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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1998
REGISTRATION 333-_____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SHOPPING.COM
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
CALIFORNIA 5311 33-0733679
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2101 EAST COAST HIGHWAY, GARDEN LEVEL
CORONA DEL MAR, CALIFORNIA 92625
(949) 640-4393
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
MARK V. ASDOURIAN, ESQ.
5 PARK PLAZA, SUITE 1480
IRVINE, CALIFORNIA 92614
(714) 557-4100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
JOHN J. GIOVANNONE, ESQ.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
650 TOWN CENTER DRIVE, 4TH FLOOR
COSTA MESA, CALIFORNIA 92626-1925
(714) 513-5100
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND
FROM TIME TO TIME THEREAFTER.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
====================================================================================================================
PROPOSED
TITLE OF EACH AMOUNT MAXIMUM MAXIMUM AMOUNT OF
CLASS OF TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO REGISTERED(1) PRICE PER OFFERING FEE
BE REGISTERED SHARE (1) PRICE (1)
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<S> <C> <C> <C> <C>
Common Stock, 2,334,500 shares (2) $25.25 $58,946,125 $17,683.84
no par value
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act based upon the
last sale reported for such security on the over-the-counter bulletin
board securities market on August 11, 1998.
(2) Includes (i) the estimated maximum number of shares that may be issued
upon conversion of the 8% Convertible Debentures and the exercise of
warrants issuable thereunder, (ii) 7,500 shares held by Trautman Kramer
& Company, Incorporated, and (iii) 152,000 shares issuable upon the
exercise of certain purchase warrants. In the event of a stock split,
stock dividend or similar transaction involving the Common Stock, in
order to prevent dilution, or in the event of an increase in the number
of shares issuable upon conversion of the 8% Convertible Debentures by
reason of the floating rate conversion price, the number of shares
registered shall be automatically increased to cover additional shares
in an indeterminate amount in accordance with Rule 416(a) under the
Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
================================================================================
Common Stock of Shopping.com ("Shopping.com" or the "Company") trades
in the over-the-counter bulletin board securities market under the symbol
"IBUY."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON
PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
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TABLE OF CONTENTS
Page
<S> <C>
SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED
CHARGES..................................................................................................4
THE COMPANY.......................................................................................................5
CAPITALIZATION....................................................................................................7
RISK FACTORS......................................................................................................7
RATIO OF EARNINGS TO FIXED CHARGES...............................................................................21
USE OF PROCEEDS..................................................................................................21
SELLING SHAREHOLDERS.............................................................................................22
PLAN OF DISTRIBUTION.............................................................................................24
DESCRIPTION OF SECURITIES TO BE REGISTERED.......................................................................25
INFORMATION WITH RESPECT TO THE REGISTRANT.......................................................................27
BUSINESS ........................................................................................................27
PROPERTY ........................................................................................................38
LEGAL PROCEEDINGS................................................................................................38
MARKET PRICE AND DIVIDENDS.......................................................................................41
SELECTED FINANCIAL DATA..........................................................................................42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................................44
LIQUIDITY AND CAPITAL RESOURCES..................................................................................48
DIRECTORS AND EXECUTIVE OFFICERS.................................................................................49
EXECUTIVE COMPENSATION...........................................................................................53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................59
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2
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INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................62
RECENT SALES OF UNREGISTERED SECURITIES..........................................................................63
FINANCIAL STATEMENT SCHEDULES....................................................................................F-1
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.......................................................................
UNDERTAKINGS.....................................................................................................II-3
SIGNATURES.......................................................................................................II-5
INDEX TO EXHIBITS................................................................................................
</TABLE>
3
<PAGE>
SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO
FIXED CHARGES.
SHOPPING.COM
2,334,500 SHARES OF COMMON STOCK
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
This Prospectus covers 2,334,500 shares (the "Shares") of Common Stock,
without par value (the "Common Stock"), of Shopping.com ("Shopping.com" or the
"Company") offered for the account of certain security holders of the Company
(the "Selling Shareholders") as described more fully herein.
This Prospectus covers all of the shares of Common Stock that have been
issued or are issuable upon the conversion of 8% Convertible Debentures (the
"Debentures") in the aggregate amount of $10,000,000 issued and to be issued to
the investors herein under "Seller Shareholders" (the "Investors") pursuant to a
June and July, 1998 private placement (the "Private Placement") and future
private placements. Based on the trading prices of the Common Stock prior to
July 31, 1998 and interest accruing on the Debentures through their two year
term, the Debentures would convert into 725,000 shares of Common Stock. In
addition, upon conversion of the Debentures under such assumptions, warrants to
purchase an aggregate of 362,500 shares would be issuable to the Investors (the
"Warrants"). The Investors have registration rights which require the Company to
register at least 200% of the shares which would be issuable upon a conversion
and exercise at the time of filing this Registration Statement. The foregoing
estimate is for illustrative purposes only. The actual number of shares of
Common Stock issued or issuable upon conversion of the Debentures and exercise
of the Warrants is subject to adjustment and could be materially more than such
estimated amount, depending upon factors that cannot be predicted by the Company
at this time, including, among others, the future market price of the Common
Stock. See "Risk Factors--Potential Volatility of Stock Price." There is also a
limitation on the number of shares of Common Stock that can be issued upon
conversion at any particular time. Each Investor has contractually agreed not to
convert the Debentures to the extent such a conversion would result in such
Investor beneficially owning more than 9.99% of the then outstanding Common
Stock, unless the Company is in default under agreements with the Investor. For
a further description of the Debentures, see "Risk Factors-- Debentures,
Warrants and Options; Potential Dilution and Adverse Impact on Additional
Financing" and "Selling Shareholders."
7,500 shares of Common Stock covered hereby are held by Trautman Kramer
& Company, Incorporated ('Trautman Kramer"). The remaining 152,000 shares of
Common Stock covered hereby are issuable upon the exercise of certain warrants
to purchase Common Stock held by, or to
4
<PAGE>
be issued to, Trautman Kramer, the placement agent in the Private Placement,
three individuals affiliated with the Placement Agent and one unaffiliated
individual.
The Shares may be offered by the Selling Shareholders from time to time
in transactions (which may include block transactions) in the over-the-counter
bulletin board securities market, in negotiated transactions, through a
combination of such methods of sale, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices. The Selling Shareholders may effect such transactions by selling the
Shares to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they may sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Company has
agreed to bear all expenses of registration of shares, but all selling and other
expenses incurred by the Selling Shareholders will be borne by the Selling
Shareholders.
The Selling Shareholders and any broker-dealers, agents or underwriters
that participate with the Selling Shareholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and the commission paid or any
discounts or concessions allowed to any such persons, and any profits received
on the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Selling Shareholders"
and "Plan of Distribution."
THE COMPANY
Shopping.com (the "Company" or "Registrant") is an Internet-based
electronic retailer ("E- retailer") specializing in marketing a broad range of
products and services at wholesale prices to both consumers and trade customers.
Product categories currently available on the Company's Web site include:
computers & software, downloadable software, consumer electronics, office
furniture, office products, books, music CDs & cassettes, musical instruments,
movies, sheet music, cigar apparel & accessories, cigars, lighters, housewares,
gourmet foods, baby & nursery, auto accessories, auto electronics, auto parts
catalog, bath, hardware, kitchen, lawn & garden, lighting, patio furniture,
plumbing, heating & cooling, storage and organization, tools, luggage, men's
furnishing & accessories, travel bags & accessories, women's accessories, marine
supplies, bicycles, games & activities, golf & sporting goods, toys & hobbies,
video games, pet supplies, bath & body care, fragrances, personal health &
beauty care, medical equipment & supplies, vitamins, collectibles, gifts,
sunglasses, watches, and prints & posters. The Company has and anticipates that
it will continue to enter into arrangements with a number of manufacturers and
distributors who will ship their products directly to its customers, allowing
the Company to avoid the expense of inventory maintenance and physical store
costs.
The Company has experienced significant growth in customer traffic
since its inception. For example, although the Company only commenced selling on
the Internet on July 11, 1997, the number of visitors to the Company's Web site
increased from 5,796 during the second quarter of fiscal year 1998 to 929,140
during the second quarter of fiscal year 1999, while the number of Web site hits
(pages viewed within the Shopping.com Web site) increased from 183,951 during
the second quarter of fiscal year 1998 to 59,108,160 during the second quarter
of fiscal year 1999.
5
<PAGE>
The Company employs proprietary information systems along with industry
software 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, delivery status of products ordered and back order information.
Shopping.com generates revenues similar to a retail store when its
customers purchase goods from its Web site. The Company adjusts gross margins on
a product by product basis based on competitive prices and its cost of goods.
The experience of the Company's management as retailers enables them to
effectively negotiate competitive prices with vendors allowing management to set
the lowest possible prices for the sale of goods or services. Generally, 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 four business days. The amount received is net of
any credit card transaction fees deducted by the financial institution
intermediary. Alternatively, the customers can mail their payments directly to
Shopping.com. After receipt of the customer's payment, the Company then pays its
vendors for the cost of goods sold. Shopping.com's vendors are generally paid
within a period ranging from zero (same day) to thirty business days.
Additionally, the Company may generate 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
generally provide 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 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, selling,
as a result, its products and services at a discount to typical retail and
warehouse/discount stores. For the same reasons, the Company is also able to
provide a broader merchandise mix than retail stores, warehouse/discount stores
and mail order catalog operators.
The Company believes that the principal competitive factors in its
market are price, speed of fulfillment, brand name recognition, breadth of
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.
Shopping.com's strategy is to become a low-price leader in E-retailing
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
will be able to offer its customers a competitive combination of price, product
availability, order fulfillment and delivery services and still attain
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 the store.
6
<PAGE>
Shopping.com commenced operations in February, 1996 and incorporated in
California on November 22, 1996. The Company's executive offices are located at
2101 East Coast Highway, Garden Level, Corona del Mar, California 92625.
CAPITALIZATION.
The following table sets forth: (i) the actual capitalization of the
Company as of April 30, 1998; (ii) the pro forma capitalization of the Company
giving effect to the issuance of certain 8% Convertible Debentures and payment
of related financing costs; and (iii) the pro forma capitalization as adjusted
to give effect to interest expense through debenture maturity, assumed
conversion of the Debentures to the Company's Common Stock, conversion of
related accrued interest to the Company's Common Stock, and the exercise of
certain warrants issued in connection with the conversion of the Debentures to
the Company's Common Stock.
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<CAPTION>
April 30, 1998 (unaudited)
------------------------------------------------
Pro forma,
Actual Pro forma as adjusted
------ --------- -----------
<S> <C> <C> <C>
Convertible debentures, 8%, due June to July, 2000 $ - $ 10,000,000 $ -
Common Stock, no par value 13,394,651 13,582,151 32,432,151
Accumulated deficit (10,429,304) (10,429,304) (13,079,304)
------------- -------------- --------------
Total shareholders' equity $ 2,965,347 $ 3,152,847 $ 19,352,847
------------- -------------- --------------
Total capitalization $ 2,965,347 $ 13,152,847 $ 19,352,847
------------- -------------- --------------
</TABLE>
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" and "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 the
forward-looking statements.
The Need for Additional Capital
The Company must seek additional financing in order to sustain
operations or achieve planned expansion. The Company anticipates that it needs
to raise at least $26 million during the next twelve months in the form of debt
and/or equity investments in the Company's securities. 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.
7
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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 expanding 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
April 30, 1998 had an accumulated deficit of approximately $10.4 million. The
Company believes that its success will depend in large part on its ability to
(i) obtain wide-spread name recognition, (ii) provide its customers with an
outstanding value and a superior shopping experience, (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 result in low 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 rate at which such losses
will be incurred may increase significantly from current levels based primarily
on marketing expenditures and the timing of those expenditures.
The Company incurred a net loss of $201,697 and had negative cash flows
from operations during the year ended January 31, 1997 of $136,546, and had a
shareholders deficit of $78,647 as of January 31, 1997. For the year ended
January 31, 1998 the Company had net losses totaling $5,522,029, negative cash
flows from operations of $4,842,628 and had an accumulated deficit of
$5,723,726. Management raised capital during 1997 through private placement
offerings of equity and debt securities and completed an initial public offering
in the latter part on 1997, which provided funding to continue present
operations, marketing and development activities.
The Company has used a portion of the net proceeds of its initial
public offering to fund its operating losses. As of January 31, 1998, the
Company had approximately $4.8 million remaining of the net proceeds and as of
April 30, 1998, the Company had approximately
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$1.4 million. Such net proceeds, together with cash generated by operations,
will, in the Company's view, be insufficient to fund the Company's anticipated
operating losses until its sales increase to a sufficient level to cover
operating expenses. In order to continue to implement its business plan, the
Company must 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. In addition, the investigation by the SEC, the pendency of several
class action suits against the Company, and the attendant adverse publicity may
also make it difficult for the Company to raise additional capital to continue
its development. See "Legal Proceedings."
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 will not
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall until revenues grow substantially. 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.
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 which may adversely effect 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, system downtime or Internet
brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to the 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 expected by the Company, (xii) governmental regulation and taxation,
(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.
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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.
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 systems
interruptions that result in the unavailability of the Company's Web site or
reduced order fulfillment process would reduce the volume of goods sold and the
attractiveness of the Company's product and service offerings. The Company may
experience periodic systems 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 a combination of industry supplied software and
internally developed software and systems for its Web site, search engine, and
substantially all aspects of transaction processing, including order management,
cash and credit card processing, shipping and 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.
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
10
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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.
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 January 31, 1998, the Company expanded from 4 employees to 67 full time and 9
part time employees, respectively, and has since grown to 85 full time and 9
part time employees as of July 31, 1998. The majority of the Company's senior
management joined the Company within the last year, and some officers have no
prior senior management experience at public companies. The Company's new
employees include a number of managerial, technical and operations personnel who
have not yet been fully integrated into the Company's operations. To manage the
increase in personnel and the expected growth of its operations, the Company
will be required to improve existing, and implement new, transaction-processing,
operational and financial systems, procedures and controls, and to train and
manage its already expanded employee base. Although the Company believes that
there will not be a significant increase in the number of employees over the
next twelve months, the Company may be required to increase its finance,
administrative and operations staff. Further, the Company's management will be
required to maintain and expand its relationships with various manufacturers,
distributors, 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 of operations would be
materially adversely affected.
Dependence of 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 products and
services 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
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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 on 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 could also 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 conditions or customer requirements, its business, prospects, financial
condition and results of operations would be materially adversely affected.
Year 2000
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
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are anticipated to arise for many of these programs in the year 2000 ("Year 2000
Problems"). The Company has taken this problem into account with respect to its
own internal programs and believes that its own internal software is not
susceptible to Year 2000 Problems. However, the Company has not made a formal
assessment of programs used by service providers or other third parties,
including the financial institutions processing credit card transactions, with
which the Company may have to interact, nor the Company's vulnerability which
may result from any such party's failure to remediate their own year 2000
issues. There can be no guarantee that the systems of other companies on which
the Company relies will be converted timely and will not have an adverse effect
on the Company's systems and the Company's business, prospects, financial
condition and results of operations.
SEC Investigation and Shareholder Litigation.
The Company is party to an ongoing investigation by the Securities and
Exchange Commission ("SEC") and various lawsuits, each discussed more fully
herein under "Legal Proceedings." The Company is devoting management time and
effort in its cooperation with the SEC investigation and its vigorous defense of
the lawsuits to which it is a party. Diversion of management time and effort
from the Company's operations and the implementation of the Company's business
plan may adversely and significantly affect the Company and its business. The
continued pendency of litigation may make it difficult for the Company to raise
additional capital to continue its development and expansion and to attract and
retain talented executives.
Debentures, Warrants and Options; Potential Dilution and Adverse Impact on
Additional Financing.
As of July 31, 1998, the Company had outstanding options and warrants
to purchase an aggregate of 2,641,850 shares of Common Stock. The Company is
also obligated to issue a currently indeterminate number of shares of Common
Stock upon conversion of the Debentures. The exact number of shares of Common
Stock issuable pursuant to such conversion cannot be estimated with certainty
because, generally, such issuances of Common Stock will vary inversely with the
market price of the Common Stock at the time of such conversion. The Debentures
are also subject to various adjustments to prevent dilution resulting from stock
splits, stock dividends or similar transactions. Further, the Company may, at
its election, choose to issue additional shares of Common Stock in lieu of cash
payments of accrued interest due to the holders of the Debentures. If all of the
Debentures had been converted and warrants issued pursuant thereto had been
converted on July 31, 1998, the Company would have been obligated to issue
543,750 shares of Common Stock in respect thereto exclusive of shares issuable
upon exercise of warrants by the Placement Agent, its affiliates and one
unaffiliated individual.
Each holder of the Debentures has agreed contractually not to convert
the Debentures to the extent that such conversion would result in such holder
beneficially owning more than 9.99% of the then outstanding Common Stock unless
at such time the Company shall be in default under any provision of the
Debentures or under the Securities Purchase Agreement, dated June 26, 1998,
between the Company and the Investor, or any of the agreements contemplated
therein.
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To the extent that such options and warrants are exercised, shares of
Common Stock are issued in lieu of payment of accrued interest or the Debentures
converted (and the warrants issuable upon such conversion are exercised),
substantial dilution of the interests of the Company's shareholders is likely to
result and the market price of the Common Stock may be materially adversely
affected. Such dilution will be greater if the future market price of the Common
Stock decreases. For the life of the warrants, options and Debentures, the
holders will have the opportunity to profit from a rise in the price of the
Common Stock. The existence of the warrants, options and Debentures is likely to
affect materially and adversely the terms on which the Company can obtain
additional financing and the holders of the warrants, options and Debentures can
be expected to exercise them at a time when the Company would otherwise, in all
likelihood, be able to obtain additional capital by an offering of its unissued
capital stock on terms more favorable to the Company than those provided by the
warrants, options and Debentures.
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 John H. Markley, its President and Chief Executive
Officer, Mark S. Winkler, its Chief Information and Technology Officer, Douglas
A. Hay, an Executive Vice President, and Howard S. Schwartz, an Executive Vice
President. 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 entered into written
employment agreements with Mr. Markley for three years terminating on May 31,
2001, and with Mr. Winkler for one year ending May 20, 1998 which subsequently
renewed for one year pursuant to an automatic renewal provision therein. Under
his employment agreement, Mr. Winkler may only be terminated for "cause."
Additionally, a $1,000,000 "key man" life insurance policy on the life of Mr.
Markley is being issued to the Company. The Company entered into a two-year
employment agreement with Douglas Hay, its Executive Vice President, as of June
1, 1998. The agreement automatically renews for one year terms unless terminated
by either party. The Company entered into a three-year employment agreement with
Howard Schwartz, its Executive Vice president, as of August 1, 1998. The
agreement automatically renews for one year terms unless terminated by either
party. 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 and retaining a sufficient number of 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 investigation by
the SEC, the pending class action litigation, and the attendant adverse
publicity may also make it difficult for the Company to attract such developers
and other qualified personnel to the Company. See "Legal Proceedings." The
failure to attract and retain 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.
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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 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 users' 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
not have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Merchants on the Internet are subject to the risk of credit card fraud
and other types of theft and fraud perpetrated by hackers and online 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 operations.
Risks of International Expansion
The Company is currently contemplating expanding its presence in Europe
and other foreign markets. To date, the Company has limited experience in
sourcing, marketing and distributing products on an international basis and in
developing localized versions of its Web site and other systems. In the event
that the Company should seek to expand its operations overseas, the Company
believes that it would incur significant costs in establishing international
facilities and operations, in promoting its name internationally, in developing
localized versions of its Web site and other systems and in sourcing, marketing
and distributing products in foreign markets. There can be no assurance that the
Company's international efforts would be successful. If the revenues resulting
from international activities were inadequate to offset the
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expense of establishing and maintaining foreign operations, such inadequacy
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. In addition, there are certain
risks inherent in doing business on an international level, such as unexpected
changes in regulatory requirements, export and import restrictions, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, political instability, fluctuations in currency exchange
rates, seasonal reductions in business activity in other parts of the world and
potentially adverse tax consequences, any of which could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of such factors would not have a material adverse impact on the
Company's future international operations and, consequently, on the Company's
business, prospects, financial condition and results of operations.
Competition
The online commerce industry, particularly on the Internet, is new,
rapidly evolving and intensely competitive. The Company expects such competition
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, CDNow, QVC and
Home Shopping Network; (ii) a number of indirect competitors that specialize in
online commerce or receive a substantial portion of their revenues from online
commerce, including America Online, Microsoft Network, Prodigy, and Compuserve;
(iii) mail order catalog operators such as Spiegel, 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 catalog
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 discount/warehouse
operators will be somewhat restricted in their ability to lower prices by the
need to protect their own pricing strategy to avoid cannibalizing their own
store margins.
The Company believes that the principal competitive factors in its
market are price, speed of fulfillment, 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
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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 make 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.
Reliance on Certain Suppliers and Shippers
Unlike retail and warehouse/discount store operators and certain online
commerce providers, the Company, as an E-retailer, 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
ensure 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.
Availability of Merchandise; Vendor Credit for the Company
Although the Company's merchandising division maintains relationships
with vendors which it believes will offer competitive sources of supply, and
believes that other sources are available for most of the 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 of brand or 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 and the uncertainty of the Company's ability to continue as a going
concern, 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. The interruption of
the trading of the Company's stock on the over-the-counter bulletin board during
March and April, 1998 made vendors reluctant to extend credit to the Company. In
addition, the investigation by the SEC and the continuation of the attendant
adverse publicity may continue to make vendors reluctant to extend credit to the
Company.
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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 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 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
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material adverse effect on the Company's business, prospects, financial
condition and results of operations.
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.
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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Risks Associates with Domain Names
The Company currently holds various Web domain names relating to its
brand, including the "Shopping.com" domain name. The acquisition and maintenance
of domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the ".com",
".net", and ".org" generic top-level domains. The regulation of domain names in
the United States and in foreign countries is subject to change. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. The
Company, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of its
trademarks and other proprietary rights. Any such inability could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Risks of Business Combinations and Strategic Alliances
The Company may choose to expand its operations or market presence by
entering into business combinations, investments, joint ventures or other
strategic alliances with third parties. Any such transactions would be
accompanied by the risks commonly encountered in such transactions. These
include, among others, the difficulty of assimilating operations, technology and
personnel of the combined companies, the potential disruption of the Company's
ongoing business, the inability to retain key technical and managerial
personnel, the inability of management to maximize the financial and strategic
position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls and policies
and the impairment of relationships with existing employees and customers. There
can be no assurance that the Company would be successful in overcoming these
risks or any other problems encountered in connection with such business
combinations, investments, joint ventures or other strategic alliances, or that
such transactions will not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Possible Volatility of Stock Price
The trading price of the Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet, online service or retail
companies, announcements by the Company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, additions or departures of
key personnel, sales of Common Stock and other events or factors, many of which
are beyond the Company's control. In addition, the stock market in general, and
the market for Internet-related and technology companies in particular, has
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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 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.
Shares Eligible for Future Sale
Sales of substantial amounts of the Company's Common Stock in the
public market after this offering could adversely affect prevailing market
prices for the Common Stock. The shares of Common Stock offered hereby will be
freely tradeable without restriction in the public market.
RATIO OF EARNINGS TO FIXED CHARGES.
The Company has incurred significant operating losses since inception.
During the year ended January 31, 1997, the Company had no interest expense and
had no preferred stock dividends. Therefore, a presentation of the ratios of
earnings to fixed charges and ratio of earnings to fixed charges and preferred
stock (collectively, "Ratios") is not presented. During the year ended January
31, 1998 and the three months ended April 30, 1998, the Company had insufficient
earnings of approximately $6.1 million and $4.7 million, respectively, to cover
its fixed charges. As such, the Company does not present Ratios for the year
ended January 31, 1998 and the three months ended April 30, 1998.
Subsequent to April 30, 1998, the Company issued $2.5 million of 8%
Convertible Debentures which will result in an increase to the Company's fixed
charges. See "Capitalization" and the financial statement schedules and notes
thereto included elsewhere in this document. Management of the Company
anticipates that the Company will continue to have insufficient earnings to
cover its fixed charges.
USE OF PROCEEDS.
The Company will not receive any of the proceeds from the sale of the
Shares offered hereunder by the Selling Shareholders. The offering is made to
fulfill the Company's contractual obligations to the Selling Shareholders to
register certain shares held by the Selling Shareholders. However, certain of
the shares of Common Stock offered hereby are issuable in the future upon the
conversion of outstanding or issuable debentures or the exercise of outstanding
issuable warrants. The Company will receive the exercise prices payable upon any
exercise of the warrants. There can be no assurance that all or any part of the
warrants will be exercised.
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SELLING SHAREHOLDERS.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of July 31, 1998 by each of the
Selling Shareholders, assuming conversion of the debentures and exercise of the
warrants. Unless otherwise indicated below, to the knowledge of the Company, all
persons listed below have sole voting and investment power with respect to the
shares of Common Stock, except to the extent authority is shared by spouses
under applicable law. None of the Selling Shareholders has had a material
relationship with the Company during the last three years, other than as a
result of the ownership of the Common Stock, the debentures, warrants or other
securities of the Company.
The information included below is based upon information provided by
the Selling Shareholders. Because the Selling Shareholders may convert their
debentures, exercise their warrants and offer all, some or none of the Common
Stock, no definitive estimate as to the number of shares thereof that will be
held by the Selling Shareholders after such offering can be provided and the
following table has been prepared on the assumption that all shares of Common
Stock offered under this Prospectus will be sold.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Common Stock
Beneficially Owned
on July 31, 1998 (1)
- -----------------------------------------------------------------------------------------------------------
Name Shares Percent Shares That May Be
---- ------ ------- Offered Hereunder
-----------------
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maslo Fund Ltd. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Wayne Invest & Trade Inc. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Chesterfield Capital Resources Ltd. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Star High Yield Investment Management Corporation (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Sloanes Trading Corp. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
DENEX International, Ltd. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Sholem Liebenthal (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Shiya Edel (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
BITUSWISS, S.A. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
Burstein & Lindsay Securities Corp. (2) 108,750 2.25 108,750
- -----------------------------------------------------------------------------------------------------------
David Stefansky (3) 42,300 * 42,300
- -----------------------------------------------------------------------------------------------------------
Richard Rosenblum (3) 42,300 * 42,300
- -----------------------------------------------------------------------------------------------------------
Vincent Calicchia (4) 1,000 * 1,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Anthony Soich (5) 1,000 * 1,000
- -----------------------------------------------------------------------------------------------------------
Trautman Kramer & Company, Inc. (6) 72,900 1.5 46,500
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
(1) As required by SEC regulations, the number of shares shown as
beneficially owned includes shares which can be purchased within 60
days after July 31, 1998. The actual number of shares of Common Stock
beneficially owned is subject to adjustment and could be materially
more or less than the estimated amount indicated depending upon factors
which cannot be predicted by the Company at this time, including among
others, issuances of the remaining Debentures and the market price of
the Common Stock prevailing at the actual date of conversion of
Debentures and exercise of Warrants.
(2) Beneficial ownership is based upon the conversion of all of the
Debentures and exercise of all of the Warrants and based on the lower
of the average of the closing bid prices of Common Stock for each of
the 30 trading days immediately preceding July 31, 1998 or $16.00. If
all Debentures held by such Selling Shareholders had been issued and
converted on July 31, 1998 (assuming a price of $16.00 per share of
Common Stock) and all resulting Warrants had been exercised, the
Company would have been obligated to issue 543,750 shares of Common
stock in respect thereto. The actual number of shares of Common Stock
issued or issuable upon the conversion of the debentures and exercise
of the warrants is subject to adjustment and could be materially less
or more than such estimated amount depending on factors that cannot be
predicted by the Company at this time, including, among others, the
future market price of the Common Stock. However, each holder of the
debentures has agreed contractually not to convert the debentures or
exercise the warrants to the extent that such conversion or exercise
would result in such holder beneficially owning more than 9.99% of the
then outstanding Common Stock unless at such time the Company shall be
in default under any provision of the debentures or under the
Securities Purchase Agreement, dated June 26, 1998, between the Company
and such holder, or any of the agreements contemplated therein. The
Company may be required to issue shares in excess of 1,087,500 in
certain circumstances. For a further description of the debentures, see
"Risk Factors--Debentures, Warrants and Options; Potential Dilution
and Adverse Impact on Additional Financing."
(3) Includes 42,300 shares of Common Stock issuable upon the exercise of
warrants issued, and to be issued, in connection with Trautman Kramer's
services to the Company as Placement Agent in the Private Placement.
The exercise price for a warrant for 5,500 shares is $16.00 with the
balance at $24.00, each exercisable for five years from issuance. Mr.
Stefansky and Mr. Rosenblum are affiliates of Trautman Kramer.
(4) Includes 1,000 shares of Common Stock issuable upon the exercise of
warrants issued in connection with Trautman Kramer's services to the
Company as Placement Agent in the Private Placement. The exercise price
is $24.00, and the warrant is exercisable until June 30, 2003. Mr.
Calicchia is an affiliate of Trautman Kramer.
23
<PAGE>
(5) Includes 1,000 shares of Common Stock issuable upon the exercise of
warrants issued to an individual in connection with the Private
Placement. The exercise price is $24.00, and the warrant is exercisable
until June 30, 2003.
(6) Includes 3,900 shares of Common Stock issued, or to be issued, to
Trautman Kramer in connection with the Private Placement and 69,000
shares of Common Stock issuable upon the exercise of warrants issued,
or to be issued, in connection with Trautman Kramer's services to the
Company as Placement Agent in the Private Placement. The exercise price
for a warrant for 9,000 shares is $16.00 with the balance at $24.00,
each exercisable for five years from the date of issuance.
PLAN OF DISTRIBUTION.
Sales of the Shares may be effected by or for the account of the
Selling Shareholders from time to time in transactions (which may include block
transactions) in the over-the-counter bulletin board, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale or at negotiated prices. The Selling Shareholders may effect such
transactions by selling the Shares directly to purchasers, through
broker-dealers acting as agents for the Selling Shareholders, or to
broker-dealers acting as agents for the Selling Shareholders, or to
broker-dealers who may purchase Shares as principals and thereafter sell the
Shares from time to time in transactions (which may include block transactions)
in the over-the-counter bulletin board, in negotiated transactions, through a
combination of such methods of sale, or otherwise. In effecting sales,
broker-dealers engaged by a Selling Shareholders may arrange for other
broker-dealers to participate. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agents or to whom they may sell as principals, or both
(which compensation as to a particular broker-dealers might be in excess of
customary commissions).
The Selling Shareholders and any broker-dealers, agents or underwriters
that participate with the Selling Shareholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act. Any
commissions paid or any discounts or concessions allowed to any such persons,
and any profits received on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Company has agreed to bear all expenses of registration of the
Shares other than legal fees and expenses, if any, of counsel or other advisors
to the Selling Shareholders. Any commissions, discounts, concessions or other
fees, if any, payable to broker-dealers in connection with any sale of the
Shares will be borne by the Selling Shareholders selling such Shares.
The Company has agreed to indemnify the Selling Shareholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the Selling Shareholders
or their respective pledgees, donees, transferees or other successors in
interest may be required to make in respect thereof.
24
<PAGE>
DESCRIPTION OF SECURITIES TO BE REGISTERED.
Common Stock
The Company's Amended and Restated Articles of Incorporation currently
authorize 20,000,000 shares of which 4,069,854 shares are issued and outstanding
as of July 31, 1998 without giving effect to the exercise of warrants or options
or the conversion of debentures. 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.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
none of which are currently issued and outstanding. The Preferred Stock may
carry certain rights, preferences and privileges including liquidation,
conversion and dividend preferences upon designation by the Board of Directors.
Warrants
In the private placements of the Company's subsequently retired 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 366,300 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.
25
<PAGE>
As part of the private placement of units comprised of promissory notes
and warrants, the Company issued warrants to purchase an aggregate of 132,500
shares of Common Stock at an exercise price of $14.00 per share, exercisable
until May 15 and June 8, 2001.
The Company also issued one warrant for the purchase of 300,000 shares
of Common Stock exercisable until June 15, 2003 at an exercise price of $21.92
per share.
In connection with the issuance of the 8% Convertible Debentures
(described below), the Company issued to the placement agent and certain of its
affiliates warrants to purchase an aggregate of 33,000 shares of Common Stock
exercisable until June 30, 2003 at the exercise price of $24.00. As
consideration for the waiver of certain provisions of an agreement with the
placement agent, the Company issued to the placement agent and certain of its
affiliates 7,500 shares of Common Stock and warrants to purchase as aggregate of
20,000 shares of Common Stock exercisable until July 31, 2003 at an exercise
price of $16.00.
As consideration for equipment leasing agreements, the Company issued
warrants to purchase an aggregate of 2,936 shares of Common Stock, more
particularly described herein: (a) 1,079 shares exercisable until February 2,
2000 at an exercise price of $22.25, and (b) 1,857 shares exercisable until
December 18, 1999 at an exercise price of $14.75.
The warrants may be exercised for unregistered shares of Common Stock,
the transfer of which is restricted, unless registered pursuant to registration
rights of the warrant holders. Certificates for shares will be issued upon
surrender of the certificate(s) for the warrants on or prior to the expiration
or the redemption date (as explained above) at the offices of the Company's
warrant agent 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 generally 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.
26
<PAGE>
Debentures
During June and July 1998, the Company issued to the Investors 8%
Convertible Debentures in the aggregate amount of $2,500,000 due two years from
the date of issuance. Additional Debentures in the aggregate amount of
$2,500,000 will be issued to the same Investors upon the effective date of the
Registration Statement (the "Second Tranche"). In addition, Debentures in the
aggregate amount of $5,000,000 will be issued to the Investors upon mutual
agreement with the Company. The Debentures are convertible into shares of Common
Stock at a conversion price per share equal to the lower of (i) the lowest
market price for any three trading days selected by the Debenture holder from
the thirty trading days prior to the conversion or (ii) $16.00. In addition,
upon conversion, the Debenture holders receive warrants to purchase the number
of share of Common Stock equal to one-half of the number of shares of Common
Stock received in the conversion. The initial warrants will be exercisable until
June 5, 2003 at an exercise price equal to the Common Stock conversion price.
The registration rights granted the Investors in the Private Placement require
the Company to register not less than 200% of the shares of Common Stock which
would be issuable upon Debenture conversion and warrant exercise at the filing
date.
Registration Rights
The holders of certain warrants have registration rights pursuant to
registration rights agreements which allow at least fifty percent of the holders
of the warrants to make one demand for registration of the Common Stock held by
them after exercise of their warrants. The registration rights agreements for
all holders of warrants provide for piggy-back rights on the Company's
registration of securities pursuant to which the holders of warrants have
contractual rights to have the Company include shares of Common Stock issuable
upon exercise of the warrants in a registration statement filed by the Company
covering any of its securities.
INFORMATION WITH RESPECT TO THE REGISTRANT.
BUSINESS.
General
Shopping.com (the "Company" or "Registrant") is an Internet-based
electronic retailer ("E-retailer") specializing in marketing a broad range of
products and services at wholesale prices to both consumers and trade customers.
Product categories currently available on the Company's Web site include:
computers & software, downloadable software, consumer electronics, office
furniture, office products, books, music CDs & cassettes, musical instruments,
movies, sheet music, cigar apparel & accessories, cigars, lighters, housewares,
gourmet foods, baby & nursery, auto accessories, auto electronics, auto parts
catalog, bath, hardware, kitchen, lawn & garden, lighting, patio furniture,
plumbing, heating & cooling, storage and organization, tools, luggage, men's
furnishing & accessories, travel bags & accessories, women's accessories, marine
supplies, bicycles, games & activities, golf & sporting goods, toys & hobbies,
video games, pet supplies, bath & body care, fragrances, personal health &
beauty care, medical equipment & supplies, vitamins, collectibles, gifts,
sunglasses, watches, and prints & posters.
27
<PAGE>
The Company has and anticipates that it will continue to enter into arrangements
with a number of manufacturers and distributors who will ship their products
directly to its customers, allowing the Company to avoid the expense of
inventory maintenance and physical store costs. Although Shopping.com's strategy
relies on offering its customers a wide selection of goods and services, for the
fiscal year ended January 31, 1998, the Company's principal products were
consumer electronics, computers and software, music CDs and books. The Company
believes that with the development of its marketing strategy and merchandise
plan, the sales of computer equipment and software will decrease as a percentage
of the Company's total sales. There can be no assurance that this will be the
case.
The Company has experienced significant growth in customer traffic
since its inception. For example, although the Company only commenced selling on
the Internet on July 11, 1997, the number of visitors to the Company's Web site
increased from 5,796 during the second quarter to 299,320 during the fourth
quarter of the fiscal year ending January 31, 1998, while the number of Web site
hits (pages viewed within the Shopping.com Web site) increased from 183,951
during the second quarter to 11,645,662 during the fourth quarter. During the
first and second quarter of its current fiscal year the number of Website
visitors increased to 916,980 and 929,140, respectively.
The Company believes that its success is dependent upon developing and
exploiting the large base of potential customers that the Internet has made
available. If the Company is successful in developing a broad customer base, the
loss of any one customer would not have a material adverse impact on the
Company's business, prospects, financial condition or results of operations.
The Company employs a combination of proprietary information systems
and industry software 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, delivery status of products ordered and back
order information. Utilizing proprietary technology, the Company has designed a
fully-scalable systems architecture for the Internet shopping marketplace.
Shopping.com generates revenues similar to a retail store when its
customers purchase goods from its Web site. The Company adjusts gross margins on
a product by product basis based on competitive prices and its cost of goods.
The experience of the Company's management as retailers enables them to
negotiate with vendors in order to obtain advantageous prices thus allowing
management to set selling prices and create 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 four business days. The amount
received is net of any credit card transaction fees deducted by the financial
institution intermediary. In the alternative, the customers can mail their
payments to Shopping.com's headquarters. After receipt of the customer's
payment, the Company then pays its vendors for the cost of goods sold.
Shopping.com's vendors are generally paid within a period ranging from zero
(same day) to thirty business days. Additionally, the Company may generate
revenues from the shipping and handling charges added to each customer's order.
28
<PAGE>
The Company has arrangements with manufacturers and distributors to
furnish the goods at predetermined prices. Generally, the Company has no written
contracts with its vendors and the arrangements can be terminated by the Company
or the vendor at will. The Company intentionally has not entered into any
exclusive supplier contracts with its vendors with the exception of En Pointe
Technologies, Inc. ("En Pointe"). The strategic advantage of not entering into
exclusive supplier agreements is that the Company retains its ability to source
several of the same products from different vendors, providing lower prices for
the Company's customers. The three vendors which supplied the Company with the
most inventory as measured by cost of goods sold, each a vendor of computer and
consumer electronic products, supplied approximately 23%, 23% and 7%,
respectively of the total cost of goods purchased for resale for the period
ending January 31, 1998. Although these three vendors supplied approximately 50%
of the Company's total products purchased for resale for the period ending
January 31, 1998, the Company believes that it has no material vendors such that
the termination of any arrangement would materially adversely affect the
Company's business or results of operations. The Company believes that the large
percentages attributable to these three vendors will not recur over the next
year, but rather are the result of factors, such as large one-time sales in
relation to the Company's sales volume in its initial sales year that most
likely will not be repeated. In addition, in the event that the relationship
with any one vendor should terminate, the Company believes that it would be able
to find other comparable suppliers.
Customers order products and services on Shopping.com's Web site and
generally provide 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 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, selling,
as a result, its products and services at a discount to typical retail and
warehouse/discount stores. For the same reasons, the Company is also able to
provide a broader merchandise mix than retail stores, warehouse/discount stores
and mail order catalog operators.
The Company believes that the principal competitive factors in its
market are price, speed of fulfillment, brand name recognition, breadth of
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.
Shopping.com's strategy is to become a low-price leader in E-retailing
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
will be able to offer its customers a competitive combination of price, product
availability, order fulfillment and delivery services and still attain
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 the store.
29
<PAGE>
Shopping.com commenced operations in February, 1996 and incorporated in
California on November 22, 1996. The Company's executive offices are located at
2101 East Coast Highway, Garden Level, Corona del Mar, California 92625.
Industry Background
According to the U.S. Department of Commerce report, The Emerging
Digital Economy [April 1998], "in 1994, three million people, most of them in
the United States, used the Internet. In 1998, 100 million people around the
world use the Internet. Some experts believe that one billion people may be
connected to the Internet by 2005."
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 costs to business. A growing number of 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
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 believes it will be able to accomplish these objectives because its
customer transactions are accomplished without the need to maintain inventory,
warehouse establishments, retail or discount store buildings and attendant
personnel. The sole source of funds for the Company from the date of inception
through April 30, 1998, other than the sale of equity and debt securities, has
been from sales of products in the amounts of $850,724 and $917,836 for the year
ended January 31, 1998 and the quarter ended April 30, 1998, respectively.
Key to the success of Shopping.com is the 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. The Company believes that 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. The Company believes that one of the advantages it has over other
retail and warehouse/discount stores is being able to showcase new products
which may not have as yet achieved market acceptance. In addition, the Company
believes that it will not be 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 believes it will be able
to create increased consumer demand by showcasing related products and services
to its customers and more accurately gauging their market acceptance.
Shopping.com believes that its success will be based on its providing excellent
service at all operating levels and aggressively bringing its advantages to the
attention of both the consumer and the vendor.
30
<PAGE>
Business Strategy
The Company's objective is to become a major retailer on the Internet
by pursuing the following key strategies:
Increase Market Awareness and Brand Name Recognition. Shopping.com
believes that it is positioned to become a leader in Internet commerce due to
its management team's background and experience operating large retail and
discount store formats combined with its expertise in information systems
programming and technology. The Company operates in a market in which its name
recognition 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 Retailing Experience for Customers. The Company
believes buyers will be attracted by consistently low prices and desirable
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 stock keeping units
("SKUs") and product description content.
Shopping.com plans to increase the range of merchandise offered to
customers worldwide at low prices and collaborating in the development of a
shopping environment including multi-lingual content and multiple currency
exchange systems.
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 continues to build its
merchandising staff to facilitate securing long-term relationships with a
variety of vendors.
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.
However, the Company acts as a principal with both its venders and customers and
arranges order fulfillment, payment verification, shipping functions and
customer support. By eliminating traditional retail expenses and undertaking
only selective point of sale functions, the Company believes it will be able to
control its gross margins, monitor its customer service and realize lower
operating costs than many of its competitors.
Develop Incremental Revenue Opportunities. The Company believes that a
significant opportunity exists to develop incremental revenue opportunities,
including expanding its product mix with additional 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 make that Web site an attractive alternative for other companies which wish
to advertise on the Web. In addition, the Company hopes to expand its customer
base to include
31
<PAGE>
Smore international customers. Today, the Company has customers from over 100
nations; and it anticipates increasing this base significantly as its marketing
campaign expands globally.
Build on Leading Technologies. The Company believes that one of its
competitive advantages is its internally developed proprietary technology, which
enables the Company to conduct automated sales with its customers. 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 facilities as new technology develops. Such
enhancements will include integration of multilingual content and developing
multiple currency exchange systems.
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 traditional retailers. With effective user-friendly search engine tools, the
Shopping.com customer enjoys a wide array of categories and specialty products
not typically offered to the general public under one store roof, while at the
same time allowing its customers the ease of virtual shopping from either home
or office, as well as substantial price discounts.
Shopping.com's merchandise strategy 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 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 competitive prices and better values;
. 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 to supply various products. Building upon the previous business
relationships of Shopping.com's management team, the Company's vendors include
many 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 the Company's standards for quality control,
product selections, packaging and shipping logistics.
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<PAGE>
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 catalog 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 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 customer loyalty through the use of
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 its customers, all of which the
Company incorporates in its merchandising. By offering customers compelling
values, the Company seeks to increase the number of visitors who make purchases
and encourage repeat visits and purchases. 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 currently employs and intends to employ a variety of media,
product development, business development and promotional activities to achieve
its marketing goals:
Online Service and Internet Advertising. The Company intends to
continue to place advertisements on various 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. The Company has used traditional media for
advertising in the past and expects to use such media 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, usually requires significant
investments of time, effort, and associated costs on the part of the consumer.
Generally the consumer is required 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 and a lower price
alternative should be well positioned to capture a significant portion of the
online shopping market.
33
<PAGE>
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 a variety of individual
customer profiles and provide excellent customer service.
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 offering. 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 is 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 goal is to exploit the opportunity for online shopping
by establishing itself as a online 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. See "Factors That May Affect Future Performance -
Competition."
The transmission, data presentation and shipping of the vast
merchandise categories E-retailed 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 rapid and economic purchase and
delivery times. 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. For the
fiscal years ended January 31, 1998 and 1997,
34
<PAGE>
the Company spent $893,923 and $83,308 respectively on product development
activities. Through the end of the first quarter of the current fiscal year, the
Company spent $634,594 on product development activities. While the Company
recognizes the importance of the Company's technology to the development and
implementation of the Company business strategy, there can be no assurance that
the Company has made or is making the optimal allocation of its resources
between research and development and the other claims on the Company's
resources.
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 by the Company. Management has sought to address anticipated or
potential systems downtime by developing and implementing a back-up response to
all 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. In
addition, the database-oriented design was developed to permit new media
technologies to be quickly introduced into the system without the need for
extensive programming.
The Company's technology and systems are protected by systems
specifically designed to assure continuity of operation in the event of natural
catastrophes or local shutdown of power. Shopping.com employs internal
protective equipment for its systems. For security, a firewall with special
protection has been created to avoid invasion by hackers or competitors. In
addition, on-site back-up and redundancy is provided. The Company has formulated
a contingency plan in case of a natural disaster. All data is downloaded and
stored in locked containers off-site on a daily basis. Security is also afforded
customers through the use of a Secured Socket Layer (S.S.L.) key with Verisign
to protect credit card information. See "Risk Factors -- Risk of Capacity
Constraints; Reliance on Internally Developed Systems; System Development
Risks"; "-- Risk of System Failure; Single Site and Order Interface"; and "--
Online Commerce Security Risks."
Intellectual Property
The Company regards its Shopping.com name and related software as
proprietary and relies primarily on a combination of copyright, trademark, trade
secret, and confidential information laws, 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 be
adequate 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.
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
35
<PAGE>
products, trademarks or other Company works. Such an assertion may require the
Company to enter into royalty arrangements or result in costly litigation.
The Company is also dependent upon existing technology related to its
operations. To the extent that new technological developments are unavailable to
the Company on terms acceptable to it, or not at all, the Company may be unable
to continue to implement its business plan 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."
Competition
The online commerce industry, particularly on the Internet, is new,
rapidly evolving and intensely competitive. The Company expects such competition
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,
NetGrocer, iMALL, Internet Shopping Network, Micro Warehouse, CDNow, QVC and
Home Shopping Network; (ii) a number of indirect competitors that specialize in
online commerce or derive a substantial portion of their revenues form online
commerce, including America Online, Microsoft Network, Prodigy and Compuserve;
(iii) mail order catalog operators such as Spiegel, 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 catalog 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 for its
market are price, speed of fulfillment, 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 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
the 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,
36
<PAGE>
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 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
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 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, financial condition and
results of operations.
Permits or licenses may be required from federal, state or local
governmental authorities to operate or to sell certain products on the Internet.
No assurances can be given 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 assurance can be made that the
Company will be able to comply with such legislation or statutes. See "Risk
Factors -- Governmental Regulation and Legal Uncertainties."
Environmental Issues
The Company's operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.
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<PAGE>
Employees
As of July 31, 1998, the Company employed 85 full-time and 9 part-time
employees, including 18 in Management Information Systems, 5 in Marketing and 12
in Accounting and Administration. One employee holds a doctorate in education.
Three additional employees hold master's 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 online industry is
intense. None of the Company's employees are 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."
PROPERTY.
The Company's principal administrative, engineering, marketing and
customer service facilities are located in an office building at 2101 East Coast
Highway, Corona del Mar, California and encompass approximately 9,200 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 with annual increases. Beginning in April 1998 the monthly
rent rose to approximately $10,994.
LEGAL PROCEEDINGS.
On July 8, 1997, Brian Leneck, a former officer of the Company,
resigned. By letter dated July 10, 1997, Robert McNulty, the former Chief
Executive Officer of the Company, tendered payment to Leneck to buy back 140,000
shares of Common Stock of the Company pursuant to a shareholder agreement.
Leneck rejected the tender, claiming that the amount was not the fair market
value of the shares. On March 17, 1998, Leneck filed a lawsuit in Orange County
Superior Court of California against the Company, Robert McNulty and three
members of the Board of Directors at the time, Bill Gross, Edward Bradley and
Paul Hill. Leneck's lawsuit seeks damages for breach of contract, conversion,
and breach of fiduciary duty with respect to 70,000 shares. The Company believes
that it has meritorious defenses, as well as affirmative claims, against Leneck
and intends to vigorously protect its rights in this matter. On March 27, 1998,
the Company filed a lawsuit in Orange County Superior Court against Leneck
asserting, inter alia, breach of contract, breach of implied covenant of good
faith and fair dealing, fraud and deceit, declaratory relief and specific
performance.
In March of 1998, the Company became aware that the Securities and
Exchange Commission (the "SEC") had initiated a private investigation to
determine whether the Company, Waldron & Co., Inc. ("Waldron"), then the
principal market maker in the Company's stock, or any of their officers,
directors, employees, affiliates or others had engaged in activities in
connection with transactions in the Company's stock in violation of the federal
securities laws. The SEC suspended trading in the Company's stock from 9:30 a.m.
EST, March 24, 1998 through 11:59 p.m. EDT on April 6, 1998 pursuant to Section
12(k) of the Securities Exchange Act of 1934. On April 30, 1998, the National
Association of Securities Dealers ("NASD")
38
<PAGE>
permitted the Company's Common Stock to resume trading on the electronic
bulletin boards beginning on April 30, 1998. Because the SEC has not alleged any
violations, it is difficult to predict the outcome of their investigation. The
Company continues, however, to fully cooperate with the SEC inquiry.
Nevertheless, the investigation by the SEC, and the attendant adverse publicity
may not only reduce significantly the liquidity of that stock but also make it
difficult for the Company to raise additional capital to continue its
development and expansion. The inability of the Company to raise additional
capital would have material adverse effect on the Company's business, prospects,
financial condition and results of operations and may prevent the Company from
carrying out its business plan.
On April 16, 1998, Michael A. Martucci on behalf of all persons who
purchased shares of the Company's stock between November 25, 1997 and March 26,
1998, filed suit in the California Superior Court for the County of Orange
alleging violations of the California securities laws by the Company, Robert
McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those
firm's executives. The complaint charges that the defendants "participated in a
scheme and wrongful course of business to manipulate the price of [the
Company's] stock, which included: (i) defendant Waldron's refusal to execute
sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal
above-market buy-ins to intimidate and dissuade potential short sellers from
selling [Company] stock short; (iv) the sale of [Company] shares to
discretionary accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about [the Company's] operating
performance and its future prospects." The complaint further alleges that the
Company "secretly arranged to sell $250,000 of product to Waldron as part of
defendants' effort to have [the Company] post revenue growth prior to the
[Company's] planned [initial public offering]," that such sales constituted
almost 25% of the Company's revenues between its inception and March 26, 1998
and that the Company did not disclose such sales or their significance in the
Prospectus used in the Company's initial public offering. The plaintiff seeks
compensatory damages in an unspecified amount, attorneys' fees and costs,
injunctive relief, disgorgement or restitution of the proceeds of the Company's
IPO and the defendants' profits from trading in the Company' s stock, and the
imposition of a constructive trust over the Company's revenues and profits.
On May 6, 1998 Steven T. Moore on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998 filed
suit in United States District Court for the Central District of California
alleging violations of the federal securities laws by the Company, Robert
McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those
firm's executives. The complaint charges that the defendants "participated in a
scheme and wrongful course of business to manipulate the price of [the
Company's] stock, which included: (i) defendant Waldron's refusal to execute
sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal
above-market buy-ins to intimidate and dissuade potential short sellers from
selling [Company] stock short; (iv) the sale of [Company] shares to
discretionary accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about [the Company's] operating
performance and its future prospects." The complaint further alleges that the
Company "secretly arranged to sell $250,000 of product to Waldron as part of
defendants' effort to have [the Company] post revenue growth prior to the
[Company's] planned [initial public offering]," that such sales constituted
almost 25% of the Company's revenues between its inception and March 26, 1998
and that the Company did not disclose such sales or their significance in the
Prospectus used in the Company's initial public
39
<PAGE>
offering. The plaintiff seeks compensatory damages in an unspecified amount,
attorneys' fees and costs, injunctive relief, disgorgement or restitution of the
proceeds of the Company's IPO and the defendants' profits from trading in the
Company' s stock, and the imposition of a constructive trust over the Company's
revenues and profits.
On April 28, 1998, Abraham Garfinkel on behalf of all persons who
purchased shares of the Company's stock between November 25, 1997 and March 26,
1998, filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle, an affiliate of Waldron.
The complaint alleges that defendants acted in concert with each other to
manipulate the price of the Company's stock by, inter alia, "work[ing] closely
with defendant McNulty on a weekly basis whereby defendant McNulty would pass
the supposedly confidential information of those who had 'hit' or contacted
Shopping's website." The complaint alleges that the defendants also manipulated
the market by engaging in conduct similar to that alleged in the Martucci and
Moore actions. The complaint also alleges that the Company's prospectus was
misleading by the failure to disclose sales to Waldron as discussed above. The
plaintiffs seek damages similar to that sought by Martucci and Moore.
On May 18, 1998, Kate McCarthy, on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that
defendants acted in concert with each other to manipulate the price of the
Company's stock by, inter alia, "work[ing] closely with defendant McNulty on a
weekly basis whereby defendant McNulty would pass the supposedly confidential
information of those who had 'hit' or contacted Shopping's website." The
complaint alleges that the defendants also manipulated the market by engaging in
conduct similar to that alleged in the Martucci and Moore actions. The complaint
also alleges that the Company's prospectus was misleading by the failure to
disclose sales to Waldron as discussed above. The plaintiffs seek damages
similar to that sought by Martucci and Moore.
The Company denies that it engaged in any of the acts alleged in any of
the above complaints and intends to defend against these actions vigorously.
Nonetheless, and despite the Company's insurance coverage for such actions,
these class action suits may be very harmful to the Company. Diversion of
management time and effort from the Company's operations and the implementation
of the Company's business plan at this crucial time in the Company's development
may adversely and significantly affect the Company and its business. The
continued pendency of this litigation may make it difficult for the Company to
raise additional capital to continue its development and expansion and to
attract and retain talented executives. The inability of the Company to raise
additional capital would have material adverse effect on the Company's business,
prospects, financial condition and results of operations and may prevent the
Company from carrying out its business plan.
Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois
& Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice
of Client's Right to Arbitration" in connection with legal services performed on
behalf of the Company. The law firm claims legal fees and costs in the amount of
$328,818.97 are due. The Company disputes
40
<PAGE>
the amount of fees owed and is in the process of exploring whether the matter
can be informally resolved. However, the Company has accrued the claimed amount
as of January 31, 1998. Though settlement negotiations have occurred, it is more
probable than not that the Company will proceed with its election to have the
matter submitted to arbitration before the Los Angeles County Bar Association.
By written contracts dated December 12, 1997, the Company retained
SoftAware, Inc. to provide facilities and services relative to the maintenance,
location and supply of T1 lines to the Company's servers. Subsequent to the
execution of the contracts, SoftAware, Inc. experienced a prolonged electrical
outage which resulted in the disruption of internet access and communications.
Based upon this and other factors, the Company determined that SoftAware, Inc.
was incapable of performing under the agreements and declined to proceed. By
letter dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon
the Company for $120,000.00 which purportedly reflected the compensatory damages
SoftAware suffered as a direct and proximate result of the Company's refusal to
proceed with performance under the contract. The Company rejected this demand
and offered to reimburse SoftAware, Inc. for reasonable costs incurred in
reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has yet
to respond to this offer.
The Company is involved in two other labor related disputes. Although
it is not possible to predict the outcome of these disputes, or any future
claims against the Company related hereto, the Company believes that such
disputes will not, either individually or in the aggregate, have a material
adverse effect on its financial condition or results of operations.
MARKET PRICE AND DIVIDENDS.
The Company's common stock began trading under the symbol "IBUY" in the
over-the-counter securities market on November 26, 1997. The over-the-counter
quotations reflect interdealer bid prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. The over-the-counter
market does not constitute active trading and trading in the Company's common
stock is limited and sporadic. The following table sets forth the range of high
bid and low bid quotations since the Company began trading on November 26, 1997
through the end of the second quarter ended July 31, 1998. The prices were
retrieved from "WWW.STOCKTOOLS.COM."
Common Stock
<TABLE>
<CAPTION>
For Fiscal Year Ended January 31, 1998 High Low
- -------------------------------------- ---- ---
<S> <C> <C>
Fourth Quarter $15.25 $8.50
<CAPTION>
For Fiscal Year Ending January 31, 1999 High Low
- --------------------------------------- ---- ---
<S> <C> <C>
First Quarter $39.00 $14.75
Second Quarter $25.50 $17.00
</TABLE>
Prior to November 1997 there was no active market for the Company's securities.
41
<PAGE>
On March 24, 1998, the SEC suspended trading in the Company's
securities for the period from 9:30 a.m. EST, March 24, 1998 through 11:59 p.m.
EDT, on April 6, 1998. The SEC's order stated that there appeared to be a "lack
of current and accurate information concerning the securities of Shopping.com
because of recent market activity in the stock that may have been the result of
manipulative conduct." Ref. SEC Release File No. 500-1. The Company became aware
in March of 1998 that the SEC had initiated a private inquiry to determine
whether violations of Section 17(a) of the Securities Act of 1933, as amended,
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder had occurred in connection with alleged false and misleading
statements concerning the alleged control and manipulation of the Company's
Common Stock. The SEC is investigating the facts to determine whether
violations, if any, have occurred. The Company is fully cooperating with the
SEC's inquiry. See "Legal Proceedings."
Following the termination of the SEC's suspension, the NASD did not
immediately allow the Company's principal market maker, Waldron & Co., Inc.
("Waldron"), to resume trading in the Company's securities on the electronic
bulletin boards. Waldron was approved for such trading, and such trading resumed
on April 30, 1998.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any future earnings of
its business, and therefore does not anticipate paying any cash dividends in the
foreseeable future.
SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the financial statement schedules and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The financial data as of and for the years ended
January 31, 1998 and 1997, are derived from the financial statements of the
Company, which have been audited by Singer Lewak Greenbaum & Goldstein LLP,
independent auditors, and are incorporated by reference elsewhere in this
Prospectus, and are qualified by reference to such financial statements and the
notes thereto. The selected financial data as of and for the quarter ended April
30, 1998, is derived from audited and unaudited interim financial statements of
the Company, which in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information set forth therein. The historical
results are not necessarily indicative of future results.
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<PAGE>
Shopping.com
SUMMARY FINANCIAL DATA
FORM S-1
<TABLE>
<CAPTION>
Quarter Ended April 30
Year Ended January 31 (unaudited)
------------------------------------ ------------------------------------
1997 1998 1997 1998
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ - $ 850,724 $ - $ 917,836
Cost of sales - 793,957 - 864,889
Gross profit - 56,767 - 52,947
Total operating expenses 201,697 5,027,636 345,977 4,793,491
Loss from operations (201,697) (4,970,869) (345,977) (4,740,544)
Total other income (expense) - (551,160) (1,000) 34,966
----------------- ------------------ ----------------- ------------------
Net loss $ (201,697) $ (5,522,029) $ (346,977) $ (4,705,578)
================= ================== ================= ==================
Basic and diluted loss per common
share $ (0.16) $ (3.05) $ (0.30) $ (1.17)
================= ================== ================= ==================
Weighted-average shares outstanding 1,282,500 1,807,874 1,152,500 4,039,013
================= ================== ================= ==================
</TABLE>
<TABLE>
<CAPTION>
January 31 April 30 (unaudited)
---------------------------------------------------------------------------------------
1997 1998 1997 1998
--------------- ------------------- ----------------- ---------------------------------
Balance Sheet Data: Pro forma,
Actual as adjusted
---------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 63 $4,829,180 $219,163 $1,476,109 $17,676,109
Working capital (deficit) (94,768) 3,977,775 209,204 (350,743) 15,849,257
Total assets 39,184 8,444,732 388,751 5,568,985 21,956,485
Total shareholders' equity
(deficit) $(78,647) $6,580,236 $353,226 $2,965,347 $19,352,847
</TABLE>
43
<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 incorporated by
reference elsewhere herein.
FORWARD LOOKING STATEMENTS
The following statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" include "forward
looking" information within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, and are subject to the safe harbor created by those sections. The
forward looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by management. All statements, trends, analyses and other
information contained in this report relative to the actual future results of
the Company could differ materially from those projected in the forward looking
information. For a discussion of certain factors that could cause actual results
to differ materially from those projected by the forward looking information,
see "Risk Factors" herein. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the SEC.
OVERVIEW
Shopping.com (the "Company") 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 retailer
("E-retailer") 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's management team 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 began generating sales on July 11, 1997, thus making an
evaluation of the Company and its prospects difficult to calculate. Since
inception through April 30, 1998, the Company has generated sales of $1,768,560.
The Company anticipates that sales from the
44
<PAGE>
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 must seek additional
financing estimated at $26 million over the next twelve months 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.
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 increase obtain sales on its Web site
significantly over the next twelve months, 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 Company has incurred significant losses and,
as of April 30, 1998, had an accumulated deficit of approximately $10.5 million.
The Company substantially increased its operating expenses over the past quarter
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 expenses 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 continue to
incur significant losses.
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. See "Risk Factor - Unpredictability Of Future Revenues; Potential
Fluctuations In Quarterly Operating Results; Seasonality."
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. Due to all of the foregoing
factors, it is likely that in some future quarters, the Company's results of
45
<PAGE>
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.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal
year ended January 31, 1998, and the three months ended April 30, 1998. The
Company is not providing any comparisons of its results of operations with the
prior year because the Company was in an early stage of development at that
time, 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. For the twelve months ended January 31, 1998, and the three months
ended April 30, 1998, the Company generated net sales of $850,724 and $917,836,
respectively. For the twelve months ended January 31, 1998, 40% of the Company's
sales were to Waldron & Co., Inc. ("Waldron"), the Company's underwriter and a
market maker. The sales to Waldron occurred primarily during the second and
third quarters of the twelve-month period ending January 31, 1998 and largely
consisted of a one-time purchase of a CISCO and Compaq computer system. The
Company's gross margins on such sales were higher than the Company's usual
margin on sales. For the three months ended April 30, 1998, sales of $84,162, or
approximately 9%, were sales to Waldron. Such sales consisted primarily of
computer equipment and office supplies which allowed the Company to generate
higher gross margins. For the three months ended April 30, 1998, sales of
$108,707 were made to CCI, a computer and computer supply resaler. The sales to
CCI constituted approximately 12% of net sales. In addition, the Company had
sales of $9,402 to Aubry Hanson, a partnership in which one of the partners is a
shareholder of the Company. The sales to Aubry Hanson approximate 1% of net
sales of the Company for three months ended April 30, 1998. The Company believes
that it is not dependent upon CCI, Waldron or any other customer and that the
loss of Waldron, CCI or any other customer as a customer would not have a
material adverse impact on the Company. The Company expects the sales to CCI and
Waldron to continue to decline as a percentage of total sales. The Company's
business model is based on a low profit margin coupled with a large volume of
sales to a broad customer base. 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.
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 for the
twelve-month period ended January 31, 1998, and the three months ending April
30, 1998 were $793,957, or approximately 93.3% of net sales, and $864,889, or
approximately 94.2% of net sales, respectively. The Company's gross profit
margin was approximately 6.7% for the twelve month period ended January 31,
1998, and 5.8% for the three months ended April 30, 1998. The failure to
generate sales with sufficient margins
46
<PAGE>
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 media costs
related to advertising, promotion and marketing literature. Advertising and
marketing expenses incurred by the Company for the twelve months ended January
31, 1998 and the three months ending April 30, 1998 were $871,964 and
$1,837,990, respectively or approximately 102.5% and 200%, respectively, of net
sales. The Company intends to significantly increase its advertising and
marketing expenses in future periods. While the Company is hopeful that its net
sales will also increase in future periods so that its sales and marketing
expense will represent a decreasing percentage of net sales, the Company is not
able to predict whether its net sales will increase by a sufficient amount for
this to occur. No assurance can be given that the Company will achieve increased
net sales or that marketing expense will decrease as a percentage of sales.
Product Development Expenses
Product development expenses consist primarily of costs incurred by the
Company to develop and enhance 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. Product development expenses incurred by the
Company for the twelve months ended January 31, 1998, and three months ended
April 30, 1998 were approximately $893,923, or approximately 105.1% of net
sales, and $634,594 or approximately 69.1% of net sales, respectively. 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.
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
for the twelve months ended January 31, 1998, and three months ended April 30,
1998 were $3,261,749, or approximately 383.4% of net sales, and $2,320,907, or
approximately 252.9% of net sales, respectively. 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.
Interest Income and Expense
Interest expense for the twelve months ending January 31, 1998 was
$580,679 or 68.3% of net sales and is primarily attributable to the Promissory
Notes issued by the Company from inception through January 31, 1998. Included in
interest expense is $221,000 of loan origination fees related to the Promissory
Notes and $299,700 of financing costs related to the issuance of
47
<PAGE>
certain warrants in connection with $600,000 of Promissory Notes. The Promissory
Notes were paid using the proceeds of the Company's initial public offering.
Interest income on cash and cash equivalents for the three months ended
April 30, 1998 was $36,418 or approximately 4% of net sales. Interest income was
due to the Company having certain interest-bearing cash and cash equivalents
accounts. Interest expense for the three months ended April 30, 1998 was $1,452
or less than 1% of net sales and is primarily attributable to interest on
accounts payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity were cash and cash
equivalents derived from public and private sales of the Company's equity and
debt securities, and from sales of product in the amounts of $850,724 and
$917,836 for the year ended January 31, 1998 and the quarter ended April 30,
1998, respectively.
Capital expenditures for the twelve month period ended January 31, 1998
and the three month period ended April 30, 1998 were $1,629.166 and $418,386,
respectively. The Company has current and long-term capital lease obligations
for certain office equipment, the aggregate amount of which, as of January 31,
1998 and April 30, 1998 were $439,718 and $690,109, respectively. The Company
anticipates a substantial increase in its capital expenditures in 1998
consistent with its anticipated growth.
The Company experienced a net loss of $5,522,029 and generated net
sales of $850,724 for the year ended January 31, 1998. The Company experienced a
net loss of $4,705,578 and generated net sales of $917,836 for the three month
period ended April 30, 1998. The Company's ability to survive and grow for the
immediate future will depend on the Company's ability to raise additional
capital from public or private equity or debt sources. In addition, the Company
believes that it will need to raise additional funds in order to avail itself of
any 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. The Company has used rather than
provided cash from its operations. These factors raise a substantial doubt about
the Company's ability to continue as a going concern. In view of the matters
described above, recoverability of a major portion of the Company's recorded
asset amounts is dependent upon the Company's ability to raise sufficient
capital to fund its working capital requirements until the Company can generate
sufficient sales volume to cover its operating expenses.
Management of the Company believes that its current cash on hand plus
the existing working capital will not be sufficient to sustain current
operations for the balance of the fiscal year ending January 31, 1999. The
Company is currently negotiating with several investors about raising additional
capital through private placement offerings. However, there can be no assurance
that such capital resources will be available to the Company or that if
available, such funding will be on terms acceptable to the Company. In addition,
the investigation by the SEC, the pendency of lawsuits and the attendant
48
<PAGE>
adverse publicity may not only reduce significantly the liquidity of the
Company's stock but also make it difficult for the Company to raise additional
capital to continue its development and expansion. See "Legal Proceedings."
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. These factors raise a
substantial doubt about the Company's ability to continue as a going concern. In
view of the matters described above, recoverability of a major portion of the
Company's recorded asset amounts is dependent upon the Company's ability to
raise sufficient capital to fund its working capital requirements until the
Company can generate sufficient sales volume to cover its operating expenses.
EMPLOYEES
As of July 31, 1998, the Company employed 85 full time and 9 part time
employees. This is an increase from January 31, 1998, when the number of
employees was 67 full time and 9 part time employees. The Company believes that
its future success will depend in part on its ability to attract, hire and
maintain qualified personnel. However, the Company believes there will not be a
significant increase in employees over the next twelve months. 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.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company's business, financial condition and results of operations may be
impacted by a number of factors including, without limitation, the factors
discussed under "Risk Factors."
DIRECTORS AND EXECUTIVE OFFICERS.
<TABLE>
<CAPTION>
Name Age Position with Shopping.com
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank W. Denny 63 Chairman
- -------------------------------------------------------------------------------------------------------
John H. Markley 58 President, Chief Executive Officer and Director
- -------------------------------------------------------------------------------------------------------
Douglas A. Hay 44 Executive Vice President and Director
- -------------------------------------------------------------------------------------------------------
Howard S. Schwartz 51 Executive Vice President
- -------------------------------------------------------------------------------------------------------
Kristine E. Webster 29 Senior Vice President, Chief Financial Officer, and
Secretary
- -------------------------------------------------------------------------------------------------------
Mark S. Winkler 39 Chief Information and Technology Officer
- -------------------------------------------------------------------------------------------------------
Paul J. Hill 52 Director
- -------------------------------------------------------------------------------------------------------
Edward F. Bradley 59 Director
- -------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
FRANK W. DENNY. Mr. Denny joined Shopping.com in April 1998 as its Chairman of
the Board. He is also the President and CEO of Group InterCom, an international
marketing and consulting group headquartered in San Antonio, Texas, and has
served in those offices since 1991. Through its United States and International
offices Group InterCom is engaged in the sale, marketing and manufacture of
general hard lines retail merchandise. Group InterCom also is a consulting firm
specializing in retail concept development and implementation as well as mergers
and acquisitions. Prior to this time, Mr. Denny was a founder, Chairman of the
Board, President and CEO of Builders Square, one of the largest retail home
improvement warehouse operations in the United States. Prior to Builders Square,
Mr. Denny was President of W.R. Grace Home Centers, a chain of home centers
operating over 300 stores nationally. Mr. Denny was an officer of the Home
Center Institute and a charter member of the National Home Center Congress and
Exposition. He was also founder of the Do It Yourself Research Institute based
in Indianapolis, Indiana.
JOHN H. MARKLEY. In June 1998 Mr. Markley became the Company's President and
Chief Executive Officer and a member of its Board of Directors. Mr. Markley
devotes substantially all of his business time to the Company. In June 1993, Mr.
Markley founded Allwoods Management Group and is currently a principal of
Allwoods Management Group which provides management consulting services to
businesses, law firms and financial institutions including acquisition analysis,
business planning and financial feasibility studies. Since August 1989, Mr.
Markley has served and currently serves as the Chairman of the Board and Chief
Executive Officer of Pay-N-Pak, a corporation and a home improvement chain with
102 stores in 14 states which had sales of $500 million but is currently a
non-operating entity which filed for protection under the Federal Bankruptcy
Code (11 USC) in 1991. From 1985 to 1989, Mr. Markley was a managing partner and
broker at Re/Max Rivera Realty and Re/Max South County Realtors which had sales
in residential and commercial real estate worth $200 million and helped manage
six offices and 100 associates. From 1980 to 1985 , Mr. Markley was President of
W.R. Grace Western Region Home Center Division. As President of W.R. Grace
Western Region Home Center Division, Mr. Markley managed a chain of 94 home
improvement stores in six Western states. From 1971 to 1980, Mr. Markley was
executive vice-president and general manager of Cashways Building Materials, a
chain of 12 home improvement stores with annual sales in excess of $100 million.
Prior to 1971, Mr. Markley held other managerial positions with home improvement
companies.
DOUGLAS HAY. Mr. Hay joined the Company in May 1997 as its Executive Vice
President and was elected as a member of the 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.
HOWARD S. SCHWARTZ. Mr. Schwartz joined the Company in July 1998 as its
Executive Vice President of Finance and Administration. Mr. Schwartz brings to
the Company more than 15 years of broad-based experience in the retail industry
most recently as Managing Director of Marketing Strategies Group, Inc., a
company specializing in strategic positioning, brand
50
<PAGE>
development, customer acquisition and retention. From November 1993 to August
1996, Mr. Schwartz served as Senior Vice President & Chief Financial Officer of
Standard Brands Paint Company, a chain of 100 paint and home decorating stores
with annual sales in excess of $200 million, operating in six Western states.
From December 1991 to June 1993 Mr. Schwartz was Senior Vice President & Chief
Financial Officer of Conran's-habitat, a national chain of upscale home
furnishings stores. From July 1983 to December 1991 Mr. Schwartz served as Chief
Financial Officer and Vice President of Finance for a national specialty store
chain and a regional discount department store chain. From September 1980 to
July 1983 Mr. Schwartz was Group Controller of the W.R. Grace Specialty Retail
Group, a group of specialty retail companies with over 550 stores nationally and
combined annual sales in excess of $1.3 billion. Mr. Schwartz has also worked in
executive financial capacities for Revlon, Inc. and U.S. Industries, Inc. Prior
to that he was with Ernst & Young, LLP from June 1968 to July 1974. Mr.
Schwartz, a Certified Public Accountant, received his Bachelor of Science degree
from Long Island University in 1968.
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 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 and Young, LLP form 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 and 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.
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 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 Harvard Developments Limited, a diversified company with
operations in real estate, broadcasting, manufacturing, oil and gas and
insurance. Mr. Hill received a Bachelor of
51
<PAGE>
Science and Bachelor of Arts degree from Georgetown University in 1967 and a
Master of Business Administration form the University of Western Ontario in
1969.
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. From
October 1997 to the present, Mr. Bradley has been a director of Kyzen
Corporation, a company which manufactures and markets chemical cleaning
solutions. Mr. Bradley has also functioned as a Special Consultant to the U.S.
Environmental Protection Agency in Washington, D.C. Mr. Bradley received 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 an
Adjunct Professor in Engineering Economics at the University of Utah.
52
<PAGE>
EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table shows as to the Chief Executive Officer and each
employee whose total annual salary and bonus exceeded $100,000 (the "Named
Officers").
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Fiscal Annual Compensation Long-Term All Other
Year Compensation Awards Compensation
Name and Principal Position End --------------------------------- ------------------------- ($)
1/31 Salary Bonus Other Annual Restricted Number of
($) ($) Compensation Stock Securities
($) Awards Underlying
($) Options
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert McNulty, CEO (1) 1998 113,801 104,105 44,588(2) 0 25,000 0
- -------------------------------------------------------------------------------------------------------------------------
Mark S. Winkler, 1998 133,177 0 0 75,000 0 0
Chief Information and
Technology Officer
- -------------------------------------------------------------------------------------------------------------------------
Michael Miramontes, 1998 116,200 0 11,000(4) 300,000 0 0
Administration and Human
Resources (3)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Resigned June 1, 1998.
(2) Includes $14,508 automobile allowance.
(3) Resigned June 12, 1998.
(4) Automobile allowance.
53
<PAGE>
Option Grants In The Last Fiscal Year
The following table shows, as to each of the Named Officers,
information concerning stock options granted during the fiscal year ended
January 31, 1998.
Option Grants in Fiscal 1998
(Individual Grants)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Percent Of Total Exercise Value At Assumed
Securities Options Granted Or Base Expiration Annual Rates of Stock
Name and Principal Underlying to Employees In Price Date Price Appreciation for
Position Options Fiscal Year 1998 ($/Sh) Option Term
--------------------------
5% 10%
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert McNulty, CEO 25,000 15.9% 3.00 July 16, 2002 20,721 45,788
- ---------------------------------------------------------------------------------------------------------------------------------
Mark S. Winkler, 0 --- --- ---
Chief Information and
Technology Officer
- ---------------------------------------------------------------------------------------------------------------------------------
Michael Miramontes, 0 --- --- ---
Administration and
Human Resources (2)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Resigned June 1, 1998.
(2) Resigned June 12, 1998.
54
<PAGE>
Option Exercises And Holdings
The following table sets forth, for each of the Named Officers, certain
information concerning the number of shares subject to both exercisable and
unexercisable stock options as of January 31, 1998. Also reported are values for
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and the fair market value of
Shopping.com's Common Stock as of January 31, 1998. No options were exercised by
any Named Officer in fiscal 1998.
<TABLE>
<CAPTION>
Number Of Securities Value Of Unexercised In-The-
Name and Principal Position Underlying Unexercised Money Options at Fiscal Year
Options At Fiscal Year End End ($) (1)
----------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert McNulty, CEO (2) 25,000 0 293,750 0
- -----------------------------------------------------------------------------------------------------------------------
Mark S. Winkler, 0 0 0 0
Chief Information and Technology
Officer
- -----------------------------------------------------------------------------------------------------------------------
Michael Miramontes, 0 0 0 0
Administration and
Human Resources (3)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Market value of underlying securities based on the closing price of
Shopping.com's Common Stock on January 30, 1998 (the last trading day
of fiscal 1998) of $14.75 minus the exercise price.
(2) Resigned June 1, 1998.
(3) Resigned June 12, 1998.
Director Compensation
Each of the Company's directors in fiscal 1998 were granted options to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$3.00 per share. Two such directors, Bill Gross and Robert McNulty, have since
left the board and were replaced by Frank Denny and John Markley.
Employment Agreements
The Company has entered into a written employment agreement with Mr.
Winkler for one year ending May 20, 1998 which was subsequently renewed for one
year pursuant to an automatic renewal provision therein. Under his employment
agreement, Mr. Winkler may only be terminated for cause. Mr. Winkler's agreement
provides for base annual salary of $200,000.
The Company entered into an employment agreement with John H. Markley,
the President and Chief Executive Officer of the Company, on June 1, 1998
through May 31, 2001. The agreement renews for one year terms unless either
party terminates the agreement. Either party may terminate the agreement for
cause. Mr. Markley's base compensation will escalate from $175,110 to $300,040
during the initial three years. Mr. Markley will also receive an
55
<PAGE>
automobile allowance of $1,000 per month and a 12-month housing allowance of
$1,500 per month.
As of June 1, 1998, the Company entered into an agreement with Mr.
Douglas Hay to serve as Executive Vice President. The term of the agreement is
for two years and is automatically renewed for one-year terms unless terminated
by either party with written notice given by January 31 of any year beginning
January 31, 2001. The agreement provides for a bi-weekly base salary of $8,465.
The agreement also provides that Mr. Hay will participate in a formula based
program to be approved annually by the Board of Directors and providing for the
opportunity to receive up to an amount equal to his base compensation for
exceeding the Company's annual business plan net profit.
The Company entered into a three-year employment agreement with Howard
S. Schwartz, an Executive Vice President of the Company, on August 1, 1998. The
term will renew year to year unless terminated by either party. Either party may
terminate for cause. Mr. Schwartz's base compensation will escalate from
$140,010 to $219,986 over the three-year base period.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of July 31, 1998 certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
any person (including any "group" as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) known by
the Company to be the beneficial owner of more than 5% of the Company's voting
securities, (ii) each director and each nominee for director of the Company,
(iii) each of the executive officers named in the Summary Compensation Table
appearing herein, and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Name and Address (1) Number of Shares Percentage of Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert J. McNulty (2) 1,556,500 34.2%
2401 Bayshore Drive
Newport Beach, California
- -------------------------------------------------------------------------------------------------------------
Mark S. Winkler 25,000 *
27863 Longhill Drive
Rancho Palos Verdes, California
- -------------------------------------------------------------------------------------------------------------
Douglas A. Hay (3) 424,750 10.1%
4630 East Sunnyside Lane
Phoenix, Arizona
- -------------------------------------------------------------------------------------------------------------
Paul J. Hill (4) 404,751 9.7%
2000-1874 Scarth Street
Regina, Saskatchewan
Canada
- -------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Name and Address (1) Number of Shares Percentage of Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edward F. Bradley (5) 304,750 7.3%
1515 N. 600 E.
Mapleton, Utah
- -------------------------------------------------------------------------------------------------------------
Kristine E. Webster (6) 45,000 1.1%
25510 Buckly
Murrieta, CA 92563
- -------------------------------------------------------------------------------------------------------------
idealab! (7) 787,500 18.5%
130 West Union Street
Pasadena, CA 91103
- -------------------------------------------------------------------------------------------------------------
Cyber Depot, Inc. (8) 350,000 8.4%
3334 E. Coast Highway, #306
Corona del Mar, CA 92625
- -------------------------------------------------------------------------------------------------------------
Edward F. Harris (9) 326,431 8.2%
P.O. Box 593
Glenbrook, Nevada
- -------------------------------------------------------------------------------------------------------------
William D. Long (10) 321,301 8.0%
P.O. Box 522
Glenbrook, Nevada
- -------------------------------------------------------------------------------------------------------------
John H. Markley (11) 454,750 10.5%
120 Eastlake Drive
Palm Springs, CA 92264
- -------------------------------------------------------------------------------------------------------------
Frank W. Denny (12) 400,000 9.7%
8221 Pimlico
Boerne, Texas
- -------------------------------------------------------------------------------------------------------------
Howard S. Schwartz 0 *
1701 South El Molino Avenue
San Marino, CA 91108
- -------------------------------------------------------------------------------------------------------------
All directors and executive officers as 2,059,001 50.6%
a group (eight persons)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1% of the total.
(1) Except as otherwise indicated below, the persons whose names appear
in the table above have sole voting and investment power with respect to all
shares of stock shown as beneficially owned by them subject to community
property laws, where applicable.
(2) Includes 250,000 shares and options to purchase 100,000 shares of
Common Stock of an exercise price of $21.25 per share owned by Cyber Depot, Inc.
Mr. McNulty is the principal shareholder of Cyber Depot, Inc. Also included are
warrants to purchase 187,500
57
<PAGE>
shares of Common Stock at an exercise price of $3.00 per share, options to
purchase 25,000 shares of Common Stock at an exercise price of $3.00 per share,
options to purchase 25,000 shares of Common Stock at an exercise price of $14.25
per share and options to purchase 150,000 shares at $16.00 per share held by Mr.
McNulty. In addition, Mr. McNulty terminated his voting power for 35,000 shares
of Common Stock held by other shareholders which were previously included in Mr.
McNulty's beneficial ownership. Mr. McNulty gave voting power for 204,750 shares
of Common Stock each to Douglas Hay, Edward Bradley, Paul Hill and John Markley
which have been included in Mr. McNulty's beneficial ownership. In addition,
Cyper Depot, Inc. gave voting power for 250,000 shares of Common Stock to Frank
Denny which have been included in Mr. McNulty's beneficial ownership.
(3) Includes options to purchase 25,000 shares of Common Stock at an
exercise price of $3.00 per share, options to purchase 25,000 shares at $14.25,
50,000 shares at $16.00 and 50,000 shares at $21.00. Includes the proxy for
204,750 shares granted by Mr. McNulty.
(4) Includes 66,667 shares of Common Stock, warrants to purchase 33,334
shares of Common Stock at an exercise price of $3.00 per share, options to
purchase 25,000 shares of Common Stock at an exercise price of $14.25 per share
and options to purchase 50,000 shares at $16.00 per share held by Kipling Isle,
Ltd., a corporation controlled by Paul J. Hill. Includes an option to purchase
25,000 shares held by Paul J. Hill at $3.00. Includes the proxy for 204,750
granted by Mr. McNulty to by Paul J. Hill.
(5) Includes options to purchase 25,000 shares of Common Stock at an
exercise price of $3.00 per share, option to purchase 25,000 shares at $14.25,
and option to purchase 50,000 shares at $16.00. Includes the proxy for 204,750
shares granted by Mr. McNulty.
(6) Includes warrants to purchase 4,166 shares of Common Stock at an
exercise price of $3.00 per share and options to purchase 12,500 shares of
Common Stock at an exercise price of $3.00 per share.
(7) Includes warrants to purchase 187,500 shares of Common Stock at an
exercise price of $3.00 per share. As of March 24, 1998, Bill Gross, a director
of Bill Gross' idealab!, ceased to be a director of the Company. Bill Gross
individually has an option to purchase 25,000 shares of Common Stock at an
exercise price of $3.00 per share and an option to purchase 25,000 shares at
$14.25.
(8) Includes warrants to purchase 187,500 shares of Common Stock at an
exercise price of $3.00 per share and options to purchase 100,000 shares at
$21.00. Cyber Depot, Inc. gave voting power to 250,000 shares to Frank Denny
which have been included in Cyber Depot Inc.'s beneficial ownership.
(9) Includes 16,795 shares of Common Stock held by The Harris Assets
Revocable Trust, 59,823 shares of Common Stock held by Ed Harris Rollover IRA,
220,000 shares of Common Stock held by the Harris Family Trust and 29,813 shares
of Common Stock held by The Harris Family Charitable Remainder Unitrust as
reported by the shareholder as of January 31, 1998.
58
<PAGE>
(10) Includes 192,000 shares of Common Stock held by William D. Long &
Kay K. Long TTEES UTD 12/31/86 FBO The Long Family Trust and 11,000 shares of
Common Stock held by William D. Long, Ken Thomson and Edward Harris TTEES: BEK
Investment Trust, UTD 2/16/94 as reported by the shareholder as of January 31,
1998.
(11) Includes options to purchase 150,000 shares of Common Stock at an
exercise price of $16.00 per share and options to purchase 100,000 shares at
$21.00. Includes the proxy for 204,750 granted by Mr. McNulty.
(12) Includes options to purchase 100,000 shares at $16.00 and options
to purchase 50,000 shares at $21.00. Includes the proxy for 250,000 granted by
Cyber Depot, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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, a former director of the Company, 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.
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.
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.
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.
59
<PAGE>
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, a former director of the Company, co-founded City-Search, a web-based
city directory which operates in eight cities, and has served on its Board since
such time.
In connection with its underwriting agreement, the Company paid Waldron
& Co., Inc. ("Waldron"), the Company's lead underwriter in its initial public
offering ("IPO"), commissions and an allowance for expenses in the amount of 10%
and 3%, respectively, of the gross proceeds of the IPO. Additionally, the
Company had product sales to Waldron of approximately $342,000 during the year
ended January 31, 1998.
During the year ended January 31, 1998, the Company obtained short-term
non-interest bearing promissory Notes in the amount of $305,000 from affiliates
of Waldron, which were fully repaid subsequent to the IPO.
The Company made advances to Robert McNulty of approximately $156,000,
which were repaid during the year ended January 31, 1998. Approximately $98,000
of such repayments were made by Cyber Depot. In addition, during the year ended
January 31, 1998, the Company made advances of $16,000 to Cyber Depot which were
fully repaid during the year.
The Company retained the services of certain consultants, which were
also shareholders. Consulting expenses amounted to approximately $50,900 of
which $28,390 was unpaid as of April 30, 1998.
In February 1998, each of the Company's directors were granted options
to purchase 25,000 shares of the Company's Common Stock at an exercise price of
$14.25 per share, for a total amount of 125,000 stock options granted. Certain
of these options were granted to Kipling Isle, Ltd., a corporation controlled by
Mr. Paul J. Hill, a director.
In April 1998, Mr. Frank Denny joined the Board of Directors as
Chairman of the Board to replace Bill Gross. In May, 1998, Mr. Denny was granted
options to purchase 100,000 shares of the Company's Common Stock at an exercise
price of $16.00 and 50,000 shares of Common Stock at an exercise price of the
closing price of the Company's Common Stock on the effective date of grant
($21.00). The effective date of grant was June 1, 1998.
In May 1998, Mr. Douglas Hay, a director and Executive Vice President
of the Company, was granted options to purchase 50,000 shares of the Company's
Common Stock at
60
<PAGE>
$16.00 per share and 50,000 shares of Common Stock at an exercise price of the
closing price of the Company's Common Stock on the effective date of grant
($21.00). The effective date of grant was June 1, 1998.
In May 1998, Mr. Edward Bradley, a director of the Company, was granted
options to purchase 50,000 shares of the Company's Common Stock at an exercise
price of $16.00. The effective date of grant was June 1, 1998.
In May 1998, Kipling Isle, Ltd., a corporation controlled by Paul J.
Hill, a director, was granted options to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $16.00. The effective date of grant was
June 1, 1998.
In June 1998, Mr. John Markley became a director and was named the
Company's President and CEO following Mr. Robert McNulty's departure on June 1,
1998. Mr. Markley was granted options to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $16.00 and 100,000 shares of
Common Stock at an exercise price of the closing price of the Company's Common
Stock on the effective date of grant ($21.00). The effective date of grant was
June 1, 1998.
On April 1, 1998 the Company entered into a two-year consulting
agreement (the "Agreement") with Stilden Co., Inc., a Texas Corporation
("Stilden") to provide general consulting services relating to operation,
promotion and financing of the Company. Pursuant to the Agreement, Stilden will
receive $7,000 per month, reimbursement for business expenses and a housing
allowance of $1,600 per month for a period of twelve months. Mr. Denny, a
director of the Company, is the president, principal shareholder and a director
of Stilden.
On June 1, 1998, the Company entered into a three-year Consulting
Agreement with Cyber Depot (the "Cyber Depot Agreement"). Pursuant to the Cyber
Depot Agreement, Cyber Depot will receive $21,500 per month and options to
purchase 100,000 shares of the Company's Common Stock at an exercise price equal
to the closing market price of the Company's Common Stock on June 1, 1998
($21.00). Mr. McNulty, a former officer and director of the Company, is the
principal shareholder of Cyber Depot.
As a result of the issuance of the below-market stock options including those
described above and issued during the fiscal year ended January 31, 1998, the
Company will record a compensation change of approximately $2,800,000 during the
three months ending July 31, 1998.
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.
61
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Limitation of Liability and Indemnification Matters
The Company has adopted provisions in Article IV of its Articles of
Incorporation that limit the liability of its directors for monetary damages to
the fullest extent permissible under California law. California law provides
that a corporation's articles of incorporation may contain provisions
eliminating or limiting the personal liability of a director for monetary
damages for breach of their fiduciary duties as directors, except for liability
(1) for acts or omissions involving intentional misconduct or a knowing and
culpable violation of law, (2) 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, (3) for any
transaction from which the director derived an improper personal benefit, (4)
for acts or omissions that show a reckless disregard for the director's duty to
the corporation or its shareholders in circumstances in which the director was
or should have been aware would pose a risk of serious injury to the corporation
or its shareholders, (5) for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the corporation or its shareholders, (6) for any transaction between the
corporation and the director or between the corporation and another corporation
having interrelated directors as provided in Section 310 of the California
Corporations Code ("Cal. Corp. Code"), or (7) for any distribution, loan or
guarantee as provided in Section 316 of the Cal. Corp. Code.
Section 317 of the Cal. Corp. Code provides that a corporation shall
have the power to indemnify any director, officer, employee or other agent of
the corporation against expenses (including attorney's fees and expenses
establishing a right to indemnification under this Section), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any threatened, pending or completed action or proceeding if that person
acted in good faith and in a manner the person reasonably believed to be in the
best interest of the corporation and, in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful.
Article VIII of the Company's Bylaws provides that the Company shall,
to the maximum extent and in the manner permitted by the Cal. Corp. Code,
indemnify any person (or estate of any person) who was or is a party, or is
threatened to be made a party, in any proceeding (including any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative or investigative) by reason of the fact that such person (1) is
or was a director or officer of the corporation or a predecessor corporation, or
(2) is or was an agent other than a director or officer of the corporation or a
predecessor corporation who, at the time, is or was also serving as a director
or officer of the corporation or a predecessor corporation. To the fullest
extent permitted by California law, indemnification under Article VIII includes
expenses incurred for attorney's fees and for establishing a right to
indemnification under the Company's Bylaws. In addition, in the manner and to
the fullest extent permitted by California law, any such expenses shall be paid
by the corporation in advance of the final disposition of such proceedings.
Company has entered into indemnification agreements with certain of its
executive officers and directors. The Company's indemnification agreements
require the Company, among
62
<PAGE>
other things, to indemnify such persons against certain liabilities that may
arise by reason of their status or service as executive officers or directors
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
RECENT SALES OF UNREGISTERED SECURITIES.
The following are all securities sold by Registrant within the past
three (3) years without registering the securities under the Securities Act/1/:
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(1) (a) March 1997-June 1997 Common Stock 1,282,500 Shares
</TABLE>
(b) There were no underwriters used in connection with this offering.
1,150,000 shares of Common Stock were offered and sold to Robert J. McNulty, CEO
of the Registrant. Subsequently, Mr. McNulty gifted an aggregate of 325,000 of
such shares to various employees of the Company for no consideration. In
addition, the Company offered and sold shares of Common Stock to idealab!, a
company controlled by Bill Gross, a former director of Registrant (100,000
shares); Alvin S. Morrow, (2,500 shares); and 30,000 shares to an independent
consultant who provided the Registrant's web site address; all of whom were
accredited investors and residents of the State of California.
(c) The securities were sold for two cents ($.02) per share except for
the 30,000 shares issued to an independent consultant which were valued at $.20
per share for an aggregate consideration of $30,650.
(d) The issuer relied on Section 4(2) and 3(a)(11) of the Securities
Act of 1933, as amended.
(e) Not Applicable.
- --------
/1/ All share amounts and related information reflect a one-for-two reverse
stock split effective upon the effective date of the Company's initial
public offering. The warrants to purchase 122,500 shares of the
Company's Common Stock issued to Waldron & Co., Inc. as the
Underwriters' Representative are not included because such warrants
were registered in connection with the Company's initial public
offering. As of July 31, 1998, the Company had issued 1,188,000
options, largely to employees, officers and directors.
63
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(2) (a) March 1997-April 1997 Series A Preferred Stock 750,000 Shares
Warrants for 375,000 Warrants
Common Stock
</TABLE>
(b) There were no underwriters used in connection with this offering.
The securities were offered and sold only to two accredited investors, Cyber
Depot, Inc., a corporation controlled by Robert J. McNulty, President and CEO of
the issuer, and idealab! a corporation controlled by Bill Gross, a director of
Registrant. One Warrant was issued for each two shares.
(c) The securities were sold for forty cents ($.40) per share of Series
A Stock.
(d) The issuer relied on Rule 506 under Regulation D based on the fact
that all offerees were accredited investors under Rule 501.
(e) The Warrants are convertible into one share of the Company's Common
Stock at an exercise price of $3.00 per share. The Warrants expire five years
from the date of issuance.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C> <C>
(3) (a) April 1997 Series B Preferred Stock 536,500 Shares
-September 1997 Warrants for Common Stock 268,250 Warrants
</TABLE>
(b) There were no underwriters used in connection with 536,500 shares
of this offering. Waldron & Co., Inc. acted as placement agents for 200,000
shares of this offering and received fees of $78,000. The securities were
offered and sold only to accredited investors. One Warrant was issued for each
two shares of Series B Stock.
(c) The securities were sold for Three Dollars ($3.00) per share for an
aggregate consideration of $1,609,500. The Warrants are exercisable for five
years for the purchase of one share of Common Stock at a strike price of $3.00.
(d) The issuer relied on Rule 506 under Regulation D based on the fact
that all offerees were accredited investors under Rule 501.
(e) Not applicable.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(4) (a) June 1997-Sept. 1997 Promissory Notes $1,150,000
Warrants for 382,950 Warrants
Common Stock
</TABLE>
(b) No underwriters were used in connection with $50,000 principal
amount of such Notes. Waldron & Co., Inc., acted as placement agents in
connection with the placement of the $1,100,000 principal amount of such Notes,
and received fees of $143,000. The securities were
64
<PAGE>
offered and sold only to qualified and accredited investors. 333 Warrants were
issued for each $1,000 in principal amount of such Notes.
(c) The Notes were sold for an aggregate consideration of $1,150,000.
The accompanying Warrants are exercisable for five years for the purchase of one
share of Common Stock at an exercise price of $6.00 per share.
(d) The issuer relied on Rule 506 under Regulation D based on the fact
that all offerees were accredited investors under Rule 501.
(e) The Warrants are exercisable for five years for the purchase of one
share of Common Stock at an exercise price of $6.00 per share. In May 1998,
16,650 Warrants were exercised in a "cashless" exercise and 13,295 shares of the
Company's Common Stock were issued.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(5) (a) April 1997 Common Stock 8,000 Shares
</TABLE>
(b) There were no underwriters used in connection with this private
placement. The securities were offered and sold to Typhoon Capital Consultants,
LLC in exchange for consulting services.
(c) The securities were valued at $6.00 per share and were exchanged
for business consulting services, for an aggregate consideration valued at
$48,000.
(d) The issuer relied on Section 4(2) of the Securities Act of 1933, as
amended.
(e) Not applicable.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(6) (a) September 1997 Common Stock 125,000 Shares
Promissory Note $600,000
Warrants for 199,800 Shares
Common Stock
</TABLE>
(b) Waldron & Co., Inc. acted as placement agent in connection with
this private placement and was paid $78,000 in fees therefor. The securities
were issued to En Pointe Technologies, Inc., an accredited investor.
(c) The Common Stock was valued at $6.00 per share and was issued as
consideration for a 5 year license to the Company to use En Pointe's EPIC
software. The Notes were issued at face value for a $600,000 loan to the
Company. 333 Warrants were issued for each $1,000 principal amount of the Note.
The Warrants are exercisable for five years for the purchase of one share of
stock at a strike price of $4.50 per share.
65
<PAGE>
(d) The issuer relied on Rule 506 under Regulation D based on the fact
that En Pointe is an accredited investor.
(e) The Warrants are exercisable for five years for the purchase of one
share of stock at a strike price of $4.50 per share.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(7) (a) February 1998 Common Stock 47,059 Shares
</TABLE>
(b) There were no underwriters used in connection with this offering.
The shares were offered pursuant to a Subscription Agreement between the Company
and Premiere Radio Network, Inc., a Delaware corporation ("PRN"), dated February
19, 1998.
(c) PRN agreed to purchase the shares in consideration of radio
advertising valued at $1,000,000.
(d) The Company relied on Section 4(2) of the Securities Act of 1933,
as amended, and Regulation D promulgated under the Securities Act of 1933, as
amended.
(e) In the event that the average closing price of the Company's Common
Stock for the ten days prior to February 19, 1999 is less than $21.25 per share,
the Company will issue to PRN up to 52,941 additional shares.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(8) (a) May 1998 Warrants for 132,500 Shares
Common Stock
Promissory Notes $1,325,000
</TABLE>
(b) Waldron & Co., Inc. acted as placement agent in connection with
this private placement and was paid 7% of the total amount raised plus an
expense allowance of 3%.
(c) The shares were offered pursuant to Subscription Agreements,
Promissory Notes and Warrant Agreements between the Company and individual
investors, each dated May 15, 1998 (except Mr. Kern's dated June 8, 1998).
Pursuant to the Subscription Agreements, each investor purchased units
consisting of a promissory Note in the principal amount of $25,000 bearing
interest at an annual rate of 10% interest and principal payable November 15,
1998 and warrants to purchase 2,500 shares of the Company's Common Stock at an
exercise price of $14.00 per share. The units were sold to Ray Fisk (two units),
Mike Weikamp (four units), Jon Aubry (twenty units), William Schweitzer (two
units), Zahra Khiaban (three units), Carlos Beharie (sixteen units), Tony
Nikolich (two units) and Daniel E. Kern (four units). A total consideration of
$1,325,000 was paid in this offering.
(d) The Company relied on Section 4(2) and Regulation D Rule 505
promulgated by the Securities and Exchange Commission as the exemption from
registration. The investors were all accredited investors.
66
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(9) (a) June and July 1998 8% Convertible $2,500,000
Debentures Due
in 2 years
Warrants for 1 share for every
Common Stock 2 shares issued upon
conversion of the
Debenture
</TABLE>
(b) Trautman, Kramer & Company, Incorporated and Waldron & Co., Inc.
acted as placement agents in connection with this private placement, receiving
9% and 1%, respectively, of the net proceeds. The Debentures in the amount of
$250,000 were sold to each of ten Investor listed in "selling stockholders."
Subject to certain restrictions on the ability of the holders of the Debentures
to convert, the Debentures are convertible into shares of the Company's Common
Stock at a conversion price for each share of Common Stock equal to the lower of
(i) the lowest market price for any three trading days selected by the Debenture
holder from the thirty trading days prior to the conversion, or (ii) $16.00.
(c) The total consideration was $2,500,000.
(d) The issuer relied on Section 4(2) and Regulation D Rule 506
promulgated by the securities and Exchange Commission as the exemption from
registration. Each investor was an accredited investor.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(10) (a) June 1998 Warrants for Common 300,000 Shares
Stock
</TABLE>
(b) There were no underwriters used in connection with this
offering. The warrants were issued to Ladenberg Thalmann &
Co., Inc. pursuant to the Company's retainer of Ladenberg as
its investment banker and financial advisor. The warrants are
exercisable after December 15, 1998 until June 15, 2003 at
$21.92 per share.
(c) The warrants were issued to Ladenberg Thalmann & Co., Inc.
pursuant to the Company's retainer of Ladenberg as its
investment banker and financial advisor.
(d) The Company relied on Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated under the Act.
(e) The warrants are exercisable after December 15, 1998 until
June 15, 2003 at $21.92 per share.
67
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(11) (a) June 1998 Warrants for Common 33,000 Shares
Stock
</TABLE>
(b) There were no underwriters in connection with this offering.
The placement agent for the private placement of the 8%
Convertible Debentures and its affiliates were issued the
warrants.
(c) The warrants were issued as consideration for the placement agent's
services.
(d) The Company relied on Section 4(2) of the Securities Act of
1993, as amended, and Regulation D promulgated under the Act.
(e) The warrants are exercisable at $24.00 per share until June 30,
2003.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(12) (a) July 1998 Common Stock 7,500 Shares
Warrants for Common 20,000 Shares
Stock
</TABLE>
(b) There were no underwriters in connection with this offering.
The placement agent for the private placement of the 8%
Convertible Debentures and its affiliates were issued the
warrants.
(c) The Common Stock and warrants were issued as consideration for
the placement agent's services.
(d) The Company relied on Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated under the Act.
(e) The warrants are exercisable at $16.00 per share until July 31,
2003.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(13) (a) August 1998 Warrants for Common 2,936
Stock
</TABLE>
(b) There were no underwriters in connection with this offering.
The warrants were issued to companies providing equipment
leasing facilities to the Company.
(c) The consideration was the provision of computer equipment leasing.
(d) The Company relied on Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated under the Act.
(e) 1,079 shares are exercisable at $22.25 until February 2, 2000.
1,857 shares are exercisable at $14.75 until December 18,
1999.
68
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Schedule No. Description Page
<S> <C> <C>
F-1 Balance Sheet as of April 30, 1998
F-2 Statement of Operations for the Three Months Ended April 30, 1998
and April 30, 1997
F-3 Statement of Cash Flows for the Three Months Ended April 30, 1998
and April 30, 1997
F-4 Notes to Condensed Financial Statements
F-5 Report of Independent Auditors
F-6 Balance Sheet as of January 31, 1998
F-7 Statements of Operations for the Years Ended January 31, 1997 and
1998
F-8 Statements of Shareholders' Equity for the Years Ended January 31,
1997 and 1998
F-9 Statements of Cash Flow for the Years Ended January 31, 1997 and
1998
F-10 Notes to Financial Statements dated January 31, 1998
F-11 Computations of Ratio of Earnings to Fixed Changes and Ratio of
Earnings to Fixed Changes and Referred Stock Dividends
</TABLE>
<PAGE>
SHOPPING.COM
BALANCE SHEET
As of April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
April 30, 1998
ASSETS (Unaudited)
------ --------------
<S> <C>
Current assets
Cash and cash equivalents $ 1,476,109
Accounts receivable, net 87,877
Other receivables 25,384
Prepaid expenses and other current assets 308,041
------------
Total Current assets 1,897,411
Furniture and equipment, net 3,131,509
Deposits 509,510
Other assets 30,555
------------
Total assets $ 5,568,985
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Current portion of capital lease obligations $ 251,459
Accounts payable 1,459,162
Accrued legal and related costs 323,535
Other accrued liabilities 213,998
------------
Total current liabilities 2,248,154
Capital lease obligation, net of current portion 355,484
------------
Total liabilities 2,603,638
------------
Commitments
Shareholders' equity
Common stock, no par value, 20,000,000 shares authorized,
4,049,059 shares issued and outstanding 13,394,651
Accumulated deficit (10,429,304)
------------
Total shareholders' equity 2,965,347
------------
Total liabilities and shareholders' equity $ 5,568,985
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SCHEDULE F-1
<PAGE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
Three Months Ended
April 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 917,836 $ --
Cost of sales 864,889 --
----------- ---------
Gross profit 52,947 --
Operating expenses:
Advertising and marketing 1,837,990 --
Product development 634,594 33,308
General and administrative 2,320,907 312,669
----------- ---------
Total operating expenses 4,793,491 345,977
----------- ---------
Loss from operations (4,740,544) (345,977)
Other income (expense):
Interest Income 36,418 --
Interest Expense (1,452) (1,000)
----------- ---------
Total other income 34,966 (1,000)
----------- ---------
Net Loss $(4,705,578) $(346,977)
=========== =========
Basic Loss Per Share $(1.17) $ (0.30)
=========== =========
Diluted Loss Per Share $(1.17) $ (0.30)
=========== =========
Weighted Average Shares Outstanding 4,039,013 1,152,500
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SCHEDULE NO. F-2
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS
For the Three Months Ended April 30,
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,705,578) $(346,977)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation of furniture and equipment 162,724 (1,276)
Common stock issued for advertising 1,000,000 -
Expense recognized from issuing stock options 90,689 -
Decrease (Increase) in prepaid expenses 357,980 (7,866)
(Increase) in other assets (340,324) (55,092)
Decrease (Increase) in accounts/advances receivable 9,507 (17,700)
(Increase) in other receivables (7,827) -
Decrease (Increase) in accounts payable 609,448 (461)
Decrease (Increase) in other accrued liabilities (37,531) (31,845)
----------- ---------
Net cash used in operating activities (2,860,912) (461,217)
----------- ---------
Cash flows from investing activities
Purchase of furniture and equipment (418,386) (71,533)
----------- ---------
Net cash used in investing activities (418,386) (71,533)
=========== =========
Cash flows from financing activities
Collection on stock subscription receivable - 23,000
Payments on note payable - (50,000)
Payments on capital lease obligations (73,773) -
Proceeds from the issuance of preferred stock,
Series A - 300,000
Proceeds from the issuance of preferred stock,
Series B - 499,900
Payment of offering costs - (21,050)
Net cash provided by financing activities (73,773) 751,850
----------- ---------
Net increase (decrease) in cash (3,353,071) 219,100
Cash, beginning of period 4,829,180 63
----------- ---------
Cash, end of period $ 1,476,109 $ 219,163
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SCHEDULE NO. F-3
<PAGE>
SHOPPING.COM
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
- ------
The accompanying condensed financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
as contemplated by the SEC under Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all normal, recurring adjustments considered necessary
for a fair presentation have been included. The interim financial statements
should be read in conjunction with the Company's January 31, 1998 annual report
on Form 10-KSB. The results of operations for the three months ended April 30,
1998 are not necessarily indicative of the operating results that may be
expected for the fiscal year ending January 31, 1999.
NOTE 2: FURNITURE AND EQUIPMENT
- ------
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
April 30, 1998
--------------
<S> <C>
Computer hardware $1,863,082
Computer software 1,262,511
Furniture & equipment 286,309
Leasehold improvements 89,200
----------
3,501,102
Less: Accumulated depreciation 369,593
----------
$3,131,509
==========
</TABLE>
NOTE 3: ADVANCES - RELATED PARTIES
- ------
During the first quarter of 1998, an officer was advanced a total of $3,344 from
the Company. In addition, the Company advanced one of its employees $7,500
bringing the employees total advances to $18,500 of which $1,000 was repaid
during the first quarter of 1998. Total advances to related parties at April
30, 1998 were $22,041 which was included in "0ther receivables" in the balance
sheet.
NOTE 4: CONSULTING FEES - RELATED PARTY
- ------
For the three months ended April 30, 1998, the Company retained the services of
certain consultants, which were also shareholders. Consulting expenses amounted
to approximately $50,900 of which $28,390 was unpaid as of April 30, 1998.
SCHEDULE NO. F-4 -- Page 1
<PAGE>
NOTE 5: SHAREHOLDER'S EQUITY
- ------
In February, 1998 the Company issued 47,059 shares of Common Stock for
$1,000,000 of radio advertising based on the then fair market value of the
Common Stock. The advertisements were aired during the three months ended April
30, 1998 and accordingly, $1,000,000 was expensed during this period. Up to
52,941 additional shares of Common Stock may be issuable under the radio
advertising agreement on February 19, 1999 if on such date the average closing
price of the Company's Common Stock for the previous ten days is less than
$21.25 per share.
NOTE 6: PROMISSORY NOTES
- ------
On May 15, 1998 the Company issued $1,225,000 of Promissory Notes, which have a
due date of six months from the date of issuance. The Promissory Notes are
unsecured, subordinated and carry an interest rate of 10% per annum. The
Promissory Notes include issuances to certain existing shareholders of the
Company.
In connection with the issuance of these Promissory Notes, 122,500 warrants to
purchase shares of Common Stock were issued which warrants are exercisable until
May 15, 2001 at an exercise price of $14.00 per share of Common Stock. These
below market warrants will result in additional interest charges of
approximately $735,000 over the term of the Promissory Notes.
NOTE 7: 8% CONVERTIBLE DEBENTURES
- ------
The Company entered into an agreement in June 1998 whereby the Company issued 8%
Convertible Debentures due May 31, 2000 in the principal amount of $1,000,000.
The 8% Convertible Debentures are convertible into shares of Common Stock at a
conversion price not to exceed $16.00 per share (the "Base Rate"). The holder
of the 8% Convertible Debenture will receive one warrant to purchase a share of
Common Stock for each two shares of Common Stock issued in connection with the
corresponding conversion of the Debentures (the "Warrants"). The Warrants
attributable to each conversion shall have an exercise price equal to the lesser
of (a) 120% of the lowest market price for any three trading days prior to
conversion or (b) 125% of the Base Rate. The Warrants expire on June 5, 2003.
NOTE 8: STOCK OPTIONS
- ------
In February 1998, each of the Company's directors were granted options to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$14.25 per share, for a total amount of 125,000 stock options granted. Certain
of these options were granted to Kipling Isle, Ltd., a corporation controlled by
Mr. Paul J. Hill, a director.
In April 1998, Mr. Frank Denny joined the Board of Directors as Chairman of the
Board to replace Bill Gross. In May, 1998, Mr. Denny was granted options to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$16.00 and 50,000 shares of Common Stock at an exercise price of the closing
price of the Company's Common Stock on the effective date of grant ($21.00).
The effective date of grant was June 1, 1998.
SCHEDULE NO. F-4 -- Page 2
<PAGE>
In May 1998, Mr. Douglas Hay, a director and Executive Vice President of the
Company, was granted options to purchase 50,000 shares of the Company's Common
Stock at $16.00 per share and 50,000 shares of Common Stock at an exercise price
of the closing price of the Company's Common Stock on the effective date of
grant ($21.00). The effective date of grant was June 1, 1998.
In May 1998, Mr. Edward Bradley, a director of the Company, was granted options
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$16.00. The effective date of grant was June 1, 1998.
In May 1998, Kipling Isle, Ltd., a corporation controlled by Paul J. Hill, a
director, was granted options to purchase 50,000 shares of the Company's Common
Stock at an exercise price of $16.00. The effective date of grant was
June 1, 1998.
In June 1998, Mr. John Markley became a director and was named the Company's
President and CEO following Mr. Robert McNulty's departure on June 1, 1998. Mr.
Markley was granted options to purchase 150,000 shares of the Company's Common
Stock at an exercise price of $16.00 and 100,000 shares of Common Stock at an
exercise price of the closing price of the Company's Common Stock on the
effective date of grant ($21.00). The effective date of grant was June 1, 1998.
As a result of the issuance of the below-market stock options including those
described above and issued during the fiscal year ended January 31, 1998, the
Company recorded a compensation charge of $90,689 during the three months ended
April 30, 1998 and will record a compensation charge of approximately $2,800,000
during the three months ending July 31, 1998. Refer to Note 9 for a description
of additional similar charges to be recorded.
NOTE 9: COMMITMENTS AND CONTINGENCIES
- ------
CONSULTING AGREEMENTS
On March 26, 1998 the Company entered into a one-year Consulting Agreement (the
Double 12 Agreement") with Double 12, Ltd., a California corporation
("Consultant"), for matters concerning strategic partnerships, public relations,
communications or other business development activities. The Double 12
Agreement includes quarterly fee payments of $40,000 and an option to extend the
service period for an additional six months.
On April 1, 1998 the Company entered into a two-year consulting agreement (the
"Agreement") with Stilden Co., Inc., a Texas Corporation ("Stilden") to provide
general consulting services relating to operation, promotion and financing of
the Company. Pursuant to the Agreement, Stilden will receive $7,000 per month,
reimbursement for business expenses and a housing allowance of $1,600 per month
for a period of twelve months. Mr. Denny, a director of the Company, is the
president, principal shareholder and a director of Stilden.
On June 1, 1998, the Company entered into a three-year Consulting Agreement with
Cyber Depot (the "Cyber Depot Agreement"). Pursuant to the Cyber Depot
Agreement, Cyber Depot will receive $21,500 per month and options to purchase
100,000 shares of the Company's Common Stock
SCHEDULE NO. F-4--Page 3
<PAGE>
at an exercise price equal to the closing market price of the Company's Common
Stock on June 1, 1998 ($21.00). Mr. McNulty, a former officer and director of
the Company, is the principal shareholder of Cyber Depot.
EMPLOYMENT AGREEMENTS
As of June 1, 1998, the Company entered into an agreement with Mr. Douglas Hay
to serve as Executive Vice President. The term of the agreement is for two
years and is automatically renewed for one-year terms unless terminated by
either party with written notice given by January 31 of any year beginning
January 31, 2001. The agreement provides for a bi-weekly base salary of $8,465.
The agreement also provides that Mr. Hay will participate in a formula based
program to be approved annually by the Board of Directors and providing for the
opportunity to receive up to an amount equal to his base compensation for
exceeding the Company's annual business plan net profit.
Also as of June 1, 1998, the Company entered into an agreement with Mr. John
Markley to serve as President and Chief Executive Officer. The term of the
agreement is for three years and is automatically renewed for one-year terms
unless terminated by either party with written notice given by January 31 of any
year beginning January 31, 2001. The agreement provides for a bi-weekly base
salary of $6,735 for the first year, $9,615 for the second year and $11,540 for
the third year. The agreement also provides that Mr. Markley will participate
in a formula based bonus program to be approved annually by the Board of
Directors and providing for the opportunity to receive up to an amount equal to
his base compensation for exceeding the Company's annual business plan net
profit. In addition, Mr. Markley will receive a twelve month housing allowance
of $1,500 per month.
LEGAL PROCEEDINGS
As more fully described in this Registration Statement, the Company is subject
to various litigations and SEC investigations. As the outcome of these issues
is uncertain and the Company believes its insurance coverage is adequate to
cover any resulting liability, the Company does not maintain any reserves at
April 30, 1998.
TERMINATION AND BUY-OUT AGREEMENT
On June 1, 1998 Mr. McNulty resigned as President, CEO and director of
Shopping.com. Pursuant to a Termination and Buy-Out Agreement dated as of June
1, 1998 between the Company and Mr. McNulty, Mr. McNulty will receive $500,000,
with $100,000 payable on or before July 31, 1998 and the balance due in $50,000
increments on or before each succeeding fiscal quarter end beginning October 31,
1998 until fully paid. Amounts payable under this agreement are payable on
demand in one lump-sum payment at the option of Mr. McNulty upon thirty days
written notice to the Company in the event a majority of the current members of
the Board of Directors are replaced by new members. In addition, Mr. McNulty
received options to purchase 150,000 shares of the Company's Common Stock at an
exercise price of $16.00 per share.
SCHEDULE NO. F-4--Page 4
<PAGE>
The issuance of these below-market stock options will result in a charge to
operations of approximately $750,000 during the three months ending
July 31, 1998.
SCHEDULE NO. F-4--Page 5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Shopping.com
We have audited the accompanying balance sheet of Shopping.com as of January 31,
1998, and the related statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended January 31, 1998. 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 audits.
We conducted our audits 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 audits provide 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,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended January 31, 1998 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 $5,522,029, had negative cash flows from
operations for the year ended January 31, 1998, and is involved in a class
action lawsuit (see Note 10). These factors, among others, as discussed in Note
1 and Note 10 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 these
uncertainties.
SCHEDULE NO. F-5
<PAGE>
SHOPPING.COM
BALANCE SHEET
January 31, 1998
================================================================================
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $4,829,180
Accounts receivable, net of allowance for doubtful accounts
of $10,000 97,384
Other receivables 17,557
Prepaid advertising and other prepaid expenses 666,021
----------
Total current assets 5,610,142
Furniture and equipment, net 2,634,849
Other assets 199,741
----------
Total assets $8,444,732
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 207,589
Accounts payable 849,714
Accrued legal and related costs 436,035
Other accrued liabilities 139,029
-----------
Total current liabilities 1,632,367
Capital lease obligations, net of current portion 232,129
-----------
Total liabilities 1,864,496
-----------
Commitments and contingencies
Shareholders' equity
Preferred stock, Series A convertible, no par value
1,500,000 shares authorized
0 shares issued and outstanding -
Preferred stock, Series B convertible, no par value
4,000,000 shares authorized
0 shares issued and outstanding -
Common stock, no par value
20,000,000 shares authorized
4,002,000 shares issued and outstanding 12,303,962
Accumulated deficit (5,723,726)
-----------
Total shareholders' equity 6,580,236
-----------
Total liabilities and shareholders' equity $ 8,444,732
===========
</TABLE>
SCHEDULE NO. F-6
<PAGE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
For the Years Ended January 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
Net sales $ 850,724 $ -
Cost of sales 793,957 -
----------- -----------
Gross profit 56,767 -
----------- -----------
Operating expenses
Advertising and marketing 871,964 -
Product development 893,923 83,308
General and administrative 3,261,749 118,389
----------- -----------
Total operating expenses 5,027,636 201,697
----------- -----------
Loss from operations (4,970,869) (201,697)
----------- -----------
Other income (expense)
Interest expense (580,679) -
Interest income 29,519 -
------- -----------
Total other income
(expense) (551,160) -
----------- -----------
Net loss $(5,522,029) $ (201,697)
=========== ===========
Basic loss per share $(3.05) $(0.16)
=========== ===========
Diluted loss per share $(3.05) $(0.16)
=========== ===========
Weighted-average shares outstanding 1,807,874 1,282,500
=========== ===========
</TABLE>
SCHEDULE NO. F-7--Page 1
<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended January 31,
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock Additional
-------------------- -------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
--------- --------- ---------- --------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1996 - $ - - $ - $ - $ - $ - $ - $ -
Issuance of common stock 1,152,500 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 - - - - 1,152,500 23,050 100,000 (201,697) (78,647)
Issuance of common stock
for cash 100,000 2,000 2,000
Issuance of common stock
for services 38,000 54,000 54,000
Issuance of preferred stock,
Series A for cash 500,000 200,000 200,000
Issuance of preferred stock,
Series A for assets and
proprietary software of
Cyber Depot, Inc. 250,000 100,000 (100,000) -
Issuance of preferred stock,
Series B for cash 536,500 1,609,500 1,609,500
Offering costs (126,219) (126,219)
Issuance of common stock
for software 125,000 750,000 750,000
Issuance of common stock
in initial public offering 1,300,000 11,700,000 11,700,000
Offering costs (2,325,512) (2,325,512)
</TABLE>
SCHEDULE NO. F-8 -- Page 1
<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
For the Years Ended January 31,
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock Additional
-------------------- -------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
--------- --------- ---------- --------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of preferred
stock, Series A to common
stock (750,000) $(300,000) $ 750,000 $ 300,000 $ $ $ -
Conversion of preferred
stock, Series B to common
stock (536,500) (1,483,281) 536,500 1,483,281 -
Issuance of warrants for
financing costs 299,700 299,700
Compensation expenses
related to issuance of
stock options 17,443 17,443
Net loss (5,522,029) (5,522,029)
----------- -----------
Balance, January 31, 1998 - $ - - $ - 4,002,000 $12,303,962 $ - $(5,723,726) $ 6,580,236
========= ========= ========== ========= ========== =========== ========== =========== ===========
</TABLE>
SCHEDULE NO. F-8 -- Page 2
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS
For the Years Ended January 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
------------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,522,029) $(201,697)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation of furniture and equipment 205,593 1,276
Amortization of loan origination fees 221,000 --
Common stock issued for services 54,000 --
Issuance of warrants for financing costs 299,700 --
Compensation expense related to stock options granted 17,443 --
(Increase) decrease in
Accounts receivable (97,384) --
Other receivables (17,557) --
Prepaid advertising and other prepaid expenses (666,021) --
Other assets (195,785) (3,956)
Increase (decrease) in
Accounts payable 638,728 35,986
Accrued legal and related costs 112,500
Other accrued liabilities 107,184 31,845
------------ ---------
Net cash used in operating activities (4,842,628) (136,546)
------------ ---------
Cash flows from investing activities
Purchase of furniture and equipment (1,629,166) (13,441)
------------ ---------
Net cash used in investing activities (1,629,166) (13,441)
------------ ---------
Cash flows from financing activities
Issuance of note payable - related party 305,000 50,000
Payments on note payable - related party (355,000) --
Payment on capital lease obligations (9,393) --
Issuance of notes payable 1,750,000 --
Payments on notes payable ( 1,750,000) --
Payment of loan origination fees (221,000) --
Proceeds from the issuance of preferred stock, Series A 200,000 100,000
Proceeds from the issuance of preferred stock, Series B 1,609,500 --
Payment of offering costs on preferred stock, Series B (126,219) --
Proceeds from the issuance of common stock 11,725,000 50
Payment of offering costs on initial public offering ( 1,826,977) -
------------ ---------
Net cash provided by financing activities 11,300,911 150,050
------------ ---------
Net increase in cash and cash equivalents 4,829,180 63
Cash and cash equivalents, beginning of period 63 -
------------ ---------
Cash and cash equivalents, end of period $ 4,829,180 $ 63
============ =========
</TABLE>
SCHEDULE NO. F-9 -- Page 1
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended January 31,
- --------------------------------------------------------------------------------
Disclosures of cash flow information
During the years ended January 31, 1998 and 1997, the Company paid $280,979
(including $221,000 of loan origination fees) and $0 in interest, respectively.
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 year ended January 31, 1998, the Company entered into the following
non-cash transactions:
issued 250,000 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.
entered into a capital lease obligation of $449,111.
issued 199,800 warrants to purchase common stock for financing costs $299,700.
issued 38,000 shares of common stock for services valued at $54,000.
issued 125,000 shares of common stock for software valued at $750,000.
converted 750,000 and 536,500 shares of preferred stock, Series A and Series B,
respectively, into 1,286,500 shares of common stock.
SCHEDULE NO. F-9 -- Page 2
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
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 250,000 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 at wholesale prices to both consumer and trade
customers over its Internet web site. On July 11, 1997, the Company commenced
selling products over the Internet through its web site 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
$5,522,029 and $201,697 for the years ended January 31, 1998 and 1997,
respectively. In addition, the Company has used, rather than provided, cash from
its operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon the Company's ability to raise
sufficient capital to fund its working capital requirements until the Company
can generate sufficient sales volume to cover its operating expenses. 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.
In addition to the capital raised in 1997 through private debt and equity
offerings and the Company's initial public offering ("IPO"), the Company is
currently negotiating with several investors about raising additional capital
through private placement offerings. Management of the Company believes that its
current cash on hand plus the additional capital that is expected to be raised
in the future will be sufficient to cover its working capital needs until the
Company's sales volume reaches a sufficient level to cover operating expenses.
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
SHEDULE NO. F-10 -- Page 1
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purpose of the statements of cash flows, cash equivalents include amounts
invested in a money market account with a high-quality financial institution.
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
carried at cost, which approximates market.
Revenue Recognition
- -------------------
The Company recognizes revenue at the time the vendor ships the product to the
customer. Outbound shipping and handling charges are included in net sales. The
Company provides an allowance for sales returns, which have been insignificant
based on historical experience. A significant portion of the Company's sales
are from the United States. International sales are minimal.
Net Loss Per Share
- ------------------
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation
if their effect is anti-dilutive. Net loss per share amounts for all periods
have been restated to conform to SFAS No. 128 requirements.
Prior to SFAS No. 128, the Securities and Exchange Commission ("SEC") required
that, even where anti-dilutive, common and common equivalent shares issued
during the twelve-month period prior to the filing of an IPO be included in the
calculation of earnings per share as if they were outstanding for all periods
presented (using the treasury stock method and the IPO price). Because of new
requirements issued in 1998 by the SEC for companies that recently completed an
IPO and interpretation by FASB of the initial application of SFAS No. 128, the
number of shares used in the calculation of basic net loss per share has changed
to exclude common equivalent shares, even when anti-dilutive. Net loss per
share for the year ended January 31, 1997 has been restated to conform with SFAS
No. 128 and Staff Accounting Bulletin No. 98.
SCHEDULE NO. F-10 -- Page 2
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
Furniture and Equipment
- -----------------------
Furniture and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of three to fifteen years as follows:
Computer hardware 5 years
Computer software 3 years
Purchased software 5 years
Furniture and equipment 5 to 7 years
Leasehold improvements 15 years
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
years ended January 31, 1998 and 1997 were $871,964 and $0, respectively.
Prepaid advertising expense represents amounts paid for advertisements that were
not run prior to the balance sheet date.
Product Development
- -------------------
Product development expenses consist principally of payroll and related
expenses for development and maintenance of the Company's web site. All
product development costs have been expensed as incurred.
Income Taxes
- ------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, 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
SCHEDULE NO. F-10 -- Page 3
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
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.
Stock Split
- -----------
At the completion of the Company's IPO on November 25, 1997, the Company
effected a one-for-two reverse stock split of its common stock. All share
and per share data have been retroactively restated to reflect this stock
split.
Stock Options
- -------------
SFAS No. 123, "Accounting for Stock-Based Compensation," 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 has elected to use the implicit value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
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 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.
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
SCHEDULE NO. F-10 -- Page 4
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
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, except En Pointe.
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 Pronouncements
- -----------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 130
will not have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will not have an effect on the Company's financial statements.
Developmental Stage Company
- ---------------------------
From inception to October 31, 1997, the Company was in the development
stage. Through October 31, 1997, the Company had a deficit accumulated
during the development stage of $2,595,785.
SCHEDULE NO. F-10 -- Page 5
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
- --------------------------------------------------------------------------------
Concentrations
- --------------
During the year ended January 31, 1998, the Company had sales to Waldron & Co.,
Inc. ("Waldron"), the Company's lead underwriter in its IPO, that accounted for
approximately 40% of net sales for the period (see Note 9).
During the year ended January 31, 1998, the Company purchased inventory from
three vendors that accounted for approximately 23%, 23%, and 7% of cost of goods
sold, The Company has no long-term contracts or arrangements with any of its
vendors that guarantee the availability of merchandise (except for the vendor
mentioned in Note 4), the continuation of particular payment terms, or the
extension of credit limits. There can be no assurance that the Company's current
vendors will continue to sell merchandise to the Company on current terms or
that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition 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 that would allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, such inability could
have a material adverse effect on the Company's financial position, results of
operations, and cash flows.
NOTE 2 - CASH AND CASH EQUIVALENTS
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 $174,339
at January 31, 1998. The Company also has investments in a money market account
with a high-quality brokerage house of $4,293,979 at January 31, 1998. 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 at January 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Computer hardware $1,302,081
Computer software 494,070
Purchased software 750,000
Furniture and equipment 237,056
Leasehold improvements 58,511
----------
2,841,718
Less accumulated depreciation and amortization 206,869
----------
Total $2,634,849
==========
</TABLE>
SCHEDULE NO. F-10 -- Page 6
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
The Company settled a lawsuit filed in July 1997, against the Company, Cyber
Depot, and the Company's president, with a consultant seeking damages for breach
of an alleged contractual relationship. The matter has settled pursuant to a
settlement agreement dated March 26, 1998. The Company has accrued for the
settlement in the January 31, 1998 financial statements.
The Company is subject to a claim by a former officer for alleged breach of
contract, breach of implied covenant of good faith and fair dealing, and other
causes of action. In addition, the officer rejected a tender by the Company to
repurchase 140,000 shares of common stock pursuant to a shareholder agreement
claiming that the amount tendered was not the fair market value of the shares.
The exposure to the Company in this matter, if any, is uncertain as of the date
of this report. Management believes it has meritorious defenses against the
officer and has filed a lawsuit seeking damages on March 27, 1998, and believes
that the outcome of this matter will not have a material affect on the Company.
Also see Note 10 for additional litigation.
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>
1999 $128,019
2000 136,590
2001 142,815
2002 149,043
2003 37,650
--------
Total $594,117
========
</TABLE>
Rent expense for the years ended January 31, 1998 and 1997 was $100,625 and
$13,451, respectively.
SCHEDULE NO. F-10 -- Page 7
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
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>
1999 $241,678
2000 187,260
2001 29,436
2002 29,436
2003 14,718
--------
502,528
Less amount representing interest 62,810
--------
439,718
Less current portion 207,589
--------
Long-term portion $232,129
========
</TABLE>
Included in furniture and equipment at January 31, 1998 is capital lease
equipment of $449,111 with accumulated amortization of $11,126.
Agreements
- ----------
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 (see Note 6). In connection therewith, the Company
issued 199,800 warrants to purchase the Company's common stock at
$4.50 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 has recognized an additional financing cost of $299,700;
. En Pointe granted the Company a license to En Pointe's proprietary
EPIC Software for five years in exchange for 125,000 shares of the
Company's common stock valued at $6.00 per share. The Company has
agreed to pay an annual maintenance and upgrade fee of $100,000. The
initial annual fee was 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 were
paid concurrent with the funding of the $600,000 subordinated notes.
SCHEDULE NO. F-10 -- Page 8
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
. En Pointe is the Company's exclusive supplier for a period of five
years for computer hardware, software, and network peripherals which
En Pointe is authorized to sell.
. On April 13, 1998, the Company entered into an agreement whereby the
placement agent agreed to offer and sell on a best efforts basis, up
to $10,000,000, 8% convertible debentures of the Company pursuant to
Regulation D promulgated under the Securities Act of 1993, as amended.
For the year ended January 31, 1997, the Company had a note payable to a related
party which was personally guaranteed by an officer of the Company. In addition,
the note was 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 accrued interest at the highest rate permitted by California law
(approximately 11% at January 31, 1997) and was due 90 days from January 13,
1997. During the year ended January 31, 1998, this note was repaid.
Also see Note 9.
NOTE 6 - NOTES PAYABLE
During June through September 1997, the Company issued $1,750,000 (which
includes the $600,000 mentioned in Note 4) of subordinated notes. The notes bear
interest at 10% per annum and are unsecured. The notes were due at the earlier
of nine months from the date of issuance or closing of the IPO. The notes were
repaid in December 1997.
In connection with the note agreement, each note holder is entitled to receive
333 warrants for each $1,000 loaned to purchase the Company's common stock for
$6.00 per share ($4.50 per share for the 199,800 warrants issued to En Pointe).
There is a twelve-month "lock-up" on the warrants and the common stock
underlying these warrants. None of the 582,750 warrants issued to the note
holders were exercised as of January 31, 1998.
NOTE 7 - SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock
- ------------------------------------
In March 1997, the Company issued 250,000 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 250,000 shares of Series A Preferred. In April 1997, the Company sold
500,000 shares of Series A Preferred for a price of $0.40 per share. The holders
of the Series A Preferred were entitled to receive a non-cumulative dividend of
$0.04 per share per annum, payable in cash at the option of the Company. No
dividends were declared or paid during the year ended January 31, 1998.
SCHEDULE NO. F-10 -- Page 9
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
Each share of Series A Preferred was 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 had a liquidation preference of $0.40 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 $3.00
per share resulting in 375,000 warrants being issued. None of these warrants
were exercised as of January 31, 1998.
Upon the effective date of the Company's IPO, the 750,000 outstanding shares of
Series A Preferred were converted into 750,000 shares of the Company's common
stock.
Series B Convertible Preferred Stock
- ------------------------------------
During May through September 1997, the Company sold 536,500 shares (8,333 shares
to an officer of the Company) of Series B convertible preferred stock ("Series B
Preferred") for a price of $3.00 per share. The holders of the Series B
Preferred were entitled to receive a non-cumulative dividend of $0.30 per share
per annum, payable in cash at the option of the Company. No dividends were
declared or paid during the year ended January 31, 1998.
Each share of Series B Preferred was convertible into shares of common stock at
the option of the holder. In addition, Series B Preferred were 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 had a liquidation preference of $3.00 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 $3.00
per share resulting in 268,250 warrants (4,166 warrants to an officer of the
Company) being issued. None of these warrants were exercised as of January 31,
1998.
Upon the effective date of the Company's IPO, the 536,500 outstanding shares of
Series B Preferred were converted into 536,500 shares of the Company's common
stock.
Common Stock
- ------------
During the year ended January 31, 1998, the Company issued 38,000 shares of
common stock for services valued at $54,000.
On November 25, 1997, the Company completed its IPO by issuing 1,300,000 shares
of common stock for gross proceeds of $11,700,000.
SCHEDULE NO. F-10 -- Page 10
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
On February 19, 1998, the Company entered into an agreement with Premiere Radio
Networks, Inc. ("Premiere") whereby the Company issued to Premiere 47,059 shares
of the Company's common stock for advertising time valued at $1,000,000 that was
provided by Premiere.
Stock Options
- -------------
The Company's board of directors adopted the 1997 Stock Option Plan (the "Plan")
and reserved 250,000 shares of common stock for grants of stock options under
the Plan. Generally, options granted under the Plan expire upon 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 has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to the pro
forma amounts indicated below for the year ended January 31, 1998:
<TABLE>
<S> <C>
Net loss
As reported $(5,522,029)
Pro forma $(5,796,592)
Basic and diluted loss per common share
As reported $ (3.05)
Pro forma $ (3.21)
</TABLE>
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended January 31, 1998: dividend yield of 0%; expected
volatility of 110%; risk-free interest rate of 5.4%; and expected life of 3.11
years. The weighted-average fair value of options granted during the year ended
January 31, 1998 was $3.87, and the weighted-average exercise price was $3.00.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
SCHEDULE NO. F-10 -- Page 11
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
<TABLE>
<CAPTION>
Weighted-Average
Number Granted Price
of Shares Per Share
--------- ----------------
<S> <C> <C>
Outstanding, January 31, 1997 Granted - $ --
232,500 $4.94
-------
Outstanding, January 31, 1998 232,500 $4.94
=======
Exercisable, January 31, 1998 137,500 $3.00
=======
</TABLE>
The weighted-average remaining contractual life of options outstanding issued
under the Plan is 4.46 years at January 31, 1998. Options available for future
grant at January 31, 1998 were 17,500.
During the year ended January 31, 1998, the Company issued 67,000 stock options
to employees where the exercise price was less than the fair value of the
Company's stock at the date of grant. The Company will recognize compensation
expense of $17,443, $112,750, $112,750, $112,750, and $95,307 during the years
ended January 31, 1998, 1999, 2000, 2001, and 2002, respectively, related to the
issuance of these 67,000 stock options.
Warrants
- --------
Outstanding warrants as of January 31, 1998 were as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Warrants Exercise Price
--------- ----------------
<S> <C> <C>
Issued in connection with
Series A preferred 375,000 $3.00
Series B preferred 268,250 $3.00
Subordinated notes 582,750 $5.49
Total 1,226,000
=========
</TABLE>
All of the above warrants are exercisable.
NOTE 8 - INCOME TAXES
For the years ended January 31, 1998 and 1997, the Company did not provide a
provision for income taxes due to the net loss incurred. At January 31, 1998,
the Company has approximately $5,600,000 and $2,800,000 in net operating loss
carry forwards for federal and state income tax purposes, respectively, that
begin to 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
$2,050,000. The other components of the Company's deferred tax assets and
liabilities are immaterial. The Company has established a valuation allowance of
approximately $2,014,000 to fully offset its deferred tax asset as the Company
does not believe the recoverability of this deferred tax asset is more
SCHEDULE NO. F-10 -- Page 12
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
likely than not. The valuation allowance increased by approximately $2,068,000
during the year ended January 31, 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended January 31, 1998, the Company incurred legal expenses of
approximately $546,000, which counsel was also a shareholder of the Company. At
January, 31, 1998, the Company had accounts payable balances of approximately
$324,000 related to such counsel.
In connection with its underwriting agreement, the Company paid Waldron
commissions and an allowance for expenses in the amount of 10% and 3%,
respectively, of the gross proceeds of the IPO. These expenses were recorded as
offering costs in the statement of shareholders' equity. Additionally, the
Company had product sales to Waldron of approximately $342,000 during the year
ended January 31, 1998, of which approximately $106,000 was included in accounts
receivable at January 31, 1998.
During the year ended January 31, 1998, the Company obtained short-term non-
interest bearing promissory notes in the amount of $305,000 from affiliates of
Waldron, which were fully repaid subsequent to the IPO. No interest expense was
imputed due to the short period of time that the promissory notes were
outstanding.
The Company made advances to an officer of approximately $156,000, which were
fully repaid during the year ended January 31, 1998. Approximately $98,000 of
the repayments were made by Cyber Depot, a company in which the officer is a
controlling shareholder. Total employee advances outstanding at January 31,
1998 amounted to $17,557, which is included in other receivables on the balance
sheet.
During the year ended January 31, 1998, the Company made advances of $16,000 to
Cyber, which were fully repaid during the year.
During the year ended January 31, 1998, the Company retained the services of
certain consultants, which were also shareholders. Consulting expenses amounted
to approximately $91,000 and were substantially paid as of January 31, 1998. At
January 31, 1998, the Company had accounts payable to these consultants of
approximately $2,000.
As more fully described in Note 4, the Company entered into an agreement with En
Pointe, a shareholder. Additionally, the Company purchased various computer
hardware from En Pointe for approximately $223,000. At January 31, 1998, the
Company had accounts payable to En Pointe of approximately $114,000.
NOTE 10 - SEC INVESTIGATION / CLASS ACTION LAWSUIT
In March 1998, the Company became aware that the SEC had initiated a private
investigation to determine whether the Company, Waldron, or any its officers,
directors, employees, affiliates or others had engaged in fraudulent activities
in connection with transactions in the Company's common stock. Such
investigation resulted in the SEC temporarily suspending trading in the
Company's stock. The trading suspension has expired, and the Company and its
officers and directors believe that they have not been guilty of any fraudulent
conduct in connection with the transactions in the Company's stock.
SCHEDULE NO. F-10 -- Page 13
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
________________________________________________________________________________
On April 16, 1998, a class action lawsuit was filed against the Company, certain
officers of the Company, Waldron, two of Waldron's executives, and one other
broker-dealer ("Defendants") on behalf of all persons who purchased shares of
the Company's stock between November 25, 1997 and March 26, 1998 alleging
violations of the California securities laws by the Defendants. The complaint
charges that the Defendants participated in a scheme and wrongful course of
business to manipulate the price of the Company's stock. The Company does not
believe that it is guilty of the acts alleged in the complaint and intends to
defend against this action vigorously. Nonetheless, and despite the Company's
insurance coverage for such actions, management believes this class action suit
may be very harmful to the Company.
In addition, diversion of management time and effort from the Company's
operations and the implementation of the Company's business plan at this crucial
time in the Company's development may adversely and significantly affect the
Company and its business. The continued pendency of this litigation and private
investigation may make it difficult for the Company to raise additional capital
to continue its development and expansion. The inability of the Company to
raise additional capital would have a material adverse effect on the Company's
financial position and results of operations and may prevent the Company from
carrying out its business plan.
SCHEDULE NO. F-10 -- Page 14
<PAGE>
Shopping.Com
Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Fixed Charges and Preferred Stock Dividends
Schedule F-11
<TABLE>
<CAPTION>
Three Months
Year Ended January 31 Ended April 30,
----------------------- --------------
1997 1998 1998
-------- ---------- ----------
<S> <C> <C> <C>
Fixed charges
Interest expense $ - $ 59,979 $ 1,452
Amortization of loan origination fees - 221,000(b) -
Issuance of warrants for financing costs - 299,700(b) -
-------- ---------- ----------
Total fixed charges $ - $ 580,679 $ 1,452
======== ========== ==========
Loss
Loss from operations $201,697 $4,970,869 $4,740,544
Fixed charges - 580,679 1,452
-------- ---------- ----------
Total loss $201,697 $5,551,548 $4,741,996
======== ========== ==========
Ratio of loss to fixed charges (a) N/A N/A
======== ========== ==========
Earnings are approximately this amount
lower than were needed to cover total
fixed charges. (a) $6,132,227 $4,743,448
======== ========== ==========
</TABLE>
- -------------------------
(a) There was no interest expense for this period.
(b) The amount shown relates to a noncash nonrecurring charge included in the
loss from operations.
N/A - This computation is not presented as the Company incurred a loss from
operations thereby having insufficient earnings to cover its fixed
charges. This information is presented only to derive the earnings
deficit for disclosure purposes.
SCHEDULE F-11
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
Exhibit No. Description
3.1 Form of Restated Articles of Incorporation of Shopping.com.
3.2* Bylaws of Shopping.com. Incorporated herein by reference from
Exhibit 3.02 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
3.3 Form of Certificate of Amendment of Bylaws dated August ____, 1998.
4.1* Form of Securities Purchase Agreement dated as of June 5, 1998
between the Company and each Investor. Incorporated herein by
reference from Exhibit 4.22 to Registrant's Quarterly Report on Form
10-Q.B. for the quarter ended April 30, 1998 (Filed with the SEC on
June 22, 1998, File No. 000-29518.)
4.2* Form of Registration Rights Agreement between the Company and each
Investor. Incorporated herein by reference from Exhibit 4.23 to
Registrant's Quarterly Report on Form 10-Q.B. for the quarter ended
April 30, 1998 (Filed with the SEC on June 22, 1998, File No.
000-29518.)
4.3* Form of 8% Convertible Debenture Due June 30, 2000 made by the
Company payable to each Investor. Incorporated herein by reference
from Exhibit 4.24 to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended April 30, 1998 (Filed with the SEC on June 22,
1998, File No. 000-29518.)
4.4 Form of Warrant Agreement dated June, 1998 between the Company and
Ladenburg Thalmann & Co., Inc.
4.5 Form of Warrant Agreement dated July 13, 1998 between the Company
and Trautman, Rosenblum and Stephansky.
4.6 Form of Warrant Agreement dated June 9, 1998 between the
Company and Trautman, Rosenblum, Stephansky, Soich and
Calicchia.
4.7 Form of Warrants dated April 10, 1998, between the Company and
Leasing Ventures, LLC.
II-1
<PAGE>
10.1 Agreement between the Company and Howard S. Schwartz dated August 1,
1998.
23.1** Form of Consent of Singer Lewak Greenbaum & Goldstein LLP.
- ---------------
* Previously filed.
** Executed document to be supplied by pre-effective amendment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule No. Description
F-1 Balance Sheet as of April 30, 1998
F-2 Statement of Operations for the Three Months Ended April 30, 1998
and April 30, 1997
F-3 Statement of Cash Flows for the Three Months Ended April 30, 1998
and April 30, 1997
F-4 Notes to Condensed Financial Statements
F-5 Report of Independent Auditors
F-6 Balance Sheet as of January 31, 1998
F-7 Statements of Operations for the Years Ended January 31, 1997 and
1998
F-8 Statements of Shareholders' Equity for the Years Ended January 31,
1997 and 1998
F-9 Statements of Cash Flow for the Years Ended January 31, 1997 and
1998
F-10 Notes to Financial Statements dated January 31, 1998
F-11 Computations of Ratio of Earnings to Fixed Changes and Ratio of
Earnings to Fixed Changes and Referred Stock Dividends
II-2
<PAGE>
UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in "Indemnification of Directors
and Officers" herein, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Corona del
Mar, State of California, on this 15th day of August, 1998.
SHOPPING.COM
By: /s/ JOHN H. MARKLEY
--------------------------------------
John H. Markley
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ FRANK W. DENNY
- -------------------------------
Frank W. Denny Chairman of the Board August 12, 1998
/s/ JOHN H. MARKLEY
- -------------------------------
John H. Markley Chief Executive Officer, August 15, 1998
President and Director
/s/ KRISTINE WEBSTER
- -------------------------------
Kristine E. Webster Senior Vice President, August 14, 1998
Chief Financial Officer
and Secretary
/s/ DOUGLAS A. HAY
- -------------------------------
Douglas A. Hay Executive Vice President August 14, 1998
and Director
/s/ PAUL J. HILL
- -------------------------------
Paul J. Hill Director August 14, 1998
/s/ EDWARD F. BRADLEY
- -------------------------------
Edward F. Bradley Director August 14, 1998
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
<S> <C> <C>
3.1 Form of Restated Articles of Incorporation of Shopping.com.
3.2* Bylaws of Shopping.com. Incorporated herein by reference from
Exhibit 3.02 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
3.3 Form of Certificate of Amendment of Bylaws dated August __, 1998.
4.1* Form of Securities Purchase Agreement dated as of June 5, 1998
between the Company and each Investor. Incorporated herein by
reference from Exhibit 4.22 to Registrant's Quarterly Report on Form
10-Q.B. for the quarter ended April 30, 1998 (Filed with the SEC on
June 22, 1998, File No. 000-29518.)
4.2* Form of Registration Rights Agreement between the Company and each
Investor. Incorporated herein by reference from Exhibit 4.23 to
Registrant's Quarterly Report on Form 10-Q.B. for the quarter ended
April 30, 1998 (Filed with the SEC on June 22, 1998, File No.
000-29518.)
4.3* Form of 8% Convertible Debenture Due June 30, 2000 made by the
Company payable to each Investor. Incorporated herein by reference
from Exhibit 4.24 to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended April 30, 1998 (Filed with the SEC on June 22,
1998, File No. 000-29518.)
4.4 Form of Warrant Agreement dated June, 1998 between the Company and
Ladenburg Thalmann & Co., Inc.
4.5 Form of Warrant Agreement dated July 13, 1998 between the Company
and Trautman, Rosenblum and Stephansky.
4.6 Form of Warrant Agreement dated June 9, 1998 between the Company and
Trautman, Rosenblum, Stephansky, Soich and Calicchia.
4.7 Form of Warrants dated April 10, 1998, between the Company and
Leasing Ventures, LLC.
10.1 Agreement between the Company and Howard S. Schwartz dated August 1,
1998.
23.1** Form of Consent of Singer Lewak Greenbaum & Goldstein LLP.
</TABLE>
- -------------------
* Previously filed.
** Executed document to be supplied by pre-effective amendment.
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
SHOPPING.COM
The undersigned certify that:
1. They are the president and the secretary, respectively, of
SHOPPING.COM, a California corporation.
2. The Amended and Restated Articles of Incorporation of this Corporation
are amended and restated to read as follows:
I.
The name of this Corporation is SHOPPING.COM
II.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
(a) The Corporation is authorized to issue two classes of stock to be
designated, respectively, as "Common Stock" and "Preferred Stock." The total
number of shares of all classes of stock that the Corporation shall have
authority to issue is Twenty-Five Million (25,000,000) shares, consisting of
Twenty Million (20,000,000) shares of common stock, no par value per share (the
"Common Stock"), and Five Million (5,000,000) shares of preferred stock, no par
value per share (the "Preferred Stock").
(b) The share of Common Stock may be issued from time to time for such
consideration as the Board of Directors may determine. Each holder of shares of
-1-
<PAGE>
Common Stock shall be entitled to one vote for each share of Common Stock held
of record on all matters on which the holders of Common Stock are entitled to
vote.
(c) The shares of Preferred Stock may be issued from time to time in one
or more series and for such consideration as the Board of Directors may
determine. The Board of Directors is authorized, subject to any limitations
prescribed by law, to establish from time to time the number of shares to be
included in each such series, and by filing a certificate pursuant to the
applicable law of the State of California to fix the designation, powers,
preferences, and rights of the shares of each such series of Preferred Stock,
and any qualifications, limitations or restrictions thereof, including, but not
limited to, the dividend rights, dividend rate or rates, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences of
any wholly unissued series of share or Preferred Stock, or any of them, all to
the fullest extent now or hereafter permitted by the General Corporation Law of
California, and to increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series of Preferred Stock shall be so decreased, the shares representing such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series. No vote of the
holders of the Common Stock or the Preferred Stock shall, unless otherwise
provided in the resolutions creating any particular series of Preferred Stock,
be a prerequisite to the issuance of any shares of any series of the Preferred
Stock authorized by an complying with the conditions of this Certificate of
Incorporation."
IV.
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
V.
The Corporation shall indemnify any director or officer and may
indemnify any agent of the Corporation in all circumstances in which
indemnification is permitted by the provisions of Section 317(a), (b), and (c)
of the General Corporation Law of California and shall advance the expenses of
any director or officer and may advance the expenses of any agent in all
circumstances in which such advancement of expenses is permitted by the
provisions of Section 317 of the General Corporation Law of California (without
regard to the authorization required by that section); provided, however, that
such indemnification is not authorized with respect to an action for a breach of
the duty of the director, officer or agent to the Corporation or its
shareholders, if any of the exceptions to exoneration from liability of
directors set
-2-
<PAGE>
forth in Section 204(a)(1) of the General Corporation Law of California are
applicable; and the director, officer or agent shall repay to the Corporation
any such advancement of expenses if the director, officer or agent is adjudged
guilty of any of the conduct specified in such exceptions or if indemnification
is expressly prohibited by said Section 31. This provision does not limit in any
way the permissive indemnification provided for in said Section 317. The
director, officer or agent may sue in any court of competent jurisdiction to
enforce the rights to indemnification and advancement of expenses grated by this
Article V. The Corporation is authorized to indemnify the directors, officers
and agents of the Corporation to the fullest extent permissible under California
law.
VI.
From time to time any of the provisions of this Articles of Incorporation
may be amended, altered or repealed, and other provisions authorized by the laws
of the State of California at the time in force may be added or inserted in the
manner and at the time prescribed by said laws, and all rights at any time
conferred upon the shareholders of the Corporation by this Articles of
Incorporation are granted subject to the provisions of this Article VI.
1. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the Board of Directors.
2. the foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
section 902, California Corporations Code. The total number of outstanding
shares of Common Stock of the Corporation is 4,062,354. The number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50%. There are no shares of Preferred
Stock outstanding.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATE:_________________ __________________________________
John H. Markley, President
__________________________________
Kristine E. Webster, Secretary
-3-
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT OF BYLAWS
OF
SHOPPING.COM
The undersigned, being the duly elected Secretary of Shopping.com, a
California corporation (the "Corporation"), hereby certifies that following are
true, accurate and complete resolutions adopted by a Unanimous Written Consent
of the Board of Directors of the Corporation on __________, 1998, and that the
same have not been amended or revoked and are now in full force and effect:
"WHEREAS, the shareholder of the Corporation at its 1998 Annual Meeting of
the Shareholders held on July 15, 1998, approved an amendment to the Bylaws
of the Corporation as set forth below.
NOW, THEREFORE, BE IT RESOLVED, that Section 2(a) of Article III of the
Bylaws of the Corporation as amended to date, is hereby amended and
restated to read as follows:
(a) The authorized number of directors of the corporation shall be
not less than five (5) nor more than nine (9). The exact number of
directors shall be five (5) until changed, within the limits specified
above, by a bylaw amending this Section 2(a), duly adopted by the board of
directors or by the shareholders. The indefinite number of directors may be
changed, or a definite number may be fixed without provision for an
indefinite number, by a duly adopted amendment to this bylaw duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; provided, however, than an amendment reducing the
fixed number or the minimum number of directors to a number less than five
(5) cannot be adopted if the votes cast against its adoption at a meeting,
or the shares not consenting in the case of an action by written consent,
are equal to more than sixteen and two-thirds (16 2/3%) of the outstanding
shares entitled to vote thereon. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2)
times the stated minimum number of directors minus one (1)."
IN WITNESS WHEREOF, I have hereunto set my hand this _____ day August,
1998.
_____________________________
Kristine E. Webster, Secretary
<PAGE>
EXHIBIT 4.4
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
300,000 Shares
FOR VALUE RECEIVED, Shopping.com, Inc. (the "Company"), a California
corporation, hereby certifies that Ladenburg Thalmann & Co. Inc., or its
permitted assigns are entitled to purchase from the Company, at any time or from
time to time commencing December 15, 1998, and prior to 5:00 p.m., New York City
time then current, on June 15, 2003, fully paid and non-assessable shares of the
common stock, no par value, of the Company at the purchase price of $21.92 per
share. (Hereinafter, (i) said common stock, together with any other equity
securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the shares of
the Common Stock purchasable hereunder are referred to as the "Warrant Shares,"
(iii) the aggregate purchase price payable hereunder for the Warrant Shares is
referred to as the "Aggregate Warrant Price," (iv) the price payable hereunder
for each of the shares of the Warrant Shares is referred to as the "Per Share
Warrant Price" and (v) this warrant and all warrants hereafter issued in
exchange or substitution for this warrant are referred to as the "Warrants.")
The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant
Price is subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Warrant Price by the Per Share Warrant Price in effect immediately
after such adjustment.
1. Exercise of Warrant.
(a) This Warrant may be exercised, in whole at any time or in part from
time to time, commencing December 15, 1998 (the "Commencement Date"), and prior
to 5:00 p.m., New York City time then current, on June 15, 2003 (the "Expiration
Date"), by the holder of this Warrant (the "Holder") by the surrender of this
Warrant (with the subscription form at the end hereof duly executed) at the
address set forth in Subsection 1 0(a) hereof, together with proper payment of
the Aggregate Warrant Price, or the proportionate part thereof if this Warrant
is exercised in part. Payment for the Warrant Shares shall be made by certified
or official bank check, payable to the order of the Company. If this Warrant is
exercised in part, this Warrant must be exercised for a number of whole shares
of the Common Stock, and the Holder is entitled to received a new Warrant
covering the number of Warrant Shares in respect of which this Warrant has not
been exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares. Upon such exercise and surrender of
this Warrant, the Company will (i) issue a certificate or certificates in the
name of the Holder for the number of whole shares of the Common Stock to which
the Holder shall be.,entitled and, if this Warrant is exercised in whole, in
lieu of any fractional share of the Common Stock to which the Holder shall be
entitled, pay cash equal to the fair value of such fractional share (determined
in such reasonable manner as the Board of Directors of the Company shall
determine), and (ii) deliver the other securities and properties receivable upon
the exercise of this Warrant, or the proportionate part thereof if this Warrant
is exercised in part, pursuant to the provisions of this Warrant.
-1-
<PAGE>
(b) In lieu of exercising this Warrant in the manner set forth in paragraph
1 (a) above, this Warrant may be exercised between the Commencement Date and the
Expiration Date by surrender of the Warrant without payment of any other
consideration, commission or remuneration, together with the cashless exercise
subscription form at the end hereof, duly executed. The number of shares to be
issued in exchange for the Warrant shall be the product of (x) the excess of the
market price of the Common Stock on the date of surrender of the Warrant and the
exercise subscription form over the Per Share Warrant Price and (y) the number
of shares subject to issuance upon exercise of the Warrant, divided by the
market price of the Common Stock on such date. Upon such exercise and surrender
of this Warrant, the Company will (i) issue a certificate or certificates in the
name of the Holder for the number of whole shares of the Common Stock to which
the Holder shall be entitled and, in lieu of any fractional share of the Common
Stock to which the Holder shall be entitled, pay cash equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (ii) deliver the other securities
and properties receivable upon the exercise of this Warrant, pursuant to the
provisions of this Warrant.
2. Reservation of Warrant Shares.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of this Warrant,
such number of shares of the Common Stock and such amount of other securities
and properties as from time to time shall be deliverable to the Holder upon the
exercise of this Warrant, free and clear of all restrictions on sale or transfer
(except such as may be imposed under applicable federal and state securities
laws) and free and clear of all preemptive rights and all other rights to
purchase securities of the Company.
3. Protection Against Dilution.
(a) If, at any time or from time to time after the date of this Warrant,
the Company shall distribute to the holders of its outstanding Common Stock, (i)
securities, other than shares of Common Stock, or (ii) property, other than cash
dividends paid in conformity with past practice, without payment therefor, with
respect to Common Stock, then, and in each such case, the Holder, upon the
exercise of this Warrant, shall be entitled to receive the securities and
property which the Holder would have held on the date of such exercise if, on
the date of this Warrant, the Holder had been the holder of record of the number
of shares of the Common Stock subscribed for upon such exercise and, during the
period from the date of this Warrant to and including the date of such exercise,
had retained such shares and the securities and properties receivable by the
Holder during such period. Notice of each such distribution shall be forthwith
mailed to the Holder.
(b) (b) If, at any time or from time to time after the date of this
Warrant, the Company shall (i) pay a dividend or make a distribution on its
capital stock in shares of Common Stock, (ii) subdivide its outstanding shares
of Common Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock of the Company,
the Per Share Warrant Price in effect immediately prior to such action shall be
adjusted so that the Holder of any Warrant thereafter exercised shall be
entitled to receive the number of shares of Common Stock or other capital stock
-2-
<PAGE>
of the Company which he would have owned or been entitled to received
immediately following the happening of any of the events described above had
such Warrant been exercised immediately prior thereto. An adjustment made
pursuant to this (b) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant to this (b),
the holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares of
Common Stock and other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a written
notice to the Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Warrant Price between or
among shares of such classes or capital stock or shares of Common Stock and
other capital stock.
(c) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any shares of Common Stock for a consideration per share less than the
Per Share Warrant Price in effect immediately prior to such issuance or sale,
the Per Share Warrant Price shall be adjusted as of the date of such issuance or
sale so that the same shall equal the price determined by dividing (i) the sum
of (A) the number of shares of Common Stock outstanding immediately prior to
such issuance or sale multiplied by the Per Share Warrant Price plus (B) the
consideration received by the Company upon such issuance or sale by (ii) the
total number of shares of Common Stock outstanding after such issuance or sale.
(d) Except as provided in 3(e), in case the Company shall hereafter issue
or sell any rights, options, warrants or securities convertible into Common
Stock entitling the holders thereof to purchase the Common Stock or to convert
such securities into Common Stock at a price per share (determined by dividing
(i) the total amount, if any, received or receivable by the Company in
consideration of the issuance or sale of such rights, options, warrants or
convertible securities plus the total consideration, if any, payable to the
Company upon exercise or conversion thereof (the "Total Consideration") by (ii)
the number of additional shares of Common Stock issuable upon exercise or
conversion of such securities) less than the then Per Share Warrant Price in
effect on the date of such issuance or sale, the Per Share Warrant Price shall
be adjusted as of the date of such issuance or sale so that the same shall equal
the price determined by dividing (i) the sum of (A) the number of shares of
Common Stock outstanding on the date of such issuance or sale multiplied by the
Per Share Warrant Price plus (B) the Total Consideration by (ii) the number of
shares of Common Stock outstanding on the date of such issuance or sale plus the
maximum number of additional shares of Common Stock issuable upon exercise or
conversion of such securities.
(e) No adjustment in the Per Share Warrant Price shall be required in the
case of (i) the issuance of shares of Common Stock upon the exercise of options
which have been granted under the Company's Stock Option Plan as in effect on
the date hereof, or (ii) the issuance of shares pursuant to the exercise of this
Warrant, or (iii) shares of Common Stock issuable upon the exercise or
conversion of any rights, options, warrants or securities convertible into
Common Stock which are outstanding as of the date of this Warrant or which the
Company is contractually obligated to issue as of the date of this Warrant.
(f) In case of any consolidation or merger to which the Company is a party
other than a merger or consolidation in which the Company is the continuing
corporation, or in case of any sale
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or conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another entity (including any exchange effectuated in connection
with a merger of any other corporation with the Company), the Holder of this
Warrant shall have the right thereafter to convert such Warrant into the kind
and amount of securities, cash or other property which he would have owned or
have been entitled to receive immediately after such consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such consolidation, merger, statutory
exchange, sale or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set forth in this
Section 3 with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth in this Section 3 shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant. The above provisions of this 3(f)
shall similarly apply to successive consolidations, mergers, statutory
exchanges, sales or conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance, and of said provisions so proposed to be
made, shall be mailed to the Holder not less than 20 days prior to such event. A
sale of all or substantially all of the assets of the Company for a
consideration consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes.
(g) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least $0.05 per
share of Common Stock; provided, however, that any adjustments which by reason
of this (g) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment; and provided further, however, that
adjustments shall be required and made in accordance with the provisions of this
Section 3 (other than this (g)) not later than such time as may be required in
order to preserve the tax-free nature of a distribution to the Holder of this
Warrant or Common Stock. All calculations under this Section 3 shall be made to
the nearest cent or to the nearest 1/100th of a share, as the case may be.
Anything in this Section 3 to the contrary notwithstanding, the Company shall be
entitled to make such reductions in the Per Share Warrant Price, in addition to
those required by this Section 3, as it in its discretion shall deem to be
advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its shareholders shall
not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of the Holder of this Warrant
in accordance with this Section 3, the Company shall, at its own expense, within
ten (10) days of such adjustment or modification, deliver to the holder of this
Warrant a certificate of the Principal Financial Officer of the Company setting
forth the Per Share Warrant Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same.
In addition, within thirty (30) days of the end of the Company's fiscal year
next following any such adjustment or modification, the Company shall, at its
own expense, deliver to the Holder of this Warrant a certificate of a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular auditors of the Company) setting forth the
same information as required by such Principal Financial Officer Certificate.
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(i) If the Board of Directors of the Company shall declare any dividend or
other distribution in cash with respect to the Common Stock, other than out of
earned surplus, the Company shall mail notice thereof to the Holder not less
than 10 days prior to the record date fixed for determining shareholders
entitled to participate in such dividend or other distribution.
4. Fully Paid Stock; Taxes.
The Company agrees that the shares of the Common Stock represented by each
and every certificate for Warrant Shares delivered on the exercise of this
Warrant in accordance with the terms hereof shall, at the time of such delivery,
be validly issued and outstanding, fully paid and non-assessable and not subject
to preemptive rights or other contractual rights to purchase securities of the
Company, and the Company will take all such actions as may be necessary to
assure that the par value or stated value, if any, per share of the Common Stock
is at all times equal to or less than the then Per Share Warrant Price. The
Company further covenants and agrees that it will pay, when due and payable, any
and all federal and state stamp, original issue or similar taxes which may be
payable in respect of the issue of any Warrant Share or certificate therefor.
5. Registration Under Securities Act of 1933.
(a) The Company agrees that if, at any two times during the period
commencing on December 15, 1998 and ending on June 15, 2003, the Holder and/or
the Holders of any other Warrants and/or Warrant Shares who or which shall hold
not less than 50% of the Warrants and/or Warrant Shares outstanding at such time
and not previously sold pursuant to this Section 5, request that the Company
file a registration statement under the Securities Act of 1933 (the "Act")
covering all or any of the Warrant Shares, the Company will (i) promptly notify
the Holder and all other registered holders, if any, of other Warrant and/or
Warrant Shares that such registration statement will be filed and that the
Warrant Shares which are then held, and/or which may be acquired upon the
exercise of Warrants, by the Holder and such holders will be included in such
registration statement at the Holders and such Holders' request, (ii) cause such
registration statement to cover all Warrant Shares which it has been so
requested to include, (iii) use its best efforts to cause such registration
statement to become effective as soon as practicable and to remain effective and
current and (iv) take all other action necessary under any federal or state law
or regulation of any governmental authority to permit all Warrant Shares which
it has been so requested to include in such registration statement to be sold or
otherwise disposed of and will maintain such compliance with each such federal
and state law and regulation of any governmental authority for the period
necessary for the Holder and such Holders to effect the proposed sale or other
disposition.
(b) The Company agrees that if, at any time and, from time to time, the
Board of Directors of the Company shall authorize the filing of a registration
statement (any such registration statement being sometimes hereinafter called a
"Subsequent Registration Statement") under the Act (otherwise than pursuant to
Section 5(a) hereof) in connection with the proposed offer of any of its
securities by it or any of its shareholders, the Company will (i) promptly
notify the Holder and all other registered Holders, if any, of other Warrants
and/or Warrant Shares that such Subsequent Registration Statement will be filed
and that the Warrant Shares which are then held, and/or which may be acquired
upon the exercise of the Warrants, by the Holder and such Holders will be
included in such Subsequent Registration Statement at the Holder's and such
Holders' request, (ii) cause such
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Subsequent Registration Statement to cover all Warrant Shares which it has been
so requested to include, (iii) cause such Subsequent Registration Statement to
become effective as soon as practicable and to remain effective and current and
(iv) take all other action necessary under any federal or state law or
regulation of any governmental authority to permit all Warrant Shares which it
has been so requested to include in such Subsequent Registration Statement to be
sold or otherwise disposed of and will maintain such compliance with each such
federal and state law and regulation of any governmental authority for the
period necessary for the Holder and such Holders to effect the proposed sale or
other disposition.
(c) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the Company
shall (1) furnish each Holder of any such Warrant Shares and each underwriter of
such Warrant Shares with such copies of the prospectus, including the
preliminary prospectus, conforming to the Act (and such other documents as each
such Holder or each such underwriter may reasonably request) in order to
facilitate the sale or distribution of the Warrant Shares, (ii) use its best
efforts to register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or jurisdictions as the Holders of
any such Warrant Shares and each underwriter of Warrant Shares being sold by
such Holders shall reasonably request and (iii) take such other actions as may
be reasonably necessary or advisable to enable such Holders and such
underwriters to consummate the sale or distribution in such jurisdiction or
jurisdictions in which such Holders shall have reasonably requested that the
Warrant Shares be sold.
(d) The Company shall pay all expenses incurred in connection with any
registration or other action pursuant to the provisions of this Section,
including the attorneys' fees and expenses of the Holder(s) of the Warrant
Shares covered by such registration incurred in connection with such
registration or other action, other than underwriting discounts and applicable
transfer taxes relating to the Warrant Shares.
(e) The market price of Common Stock shall mean the price of a share of
Common Stock on the relevant date, determined on the basis of the last reported
sale price of the Common Stock as reported on the NASDAQ National Market System
("NASDAQ"), or, if there is no such reported sale on the day in question, on the
basis of the average of the closing bid and asked quotations as so reported, or,
if the Common Stock is not listed on NASDAQ, the last reported sale price of the
Common Stock on such other national securities exchange upon which the Common
Stock is listed, or, if the Common Stock is not listed on any national
securities exchange, on the basis of the average of the closing bid and asked
quotations on the day in question in the over-the-counter market as reported by
the National Association of Securities Dealers' Automated Quotations System, or,
if not so quoted, as reported by National Quotation Bureau, Incorporated or a
similar organization.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each selling holder
of Warrant Shares and each person who controls any such selling holder within
the meaning of Section 15 of the Act, and each and all of them, from and against
any and all losses, claims, damages, liabilities or actions, joint or several,
to which any selling holder of Warrant Shares or they or any of them may become
subject under the Act or otherwise and to reimburse the persons indemnified as
above for
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any legal or other expenses (including the cost of any investigation and
preparation) incurred by them in connection with any litigation or threatened
litigation, whether or not resulting in any liability, but only insofar as such
losses, claims, damages, liabilities or actions arise out of, or are based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained in any registration statement pursuant to which Warrant Shares were
registered under the Act (hereinafter called a "Registration Statement"), any
preliminary prospectus, the final prospectus or any amendment or supplement
thereto (or in any application or document filed in connection therewith) or
document executed by the Company based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to register or
qualify the Warrant Shares under the securities laws thereof or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or (ii) the employment by the
Company of any device, scheme or artifice to defraud, or the engaging by the
Company in any act, practice or course of business which operates or would
operate as a fraud or deceit, or any conspiracy with respect thereto, in which
the Company shall participate, in connection with the issuance and sale of any
of the of the Warrant Shares; provided, however, that (i) the indemnity
agreement contained in this (a) shall not extend to any selling holder of
Warrant Shares in respect if any such losses, claims, damages, liabilities or
actions arising out of, or based upon, any such untrue statement or alleged
untrue statement, or any such omission or alleged omission, if such statement or
omission was based upon and made in conformity with information furnished in
writing to the Company by a selling holder of Warrant Shares specifically for
use in connection with the preparation of such Registration Statement, any final
prospectus, any preliminary prospectus or any such amendment or supplement
thereto. The Company agrees to pay any legal and other expenses for which it is
liable under this (a) from time to time (but not more frequently than monthly)
within 30 days after its receipt of a bill therefor.
(b) Each selling holder of Warrant Shares, severally and not jointly, will
indemnify and hold harmless the Company, its directors, its officers who shall
have signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act to the same extent as the
foregoing indemnity from the Company, but in each case to the extent, and only
to the extent, that any statement in or omission from or alleged omission from
such Registration Statement, any final prospectus, any preliminary prospectus or
any amendment or supplement thereto was made in reliance upon information
furnished in writing to the Company by such selling holder specifically for use
in connection with the preparation of the Registration Statement, any final
prospectus or the preliminary prospectus or any such amendment or supplement
thereto; provided, however, that the obligation of any holder of Warrant Shares
to indemnify the Company under the provisions of this (b) shall be limited to
the product of the number of Warrant Shares being sold by the selling holder and
the market price of the Common Stock on the date of the sale to the public of
these Warrant Shares. Each selling holder of Warrant Shares agrees to pay any
legal and other expenses for which it is liable under this (b) from time to time
(but not more frequently than monthly) within 30 days after receipt of a bill
therefor.
(c) If any action is brought against a person entitled to indemnification
pursuant to the foregoing Sections 6 (a) or (b) (an "indemnified party") in
respect of which J indemnity may be sought against a person granting
indemnification (an "indemnifying party") pursuant to such Sections, such
indemnified party shall promptly notify such indemnifying party in writing of
the
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commencement thereof; but the omission so to notify the indemnifying party of
any such action shall not release the indemnifying party from any liability it
may have to such indemnified party otherwise than on account of the indemnity
agreement contained in (a) or (b) of this Section 6. In case any such action is
brought against an indemnified party and it notifies an indemnifying party of
the commencement thereof, the indemnifying party against which a claim is to be
made will be entitled to participate therein at its own expense and, to the
extent that it may wish, to assume at its own expense the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided, however,
that (i) if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded based upon advice of counsel that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
shall have the right to select separate counsel to assume such legal defenses
and otherwise to participate in the defense of such action on behalf of such
indemnified party or parties and (ii) in any event, the indemnified party shall
be entitled to have counsel chosen by such indemnified party participate in, but
not conduct, the defense at the expense of the indemnifying party. Upon receipt
of notice from the indemnifying party to such indemnified party of its election
so to assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with proviso (i) to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel), (ii)
the indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. An indemnifying party shall not be liable for
any settlement of any action or proceeding effected without its written consent.
(d) In order to provide for just an equitable contribution in circumstances
in which the indemnity agreement provided for in (a) of this Section 6 is
unavailable to a selling holder of Warrant Shares in accordance with its terms,
the Company and the selling holder of Warrant Shares shall contribute to the
aggregate losses, claims, damages and liabilities, of the nature contemplated by
said indemnity agreement, incurred by the Company and the selling holder of
Warrant Shares, in such proportions as is appropriate to reflect the relative
benefits received by the Company and the selling holder of Warrant Shares from
any offering of the Warrant Shares; provided, however, that if such allocation
is not permitted by applicable law or if the indemnified party failed to give
the notice required under (c) of this Section 6, then the relative fault of the
Company and the selling holder of Warrant Shares in connection with the
statements or omissions which resulted in such losses, claims, damages and
liabilities and other relevant equitable considerations will be considered
together with such relative benefits.
(e) The respective indemnity and contribution agreements by the Company and
the selling holder of Warrant Shares in section (a), (b), (c) and (d) of this
Section 6 shall remain operative and in full force and effect regardless of (i)
any investigation made by any selling holder of Warrant Shares or by or on
behalf of any person who controls such selling holder or by the Company or any
controlling person of the Company or any director or any officer of the company,
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<PAGE>
(ii) payment for any of the Warrant Shares or (iii) any termination of this
Agreement, and shall survive the delivery of the Warrant Shares, and any
successor of the Company, or of any selling holder of Warrant Shares, or of any
person who controls the Company or of any selling holder of Warrant Shares, as
the case may be, shall be entitled to the benefit of such respective indemnity
and contribution agreements. The respective indemnity and contribution
agreements by the Company and the selling holder of Warrant Shares contained in
(a), (b), (c) and (d) of this Section 6 shall be in addition to any liability
which the Company and the selling holder of Warrant Shares may otherwise have.
7. Limited Transferability.
(a) This Warrant is not transferable or assignable by the Holder except (i)
to Ladenburg Thalmann & Co. Inc., any successor firm or corporation of Ladenburg
Thalmann & Co. Inc. (ii) to any of the officers or employees of Ladenburg
Thalmann & Co. Inc. or of any such successor firm or (iii) in the case of an
individual, pursuant to such individual's last will and testament or the laws of
descent and distribution and is so transferable only upon the books of the
Company which it shall cause to be maintained for the purpose. The Company may
treat the registered holder of this Warrant as he or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
holder of a Warrant or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants. All Warrants will be dated the same
date as this Warrant.
(b) By acceptance hereof, the Holder represents and warrants that this
Warrant is being acquired, and all Warrant Shares to be purchased upon the
exercise of this Warrant will be acquired, by the Holder solely for the account
of such Holder and not with a view to the fractionalization and distribution
thereof and will not be sold or transferred except in accordance with the
applicable provisions of the Act and the rules and regulations of the Securities
and Exchange Commission promulgated thereunder, and the Holder agrees that
neither this Warrant nor any of the Warrant Shares may be sold or transferred
except under cover of a Registration Statement under the Act which is effective
and current with respect to such Warrant Shares or pursuant to an opinion, in
form and substance reasonably acceptable to the Company's counsel, that
registration under the Act is not required in connection with such sale or
transfer. Any Warrant Shares issued upon exercise of this Warrant shall bear
the following legend:
"The Securities represented by this certificate have not been
registered under the Securities Act of 1933 and are restricted securities within
the meaning thereof. Such securities may not be sold or transferred except
pursuant to a Registration Statement under such Act which is effective and
current with respect to such securities or pursuant to an opinion of counsel
reasonably satisfactory to the issuer of such securities that such sale or
transfer is exempt from the registration requirements of such Act."
8. Loss, etc., of Warrant.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and of indemnity reasonably
satisfactory to the Company, if lost, stolen or destroyed, and upon surrender
and cancellation of this Warrant, if mutilated, and upon
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reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
9. Warrant Holder Not Shareholders.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder any right to vote or to consent to or receive notice as a shareholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a shareholder, prior to the exercise hereof.
10. Communication.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and shall be
deemed to have been given if, the same is in writing and is mailed by first-
class mail, postage prepaid, addressed to:
(a) the Company at 2101 East Coast Highway, Garden level, Corona Del Mar,
California 92625 or such other address as the Company has designated in writing
to the Holder; or
(b) the Holder at 590 Madison Avenue, 35th floor, New York, New York 10022
or such other address as the Holder has designated in writing to the Company.
11. Headings.
The headings of this Warrant have been inserted as a matter of convenience
and shall not affect the construction hereof.
12. Applicable Law.
This Warrant shall be governed by and construed in accordance with the laws
of the State of New York without giving effect to the principles of conflicts of
law thereof.
IN WITNESS WHEREOF, Shopping.com, Inc. has caused this Warrant to be signed by
its Chairman of the Board and its corporate seal to be hereunto affixed and
attested by its Secretary this __ day of June, 1998.
ATTEST:
By: ________________________ By: ________________________
Secretary Chairman of the Board
[Corporate Seal]
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SUBSCRIPTION
The undersigned, __________, pursuant to the provisions of the foregoing
Warrant, hereby agrees to subscribe for and purchase _____ shares of the Common
Stock of _____ covered by said Warrant, and makes payment therefor in full at
the price per share provided by said Warrant.
Dated: Signature:
Address:
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SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION
The undersigned, _____, pursuant to the provisions of the foregoing
Warrant, hereby agrees to subscribe to that number of shares of the Common Stock
as are issuable in accordance with the formula set forth in paragraph 1(b) of
the Warrant, and makes payment therefor in full by surrender and delivery of
this Warrant.
Dated: Signature:
Address:
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ASSIGNMENT
FOR VALUE RECEIVED, _____ hereby sells, assigns and transfers unto
the foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint _____, attorney, to transfer said Warrant on the books of
__________.
Dated: Signature:
Address:
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PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _____ hereby assigns and transfers unto _____ the right
to purchase _____ shares of the Common Stock of _____ by the foregoing Warrant,
and a proportionate part of said Warrant and the rights evidenced hereby, and
does irrevocably constitute and appoint _____ attorney, to transfer that part of
said Warrant on the books of _____.
Dated: Signature:
Address:
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EXHIBIT 4.5
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EX CHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
SHOPPING.COM
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions. In consideration of good and
-----------------------------
valuable consideration, the receipt of which is hereby acknowledged by
SHOPPING.COM, a Delaware corporation (the "Company"), _____________________ or
registered assigns (the "Holder") is hereby granted the right to purchase at any
time until 5:00 P.M., New York City time, on July 31, 2003 (the "Expiration
Date"). _______________________________ (_________) fully paid and
nonassessable shares of the Company's Common Stock, par value $.001 per share
(the "Common Stock") at an initial exercise price per share (the "Exercise
Price") of $16.00 per share, subject to further adjustment as set forth in
Section 6 hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or in
--------------------
part at the Exercise Price per share of Common Stock payable hereunder, payable
in cash or by certified or official bank check, or by "cashless exercise," by
means of tendering this Warrant Certificate to the Company to receive a number
of shares of Common Stock equal in Market Value to the difference between the
Market Value of the shares of Common Stock issuable upon exercise of this
Warrant and the total cash exercise price thereof. Upon surrender of this
Warrant Certificate with the annexed Notice of Exercise Form duly executed
(which Notice of Exercise Form may be submitted either by delivery to the
Company or by facsimile transmission as provided in Section 8 hereof), together
with payment of the Exercise Price for the shares of Common Stock purchased, the
Holder shall be entitled to receive a certificate or certificates for the shares
of Common Stock so purchased. For the purposes of this Section 2, "Market
Value" shall be an amount equal to the average closing bid price of a share of
Common Stock, as reported by Bloomberg, LP or, if not so reported, as reported
on the over-the-counter market for the five (5) trading days preceding the
Company's receipt of the Notice of Exercise From duly executed multiplied by the
number of shares of Common Stock to be issued upon surrender of this Warrant
Certificate.
3. Reservation of Shares. The Company hereby agrees that at all
---------------------
times during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
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4. Mutilation or Loss of Warrant. Upon receipt by the Company of
-----------------------------
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Protection Against Dilution.
---------------------------
6.1 Adjustment Mechanism. If an adjustment of the Exercise
--------------------
Price is required pursuant to this Section 6, the Holder shall be entitled to
purchase such number of additional shares of Common Stock as will cause (i) the
total number of shares of Common Stock Holder is entitled to purchase pursuant
to this Warrant, multiplied by (ii) the adjusted purchase price per share, to
equal (iii) the dollar amount of the total number of shares of Common Stock
Holder is entitled to purchase before adjustment multiplied by the total
purchase price before adjustment.
6.2 Capital Adjustments. In case of any stock split or reverse
-------------------
stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original purchase price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof. A rights offering to stockholders shall be deemed a stock dividend to
the extent of the bargain purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason, prior to the
-----------------------
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive compensation for such business, operations or assets, but causes
securities of another equity (the "Spin Off Securities") to be issued to
security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off Securities
equal to the number thereof which would have been issued to the Holder had
all of the Holder's unexercised Warrants outstanding on the record date
(the "Record Date") for determining the amount and number of Spin Off
Securities to be issued to security holders of the
-2-
<PAGE>
Company (the "Outstanding Warrants") been exercised as of the close of
business on the trading day immediately before the Record Date (the
"Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the
exercise of all or any of the Outstanding Warrants, such amount of the
Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares
multiplied by (y) a fraction, of which (I) the numerator is the amount of
the Outstanding Warrants then being exercised, and (II the denominator is
the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be adjusted
immediately after consummation of the Spin Off by multiplying the Exercise
Price by a fraction (if, but only if, such fraction is less than 1.0), the
numerator of which is the Average Market Price of the Common Stock for the
five (5) trading days immediately following the fifth trading day after the
Record Date, and the denominator of which is the Average Market Price of
the Common Stock on the five (5) trading days immediately preceding the
Record Date; and such adjusted Exercise Price shall be deemed to be the
Exercise Price with respect to the Outstanding Warrants after the Record
Date.
For the purposes of this Section 6.3, the "Average Market Price of the Common
Stock" shall mean, for the relevant period, (x) the average closing bid price of
a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as
reported on the over-the-counter market or (y) if the Common Stock is listed on
a stock exchange, the closing price on such exchange on the date indicated in
the relevant provision hereof, as reported in The Wall Street Journal.
7. Transfer to Comply with the Securities Act Registration Rights.
--------------------------------------------------------------
(a) This Warrant has not been registered under the Securities Act of
1933, as amended (the "Act"), and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant or
the Warrant Shares. Neither this Warrant not any of the Warrant Shares or
any other security issued or issuable upon exercise of this Warrant may be
sold, transferred, pledge or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an
opinion of counsel satisfactory to the Company that registration is not
required under the Act. Each certificate for the Warrant, the Warrant
Shares and any other security issued or issuable upon exercise of this
Warrant shall contain a legend on the face thereof, in form and substance
satisfactory to counsel for the Company, setting forth the restrictions on
transfer contained in this Section.
(b) The Company hereby grants to the Holder piggyback registration
rights with respect to the Warrant Shares. In the event the Company is
filing a Registration Statement for itself or on behalf of any of its
shareholders, the Company shall notify the Holder in writing reasonably in
advance of such filing (but at least five business days) and give the
Holder the opportunity to include all or any party of the Warrant Shares
(whether or not previously issued, to the extent permissible under the Act
or any regulation promulgated thereunder. Upon the Holder's notification
that the Holder desires to have all or any portion of the Warrant Shares
included in such registration, the
-3-
<PAGE>
Company shall, at no cost or expense to the Holder, include or cause to be
included in such registration statement the Warrant Shares so identified by
the Holder.
8. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
SHOPPING.COM
2101 East Coast Highway
Garden Level
Costa del Mar, CA 92625
ATTN: John Markley
Telephone No.: (714) 640-4393
Telecopier No.: (714) 640-4374
(ii) if to the Holder, to:
________________________
c/o Trautman Kramer & Company, Incorporated
500 Fifth Avenue
14th Floor
New York, NY 10110
Telephone: (212) 575-550
Telecopier: (212) 271-0611
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant may be
-------------------------------------------
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant of even date herewith contain the full understanding of
the parties hereto with respect to the subject matter hereof and thereof and
there are no representations, warranties, agreements or understandings other
than expressly contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a contract
-------------
made under the laws of the State of New York and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
-4-
<PAGE>
11. Counterparts. This Warrant may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
13th day of July, 1998.
SHOPPING.COM
By: __________________________________
Name:
Its:
Attest:
_______________________________
Name:
Title:
-5-
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of ________________, 1998, to
purchase ______ shares of the Common Stock, par value $.001 per share, of
SHOPPING.COM and tenders herewith payment in accordance with Section 1 of said
Common Stock Purchase Warrant.
Please deliver the stock certificate to:
Dated: ________________________
______________________________
[Name of Holder]
By: __________________________
[_] CASH: $____________________
[_] CASHLESS EXERCISE
-6-
<PAGE>
EXHIBIT 4.6
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EX CHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
SHOPPING.COM
COMMON STOCK PURCHASE WARRANT
1. Issuance; Certain Definitions. In consideration of good and
-----------------------------
valuable consideration, the receipt of which is hereby acknowledged by
SHOPPING.COM, a Delaware corporation (the "Company"), _____________________ or
registered assigns (the "Holder") is hereby granted the right to purchase at any
time until 5:00 P.M., New York City time, on June 30, 2003 (the "Expiration
Date"). _______________________________ (_________) fully paid and
nonassessable shares of the Company's Common Stock, par value $.001 per share
(the "Common Stock") at an initial exercise price per share (the "Exercise
Price") of $24.00 per share, subject to further adjustment as set forth in
Section 6 hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or in
--------------------
part at the Exercise Price per share of Common Stock payable hereunder, payable
in cash or by certified or official bank check, or by "cashless exercise," by
means of tendering this Warrant Certificate to the Company to receive a number
of shares of Common Stock equal in Market Value to the difference between the
Market Value of the shares of Common Stock issuable upon exercise of this
Warrant and the total cash exercise price thereof. Upon surrender of this
Warrant Certificate with the annexed Notice of Exercise Form duly executed
(which Notice of Exercise Form may be submitted either by delivery to the
Company or by facsimile transmission as provided in Section 8 hereof), together
with payment of the Exercise Price for the shares of Common Stock purchased, the
Holder shall be entitled to receive a certificate or certificates for the shares
of Common Stock so purchased. For the purposes of this Section 2, "Market
Value" shall be an amount equal to the average closing bid price of a share of
Common Stock, as reported by Bloomberg, LP or, if not so reported, as reported
on the over-the-counter market for the five (5) trading days preceding the
Company's receipt of the Notice of Exercise From duly executed multiplied by the
number of shares of Common Stock to be issued upon surrender of this Warrant
Certificate.
3. Reservation of Shares. The Company hereby agrees that at all
---------------------
times during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
-1-
<PAGE>
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
-----------------------------
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. Protection Against Dilution.
---------------------------
6.1 Adjustment Mechanism. If an adjustment of the Exercise
--------------------
Price is required pursuant to this Section 6, the Holder shall be entitled to
purchase such number of additional shares of Common Stock as will cause (i) the
total number of shares of Common Stock Holder is entitled to purchase pursuant
to this Warrant, multiplied by (ii) the adjusted purchase price per share, to
equal (iii) the dollar amount of the total number of shares of Common Stock
Holder is entitled to purchase before adjustment multiplied by the total
purchase price before adjustment.
6.2 Capital Adjustments. In case of any stock split or reverse
-------------------
stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original purchase price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the purposes
hereof. A rights offering to stockholders shall be deemed a stock dividend to
the extent of the bargain purchase element of the rights.
6.3 Adjustment for Spin Off. If, for any reason, prior to the
-----------------------
exercise of this Warrant in full, the Company spins off or otherwise divests
itself of a part of its business or operations or disposes all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive compensation for such business, operations or assets, but causes
securities of another equity (the "Spin Off Securities") to be issued to
security holders of the Company, then
(a) the Company shall cause (i) to be reserved Spin Off Securities
equal to the number thereof which would have been issued to the Holder had
all of the Holder's unexercised Warrants outstanding on the record date
(the "Record Date") for determining the amount and number of Spin Off
Securities to be issued to security holders of the
-2-
<PAGE>
Company (the "Outstanding Warrants") been exercised as of the close of
business on the trading day immediately before the Record Date (the
"Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the
exercise of all or any of the Outstanding Warrants, such amount of the
Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares
multiplied by (y) a fraction, of which (I) the numerator is the amount of
the Outstanding Warrants then being exercised, and (II the denominator is
the amount of the Outstanding Warrants; and
(b) the Exercise Price on the Outstanding Warrants shall be adjusted
immediately after consummation of the Spin Off by multiplying the Exercise
Price by a fraction (if, but only if, such fraction is less than 1.0), the
numerator of which is the Average Market Price of the Common Stock for the
five (5) trading days immediately following the fifth trading day after the
Record Date, and the denominator of which is the Average Market Price of
the Common Stock on the five (5) trading days immediately preceding the
Record Date; and such adjusted Exercise Price shall be deemed to be the
Exercise Price with respect to the Outstanding Warrants after the Record
Date.
For the purposes of this Section 6.3, the "Average Market Price of the Common
Stock" shall mean, for the relevant period, (x) the average closing bid price of
a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as
reported on the over-the-counter market or (y) if the Common Stock is listed on
a stock exchange, the closing price on such exchange on the date indicated in
the relevant provision hereof, as reported in The Wall Street Journal.
7. Transfer to Comply with the Securities Act Registration Rights.
--------------------------------------------------------------
(a) This Warrant has not been registered under the Securities Act of
1933, as amended (the "Act"), and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant or
the Warrant Shares. Neither this Warrant not any of the Warrant Shares or
any other security issued or issuable upon exercise of this Warrant may be
sold, transferred, pledge or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an
opinion of counsel satisfactory to the Company that registration is not
required under the Act. Each certificate for the Warrant, the Warrant
Shares and any other security issued or issuable upon exercise of this
Warrant shall contain a legend on the face thereof, in form and substance
satisfactory to counsel for the Company, setting forth the restrictions on
transfer contained in this Section.
(b) The Company hereby grants to the Holder piggyback registration
rights with respect to the Warrant Shares. In the event the Company is
filing a Registration Statement for itself or on behalf of any of its
shareholders, the Company shall notify the Holder in writing reasonably in
advance of such filing (but at least five business days) and give the
Holder the opportunity to include all or any party of the Warrant Shares
(whether or not previously issued, to the extent permissible under the Act
or any regulation promulgated thereunder. Upon the Holder's notification
that the Holder desires to have all or any portion of the Warrant Shares
included in such registration, the
-3-
<PAGE>
Company shall, at no cost or expense to the Holder, include or cause to be
included in such registration statement the Warrant Shares so identified by
the Holder.
8. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage pre-paid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission,
or, if mailed, two days after the date of deposit in the United States mails, as
follows:
(i) if to the Company, to:
SHOPPING.COM
2101 East Coast Highway
Garden Level
Corona del Mar, CA 92625
ATTN: John Markley
Telephone No.: (714) 640-4393
Telecopier No.: (714) 640-4374
(ii) if to the Holder, to:
________________________
c/o Trautman Kramer & Company, Incorporated
500 Fifth Avenue
14th Floor
New York, NY 10110
Telephone: (212) 575-550
Telecopier: (212) 271-0611
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant may be
-------------------------------------------
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant of even date herewith contain the full understanding of
the parties hereto with respect to the subject matter hereof and thereof and
there are no representations, warranties, agreements or understandings other
than expressly contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a contract
-------------
made under the laws of the State of New York and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
-4-
<PAGE>
11. Counterparts. This Warrant may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
9th day of June, 1998.
SHOPPING.COM
By: __________________________________
Name:
Its:
Attest:
_______________________________
Name:
Title:
-5-
<PAGE>
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of ________________, 1998, to
purchase ______ shares of the Common Stock, par value $.001 per share, of
SHOPPING.COM and tenders herewith payment in accordance with Section 1 of said
Common Stock Purchase Warrant.
Please deliver the stock certificate to:
Dated: ________________________
________________________________
[Name of Holder]
By: ___________________________
[_] CASH: $____________________
[_] CASHLESS EXERCISE
<PAGE>
EXHIBIT 4.7
SHOPPING.COM
WARRANT AGREEMENT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE.
This Warrant Agreement (this "Agreement") is entered into as of April 10,
1998 by and between, SHOPPING.COM, INC., a California corporation (the
"Company") and Leasing Ventures, LLC (the "Holder").
RECITALS
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
1079 shares of Company Common Stock in exchange and in consideration for good
and valuable goods and services.
NOW, THEREFORE, BE IT RESOLVED, the parties agree hereto as follows:
1. Description: Execution:
-----------------------
(a) The Company agrees to issue to the Holder and the Holder agrees to
accept the Warrant Certificate evidencing the right to purchase _________
shares of the Company common stock at a purchase price of _______________
Dollars _________ Cents ($_____) per Share as to which the Warrant is
exercisable. The Warrant Certificate shall be substantially in the form
annexed hereto as Exhibit A.
(b) This Agreement shall be executed on behalf of the Company by its
President. Upon delivery of this Warrant to the Holder, this Agreement
shall be binding upon the Company, and the Holder shall be entitled to all
the benefits set forth herein.
2. Terms of Warrant.
----------------
The Warrant shall become exercisable at any time after the date hereof
and remain exercisable, subject to the conditions set forth in Section 3 until
the close of business on _____________ (the "Expiration Date").
-1-
<PAGE>
3. Exercise of Warrant.
-------------------
(a) Subject to (b) below, at any time until the Expiration Date, the
Holder shall have the right to purchase from the Company (and the Company
shall promptly issue to the Holder) one fully-paid and nonassessable share
of Common Stock at the Exercise Price (as defined below) for each Warrant,
by surrendering the appropriate Warrant Certificate and the Subscription
Form attached hereto to the Company at its executive offices and paying the
aggregate Exercise Price for the shares to be purchased, in cash, by check
or by cancellation of indebtedness.
(b) The Warrant may be exercised in whole and in part but not in
increments of less than 100 shares. In case of partial exercise, the
Warrant Certificate shall be surrendered and a new Warrant Certificate of
the same tenor and for the purchase of the number of shares not purchased
upon such partial exercise shall be issued by the Company to the Holder
hereof. The Warrants shall be deemed to have been exercised immediately
prior to the close of business on the date of their surrender for exercise
as provided above, and the person or entity entitled to receive the shares
of Common Stock issuable upon the exercise shall be treated for all
purposes as the Holder of such shares of record as of the close of business
on such date. Prior to such exercise, neither the Holder nor any person
entitled to receive shares issuable upon exercise shall be or have any of
the rights of a shareholder of the Company. No adjustments shall be made
for dividends or other stockholder rights for which the record date is
prior to the date of exercise. As soon as practicable on or after such
date, the Company shall issue in the name of, and deliver to the person or
persons entitled to receive, a certificate or certificates for the full
number of shares of Common Stock issuable upon such exercise.
4. Exercise Price. The initial Exercise Price for each share of Common
--------------
Stock issuable pursuant to the Warrant shall be Twenty-Two Dollars Twenty-Five
Cents ($22.25) per Share, adjusted as provided below. The Exercise Price must
be paid, in cash, cashier's check or by cancellation of indebtedness from the
Company to the Holder.
5. Adjustment of Warrant Price and Number of Shares of Common Stock.
----------------------------------------------------------------
The number and kind of securities purchasable upon the exercise of the
Warrants and the Exercise Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
-2-
<PAGE>
5.1 Adjustments. The exercise Price of the Warrant shall be subject
-----------
to adjustment as follows:
(a) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its Common
Stock, without any charge to such holders, entitling the holder thereof to
subscribe for or purchase Stock at a price per share which is lower at the
date of issuance of such rights, options, warrants or securities than the
then Current Fair Market Value (as defined in Section 7 hereof), the price
of shares of Stock thereafter purchasable upon the exercise of the Warrant
shall be reduced to a price equal to an amount which would entitle the
Holder to receive the same number of shares of Common Stock and other
securities that he would have received had he exercised the Warrants
immediately prior to such issuance.
(b) For the purpose of this Section 5, the term "Common stock" shall
mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement, or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value.
5.2 No Adjustment for Dividends. Except as provided in Section 5.1
---------------------------
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of a
Warrant.
5.3 No Adjustment in Certain Cases. No adjustments shall be made
------------------------------
pursuant to Section 5 hereof in connection with the grant or exercise of
presently authorized or outstanding options to purchase Common Stock under the
Company's existing stock option plan or the exercise of presently outstanding
warrants to purchase Common Stock.
5.4 Preservation of Purchase Rights Upon Reclassification,
------------------------------------------------------
Consolidation, etc. In case of any consolidation of the Company with or merger
- -------------------
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Holder an
agreement that the Holder shall have the right thereafter, upon payment of the
Exercise Price in effect immediately prior to such action, to purchase, upon
exercise of each Warrant, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
occurrence of such consolidation, merger, sale or conveyance had each Warrant
been exercised immediately prior to such action. In the
-3-
<PAGE>
event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code
of 1986, as amended, in which the Company is the surviving corporation, the
right to purchase shares of Common Stock under the Warrant shall terminate on
the date of such merger and thereupon the Warrant shall become null and void,
but only the controlling corporation shall agreed to substitute for the Warrant
its warrant which entitle the holders thereof to purchase upon their exercise
the kind and amount of shares and other securities and property which they would
have owned or entitled to receive had the Warrant been exercised immediately
prior to such merger. Any such agreements referred to in this Subsection 5.4
shall provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 5 hereof. The provisions
of this Subsection 5.4 shall similarly apply to successive consolidations,
mergers, sales or conveyances.
6. Registration Rights.
-------------------
6.1 Definitions.
-----------
(a) "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act of
1933, as amended (the "Securities Act").
(b) "Registrable Securities" shall mean (x) shares of Common Stock
issuable upon exercise of the Warrant and (y) any Common Stock issued at a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (x) above, provided, however, that
Registrable Securities shall not include any share of Common Stock which
have previously been registered or which have been sold to the public.
(c) The terms "register", "registered", and "registration" shall refer
to a registration effected by preparing and filing a registration statement
in compliance with the Securities Act and applicable sales and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(d) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
all registration, qualification, and filing fees, printing expenses, escrow
fees, fees and disbursements of counsel for the Company, blue sky fees and
expenses of any regular or special audits incident to or required by any
such registration but shall not include selling expenses and fees and
disbursements of counsel for the Holder.
-4-
<PAGE>
(e) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or
any similar successor rule that may be promulgated by the Commission.
(f) "Rule 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or
any similar successor rule that may be promulgated by the Commission.
6.2 "Piggyback Registration". If the Company shall determine to
------------------------
register any of its shares of Common Stock in a form commitment public offering
for its own account, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a Rule 145 transaction on
Form S.4, or any registration form that does not permit secondary sales, the
Company will:
(a) promptly give to Holder written notice thereof;
(b) use its best efforts to include in such registration (and any
related qualification under the blue sky laws or other compliance), except
as set forth in Section 6.3 below, and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests made by Holder within twenty (20) days after the written notice
from the Company described in clause 6.2(a) above is given. Such written
request may specify all or a part of Holders Registrable Securities, and
(c) pay all Registration Expenses, other than the selling expenses of
Holder's Registrable Securities.
6.3 Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice. In such
event, the right of the Holder to registration pursuant to this Section 6 shall
be conditioned upon Holder's participation in such underwriting and the
inclusion of the Holder's Registrable Securities in the underwriting to the
extent provided herein. The Holder shall (together with the Company) enter into
an underwriting agreement in customary form with the representative of the
underwriter of underwriters selected by the Company.
6.4 Exclusion of Registrable Securities. Notwithstanding any other
-----------------------------------
provisions of this Section 6, if the representative of the underwriter advises
the Company that marketing factors require a limitation on the number of shares
to be underwritten, the representative may (subject to the limitations set forth
below),
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<PAGE>
exclude all Registrable Securities from, or limit the number of Registrable
Securities to be included in the registration and underwriting. The Company
shall so advise the Holder, and the number of shares of securities that are
entitled to the included in the registration and underwriting shall be allocated
first to the Company for securities being sold for its own and thereafter to the
Holder, pro rata with any other holders of Common Stock having registration
rights. If the Holder does not agree to the terms of any such underwriting he
shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal so the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
amongst those persons requesting inclusion.
6.5 Registration Procedures. In the case of each registration by the
-----------------------
Company pursuant to Section 6, the Company will keep Holder advised in writing
as to the initiation of each registration and as to the completion thereof, at
its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holder has completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (x) such 120-day period shall be extended
for a period of time equal to the period the Holder refrains from selling
any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company and (y) in
the case of any registration of Registrable Securities on Form S-3 which
are intended to be offered on a continuous or delayed basis, such 120-day
period shall be extended, if necessary, to keep the registration effective
until all such Registrable Securities are sold, provided that Rule 145, or
any successor rule under the Securities Act, permits an offering on a
continuous or delayed basis, and provided further that applicable rules
under the Securities Act governing the obligation to file a post-effective
amendment that (I) includes any prospectus by Section (O)(a)(3) of the
Securities Act or (II) reflects facts or events representing a material or
fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be
included in (i) and (II) above to be contained in periodic reports filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 in
the registration statement.
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<PAGE>
(b) Prepare and file with the Commission such amendments and
supplements to such registration and the prospectus used in connection with
such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish such number of prospectuses and other documents, incident
thereto, including any amendment of or supplement to the prospectus, as the
Holder from time to time may reasonably request;
(d) Notify the Holder at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue meaning of a material fact
or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in
the light of the circumstances then existing, and at the request of Holder,
prepared and furnish to the Holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities in each case not later than the
effective date of such registration; and
(g) Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security
holders, as soon as practicable, an earnings statement covering the period
of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
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<PAGE>
7. Fractional Shares; Issuance of Shares; Legends.
----------------------------------------------
7.1 Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares that of Company Common Stock on the exercise of a Warrant. If
any fraction of a share of Stock would, except for the provisions of this
Section 6, be issuable of a Warrant (or specified portion thereof), the Company
shall, in lieu thereof pay an amount in cash equal to the then Current Fair
Market Value, multiplied by such fraction. For purposes of this Agreement, the
term "Current Fair Market Value" shall mean (i) if the Common Stock is traded in
the over-the-counter market and not in the NASDAQ Small Cap Market or the
National Market nor on any national securities exchange, the average of the per
share closing bid prices of he Common Stock on the 10 consecutive trading days
immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ Small Cap Market or the National Market or on a national
securities exchange, the average for the 10 consecutive trading days immediately
preceding the date in question of the daily per share closing prices of the
Common Stock in the NASDAQ Small Cap Market or the National Market or on a
national securities exchange, the average for 10 consecutive trading days
immediately preceding the date in question of the daily per share closing prices
of the Common Stock in NASDAQ Small Cap Market or the National Market or on the
principal stock exchange on which it is listed, as the case may be, or (iii) if
the class of Stock is not publicly traded or quoted, the fair market value as
determined by the Board of Directors of the Company based on (with appropriate
adjustments) the most recent purchases of the Company's stock and/or other
relevant factors including the Company's income and assets or evaluation reports
---------
received by the Company.
7.2 Issuance of Shares. All shares of Stock issued upon exercise of
------------------
a Warrant will be duly authorized, validly issued, fully paid and nonassessable.
7.3 Legends. If the Stock to be issued upon exercise of this Warrant
-------
has not been registered under the Securities Act of 1933, as amended, then the
stock certificates representing such shares of Common Stock shall bear a legend
substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE STATE
SECURITIES LAWS AND ARE RESTRICTED SECURITIES, SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER THE ACT AND STATE SECURITIES LAWS.
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<PAGE>
8. Transferability.
---------------
The Warrant or the Shares of Company Common Stock underlying the Warrant
shall not be transferred, and the Company shall not be required to register any
transfer on the books of the Company, unless the Company shall have been
provided with an opinion of counsel satisfactory to its prior to such transfer
that registration under the Securities Act and applicable state securities laws
is not required in connection with the transaction resulting in such transfer.
Each new Warrant or Company Common Stock certificate issued upon any transfer as
above provided shall bear an appropriate investment legend, except that such
Warrant or Company Common Stock certificate shall not bear such restrictive
legend if the opinion of counsel referred to above is to further effect that
such legend is not required in order to establish compliance with the provisions
of the Securities Act or if such transfer is made in accordance with the
provisions of Rule 144(k) promulgated under the Securities Act. The Warrant may
also be transferred by will or devise and by the laws descent.
Any attempt to transfer, sell or otherwise dispose of this Warrant (except
as provided above) shall be void and shall not convey any rights or privileges
to the transferee.
9. Miscellaneous.
-------------
9.1 Notices.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
to the following address.
If to the Company: SHOPPING.COM, INC.
2101 East Coast Highway, Garden Level
Corona del Mar, California 92625
Attn: Howard Schwartz
With a copy to: Mark V. Asdourian, Esq.
5 Park Plaza, Suite 1480
Irvine, California 92614-5976
If to Holder: Richard Heard
Insight Investments, Corp.
265 South Anita Drive, Suite 200
Orange, California 92868-3314
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<PAGE>
Any party may change the address to which such communications are to
be directed to it by giving written notice to the other party. Except as
otherwise provided in this Warrant, all notice shall be deemed given when
delivered in person, or if placed in the mail as aforesaid, then two (2) days
thereafter.
9.2 Modifications.
-------------
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant in any manner agreed by then in writing at
any time.
9.3 Entire Agreement.
----------------
This Agreement, and any document, instruments or agreements
specifically referred to herein, set forth the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior agreement, arrangements and understandings
relating to the subject matter hereof.
9.4 Headings.
--------
The section and paragraph headings contained in this Agreement are for
convenient reference only, and shall not in any way affect the meaning or
interpretation hereof.
9.5 Governing Law, Arbitration.
--------------------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without any regard to the choice of law
provisions thereof. Any dispute arising under this Agreement shall be resolved
by binding arbitration under the rules of commercial arbitration of the American
Arbitration Association in Orange County, California.
9.6 Severability.
------------
If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, it shall be deemed severable from the remaining
provisions of this Agreement which shall remain in full force and effect.
9.7 Waiver.
------
No waiver of any provision of this Agreement or any breach thereof
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not
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<PAGE>
similar) or any other breach hereunder nor shall such waiver constitute a
continuing waiver. Either party may waive performance of any provision of this
Agreement, the non-performance of which would otherwise constitute a breach of
this Agreement, including, but not limited to, the non-performance of any
condition precedent to such party's performance, without affect the
enforceability of this Agreement or the provisions contained herein.
9.8 Heirs, Successors and Assigns.
-----------------------------
The terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective heirs, successors and assigns of the
parties hereto. Holders may transfer and assign the Warrants only as provided in
Section 7 and any assignment in violation of the foregoing shall be void.
9.9 Attorneys' Fees.
---------------
If any legal action is instituted to enforce or interpret the terms of
this Agreement, the prevailing party in such action shall be entitled to actual
attorneys' fees in addition to any other relief to which the party is entitled.
IN WITNESS WHEREOF, the parties have executed this instrument as of
the date first written above.
SHOPPING.COM, INC., a California corporation
By: _______________________________
Title: _______________________________
LEASING VENTURES, LLC
By: _______________________________
Title: _______________________________
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<PAGE>
EXHIBIT 10.1
AGREEMENT
---------
This Agreement is made on August 1, 1998 between Howard S. Schwartz (HSS)
an individual residing in California, and SHOPPING.COM (S.C.), a California
corporation. Howard S. Schwartz has accepted the position of Executive Vice
President of Shopping.com and Shopping.com wishes to employ HSS.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
ARTICLE I
Term
1. The term of this Agreement shall be for a period of three years
commencing August 1, 1998 and ending on July 31, 2001. The contract will
automatically be renewed in one-year increments unless either party terminates
via giving written notice by June 1st each year starting with June 1, 2001.
Employer may terminate this Agreement at any time for "Cause" with or without
notice. For purposes of the Agreement, the term "Cause" shall mean any of the
following:
(i) Employee's willful breach or habitual neglect of the duties and
obligations required of him, either expressly or impliedly by the
terms of the Agreement;
(ii) Employee's failure to perform his duties in a manner consistent
with good business judgment, or in the best interests of
Employer;
(ii) The event of Employee being charged by any federal, state, or
local authority with act of dishonesty, any act involving public
ridicule or moral turpitude, or an act constituting a felony, and
Employee either being convicted or entering a plea of guilty or
nolo contendere; or
(iv) Employee's commission of a fraud, embezzlement, or mis
appropriation, whether or not a criminal or civil charge is filed
in connection therewith.
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<PAGE>
ARTICLE II
Services
HSS shall provide executive management for the financial and administration
functions of S.C.'s business. HSS will devote substantially all of his business
time to the operation of S.C. HSS shall report directly to the President and
Chief executive Officer of Shopping.com. HSS agrees to obtain, at S.C.'s
expense, key man life insurance of $1.0 million with the company as the
beneficiary.
ARTICLE III
Compensation
HSS shall receive a bi-weekly base compensation of $5,385 during the period
commencing August 1, 1998 and ending July 31, 1999. For the period commencing
August 1, 1999 through July 31, 2000 the bi-weekly base compensation shall be
$7,692. For period commencing August 1, 2000 through July 31, 2001 the bi-
weekly base compensation shall be $8,461. Actual business expenses will be 100%
reimbursed by S.C. HSS will document all expenses on an approved expense form.
S.C. has authorized a $1,000 per month auto allowance. S.C. agrees to provide
health and life insurance for the employee at the company's expense. In addition
to the above, HSS will participate in a formula bonus which will provide for the
opportunity to receive an amount equal 100% of HSS base compensation for
exceeding the Shopping-com annual business plan net profit. The incentive plan
shall be approved annually by the Board of Directors.
ARTICLE IV
Non-Disclosure and Secrecy
1. HSS agrees that, during the term of this Agreement, and at all
times thereafter, it will keep and cause all S.C. information in strictest
confidence and will not either directly or indirectly use or allow to be used
for personal benefit, or the benefit of others, disseminate or disclose any
Confidential Information or Trade Secrets (as such terms are defined below) used
and/or obtained in providing the Services hereunder, except to parties to this
Agreement, regardless of whether the Confidential information of Trade Secrets
have been conceived or developed, in whole or in part by HSS. HSS acknowledges
and agrees that the terms "Confidential Information" and "Trade Secrets" as used
in this Agreement include without limitation, the whole or any portion or phase
of any design, process, service, procedure, formula, improvement, customer list,
information with respect to customer requirements and practices, marketing
research and development information, statistical data, sources of merchandise,
technical information, computer models, and all other information concerning the
industry and business in which the S.C. concept operates and which is of value
in the operation of S.C. business, or is otherwise understood to be, of a
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<PAGE>
confidential character and which has not been published or otherwise understood
to be, of a confidential character and which has not been published or otherwise
become a matter of general public knowledge, under circumstances involving no
breach of this Agreement. HSS agrees that all Trade Secrets and Confidential
Information are and shall be the property of S.C. regardless of whether
conceived or developed by HSS pursuant to the Services. To that end, HSS hereby
assigns to S.C. all rights and all Trade Secrets and proprietary information
developed by HSS in providing the Services.
2. Upon termination or earlier expiration of this Agreement HSS
shall surrender to S.C. at any time of such expiration or termination of this
Agreement or upon demand by S.C. at any time all material of a confidential and
secret nature, including without limitation, the Confidential Information and
Trade Secrets, and any other documents of a proprietary nature as may then be in
HSS (s) possession or control.
ARTICLE V
Miscellaneous
1. Injunctive Relief. HSS acknowledges and agrees that any breach
-----------------
of obligations to be performed by and pursuant to Article IV is likely to result
in irreparable harm to S.C. and HSS therefore consents and agrees that if it
violates any such obligations, S.C. shall be entitled, among and in addition to
any other rights and remedies available under this Agreement or otherwise, to
temporary and permanent injunctive relief to prevent HSS from committing or
continuing a breach of such obligations.
2. Entire Agreement. This agreement constitutes the whole Agreement
-----------------
between the parties hereto and there are no other terms other than those
contained herein. This Agreement supersedes any prior contract or understanding
related to retaining HSS.
3. Amendment. No variation of this Agreement shall be deemed valid
---------
unless in writing and signed by the parties hereto.
4. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of California
5. Severability. Each provision of this Agreement is intended to
------------
be severable from the other so that if any provision or term hereof is illegal
or invalid for any reason whatsoever, such illegality or invalidity shall not
effect the validity of the remaining provisions and terms hereof.
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<PAGE>
6. Indemnity and Hold Harmless. S.C. agrees to indemnify and does
---------------------------
hold harmless HSS from and against any and all liabilities, claims, demands,
damages, costs and expenses (including attorney's fees) resulting from, arising
out of, or occasioned by any S.C. business related activity.
7. Assignment. This Agreement may not be assigned by HSS to any
----------
other person or party without S.C.'s prior written consent which may be withheld
in S.C.'s sole discretion. Notwithstanding the forgoing, S.C. may assign this
Agreement to any successor corporation, affiliated company of subsidiary. In the
case of assignment by S.C., Assignee shall assume, in writing, S.C. obligations.
8. Representation and Warranty. HSS hereby agrees that any
---------------------------
documents produced with respect to the business of S.C. shall be marked
"Confidential" and "Property of Shopping.com" whether those documents are
produced by HSS or by a vendor or party chosen by HSS.
9. Captions. Captions used in this Agreement are used for
--------
convenience only and are not intended to, nor are they to be construed to, have
any substantive meaning or control in the construction of the Agreement.
10. Notices. Any Notice given by one party to any other party
-------
hereunder shall be delivered to the party at the address indicated below that
party's signature to this Agreement. Such notice shall be given to U.S. Mail,
certified, and shall be deemed delivered on the date of actual receipt or the
date of first refusal to accept delivery.
11. Representation By Counsel. Each party agrees and acknowledges
-------------------------
that it has had the opportunity to consult with independent legal, tax and
financial counsel of each party's choice in order to be advised with respect to
the effect of this Agreement.
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<PAGE>
12. Construction. Any issues with respect to construction or
------------
interpretation of this Agreement are to be resolved without resort to the
presumption that any ambiguities in this Agreement should be construed against
the drafter.
Agreed to:
Date: July 16, 1998 /s/ Howard S. Schwartz
----------------------------------
Howard S. Schwartz
/s/ Edward F. Bradley /s/ Frank W. Denny
- ------------------------------------ ----------------------------------
Shopping.com Shopping.com
By: Ed Bradley By: Frank W. Denny
/s/ John H. Markley
----------------------------------
Shopping.com
By: John H. Markley
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