics brokerage company and
a wholly-owned subsidiary of US Xpress Enterprises, Inc. Prior to that she was
with Ernst & Young LLP from January 1988 to April 1992. From May 1992 to March
1993, she was a consultant and contract professor. In addition, since December
1990 Ms. Webster has owned Plaza Travel, a travel agency specializing in group
travel. Ms. Webster received her Bachelor of Business Administration degree,
summa cum laude, from Loma Linda University in 1989 and her Master of Business
Administration degree from La Sierra University in 1991. She is a Certified
Public Accountant in the State of California.
MARK S. WINKLER. Mr. Winkler joined the Company in May 1997 as its Chief
Information and Technology Officer. From 1978 to April 1997, Mr. Winkler
founded and served as Chief Executive Officer of Winkler & Associates, a
software consulting company which provided consulting services for various
companies including Warner Brothers, IBM, Inc.--Broadcast Solutions Division,
Pacificare HMO, American Express Company, Los Angeles Times, Air Freight
Forwarding Company, Inc., Jefferies & Company, Inc., Alliance Logistics
Resources Inc., Bank of America State Trust Company, TRW, Inc. and Jet
Propulsion Laboratory. Mr. Winkler received his Bachelor of Science degree in
Computer Science from the University of California, Santa Barbara in 1981.
DOUGLAS HAY. Mr. Hay joined the Company in May 1997 as its Executive Vice
President and was elected as a member of its Board of Directors in July 1997.
Mr. Hay has spent over 25 years in the field of marketing consumer products
and services. From 1990 to April 1997, Mr. Hay was General Manager of Projects
Et Al Inc., a business consulting firm that developed marketing and
merchandising programs for some of the nations leading retail companies. Mr.
Hay has also served as Vice President of Marketing for Northern Automotive,
Inc., an automotive parts retail company.
EDWARD F. BRADLEY. Mr. Bradley joined the Company as a member of its Board
of Directors in April 1997. From December 1996 to the present, Mr. Bradley has
been President and Chairman of Cannon Industries, Inc., a business development
and venture capital firm. Prior to joining Cannon Industries, Inc., from
January 1993 to December 1996, Mr. Bradley was the Corporate Director of
Quality of Geneva Steel Corp., an integrated steel manufacturer. From 1985 to
January 1993, Mr. Bradley carried on a management consulting business. From
1972 to 1985, Mr. Bradley was President of his environmental consulting
company with regional offices in New York, Washington D.C., Chicago, Detroit
and Milwaukee. Mr. Bradley has also functioned as a Special Consultant to the
U.S. Environmental Protection Agency in Washington, D.C. Mr. Bradley received
both a Bachelor of Science degree in Civil Engineering in 1961 and a Master of
Science degree in Civil Engineering in 1964 from the University of Notre Dame,
and is a Registered Professional Engineer. From 1988 to June 1996, Mr. Bradley
was a Adjunct Professor in Engineering Economics at the University of Utah.
PAUL J. HILL. Mr. Hill joined the Company as a member of its Board of
Directors in April 1997. He brings over 25 years of experience in managing
diversified integrated companies operating in areas such as insurance, real
estate, communications, resources and manufacturing. From June 1994 to the
present, Mr. Hill has served as Chairman of Crown Life Insurance Company. Mr.
Hill has participated as a board member and co-officer of many public and
private companies in both the United States and Canada. From 1978 to the
present Mr. Hill has also been President of McCallum Hill Companies, a
diversified company with operations in real estate, oil and gas and brokerage.
Mr. Hill received both a Bachelor of Science and Bachelor of Arts degree from
Georgetown University in 1967 and a Master of Business Administration degree
from the University of Western Ontario in 1969.
OGDEN M. FORBES, ED.D. Dr. Forbes brings to the Company an extensive
background and a significant level of experience in Internet research,
analysis, development, testing and marketing. From 1994 to 1997, Dr. Forbes
was Vice President of Research for Logon Data Corp., an Internet software
company and an Information Specialist at Pepperdine University. Dr. Forbes'
responsibilities have included identification of specific Internet markets,
trends, tracking competition, authoring of technical documents, specific and
general
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Internet research, and executive advisement. Dr. Forbes received a Bachelor of
Arts degree in English from the University of California, Davis in 1979, a
Master of Arts degree in English from the Claremont Graduate School in 1985, a
Master of Arts degree in Education from the University of San Francisco in
1995 and a Doctorate in Education from the University of San Francisco in
1995.
SPECIAL BY-LAW PROVISIONS REGARDING NUMBER AND QUALIFICATION OF DIRECTORS
The authorized number of directors of the Company is seven. There are
currently two vacancies on the Board, and the Company does not intend to fill
such vacancies. Further, the Company's By-laws provide that, when the Company
becomes a "listed corporation," the Company's Board will be divided into two
classes to serve for terms of two years and to eliminate cumulative voting.
Pursuant to Section 301.5 of the California Corporations Code a listed
corporation is one with (i) outstanding shares listed on the New York Stock
Exchange or America Stock Exchange or (ii) outstanding securities designated
as qualified for trading as a national market system security on NASDAQ. After
completion of this offering the Company will not be a listed corporation as
such term is defined.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established a Compensation Committee
and an Audit Committee. The Compensation Committee reviews and recommends the
compensation arrangements for all officers, approves such arrangements for
other senior level employees and administers and takes such other action as
may be required in connection with certain compensation and incentive plans of
the Company (including the grant of stock options). The Audit Committee
recommends the independent accounting firm to audit the Company's financial
statements and to perform services related to the audit, reviews the scope and
results of the audit with the independent accountants, reviews with management
and the independent accountants the Company's year-end operating results and
considers the adequacy of the internal accounting procedures.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Mr. Gross and Mr. Bradley.
In April 1997, idealab!, a company controlled by Mr. Gross, purchased 500,000
shares of the Company's Series A Preferred Stock at $0.40 per share and
100,000 shares of the Company's Common Stock at $0.02 per share.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors or members of committees of the Board of Directors, but are
reimbursed for their reasonable expenses incurred in connection with attending
meetings of the Board of Directors. In July 1997, the Company granted each of
the directors a stock option to purchase 25,000 shares of Common Stock at an
exercise price of $3.00 per share. For Messrs. Gross, Hill and Bradley, the
options were nonqualified stock options while for Messrs. McNulty and Hay the
options were qualified stock options. The qualified stock options are
"incentive stock options," which are generally available only to employees
(such as Messrs. McNulty and Hay), and pursuant to which, provided certain
conditions are met, the employee recognizes capital gain only when the stock
acquired pursuant to the option is sold. By contrast, a non-qualified stock
option is available to non-employees (such as Messrs. Gross, Hill and Bradley,
who are outside directors), who, in general, will recognize ordinary income
when the option is exercised (while the Company is entitled to a concomitant
deduction) to the extent the then fair market value of the stock exceeds the
option exercise price. All of the options were granted pursuant to the Plan
and vested immediately. The Company currently intends to make comparable
option grants to directors in the future. See "Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Articles of Incorporation limit the liability of
directors to the full extent permitted by California law. California law
provides that a corporation's articles of incorporation may contain a
provision eliminating or limiting the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and
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<PAGE>
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interests of the corporation or its shareholders or
that involve the absence of good faith on the part of the director, (iii) for
any transaction from which a director derived an improper personal benefit,
(iv) for acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty, (vi) for certain transactions between the director and
the corporation or for certain distributions, loans or guarantees. The
Company's Bylaws provide that the Company shall indemnify its directors and
officers and may indemnify its employees and agents to the fullest extent
permitted by law.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers. The Company has obtained a policy insuring
the directors and officers for the liability described above.
At present, the only pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted is the lawsuit by the former consultant. See
"Business--Legal Proceedings."
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for the fiscal year ended January 31, 1997 for services rendered to
the Company in all capacities by the Company's executives. No executive
officer of the Company who held office at January 31, 1997 met the definition
of "highly compensated" within the meaning of the Commission's executive
compensation disclosure rules.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION TABLE
--------------------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION SALARY($) BONUS($) COMPENSATION($) COMPENSATION($)
------------------ --------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Robert J. McNulty,
President and Chief
Executive Officer...... $53,883 -- -- --
</TABLE>
- --------
(1) All other compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits constituted the lesser of $50,000 or 10% of
the total annual salary and bonus of the Named Executive for such year.
EMPLOYMENT AGREEMENTS
Mr. McNulty's employment agreement requires him to perform the duties of
President and Chief Executive Officer at an initial annual salary of $75,000
and a review by the Compensation Committee to adjust his salary to an industry
standard, but in no event less than his current annual salary, as well as a
bonus to be determined by the Compensation Committee and the Board of
Directors. The employment agreement also provides that if he is terminated
without cause he would receive severance pay in the amount of two years,
11 months and 28 days of compensation. He is also entitled to participate in
the Plan and to receive the same benefits afforded to other executives. Mr.
McNulty's employment agreement terminates on May 1, 2002 with a rolling five
year term.
Mr. Winkler's employment agreement requires him to perform duties of Chief
Information and Technology Officer at an initial annual salary of $200,000 and
a bonus to be determined by the Compensation Committee and the Board of
Directors. The employment agreement also provides that if he is terminated
without cause he would receive severance pay in the amount of 18 months of
compensation. Mr. Winkler holds 25,000 shares of Common Stock of the Company.
He has signed a Shareholder's Agreement under which his stock is subject to
repurchase pursuant to a vesting schedule as follows: 100% at the first
anniversary of his employment, 66 2/3% up to the second anniversary, 33 1/3%
up to the third anniversary and thereafter 0%.
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<PAGE>
EMPLOYEE BENEFIT PLANS
Stock Option Plan of 1997 (the "Plan"). The Company's Board of Directors has
adopted the Plan and reserved an aggregate of 250,000 shares of Common Stock
for grants of stock options under the Plan. The purpose of the Plan is to
enhance the long-term shareholder value of the Company by offering
opportunities to employees, directors, officers, consultants, agents, advisors
and independent contractors of the Company to participate in the Company's
growth and success, and to encourage them to remain in the service of the
Company and acquire and maintain stock ownership in the Company.
As of July 31, 1997, options to purchase 178,000 shares of Common Stock were
outstanding under the Plan with an exercise price of $3.00 per share, options
to purchase 72,000 shares were available for grant and no options had been
exercised.
The Plan is administered by the Compensation Committee, which has the
authority to select individuals who are to receive options under the Plan and
to specify the terms and conditions of each option so granted (qualified or
nonqualified), the vesting provisions, the option term and the exercise price.
Unless otherwise provided by the Compensation Committee, an option granted
under the Plan expires 10 years from the date of grant (five years in the case
of a qualified Stock option granted to a holder of 10% or more of the shares
of the Company's outstanding capital stock) or, if earlier, three months after
the optionee's termination of employment or service other than termination for
cause, one year after the optionee's retirement, early retirement at the
Company's request, death or disability, or immediately upon notification to an
optionee of termination for cause. Non-qualified options granted to non-
employee directors or consultants will not have the limitations and
restrictions described in the previous sentence. Options granted under the
Plan are not generally transferable by the optionee except by will or the laws
of descent and distribution and generally are exercisable during the lifetime
of the optionee only by such optionee. The Plan is subject to the approval of
the shareholders within 12 months from the date of its adoption.
In the event of (i) a merger or consolidation of the Company in which it is
not the surviving corporation, or pursuant to which shares of Common Stock are
converted into cash, securities or other property (other than a merger in
which holders of Common Stock immediately before a merger have the same
proportionate ownership of the capital stock of the surviving corporation
immediately after a merger), (ii) the sale, lease, exchange or other transfer
of all or substantially all of the Company's assets (other than a transfer to
a majority-owned subsidiary), or (iii) the approval by the holders of Common
Stock of any plan or proposal for the Company's liquidation or dissolution
(each, a "Corporate Transaction"), the Compensation Committee will determine
whether provision will be made in connection with the Corporate Transactions
for assumption of the options under the Plan or substitution of appropriate
new options covering the stock of the successor corporation, or an affiliate
of the successor corporation. If the Compensation Committee determines that no
such assumption or substitution will be made, each outstanding option under
the Plan shall automatically accelerate so that it will become 100% vested and
exercisable immediately before the Corporate Transaction, except that
acceleration will not occur if, in the option of the Company's accountants, it
would render unavailable "pooling of interest" accounting for the Corporate
Transaction.
Repurchase Rights Under the Plan. With respect to the Plan, the Compensation
Committee has the discretion to authorize the issuance of unvested shares of
Common Stock pursuant to the exercise of a stock option. If the optionee
ceases to be employed by or provide services to the Company, all shares of
Common Stock issued on exercise of a stock option which are unvested at the
time of cessation shall be subject to repurchase by the Company at the
exercise price paid for such shares. The terms and conditions upon which the
repurchase rights are exercisable by the Company are determined by the
Compensation Committee and set forth in the agreement evidencing such right.
The Compensation Committee has discretionary authority to cancel the Company's
outstanding repurchase rights with respect to one or more shares purchased or
purchasable under an option granted pursuant to the Plan. In the event of a
terminating event or a Corporate Transaction under the Plan, if vesting of the
options accelerates, the repurchase rights of the Company with respect to
shares previously acquired on exercise of options granted under the Plan shall
terminate.
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<PAGE>
CERTAIN TRANSACTIONS
In November 1996, Mr. McNulty subscribed to purchase 1,150,000 shares of the
Common Stock at $0.02 per share. In March 1997, the Company issued 250,000
shares of its Series A Preferred Stock to Cyber Depot, Inc., in exchange for
certain assets and liabilities of Cyber Depot, Inc., relating to Internet
shopping including hardware, software and certain furniture and fixtures. Mr.
McNulty is the controlling shareholder of Cyber Depot, Inc. and is also the
President, Chief Executive Officer and a Director of the Company. In
connection with such transaction, Mr. McNulty was issued five year warrants to
purchase 187,500 shares of Common Stock with an excise price of $3.00 per
share, as well as registration rights providing for one demand and unlimited
piggy-back registration rights. See "Description of Securities--Warrants" and
"--Registration Rights."
In April 1997, in a private placement, the Company sold 500,000 shares of
its Series A Preferred Stock at a price of $0.40 per share and 100,000 shares
of its Common Stock at $0.02 per share to idealab!, a corporation of which
Bill Gross, the Company's Chairman of the Board, is a director. In connection
therewith, idealab! was issued five year warrants to purchase 187,500 shares
of Common Stock with an exercise price of $3.00 per share, as well as
registration rights providing for one demand and unlimited piggy-back
registration rights. See "Description of Securities--Warrants" and "--
Registration Rights."
In May 1997, the Company sold 66,667 shares of its Series B Preferred Stock
in a private placement at a price of $3.00 per share to Kipling Isle, Ltd., a
company controlled by Paul J. Hill, a Director of the Company. In connection
therewith, Kipling Isle, Ltd. was issued five year warrants to purchase 33,333
shares of Common Stock with an exercise price of $3.00 per share as well as
registration rights providing for one demand and unlimited piggy-back
registration rights. See "Description of Securities--Warrants" and "--
Registration Rights."
In May 1997, the Company sold 100,000 shares of Series B Preferred Stock in
a private placement at a price of $3.00 per share to Christopher B. Cannon who
controls Cannon Industries, Inc., in which Edward Bradley, a Director of the
Company, is an executive officer. Mr. Cannon was issued five-year warrants to
purchase 50,000 shares of Common Stock with an exercise price of $3.00, as
well as registration rights providing for one demand and unlimited piggy-back
registration rights. See "Description of Securities--Warrants" and "--
Registration Rights."
In June 1997, the Company, through idealab!, purchased its domain name,
Shopping.com, from Magdalena Yesil. As consideration, Ms. Yesil received
30,000 shares of the common stock of idealab!, 30,000 shares of Common Stock
of the Company and $30,000 from the Company.
In August 1997, the Company sold 8,333 shares of its Series B Preferred
Stock in a private placement at a price of $3.00 per share to Ms. Webster, the
Company's Chief Financial Officer and Secretary. In connection therewith, Ms.
Webster was issued five year warrants to purchase 4,166 shares of Common Stock
with an exercise price of $3.00 per share as well as registration rights
providing for one demand and unlimited piggy-back registration rights. See
"Description of Securities--Warrants" and "--Registration Rights."
On August 19, 1997 Shopping.com signed an agreement with CitySearch, a
market innovator in providing community-based online information services for
the Web, to provide necessary back office transactions support for
CitySearch's new electronic commerce pilot program. According to the
agreement, Shopping.com will provide "shopping cart" tools, customer credit
authentication and verification, coordination with the merchant that an order
has been placed, communication with the customer when the order will be
shipped, collection of payment from the user and disbursement of payments to
the merchant. CitySearch plans to develop, manage, and monitor the electronic
commerce program, select customers for participation in the pilot program, as
well as market the program through its Austin CitySearch Web site. The pilot
program will be launched in early September and will run for a minimum of two
months. In October 1995, Mr. Gross co-founded CitySearch, a web-based city
directory which operates in eight cities, and has served on its Board since
such time.
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<PAGE>
The Company has entered into employment agreements with Robert J. McNulty
and Mark S. Winkler. See "Management--Employment Agreements."
See "Management--Directors Compensation" for a description of certain
options granted members of the Company's Board.
Certain employees of the Company have entered into shareholder agreements
with Mr. McNulty and the Company and have given irrevocable proxies to Mr.
McNulty. See "Description of Securities--Shareholder Agreements."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained on an
arms-length basis from unaffiliated third parties. The Company has adopted a
policy pursuant to which all transactions (including, without limitation, the
borrowing of money) between the Company and its officers, directors and
affiliates will be on terms no less favorable for the Company than could be
obtained on an arms-length basis from unrelated third parties and will be
approved by a majority of the independent and disinterested members of the
Company's Board of Directors.
Previous Legal Proceedings. On September 30, 1994, the Securities and
Exchange Commission (the "SEC") filed a complaint arising out of actions taken
in 1989 by officers of four public corporations, AG Automotive Warehouses,
Inc., Auto Depot, Inc., HQ Office Supplies Warehouse, Inc., and HQ Office
International Inc. (collectively, the "Corporations"), in which Mr. McNulty
was Chairman of the Board but not an officer. Funds from two of the
Corporations were used to purchase securities of other companies from the
Corporations' market-maker, who threatened to abandon the market if this were
not done. The Corporations failed to disclose properly the transactions in
filings, on such Corporations' Quarterly Report on Form 10-Q for September
1990 which were filed in November 1990. The transactions were subsequent to
the end of such Corporations' fiscal quarters. After Mr. McNulty was advised
that such transactions were not properly disclosed, the filings were amended
in January 1991. The improper and amended filings were disclosed in the
subsequent filings on such Corporations' Annual Report on Form 10-K in May
1991. Such Corporations also made inter-company loans with funds which were
proceeds of securities offerings and not disclosed in the filings. Mr. McNulty
resigned as a director of all of the Corporations in April 1991.
The complaint alleged that, with the knowledge of Mr. McNulty, officers of
said Corporations had failed to disclose certain inter-company transactions,
loans and use of proceeds and loans or transfers to the underwriter and
market-maker for the Corporations rather than the stated purposes of funding
issuers' operations and thereby defrauded investors and failed to make
required filings with the SEC. Mr. McNulty personally met with the enforcement
division of the SEC, and, without admitting or denying the allegations,
consented to a judgment. Mr. McNulty also consented to the repayment of
$70,000 which was a loan to a company controlled by him.
On October 10, 1995, the United States District Court for the Southern
District of New York entered a consent judgment in which Mr. McNulty, neither
admitted nor denied the allegations of the complaint. The judgment enjoined
Mr. McNulty from violating section 17(a) of the Securities Act of 1933, as
amended, and sections 10(b), 13(a), 13(b), 13(b)(2)(a) and 13(d) and Rules
10b-5, 12(b)-20 13a-1, 13a-13, 13b2-1, 13b2-2 and 13d-1 of the Securities
Exchange Act of 1934, as amended. The SEC ordered Mr. McNulty to disgorge
$70,000 to pay prejudgment interest but waived the disgorgement order,
prejudgment interest and a civil penalty contingent upon the accuracy and
completeness of Mr. McNulty's statement of financial condition. See
"Management--Robert J. McNulty."
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 19, 1997 and as
adjusted to reflect the sale of 1,300,000 shares of Common Stock offered
hereby, (i) by each person who is known to the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) by each director
and executive officer of the Company and (iii) by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING(1) OFFERING(2)
NAME AND ADDRESS OF BENEFICIAL --------------------------------------------
OWNER(3) NUMBER PERCENT NUMBER PERCENT
------------------------------ ----------- --------------------- ----------
<S> <C> <C> <C> <C>
Robert J. McNulty(4)............... 1,325,000 49.04% 1,110,000 27.74%
idealab! .......................... 600,000 22.21 600,000 14.99
Bill Gross(5)...................... 600,000 22.21 600,000 14.99
Douglas Hay........................ 70,000 2.59 70,000 1.75
Kipling Isle, Ltd. ................ 66,667 2.47 66,667 1.67
Paul J. Hill(6).................... 66,667 2.47 66,667 1.67
Mark S. Winkler.................... 25,000 * 25,000 *
Kristine E. Webster................ 28,333 1.05 28,333 *
Edward F. Bradley(7)............... 0 * 0 *
En Pointe Technologies, Inc. ...... 125,000 4.63 125,000 3.12
----------- -----------
All directors and executive
officers as a group (7 persons)... 2,240,000 82.90% 2,025,000 50.60%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable, or
become exercisable within 60 days from the date hereof, are deemed
outstanding. However, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person. Percentage
ownership is based on 2,702,000 shares of Common Stock outstanding prior
to this offering (giving effect to the conversion of the Company's Series
A and Series B Preferred Stock into shares of Common Stock) and 4,002,000
shares of Common Stock outstanding after this offering.
(2) Assumes no exercise of any portion of the Underwriters' Over-Allotment
Option to purchase up to an aggregate of 195,000 shares of Common Stock.
Assumes no exercise of warrants issued and outstanding to purchase
1,226,000 shares of Common Stock which warrants are not exercisable for a
period of 90 days following the date of this Prospectus. See "Description
of Securities--Warrants."
(3) The address of each of the Beneficial Owners is 2101 East Coast Highway,
Garden Level, Corona del Mar, CA 92625 except for En Pointe Technologies,
Inc. whose address is 100 North Sepulveda Blvd., 19th Floor, El Segundo,
CA 90245.
(4) Includes the 250,000 shares of Common Stock which are subject to
irrevocable proxies held by Mr. McNulty, and includes 250,000 shares of
Series A Preferred Stock owned by Cyber Depot, Inc. Proxies representing
215,000 shares of Common Stock terminate upon the closing of this
offering. See "Description of Securities--Shareholder Agreements."
(5) Includes 600,000 shares of Common Stock held by idealab!, a California
corporation of which Mr. Gross is a director, as to which shares Mr. Gross
disclaims beneficial ownership, except to the extent of his derivative
ownership interest in idealab!.
(6) Includes 66,667 shares of Common Stock held by Kipling Isle, Ltd., a
corporation controlled by Paul J. Hill.
(7) Does not include shares of Common Stock held by Christopher B. Cannon in
which stock, Mr. Bradley claims no beneficial interest.
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<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Amended and Restated Articles of Incorporation currently
authorizes 8,000,000 shares of which 1,415,500 shares are currently issued and
outstanding without giving effect to the conversion of Preferred Stock,
1,158,000 shares of which have been issued to employees and consultants of the
Company. The holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders, except
that, upon giving notice required by law, shareholders may cumulate their
votes in the election of directors. Under cumulative voting, each shareholder
may give any one candidate whose name is placed in nomination prior to the
commencement of voting a number of votes equal to the number of directors to
be elected, multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute such number of votes among as many
candidates as the shareholder sees fit. The effect of cumulative voting is
that the holders of a majority of the outstanding shares of Common Stock may
not be able to elect all of the Company's directors. Holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding senior
securities. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, when issued, validly issued, fully paid and nonassessable.
After completion of this offering, the Company will file a new Amended and
Restated Articles of Incorporation which will authorize 20,000,000 shares of
Common Stock, of which 4,002,000 shares of Common Stock will be issued and
outstanding (assuming no exercise of the Over-Allotment Option and the
Representative's Warrants), with all of the rights discussed above.
PREFERRED STOCK
The Company is authorized to issue 5,500,000 shares of Preferred Stock.
1,500,000 shares of Series A Convertible Preferred Stock are authorized of
which 750,000 shares of the Series A Preferred Stock have been issued and are
outstanding. 4,000,000 shares of the Series B Preferred Stock are authorized
of which 536,500 shares are issued and outstanding. The Preferred Stock
carries certain rights, preferences and privileges including liquidation,
conversion and dividend preferences. However, upon the closing date of this
offering, all of the issued and outstanding Preferred Stock will be
automatically converted to Common Stock on a one share of Preferred Stock for
one share of Common Stock basis. After the completion of this offering, the
Amended and Restated Articles of Incorporation will not authorize the issuance
of any shares of Preferred Stock.
WARRANTS
In the private placements of the Company's Series A and Series B Preferred
Stock, one warrant exercisable until May 31, 2002 at an exercise price of
$3.00 for one share of Common Stock was issued with each two shares of
preferred stock purchased for an aggregate of 643,250 shares. In the private
placement of the Promissory Notes, warrants to purchase 33,300 were issued for
each $100,000 principal of a Promissory Note, which warrants are exercisable
until May 31, 2002 at an exercise price of $6.00 per share of Common Stock,
for an aggregate of 382,950 shares. In connection with the Company's agreement
with En Pointe, the Company issued warrants exercisable for a five year term
at an exercise price of $4.50 per share of Common Stock, for an aggregate of
199,800 shares. The warrants are transferable separately from the Series A and
Series B Preferred Stock and the Promissory Notes, but the warrants are not
exercisable for a period equal to the earlier of 90 days following the date of
this Prospectus or June 30, 1998.
The warrants may be exercised for the shares of Common Stock which is not
registered and the transfer of which is restricted, unless registered upon
surrender of the certificate(s) therefor on or prior to the expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent")
45
<PAGE>
with the form of "Election to Purchase" completed and executed as indicated,
accompanied by payment (in the form of certified or cashier's check payable to
the order of the Company or assignment of certain securities) of the full
exercise price or value for the number of warrants being exercised.
The warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including issuances of Common Stock (or securities convertible, exchangeable
or exercisable into Common Stock) at less than market value, stock dividends,
stock splits, mergers, a sale of substantially all of the Company's assets,
and for other extraordinary events; provided, however, that no such adjustment
shall be made upon among other things, (i) the issuance or exercise of options
or other securities under the Company's Plan or other employee benefit plans,
or (ii) the sale or exercise of outstanding options or warrants.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof, will make a cash payment based upon the current market value
of such fractional shares. A holder of Warrants will not possess any rights as
a stockholder of the Company unless and until the Warrants are exercised.
See "Underwriting" for a description of the Representative's Warrants.
PROMISSORY NOTES
The Company has issued $1,750,000 of Promissory Notes, which have a due date
of nine months from the date of issuance or on the closing of this offering,
whichever is earlier. The Promissory Notes are unsecured, subordinated and
carry an interest rate of 10% per annum.
REGISTRATIONS RIGHTS
Registration Rights for Common Stock Shareholders
The shareholders of the existing Common Stock have piggyback registration
rights pursuant to a registration rights agreement. The piggyback registration
rights will be permitted only on registrations following this offering and
then subject to the determination by the underwriter or the Company of the
registration as to the appropriateness of the amount of the registration of
the Common Stock to be registered thereby.
Registration Rights for the Existing Series A and Series B Preferred Stock
Shareholders and Holders of the Warrants
The shareholders of Series A and Series B Preferred Stock and holders of the
warrants have registration rights pursuant to registration rights agreement
which allows at least fifty percent of the holders of said Preferred Stock and
warrants to make one demand for registration of the Common Stock held by them
after conversion of their Preferred Stock or exercise of their warrants, as
applicable, only after this offering and then subject to certain limitations
in connection with the approval of an underwriter. The registration rights
agreements also provide for piggyback rights on subsequent registration of
securities of the Company following this offering and subject to the approval
of the underwriter or the Company.
See "Certain Transactions" for a description of Registration Rights granted
to the Company's officers and directors.
SHAREHOLDER AGREEMENTS
Certain of the employees of the Company who are holders of the Common Stock
of the Company have entered into shareholder agreements in which they have
agreed to be subject to repurchase covenants by the Company and Mr. McNulty in
the event of, among other situations, their death, disability and termination
of employment. There are vesting provisions, which vary for each shareholder,
pursuant to which Mr. McNulty may purchase their stock at a price set by the
Board of Directors. The shareholder agreements also provides for a right of
first refusal in favor of the Company and Mr. McNulty in the event that the
holder of the Common Stock desires to sell or transfer the Common Stock. The
shareholder agreements are terminated after the effective date of this
offering. Certain of the employees who are also shareholders of the Company
have given to Mr. McNulty
46
<PAGE>
irrevocable proxies to vote their shares which proxies terminate on the
earlier of 10 years from their date of grant or on the date of this
Prospectus. Of such proxies, proxies representing 215,000 shares terminate on
the date of this Prospectus and proxies representing 35,000 shares do not
terminate.
CERTAIN MARKET INFORMATION
The Company has applied and been accepted for inclusion of the Common Stock
on the Bulletin Board under the symbol IBUY, although there can be no
assurance that an active trading market will develop. While the Company meets
the quantitative criteria for inclusion on the NASDAQ system, the Company's
application for quotation on the NASDAQ SmallCap Market has been withdrawn,
while the application was being considered for denial. The Company does not
agree with the concerns of the staff of the NASDAQ SmallCap Market and intends
to pursue obtaining quotation of its Common Stock on the NASDAQ SmallCap
Market, including filing an appeal and attending a hearing if necessary. No
assurance can be given that the Common Stock will ever be included for
quotation on the NASDAQ SmallCap Market. See "Risk Factors--No Assurance of
Public Market for the Common Stock; No Assurance of NASDAQ SmallCap Listing."
TRANSFER AGENT AND REGISTRAR
The Transfer agent and Registrar for the Common Stock and the Warrants of
the company is U.S. Stock Transfer Corporation, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, 4,002,000 shares of Common Stock will be
issued and outstanding after giving effect to the automatic conversion of the
Preferred Stock and assuming no exercise of (i) the Underwriters' Over-
Allotment Option or (ii) the Representative's Warrant. The 1,300,000 shares of
Common Stock sold in this offering registered on the Registration Statement of
which this Prospectus forms a part will be freely transferable without
restriction or further registration under the Securities Act by persons other
than "affiliates" of the Company (as that term is defined in Rule 144 under
the Securities Act). The remaining 2,702,000 shares of Common Stock issued by
the Company prior to this offering will be "restricted securities," as that
term is defined under Rule 144 promulgated under the Securities Act, and may
be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration such as Rule 144.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year, but less than
two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 40,020 shares immediately after
completion of this offering) or (ii) the average weekly trading volume during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least two years would be
entitled to sell such shares pursuant to Rule 144(k) without regard to the
volume limitation, manner of sale provisions, notice or other requirements of
Rule 144.
In addition, restricted securities issued and sold by the Company in
reliance on Rule 701 of the Securities Act may be resold under Rule 144
without compliance with certain of Rule 144's requirements. Subject to certain
limitations on the aggregate offering price of a transaction and other
conditions, Rule 701 may be relied upon by the Company with respect to certain
sales of shares of Common Stock by the Company to its employees, directors,
officers, consultants or advisors, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons, such
as the Plan. Securities issued in reliance on Rule 701 are restricted
securities and, beginning 90 days after the effective date of this Prospectus,
may be sold pursuant to
47
<PAGE>
Rule 144 by persons other than affiliates of the Company subject only to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its two-year minimum holding period requirements. Rule 701
will not be available to the Company once it becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended.
Each holder of Common Stock who is an officer, director or key employee of
the Company and each holder of Preferred Stock has entered into a "lock-up"
agreement providing that such shareholder will not offer, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of the Company's Common Stock or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of the Company's Common Stock for a period of 12
months from the date of this Prospectus without the prior written consent of
the Representative. 1,300,000 shares of Common Stock will be eligible for sale
after the effective date of this offering, an additional 802,000 shares of
Common Stock will be eligible for sale 12 months from the date of this
Prospectus and an additional 1,900,000 shares of Common Stock will be eligible
for sale from April 1999 through August 1999, subject to satisfaction of the
applicable conditions of Rule 144.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made of the effect, if any, that
future sales of restricted shares or the availability of restricted shares for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the restricted shares of Common Stock in the
public market could adversely affect the then prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through the Representative, Waldron & Co., Inc. have
severally agreed to purchase from the Company the following respective number
of shares at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus and the Company has
agreed to sell to the Underwriters named below 1,300,000 shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Waldron & Co., Inc. ............................................. 800,000
Gaines, Berland Inc. ............................................ 100,000
H.J. Meyers & Co., Inc. ......................................... 100,000
Redwine & Company, Inc. ......................................... 100,000
Morgan Fuller Capital Group...................................... 75,000
Pryor, McClendon, Counts & Co., Inc. ............................ 75,000
LT Lawrence & Co., Inc. ......................................... 50,000
---------
Total ....................................................... 1,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all Shares offered hereby, if any of such Shares are purchased. The
Company has been advised by the Representative that (i) the Underwriters
propose to offer the Shares purchased by them directly to the public at the
offering price set forth on the cover page of this Prospectus and to certain
dealers at a price that represents a concession of $0.40 per Share, or 4.44 %
per Share and (ii) none of the Underwriters intends to sell any Shares to
accounts for which such Underwriter exercises discretionary authority. After
the initial public offering of the Shares, the offering price and the selling
terms may be changed by the Underwriters.
The Company has granted the Underwriters the Over-Allotment Option,
exercisable for 45 days from the effective date of this offering, to purchase
up to 195,000 Shares at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of Shares to be purchased by it shown in
the above table represents to the total shown, and the Company will be
obligated, pursuant to the option, to sell such Shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the Shares offered hereby. If purchased, such
additional Shares will be sold by the Underwriters on the same terms as those
on which the 1,300,000 Shares are being offered.
The Company has agreed to pay the Representative a non-accountable expense
allowance in the amount of 3% of the offering proceeds received from the sale
of the Shares, which is estimated at $351,000 or $403,650 if the Over-
Allotment Option is exercised.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act. Insofar as indemnification for
liabilities arises under the Securities Act that may be permitted to
directors, officers, and controlling persons of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
At the closing of this offering, the Company will issue as to the
Representative, for $100, a warrant (the "Representative's Warrants") to
purchase a number of shares (the "Representative's Shares") equal to
122,000 Shares. The Representative's Warrants will be exercisable for a four-
year period commencing one year from the date of this Prospectus at an
exercise price equal to 160% of the price per Share in this offering. The
49
<PAGE>
Representative's Warrants does not entitle the Representative to any rights as
a shareholder of the Company until such warrant is exercised. The
Representative's Warrants may not be transferred, sold, assigned or
hypothecated for a period of one year from the date of this Prospectus except
to officers or partners of the Representative and members of the selling group
and their officers or partners, or by will or operation of law. After one year
from the date of this Prospectus, if a transfer of the Representative's
Warrant occurs to a party not an officer or partner of the Representative or
selling group member, then the Representative's Warrants so transferred must
be immediately exercised.
For the period during which the Representative's Warrant is exercisable, the
holder(s) will have the opportunity to profit from a rise in the market value
of the Common Stock, with a resulting dilution in the interests of the other
shareholders of the Company. The holder(s) of the Representative's Warrant can
be expected to exercise it at a time when the Company would, in all
likelihood, be able to obtain any needed capital from an offering of its
unissued Common Stock on terms more favorable to the Company than those
provided for in the Representative's Warrants. Such facts may adversely affect
the terms on which the Company can obtain additional financing.
The Company must file all necessary undertakings required by the Commission
in connection with the registration of the shares issuable upon exercise of
the Representative's Warrants. Upon the Representative's demand, the Company
will file a registration statement or post-effective amendment so as to permit
the Representative to sell publicly the shares issuable upon exercise of the
Representative's Warrants. The Company has agreed to register the securities
issuable upon exercise of the Representative's Warrants under the Act on two
occasions at any time within five (5) years from the date of this Prospectus
(the first at the Company's expense and the second at the expense of the
holders of the Representative's Warrants). The Representative's Warrants
includes a provision permitting the holder to elect a cashless exercise
pursuant to which the holder may exercise a portion of the Representative's
Warrants in exchange for a decrease in the total number of shares underlying
the Representative's Warrants. The Company has also granted certain piggy-back
registration rights to holders of the Representative's Warrants which expire
seven (7) years from the date of this Prospectus.
The Company has also agreed to appoint the Representative, for a period of
three years, as its exclusive advisor for the purpose of identifying and
developing future merger and acquisition candidates. If, during the term of
this appointment, the Company participates in any merger, acquisition or other
transaction, whether as acquiror or acquiree, including an acquisition of
assets or stock and in which it pays for the acquisition, in whole or in part,
with shares of the Company's Common Stock, then it will pay for the
Representative's services an amount equal to 5% of the first million dollars
of value involved in the transaction, 4% of the second million, 3% of the
third million, 2% of the fourth million and 1% of all such value above
$4,000,000.
The officers, directors and key employees of the Company have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock owned or
hereafter acquired by them for one year following the date of this Prospectus
without the Representative's prior written consent. See "Shares Eligible For
Future Sale."
The Representative will have the right, for a period of three years
following the date of this Prospectus, to receive notice of, and to have an
observer present at, meetings of the Board of Directors and shareholders of
the Company and the Company is obligated to reimburse the Representative for
the costs and expenses reasonably incurred by such observer in attending such
meetings, but such observer will not otherwise be entitled to compensation
from the Company.
In connection with the private placement of securities by the Company, the
Company paid Waldron & Co., Inc., as placement agent, a commission in the
amount of $170,000 and a non-accountable expense allowance of $51,000.
Further, the Company owes Waldron & Co., Inc. an additional $60,000 in
commissions and $18,000 in non-accountable expenses. The Company also issued
to Waldron & Co., Inc. warrants (the "Placement Agent Warrants") to purchase
75,000 shares of Common Stock at an exercise price of $3.00 per share
exercisable for a period of five years. The Placement Agent Warrants will be
canceled prior to consummation of this offering.
50
<PAGE>
While Waldron & Co., Inc. has been in the investment banking business and a
registered NASD member since 1939, it has only recently participated as a
managing underwriter in its first public offering of securities. Prospective
purchasers of Common Stock in this offering should consider the lack of
experience of Waldron & Co., Inc. in evaluating an investment in the Company,
See "Risk Factors--Lack of Experience of Waldron & Co., Inc."
Prior to this offering, there has been no public market for any securities
of the Company. Consequently, the initial public offering price for the Shares
has been determined by negotiation between the Company and the Representative.
Among the factors considered in such negotiations will be prevailing market
conditions, the results of operations of the Company in recent periods, the
price-to-earnings ratios of publicly traded companies that the Company and the
Representative believe to be comparable to the Company, the revenues and
earnings of the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant. The offering price does not necessarily bear any direct relation to
current market price, asset value or net book value of the Company.
The Representative has indicated its intention to make a market in the
Company's Common Stock after the offering made hereby. In connection with that
activity, the Representative may, but shall not be required to, effect
transactions which stabilize or maintain the market price of the Common Stock
offered hereby at a level above that which might otherwise prevail in the open
market. Such stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for the Company by Lewis, D'Amato, Brisbois & Bisgaard LLP, Los Angeles,
California. Leon M. Cooper, a partner of Lewis, D'Amato, is the beneficial
owner of 20,000 shares of Common Stock of the Company and 100,000 shares (10%)
of the common stock in Cyber Depot, Inc., the controlling shareholder of which
is Robert J. McNulty and which holds 250,000 shares of the Company's Series A
Preferred Stock. Certain matters will be passed upon for the Underwriters by
Donahue, Mesereau & Leids LLP, Los Angeles, California.
EXPERTS
The balance sheet of the Company as of January 31, 1997 and the related
statements of operations, shareholders' equity (deficit) and cash flows for
the fiscal year ended January 31, 1997, included elsewhere in this Prospectus,
have been included in reliance on the report of Singer Lewak Greenbaum &
Goldstein LLP, independent certified public accountants, given on the
authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. Office of the Commission, a
Registration Statement on Form SB-2 under the Securities Act, with respect to
the securities offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in
such Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding
the contents of any contract or any other document referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, each such statement being
qualified in all respects by such reference. The Registration Statement and
the exhibits and schedules thereto may be inspected, without charge, and
copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at Judiciary Plaza, Room 1024,
51
<PAGE>
450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661,
and copies of all or any part thereof may be obtained from such offices upon
the payment of the fees prescribed by the Commission. Electronic filings made
by the Company through the Commission's Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") System are publicly available through the Commission's
World Wide Web site (http://www.sec.gov), which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Company is not subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
Upon completion of this offering, the Company will be subject to the
information requirements of the Exchange Act, and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information may be inspected at the
public references facility of the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W. 20549, and at its regional offices located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Commission at such
address. Such reports, proxy statements and other information can also be
inspected at the Commission's regional offices at the addresses indicated
above.
52
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................... F-2
FINANCIAL HIGHLIGHTS
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Shareholders' Equity (Deficit)............................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Shopping.com
We have audited the accompanying balance sheet of Shopping.com (a
development stage company) as of January 31, 1997, and the related statements
of operations, shareholders' equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shopping.com as of January
31, 1997, and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $201,697 and had negative cash
flows from operations for the year ended January 31, 1997, and had a
shareholders' deficit at January 31, 1997. These factors, among others, as
discussed in Note 1 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
June 17, 1997
F-2
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
AS OF JANUARY 31, 1997 AND JULY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1997 1997
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets
Cash (Note 2)............................................. $ 63 $ 289,392
Stock subscription receivable............................. 23,000 --
Prepaid expenses.......................................... -- 115,286
--------- -----------
Total current assets.................................... 23,063 404,678
Furniture and equipment, net (Note 3)....................... 12,165 800,931
Loan origination fees....................................... -- 109,778
Deferred offering costs..................................... -- 20,000
Other assets................................................ 3,956 107,814
--------- -----------
Total assets............................................ $ 39,184 $ 1,443,201
========= ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities
Notes payable (Note 6).................................... $ -- $ 950,000
Note payable--related party (Note 5)...................... 50,000 --
Current portion of capital lease obligation (Note 4)...... -- 15,993
Accounts payable.......................................... 35,986 322,259
Other accrued liabilities................................. 31,845 53,829
Deferred revenue.......................................... -- 52,500
--------- -----------
Total current liabilities............................... 117,831 1,394,581
Capital lease obligation, net of current portion (Note 4)... -- 74,200
--------- -----------
Total liabilities....................................... 117,831 1,468,781
--------- -----------
Commitments (Note 4 and 9)
Shareholders' equity (deficit) (Note 7)
Preferred stock, Series A convertible, no par value,
1,500,000 shares authorized, 0 and 1,500,000 shares
issued and outstanding................................... -- 300,000
Preferred stock, Series B convertible, no par value,
4,000,000 shares authorized, 0 and 686,666 shares issued
and outstanding.......................................... -- 916,781
Common stock, no par value, 8,000,000 shares authorized,
2,305,000 and 2,565,000 shares issued and outstanding.... 23,050 31,050
Additional paid-in capital................................ 100,000 --
Deficit accumulated during development stage.............. (201,697) (1,273,411)
--------- -----------
Total shareholders' equity (deficit).................... (78,647) (25,580)
--------- -----------
Total liabilities and shareholders' equity (deficit).. $ 39,184 $ 1,443,201
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997 AND
THE SIX MONTHS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
FOR THE SIX MONTHS SIX MONTHS (FEBRUARY
YEAR ENDED ENDED ENDED 1996) TO
JANUARY 31, JULY 31, JULY 31, JULY 31,
1997 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $ -- $ 55,541 $ -- $ 55,541
Cost of sales........... -- 50,509 -- 50,509
--------- ----------- --------- -----------
Gross profit............ -- 5,032 -- 5,032
--------- ----------- --------- -----------
Operating Expenses...... 201,697 1,070,208 70,391 1,271,905
--------- ----------- --------- -----------
Loss from operations.... (201,697) (1,065,176) (70,391) (1,266,873)
Other expenses
Interest expense...... -- (6,538) -- (6,538)
--------- ----------- --------- -----------
Total other
expenses........... -- (6,538) -- (6,538)
--------- ----------- --------- -----------
Net loss................ $(201,697) $(1,071,714) $ (70,391) $(1,273,411)
========= =========== ========= ===========
Net loss per share...... $ (0.03) $ (0.16) $ (0.01) $ (0.19)
========= =========== ========= ===========
Weighted average shares
outstanding............ 6,809,588 6,809,588 6,809,588 6,809,588
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED JANUARY 31, 1997 AND
THE SIX MONTHS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
------------------ ------------------ DEFICIT
SERIES A SERIES B ACCUMULATED
CONVERTIBLE CONVERTIBLE COMMON STOCK ADDITIONAL DURING
------------------ ------------------ ----------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
--------- -------- ------- ---------- --------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1,
1996................... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common
stock.................. 2,305,000 23,050 23,050
Capital contributed by
Cyber Depot, Inc. to
purchase assets and
develop proprietary
software............... 100,000 100,000
Net loss................ (201,697) (201,697)
--------- -------- ------- ---------- --------- ------- --------- ----------- -----------
Balance, January 31,
1997................... -- -- -- -- 2,305,000 23,050 100,000 (201,697) (78,647)
Issuance of common
(unaudited)............ 260,000 8,000 8,000
Issuance of preferred
stock, Series A for
cash (unaudited)....... 1,000,000 200,000 200,000
Issuance of preferred
stock, Series A for
assets and proprietary
software of Cyber
Depot, Inc.
(unaudited)............ 500,000 100,000 (100,000) --
Issuance of preferred
stock, Series B for
cash (unaudited)....... 686,666 1,030,000 1,030,000
Offering costs
(unaudited)............ (113,219) (113,219)
Net loss (unaudited).... (1,071,714) (1,071,714)
--------- -------- ------- ---------- --------- ------- --------- ----------- -----------
Balance, July 31, 1997
(unaudited)............ 1,500,000 $300,000 686,666 $ 916,781 2,565,000 $31,050 $ -- $(1,273,411) $ (25,580)
========= ======== ======= ========== ========= ======= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1997 AND
THE SIX MONTHS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
FOR THE YEAR SIX MONTHS SIX MONTHS (FEBRUARY
ENDED ENDED ENDED 1996) TO
JANUARY 31, JULY 31, JULY 31, JULY 31,
1997 1997 1996 1997
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss.................. $(201,697) $(1,071,714) $(70,391) $(1,273,411)
Adjustments to reconcile
net loss to net cash used
in operating activities
Depreciation of
furniture and
equipment.............. 1,276 23,848 576 25,124
Amortization of loan
origination fees....... -- 13,722 -- 13,722
Expense recognized from
issuing common stock
below market value..... -- 6,000 -- 6,000
(Increase) in prepaid
expenses............... -- (115,286) -- (115,286)
(Increase) in other
assets................. (3,956) (103,858) (3,956) (107,814)
Increase in accounts
payable................ 35,986 271,273 -- 307,259
Increase in other
accrued liabilities.... 31,845 21,984 -- 53,829
Increase in deferred
revenue................ -- 52,500 -- 52,500
--------- ----------- -------- -----------
Net cash used in operating
activities................. (136,546) (901,531) (73,771) (1,038,077)
--------- ----------- -------- -----------
Cash flows from investing
activities
Purchase of furniture and
equipment................ (13,441) (722,421) (13,441) (735,862)
--------- ----------- -------- -----------
Net cash used in investing
activities................. $ (13,441) $ (722,421) $(13,441) $ (735,862)
========= =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND
THE SIX MONTHS ENDED JULY 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
FOR THE SIX MONTHS SIX MONTHS (FEBRUARY
YEAR ENDED ENDED ENDED 1996) TO
JANUARY 31, JULY 31, JULY 31, JULY 31,
1997 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing
activities
Issuance of note payable--
related party............... 50,000 -- -- 50,000
Payments on note payable--
related party............... -- (50,000) -- (50,000)
Issuance of notes payable.... -- 950,000 -- 950,000
Payment of loan origination
fees........................ -- (123,500) -- (123,500)
Proceeds from the issuance of
preferred stock, Series A... -- 200,000 -- 300,000
Proceeds from the issuance of
preferred stock, Series B... -- 1,030,000 -- 1,030,000
Payment of offering costs.... -- (118,219) -- (118,219)
Proceeds from the issuance of
common stock................ 50 25,000 -- 25,050
Capital contribution......... 100,000 -- 87,212 --
-------- ---------- ------- ----------
Net cash provided by financing
activities.................... 150,050 1,913,281 87,212 2,063,331
-------- ---------- ------- ----------
Net increase in cash........... 63 289,329 -- 289,392
Cash, beginning of period...... -- 63 -- --
-------- ---------- ------- ----------
Cash, end of period............ $ 63 $ 289,392 $ -- $ 289,392
======== ========== ======= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the six months ended July 31, 1997, the Company paid $1,000 (unaudited)
in interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended January 31, 1997, the Company issued common stock in the
amount of $23,000 for a subscription receivable.
During the six months ended July 31, 1997, the Company issued 500,000 shares
of Series A convertible preferred stock in exchange for certain assets and
software research and development of Cyber Depot, Inc. valued at $100,000
(unaudited). In addition, the Company entered into a capital lease obligation
of $90,193 (unaudited).
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
Shopping.com (the "Company") was incorporated in California on November 22,
1996. Cyber Depot, Inc. ("Cyber") was incorporated in California in January
1996 and among other business ventures commenced the design and development of
proprietary software for the Internet shopping marketplace in February 1996.
In March 1997, Cyber agreed to sell certain assets and liabilities and
proprietary software to Shopping.com for 500,000 shares of Series A
Convertible Preferred Stock, and Shopping.com continued the design and
development of the proprietary software. The operations of Cyber devoted to
the design and development of the proprietary software are considered to be
the predecessor operations of the Company and have been included with the
operations of the Company since February 1996. The propriety software acquired
by the Company in this transaction has been expensed as software research and
development. The Company is engaged in the design and development of
proprietary software for marketing a broad range of products and services to
retail customers on the Internet. On July 11, 1997, the Company commenced
selling products over the Internet through its website at
http://www.shopping.com.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of the
Company as a going concern. However, the Company has experienced net losses of
$201,697 and $1,071,714 (unaudited) for the year ended January 31, 1997 and
the six months ended July 31, 1997, respectively. In addition, the Company has
used, rather than provided, cash from its operations. In view of the matters
described above, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheets is dependent upon continued
operations of the Company, which in turn, is dependent upon the Company's
ability to continue to meet its financing requirements and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts,
or amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
Management has raised capital during 1997 through private placement
offerings of equity and debt securities and expects to complete an initial
public offering ("IPO") in the latter part of 1997, which management expects
will provide sufficient funding to continue present operations and support
future marketing and development activities.
INTERIM FINANCIAL INFORMATION
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of its operations and cash flows for the periods
presented. The results of operations for the six months ended July 31, 1997
are not necessarily indicative of results for the entire fiscal year ending
January 31, 1998.
ESTIMATES
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 the
disclosures 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.
F-8
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
REVENUE RECOGNITION
The Company recognizes revenue at the time the vendor ships the product to
the customer.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
common equivalent shares outstanding during the period. In connection with the
Company's IPO, convertible preferred stock and warrants to purchase the
Company's common stock issued for consideration below the IPO per share price
(assuming an IPO price of $4.25 on a pre-split basis or $8.50 on a post-split
basis) during the twelve months before the filing of the registration
statement have been included in the calculation of common stock equivalent
shares using the treasury stock method as if they had been outstanding for all
periods presented.
STOCK SUBSCRIPTION RECEIVABLE
At January 31, 1997, the Company had subscriptions to purchase its common
stock of $23,000. This amount was collected subsequent to the balance sheet
date; therefore, the amount is shown as an asset in the accompanying balance
sheet.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months
or less to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost less accumulated depreciation.
Depreciation and amortization are provided using the straight-line method over
estimated useful lives of three to fifteen years as follows:
<TABLE>
<S> <C>
Computer hardware........................................... 5 years
Computer software........................................... 3 years
Furniture and equipment..................................... 5 to 7 years
Leasehold improvement....................................... 15 years
</TABLE>
Maintenance and minor replacements are charged to expense as incurred. Gains
and losses on disposals are included in the results of operations.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for
the year ended January 31, 1997 and for the six months ended July 31, 1997 and
1996 were $0, $11,603 (unaudited), and $0 (unaudited), respectively.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method,
F-9
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
INCOME TAXES (CONTINUED)
deferred income taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's
financial instruments, including cash, accounts payable, and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for note payable also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same.
DEFERRED OFFERING COSTS
Amounts paid for costs associated with an anticipated IPO are capitalized
and will be recorded as a reduction to common stock upon the completion of the
IPO. In the event that the IPO is not successful, the deferred offering costs
will be charged to expense.
LOAN ORIGINATION FEES
Loan origination fees are amounts paid to obtain the $950,000 in debt
financing. These fees are being amortized over the lives of the respective
notes payable (nine months). Any unamortized fees at the completion of the IPO
will be expensed immediately. The amortization of those fees for the six
months ended July 31, 1997 was $13,722 (unaudited).
STOCK SPILT
At the closing of the Company's IPO, the Company will effect a one for two
reverse stock split of its common stock. These financial statements do not
reflect this reverse stock split as it is contingent upon the closing of the
Company's IPO.
STOCK OPTIONS
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for fiscal years beginning after
December 15, 1995. SFAS 123 establishes and encourages the use of the fair
value based method of accounting for stock-based compensation arrangements
under which compensation cost is determined using the fair value of stock-
based compensation determined as of the date of grant and is recognized over
the periods in which the related services are rendered. The statement also
permits companies to elect to continue using the current implicit value
accounting method specified in Accounting Principles Bulletin ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company will use the implicit value based method and will be
required to disclose the pro forma effect of using the fair value based method
to account for its stock-based compensation.
F-10
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
RISKS AND UNCERTAINTIES
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth
in the use of an interest in the Web, the Internet, and other online services
is a recent phenomenon, and there can be no assurance that acceptance and use
will continue to develop or that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and other online services as a medium
of commerce.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Shopping.com online store.
The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices that
could render the Company's existing Web site and proprietary technology and
systems obsolete. The Company's success will depend, in part, on its ability
to license leading technologies useful in its business, enhance its existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of its prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card
numbers. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data.
The online commerce market, particularly over the Internet, is new, rapidly
evolving, and intensely competitive, which competition the Company expects to
intensify in the future. Barriers to entry are minimal, and current and new
competitors can launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies.
The Company carries no inventory, has no warehouse employees or facilities,
and relies on rapid fulfillment from its vendors. To satisfy customer orders,
the Company has no long-term contracts or arrangements with any of its
manufacturers or distributors that guarantee the availability of merchandise,
the continuation of particular payment terms, the extension of credit limits,
or the shopping schedules.
The Company regards its Shopping.com brand name and related software as
proprietary and relies primarily on a combination of copyright, trademark,
trade secret and confidential information laws, and employee and third party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect
against technologies that are substantially equivalent or superior to the
Company's technologies. The Company does not currently hold any patents or
have any patent applications pending for itself or its products and has not
obtained federal registration for any of its trademarks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per
Share," which is effective for financial statements issued for periods ending
after December 31, 1997. SFAS No. 128 requires public companies to present
basic earnings per share and, if applicable, diluted earnings per share
instead of primary and fully-diluted earnings per share. The Company does not
believe that diluted earnings per share in accordance with SFAS No. 128 will
be materially different from the earnings per share previously reported.
F-11
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 2--CASH
The Company maintains cash balances at financial institutions located in
California. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregated to
$137,004 (unaudited) at July 31, 1997. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
NOTE 3--FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1997 1997
----------- --------
(UNAUDITED)
<S> <C> <C>
Computer hardware..................................... $12,761 $570,547
Computer software..................................... -- 49,174
Furniture and equipment............................... 680 162,993
Leasehold improvements................................ -- 43,341
------- --------
13,441 826,055
Less accumulated depreciation and amortization........ 1,276 25,124
------- --------
Total............................................... $12,165 $800,931
======= ========
</TABLE>
NOTE 4--COMMITMENTS
LITIGATION
The Company is involved in certain litigation in the normal course of
business. The Company does not believe that the resolution of any suit will
result in any material adverse effect on the Company's financial position,
results of operations or cash flows.
LEASES
The Company leases a facility for its corporate offices under a non-
cancelable operating lease agreement that expires in 2002. Future minimum
lease payments under this non-cancelable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31,
-----------------------
<S> <C>
1998............................................................ $ 75,489
1999............................................................ 117,282
2000............................................................ 125,798
2001............................................................ 131,594
2002............................................................ 137,390
Thereafter...................................................... 40,565
--------
Total......................................................... $628,118
========
</TABLE>
Rent expense was $13,451 for the year ended January 31, 1997 and $29,422
(unaudited) and $6,594 (unaudited) for the six months ended July 31, 1997 and
1996, respectively.
F-12
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 4--COMMITMENTS (CONTINUED)
LEASES (CONTINUED)
The Company also leases certain office equipment under a non-cancelable
capital lease arrangement. Future minimum lease payments under this lease
agreement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31,
-----------------------
<S> <C>
1998........................................................... $ 13,905
1999........................................................... 23,837
2000........................................................... 23,837
2001........................................................... 23,837
2002........................................................... 23,837
Thereafter..................................................... 9,933
--------
119,186
Less amount representing interest................................ 28,993
--------
90,193
Less current portion............................................. 15,993
--------
Long-term portion.............................................. $ 74,200
========
</TABLE>
Included in furniture and equipment at July 31, 1997 is capital lease
equipment of $90,193 (unaudited) with accumulated amortization of $0
(unaudited).
NOTE 5--NOTE PAYABLE--RELATED PARTY
The Company has a note payable to a related party which is personally
guaranteed by an officer of the Company. In addition, the note is personally
guaranteed by a vice president of the Company and secured by a second deed of
trust on a residence owned by the vice president. The note accrues interest at
the highest rate permitted by California law (approximately 11% at January 31,
1997) and is due 90 days from January 13, 1997.
Subsequent to year-end, $51,000 was repaid which includes accrued interest
of $1,000.
NOTE 6--NOTES PAYABLE
In June and July 1997, the Company issued $950,000 of subordinated notes.
The notes bear interest at 10% per annum and are unsecured. The notes are due
at the earlier of nine months from the date of issuance or closing of the IPO.
In connection with the note agreement, each note holder is entitled to
receive 666 warrants for each $1,000 loaned to purchase the Company's common
stock for $3.00 per share. There is a twelve month "lock-up" on the warrants
and the common stock underlying these warrants. Given the time between the
issuance of the notes and the completion of the IPO, the twelve-month "lock-
up" period for these warrants, and the financial condition of the Company at
the date of grant, the Company has determined that the fair value of the
Company's common stock is less than the exercise price of the warrants.
Accordingly, no additional financing expense has been recognized in connection
with the issuance of these warrants.
F-13
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 7--SHAREHOLDERS' EQUITY (DEFICIT)
SERIES A CONVERTIBLE PREFERRED STOCK
In March 1997, the Company issued 500,000 shares of Series A convertible
preferred stock ("Series A Preferred") in connection with the acquisition of
certain assets and liabilities, and proprietary software developed by Cyber
(see Note 1). The historical cost of the assets and liabilities, and
proprietary software acquired was approximately $100,000 which is the amount
used to value the 500,000 shares of Series A Preferred. In April 1997, the
Company sold 1,000,000 shares of Series A Preferred for a price of $0.20 per
share. The holders of the Series A Preferred are entitled to receive a non-
cumulative dividend of $0.02 per share per annum, payable in cash at the
option of the Company.
Each share of Series A Preferred is convertible into shares of common stock
at the option of the holder. In addition, Series A Preferred will be
automatically converted into shares of common stock based upon the effective
conversion price immediately upon the closing of an IPO of not less than
$6,000,000.
The Series A Preferred has a liquidation preference of $0.20 per share plus
all declared and unpaid dividends prior to the payment of any amount to the
holders of common stock.
Each holder of Series A Preferred was issued one warrant for every two
shares of Series A Preferred to purchase a share of the Company's common stock
for $1.50 per share resulting in 750,000 warrants being issued. Based on the
financial condition of the Company at the time the warrants were issued,
management estimates that the fair value of the Company's common stock was
less than the exercise price of the warrants.
SERIES B CONVERTIBLE PREFERRED STOCK
During May to July 1997, the Company sold 686,666 shares of Series B
convertible preferred stock ("Series B Preferred") for a price of $1.50 per
share. The holders of the Series B Preferred are entitled to receive a non-
cumulative dividend of $0.15 per share per annum, payable in cash at the
option of the Company.
Each share of Series B Preferred is convertible into shares of common stock
at the option of the holder. In addition, Series B Preferred will be
automatically converted into shares of common stock based upon the effective
conversion price immediately upon the closing of an IPO of not less than
$6,000,000.
The Series B Preferred has a liquidation preference of $1.50 per share plus
all declared and unpaid dividends prior to the payment of any amount to the
holders of common stock.
Each holder of Series B Preferred was issued one warrant for every two
shares of Series B Preferred to purchase a share of the Company's common stock
for $1.50 per share resulting in 343,333 warrants being issued. Based on the
financial condition of the Company at the time the warrants were issued,
management estimates that the fair value of the Company's common stock
approximates the exercise price of the warrants.
F-14
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 7--SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTIONS (UNAUDITED)
The Company's board of directors adopted the 1997 Stock Option Plan (the
"Plan") and reserved 500,000 shares of common stock for grants of stock
options under the Plan. Generally, options granted under the Plan expire the
earlier of ten years from the date of grant (five years in the case of an
incentive stock option granted to a holder of 10% or more of the Company's
outstanding capital stock) or three months after the optionee's termination of
employment or service. The Company had not granted any stock options as of
January 31, 1997, therefore, the disclosures required by SFAS No. 123 are not
applicable. Listed below is information regarding stock options granted
subsequent to January 31, 1997.
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE
OPTIONS PRICE
------- --------
<S> <C> <C>
Balance, January 1, 1997................................. -- $ --
Granted.................................................. 356,000 1.50
Exercised................................................ -- --
Expired/terminated....................................... -- --
------- -----
Balance, July 31, 1997................................. 356,000 $1.50
======= =====
</TABLE>
Based on the financial condition of the Company at the time the stock
options were granted, management estimates that the fair value of the
Company's common stock approximates the exercise price of the stock options,
therefore, no compensation expense is being recognized.
NOTE 8--INCOME TAXES
For the year ended January 31, 1997 and the six months ended July 31, 1997,
the Company did not provide a provision for income taxes due to the net loss
incurred. At January 31, 1997, the Company has approximately $98,000 and
$49,000 in net operating loss carryforwards for federal and state income tax
purposes, respectively, that expire in 2012 and 2002, respectively. The
components of the Company's deferred tax assets and liabilities for income
taxes consist of a deferred tax asset relating to the net operating loss
carryforwards of approximately $36,000. The other components of the Company's
deferred tax assets and liabilities are immaterial. The Company has
established a valuation allowance of approximately $36,000 to fully offset its
deferred tax asset as the Company does not believe the recoverability of this
deferred tax asset is more likely than not.
NOTE 9--SUBSEQUENT EVENTS (UNAUDITED)
In August and September 1997, the Company sold an additional 386,334 shares
of Series B Preferred and issued 193,167 warrants to purchase the Company's
common stock at $1.50 per share.
Also, in August and September 1997, the Company issued an additional
$200,000 of subordinated notes. In connection therewith, the Company also
issued 133,200 warrants to purchase the Company's common stock at $3.00 per
share.
F-15
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1997 AND
1996
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
IS UNAUDITED.)
NOTE 9--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
In addition, on September 15, 1997 the Company entered into an agreement
with En Pointe Technologies, Inc. ("En Pointe") whereby:
. En Pointe made an investment in the Company by purchasing $600,000 of
subordinated notes. In connection therewith, the Company issued 399,600
warrants to purchase the Company's Common Stock at $2.25 per share. As a
result of these warrants being issued with an exercise price less than
the fair market value of similar warrants, the Company will recognize
additional financing cost of $299,700 over the nine month term of this
subordinated note with the unamortized portion at the closing of the IPO
being expensed immediately;
. En Pointe granted the Company a license to En Pointe's proprietary EPIC
Software for five years in exchange for 250,000 shares of the Company's
Common Stock valued at $3.00 per share. The Company has agreed to pay an
annual maintenance and upgrade fee of $100,000. The initial annual fee
is to be paid concurrent with the funding of the $600,000 subordinated
notes;
. En Pointe has also agreed to provide (i) consulting services to the
Company by customizing its EPIC Software and (ii) information system
services for a quarterly fee estimated to be $60,000 and $50,000,
respectively. The initial quarterly fees of $60,000 and $50,000 are to
be paid concurrent with the funding of the $600,000 subordinated notes;
. In the event that the Company does not complete its IPO within one year,
the Company is obligated to pay En Pointe $1,000,000 for the licensing
of the EPIC Software.
F-16
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED OR SINCE THE DATE OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 24
Business.................................................................. 28
Management................................................................ 37
Certain Transactions...................................................... 42
Principal Shareholders.................................................... 44
Description of Securities................................................. 45
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL FEBRUARY 23, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,300,000 SHARES
[LOGO OF SHOPPING.COM]
COMMON STOCK
---------------
PROSPECTUS
---------------
WALDRON & CO., INC.
NOVEMBER 25, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
