<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27,
1998
REGISTRATION 333-61777
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SHOPPING.COM
(Exact name of Registrant as specified in its charter)
CALIFORNIA 5311 33-0733679
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
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)
<PAGE>
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. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TITLE OF EACH AMOUNT PROPOSED MAXIMUM AMOUNT OF
CLASS OF TO BE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO REGISTERED(1) OFFERING OFFERING FEE
BE REGISTERED PRICE PER PRICE (1)
SHARE (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 8,660,500 shares $6.25 $54,128,125 $17,683.84 (3)
no par value (2)
- --------------------------------------------------------------------------------
</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 November 20, 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 its affiliates, and (iii) 353,000 shares issuable upon
the exercise of certain purchase warrants.
(3) Previously paid; based on a higher maximum aggregate offering price in a
prior draft of this Registration Statement.
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.
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<PAGE>
SHOPPING.COM
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501 (B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN
PROSPECTUS
----------------------------------------------------- -------------------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus . . . . . . . Outside Front Cover Page of Prospectus and
Outside Front Cover Page.
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges . . . . . . . . . . . . . . Summary Information, Risk Factors, and Ratio
of Earnings to Fixed Charges; The Company;
Capitalization; Risk Factors; Ratio of Earnings
to Fixed Charges.
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . Use of Proceeds.
5. Determination of Offering Price . . . . . . . . . . . Not Applicable.
6. Dilution . . . . . . . . . . . . . . . . . . . . . . Risk Factors.
7. Selling Security Holders . . . . . . . . . . . . . . Selling Shareholders; Plan of Distribution.
8. Plan of Distribution . . . . . . . . . . . . . . . . Outside Front Cover Page; Plan of
Distribution.
9. Description of Securities to be Registered . . . . . Outside Front Cover Page; Description of the
Securities to be Registered.
10. Interests of Named Experts and Counsel . . . . . . . Not Applicable.
11. Information with Respect to the Registrant . . . . . Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges; The Company;
Capitalization; Risk Factors; Ratio of Earnings
to Fixed Charges; Information with Respect to
the Registrant; Business; Property; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Liquidity
and Capital Resources; Directors and
Executive Officers; Security Ownership of
Certain Beneficial Owners and Management;
Certain Relationships and Related
Transactions.
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . . Not Applicable.
</TABLE>
<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 AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
PROSPECTUS
SUBJECT TO COMPLETION
DATED NOVEMBER 27, 1998
SHOPPING.COM
8,660,500 SHARES COMMON STOCK, NO PAR VALUE
ISSUE PRICE: $1.00/Share
The 8,660,500 shares (the "Shares") of Common Stock, without par value, of
Shopping.com (the "Company") are being offered for resale by certain security
holders of the Company (the "Selling Shareholders"). The Shares being registered
have been issued or are issuable upon the conversion of 8% Convertible
Debentures in the aggregate amount of $5,000,000 issued and to be issued to
certain investors pursuant to a June and July, 1998 private placement and upon
the exercise of related warrants. In addition, Common Stock and Shares issuable
upon the exercise of warrants issued to the placement agent ("Placement Agent")
in the private placement of the 8% Convertible Debentures and its affiliates are
included in the shares being registered. 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Underwriting discounts Proceeds to issuer
Price to public and commissions or other persons
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ....................$1.00........................N/A.................................$1.00....................
Total ........................$8,660,500...................N/A.................................$8,660,500...............
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the Commission's
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, NW, Washington D.C.
20549, at prescribed rates. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the World Wide Web site is http:/www.sec.gov.
The Company has filed with the Commission a registration statement on
Form S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock underlying the Debentures
and the related warrants and Common Stock and Shares underlying warrants issued
to the Placement Agent and its affiliates in the private placement. This
Prospectus which constitutes part of the Registration Statement does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and financial statements, notes and schedules filed as part thereof or
incorporated by reference therein, which may be inspected at the public
reference facilities of the Commission at the addresses set forth above or
through the Commission's Internet home page.
Statements contained in the Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
contract or document filed as an exhibit to the Registration Statement.
INFORMATION INCORPORATION BY REFERENCE
The following documents have been filed with the Commission and are
incorporated by reference:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended January 31, 1998, as amended by the Company's Form 10-KSB/A filed with the
Commission on May 1, 1998;
(b) The Company's Quarterly Report on Form 10-QSB for the quarter ended
April 30, 1998; and
(c) The Company's Quarterly Report on Form 10-QSB for the quarter ended
July 31, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of the
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<PAGE>
Common Stock offered hereby shall be deemed to be incorporated by reference into
this Prospectus and be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in a Prospectus Supplement or in any other document subsequently filed with the
Commission which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
-3-
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO
FIXED CHARGES............................................................................................7
THE COMPANY.......................................................................................................8
CAPITALIZATION...................................................................................................10
RISK FACTORS.....................................................................................................10
RATIO OF EARNINGS TO FIXED CHARGES...............................................................................24
USE OF PROCEEDS..................................................................................................24
SELLING SHAREHOLDERS.............................................................................................25
PLAN OF DISTRIBUTION.............................................................................................27
DESCRIPTION OF SECURITIES TO BE REGISTERED.......................................................................28
INFORMATION WITH RESPECT TO THE REGISTRANT.......................................................................30
BUSINESS ........................................................................................................30
PROPERTY ........................................................................................................41
LEGAL PROCEEDINGS................................................................................................41
MARKET PRICE AND DIVIDENDS.......................................................................................44
SELECTED FINANCIAL DATA..........................................................................................45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................................47
DIRECTORS AND EXECUTIVE OFFICERS.................................................................................52
EXECUTIVE COMPENSATION...........................................................................................56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................................................................59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................62
INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................65
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
RECENT SALES OF UNREGISTERED SECURITIES..........................................................................66
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.......................................................................72
FINANCIAL STATEMENT SCHEDULES....................................................................................73
UNDERTAKINGS.....................................................................................................74
SIGNATURES.......................................................................................................76
INDEX TO EXHIBITS................................................................................................77
INDEX TO FINANCIAL STATEMENT SCHEDULES...........................................................................78
</TABLE>
-5-
<PAGE>
SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO
FIXED CHARGES.
SHOPPING.COM
8,660,500 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 8,660,500 shares (the "Shares") of Common Stock,
without par value (the "Common Stock"), of Shopping.com ("Shopping.com" or the
"Company") offered for resale by 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 $5,000,000 issued and to be issued to
the investors listed herein under "Seller Shareholders" (the "Investors")
pursuant to a June and July, 1998 private placement (the "Private Placement")
and upon the payment of interest on the Debentures in Common Stock, if elected
by the Company, and the exercise of related warrants. In addition, this
Prospectus covers shares of Common Stock issued and issuable upon the exercise
of warrants issued to the Placement Agent and its affiliates and designees in
the private placement and related transactions. Based on the trading prices of
the Common Stock prior to October 31, 1998 and interest accruing on the
Debentures through their two year term, the Debentures and interest thereon
would convert into 5,800,000 shares of Common Stock. In addition, upon
conversion of the Debentures under such assumptions, warrants to purchase an
aggregate of 2,500,000 shares would be issuable to the Investors ("Investor
Warrants"). Additionally, an aggregate of 353,000 shares would be issuable upon
the conversion of warrants issued to the Placement Agent and its affiliates and
designees (the "Placement Agent Warrants"). (The term "Warrants" shall refer to
the Investor Warrants and the Placement Agent Warrants, collectively.) 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 Investor 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 and its affiliates 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."
-6-
<PAGE>
In order to determine the number of shares of Common Stock to be
registered hereunder, the conversion price is assumed to be $1.00 for all
purposes set forth herein. If all of the Debentures are converted, interest
thereon is paid by the Company in Common Stock and all of the Warrants are
exercised, the holders of the Debentures and Warrants could beneficially own
8,660,500 shares or 66.3% of the outstanding shares of Common Stock of the
Company. The figures set forth above do not reflect, but are subject to, the
9.99% contractual limitation described above.
Each holder of a Debenture may convert a portion of its Debenture into
Common Stock at times specified until the maturity date at a conversion price
equal to the lower of (x) the lowest average closing bid price on the over-the-
counter bulletin board market for any three trading days from the thirty trading
days ending on the trading day before the conversion or (y) $16.00. The
Debentures are convertible over time. $2,500,000 of the Debentures will be
convertible on December 8, 1998 and the balance become fully convertible between
that date and April 20, 1999. Portions of this Registration Statement assume
that all of the Debentures were fully convertible as of October 31, 1998 and
that all accrued interest based on $5,000,000 of 8% Convertible Debentures
outstanding for two years was satisfied with the issuance of Common Stock.
Conversion requires written notice to the Company. Conversion occurs on the date
of the notice if the Debenture is delivered to the Company's transfer agent
within five business days of the notice.
Upon conversion of a Debenture, the Company is contractually obligated
to issue to the holder an Investor Warrant for the purchase of one share of
Common Stock for each two shares of Common Stock issuable in the conversion of
the Debenture. The Investor Warrants are fully exercisable at any time after
their issuance upon tender of the warrant certificate, payment therefor and
written notice. The exercise price of the Warrants is to be the lesser of (x)
120% of the Debenture conversion price or (y) 125% of $16.00. Portions of this
Registration Statement assume that all of the Warrants were issued and
exercisable as of October 31, 1998.
7,500 shares of Common Stock covered by this Registration Statement
are held by Trautman Kramer & Company, Incorporated ("Trautman Kramer"), the
Placement Agent in the Private Placement, and its affiliates. The remaining
353,000 shares of Common Stock covered hereby are issuable upon the exercise of
the Placement Agent Warrants.
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 the 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
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<PAGE>
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:
automotive, baby and nursery, bath, body and cosmetics, books, cigars, computers
and software, consumer electronics, drug store, fragrances, golf, gourmet, home
improvement, housewares, janitorial, jewelry, luggage and more, magazines,
marine, music and movies, musical instruments, office supplies, patios and
barbecues, pets and farm, sporting and camping, sunglasses, toys and hobbies,
video games, vitamins and fitness and watches. 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 ending January 31, 1999, while the
number of Web site hits ending January 31 increased from 183,951 during the
second quarter of fiscal year ending January 31, 1998 to 59,108,160 during the
second quarter of fiscal year 1999.
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, and detailed product
descriptions.
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 charges added
to each customer's order.
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<PAGE>
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.
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 July 31, 1998; (ii) the pro forma capitalization of the Company giving effect
to the issuance of an additional $2.5 million of 8% Convertible Debentures for a
total of $5.0 million, payment and capitalization of loan origination fees
(including the effects of certain beneficial conversion features and issuance of
below-market warrants) of approximately $2.15 million, the net issuance of
$800,000 of promissory notes after July 31, 1998, and the issuance of $1.0
million of common stock for advertising after July 31, 1998; and (iii) the pro
forma capitalization as adjusted to give effect to interest expense through
debenture maturity, assumed conversion of the $5.0 million of Debentures to the
Company's Common Stock, conversion of related accrued interest in the amount of
$800,000 to the Company's Common Stock, the assumed exercise of 2.5 million
warrants at $1.20 per share assumed to be issued in connection with the
conversion of the Debentures to the Company's Common Stock, and the assumed
exercise of 300,000 warrants issued to the placement agent at $2.00 per
share.
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<PAGE>
<TABLE>
<CAPTION>
JULY 31, 1998 (UNAUDITED)
-------------------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
Convertible debentures, 8%, due June to July, 2000 $ 2,500,000 $ 5,000,000 $ --
Promissory Notes(1)(2) 1,325,000 2,125,000 2,125,000
Common Stock, no par value 18,795,749 22,103,109 31,503,109
Accumulated deficit (19,014,673) (20,014,673) (24,050,125)
------------ ------------ ------------
Total shareholders' equity (deficit) $ (218,924) $ 2,088,436 $ 7,452,984
------------ ------------ ------------
Total capitalization $ (3,606,076) $ 9,213,436 $ 9,577,984
============ ============ ============
</TABLE>
Footnotes:
- ---------
(1) Actual notes payable issued as of July 31, 1998 includes two 8% notes
payable, each with a six month maturity, for $1.25 million and $100,000,
respectively, which were issued on May 15, 1998 and June 30, 1998,
respectively. These notes are also included in the pro forma and pro forma,
as adjusted, presentations above.
(2) The pro forma and pro forma, as adjusted, presentations reflect the
issuance of two promissory notes subsequent to July 31, 1998. On August 25,
1998, the Company issued a $500,000 convertible promissory note, with a six
month maturity, with interest at 8%, and which is convertible at $3.30 per
share and included the issuance of 50,000 below-market warrants with an
exercise price $3.30 per share. On September 15, 1998, the Company issued a
$500,000 promissory note, of which $200,000 was subsequently repaid, which
is due at the earlier of the Company receiving $300,000 additional
financing from another source or December 2, 1998.
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 $14 million during the next twelve months in the form of debt
and/or equity investments in the Company's securities in order to sustain
operations or achieve planned expansion. This figure is lower than previously
anticipated due to Management's change in the Company's choice of advertising
media. Previously, the Company had used portal advertising, which Management has
subsequently determined is not as effective as using "referral site"
advertising. Therefore, Management has changed its planned advertising
expenditures and program to primarily utilize referral site advertising thus
reaping the benefits of substantially lower advertising costs. 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.
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
-10-
<PAGE>
management of growth. To address these risks, the Company must, among other
things, obtain a customer base, implement and successfully execute its business
and marketing strategy, continue to develop and upgrade its technology and
transaction-processing systems, improve its Web site, provide superior customer
service and order fulfillment, respond to competitive developments, and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Since inception, the Company has incurred significant losses, and as of
July 31, 1998 had an accumulated deficit of approximately $19 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 or even negative gross
margins from time to time. Because the Company has relatively low gross margins,
achieving profitability depends upon the Company's ability to generate and
sustain substantially increased sales levels. As a result, the Company believes
that it will incur substantial operating losses for the foreseeable future, and
that the rate at which such losses will be incurred 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 an accumulated shareholder's equity of
$6,580,236. Management raised capital during 1997 and 1998 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 as of April
30, 1998, the Company had approximately $1.4 million remaining. As of July 31,
1998, the Company had used all of the proceeds from the Company's initial public
offering. For the six months ended July 31, 1998, the Company had net losses
totaling $13,290,947, negative cash flows from operations of $6,569,112 and an
accumulated deficit of $19,014,673. Although the Company has obtained additional
financing subsequent to its initial public offering, the proceeds of such
financing, together with cash generated by operations, will be insufficient to
fund the Company's anticipated operating losses until its sales increase to a
sufficient level to cover operating expenses. Accordingly, in order to continue
to sustain operations and 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
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<PAGE>
investigation by the SEC of trading in the Company's stock, the pendency of
several class action suits against the Company, and related 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
anticipates its revenues will be insufficient to fund its operations on an
ongoing basis until revenues grow substantially. Furthermore, the Company will
not be able to adjust spending in a timely manner to compensate for the
anticipated revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to the Company's planned expenditures could have an
immediate adverse effect on the Company's business, prospects, financial
condition and results of operations.
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 coupled with fluctuations in payment
terms, (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. 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 that it will experience seasonality in its
business, reflecting a combination of seasonal fluctuations in Internet usage
and traditional retail seasonality patterns. Internet usage and the rate of
Internet growth may be expected to decline during the summer. Further, sales in
the traditional retail industry are significantly higher in the quarter of each
year ending January 31 than in the preceding three quarters.
-12-
<PAGE>
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. Currently, the Company is experiencing a significant increase in
customer telephone inquiries regarding pending orders resulting in an overload
of its telephone system. The telephone system requires major enhancements
immediately to handle the current telephone volume. 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 disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and
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<PAGE>
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 125 full time and 19
part time employees as of October 23, 1998. Some 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 consumers must
accept and utilize novel ways of conducting business and exchanging information.
-14-
<PAGE>
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 will be interacting with certain computer programs in
connection with credit card transactions and programs used by the Company's
vendors and suppliers. These programs may refer to annual dates only by the
last two digits, e.g., "97" for "1997." Problems are anticipated to arise for
many of these programs in the year 2000 ("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
-15-
<PAGE>
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 October 31, 1998, the Company had outstanding options and warrants to
purchase an aggregate of 3,109,136 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 and exercise of the Warrants. 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 the Investor
Warrants had been exercised on October 31, 1998, the Company would have been
obligated to issue 7,500,000 shares of Common Stock in respect thereto,
exclusive of interest on the Debentures and shares issuable upon exercise of the
Placement Agent Warrants. For a further description of the terms of conversion
of the Debentures and the exercise of the Warrants, see "Summary Information,
Risk Factors and Ratio of Earnings to Fixed Charges."
Each holder of the Debentures has agreed contractually not to convert the
Debentures to the extent that such conversion would result in such holder and
its affiliates beneficially owning more than 9.99% of the then outstanding
Common Stock unless at such time the Company is in default under any provision
of the Debentures or under the relevant Securities Purchase Agreement between
the Company and the Investor, or any of the agreements contemplated
therein.
-16-
<PAGE>
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 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, and
Howard S. Schwartz, Executive Vice President - Finance and Administration. 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 three-year employment agreement with Howard
Schwartz, its Executive Vice President - Finance and Administration, 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 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.
-17-
<PAGE>
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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<PAGE>
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
-19-
<PAGE>
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 are not prepared to advance normal
levels of credit to the Company. An unwillingness to extend credit along with a
substantial increase in product volume will cause the Company to exceed its
current credit limit, thus requiring additional amounts of capital 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.
-20-
<PAGE>
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
-21-
<PAGE>
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.
-22-
<PAGE>
Risks Associated 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.
Volatility of Stock Price
- -------------------------
The trading price of the Common Stock has been highly volatile and subject
to wide fluctuations and is likely to remain so 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,
-23-
<PAGE>
has 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 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
that company. Additional 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 six months ended July 31, 1998, the Company had insufficient
earnings of approximately $6.1 million and $14.3 million, respectively, to cover
its fixed charges. As such, the Company does not present Ratios for the year
ended January 31, 1998 and the six months ended July 31, 1998. 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.
-24-
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of October 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.
-25-
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
on October 31,1998
(1)
- --------------------------------------------------------------------------------------------------------------
Shares That May Be
NAME SHARES PERCENT Offered Hereunder
---- ------ ------- ------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maslo Fund Ltd. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Wayne Invest & Trade Inc. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Chesterfield Capital Resources Ltd. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Star High Yield Investment Management 830,000 7.94 830,000
Corporation (2)
- --------------------------------------------------------------------------------------------------------------
Sloanes Trading Corp. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
DENEX International, Ltd. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Sholem Liebenthal (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Shiya Edel (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
BITUSWISS, S.A. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
Burstein & Lindsay Securities Corp. (2) 830,000 7.94 830,000
- --------------------------------------------------------------------------------------------------------------
David Stefansky (3) 85,300 * 85,300
- --------------------------------------------------------------------------------------------------------------
Richard Rosenblum (3) 85,300 * 85,300
- --------------------------------------------------------------------------------------------------------------
Vincent Calicchia (4) 11,000 * 11,000
- --------------------------------------------------------------------------------------------------------------
Anthony Soich (5) 1,000 * 1,000
- --------------------------------------------------------------------------------------------------------------
Trautman Kramer & Company, Inc. (6) 57,900 * 57,900
- --------------------------------------------------------------------------------------------------------------
Krieger & Prager (7) 50,000 * 50,000
- --------------------------------------------------------------------------------------------------------------
Wall and Broad Equities (8) 70,000 * 70,000
- --------------------------------------------------------------------------------------------------------------
* Less than 1%
</TABLE>
(1) As required by SEC regulations, the number of shares shown as
beneficially owned includes shares which could be purchased within 60
days after October 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, the market price of the Common Stock prevailing
at the actual date of conversion of Debentures and exercise of
Warrants.
-26-
<PAGE>
(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 October 28, 1998 or $16.00.
If all Debentures held by such Selling Shareholders had been issued and
converted on October 31, 1998 (assuming a price of $1.00 per share of
Common Stock) and all Investor Warrants had been exercised and,
assuming two years interest at 8% being paid in Common Stock, the
Company would have been obligated to issue 8,300,000 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 Investor 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 Investor Warrants to the extent that such
conversion or exercise would result in such holder and its affiliates
beneficially owning more than 9.99% of the then outstanding Common
Stock unless at such time the Company is in default under any provision
of the Debentures or under the relevant Securities Purchase Agreement
between the Company and such holder, or any of the agreements
contemplated therein. The Company may be required to issue shares in
excess of 8,300,000 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 1,800 shares of Common Stock issued to Trautman Kramer in
connection with the Private Placement and 83,500 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 prices are 5,500 warrants at $16.00,
8,000 at $24.00 and 70,000 at $2.00, each exercisable for five years
from issuance. Mr. Stefansky and Mr. Rosenblum are affiliates of
Trautman Kramer.
(4) Includes 11,000 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
for 1,000 warrants is $24.00 and for 10,000 shares is $2.00, and the
warrants are exercisable for five years from issuance. Mr. Calicchia is
an affiliate of Trautman Kramer.
(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 to Trautman Kramer in
connection with the Private Placement and 57,900 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 prices for the warrants are 9,000
shares at $16.00, 15,000 at $24.00 and 30,000 at $2.00, each
exercisable for five years from the date of issuance.
-27-
<PAGE>
(7) Includes 50,000 shares of Common Stock issuable upon the exercise of
warrants issued to a designee of Trautman Kramer in connection with the
Private Placement. The exercise price is $2.00, and the warrant is
exercisable for five years from the date of issuance.
(8) Includes 70,000 shares of Common Stock issuable upon the exercise of
warrants issued to a designee of Trautman Kramer in connection with the
Private Placement. The exercise price is $2.00, and the warrant is
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 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 market, 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.
-28-
<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 Common Stock of which 4,404,601 shares are issued
and outstanding as of October 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.
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. The registration rights associated with the
Debentures prohibit the Company from including many other securities in this
Registration Statement. Therefore, the Company is performing under the agreement
with the Investors and is in violation of its registration rights agreements
with other security holders.
-29-
<PAGE>
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:
automotive, baby and nursery, bath, body and cosmetics, books, cigars, computers
and software, consumer electronics, drug store, fragrances, golf, gourmet, home
improvement, housewares, janitorial, jewelry, luggage and more, magazines,
marine, music and movies, musical instruments, office supplies, patios and
barbecues, pets and farm, sporting and camping, sunglasses, toys and hobbies,
video games, vitamins and fitness, and watches. 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 of the fiscal year ended January
31, 1998 to 929,140 during the second quarter of the fiscal year ending January
31, 1999, while the number of Web site hits increased from 183,951 during the
second quarter of the fiscal year ended January 31, 1998 to 59,108,160 during
the second quarter of fiscal year 1999.
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.
-30-
<PAGE>
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.
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% (audited), 23%
(audited) and 7% (audited), respectively of the total cost of goods purchased
for resale for the period ending January 31, 1998. During the six months ended
July 31, 1998 the Company purchased inventory from three vendors that accounted
for 12% (unaudited), 11% (unaudited) and 9% (unaudited) of the goods sold.
Although these three vendors supplied approximately 50% of the Company's total
products purchased for resale for the period ending January 31, 1998 and
approximately 32% of the Company's total products purchased for resale for the
period ended July 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
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<PAGE>
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.
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.
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The sole source of funds for the Company from the date of inception through July
31, 1998, other than the sale of equity and debt securities, has been from sales
of products in the amounts of $850,724 and $1,951,617 for the year ended January
31, 1998 and the six-month period ended July 31, 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.
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.
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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 more 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
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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.
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:
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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.
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 an 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
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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) 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, the Company spent $893,923 and $83,308
respectively on product development activities. Through the six-month period
ended July 31, 1998, the Company spent $2,071,112 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
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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 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,
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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, 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
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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.
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. As of October 23, 1998, the
number of Company employees had grown to 125 full-time and 19 part-time. 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.
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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") 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
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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 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 July 1, 1998, Mr. Garfinkel filed a companion state court complaint
in the Orange County Superior Court based on virtually the same operative facts
as the federal court claim. The state court action alleges claims for negligent
misrepresentation, common law fraud and deceit as well as violation of sections
25400, 25402 and 25500 of the California Corporations Code.
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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, the
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 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
rejected this offer and the parties are continuing settlement negotiations.
-43-
<PAGE>
On September 12, 1998 the Company was served with a summons and
complaint by MTS, Incorporated filed in Sacramento County Superior Court of
California for damages arising out of the Company's as well as two other
merchants' sale of the video "Titanic" at below cost thereby purportedly
constituting violation of section 17043 and 17044 of California's Business and
Professions Code as well as the California Unfair Business Practices Act (Cal.
Bus. & Prof. Code section 17200 ET. SEQ.). The complaint alleges damages in
excess of $25,000.00, that sum trebled should a statutory violation be
established, and attorneys' fees and costs. The Company has not had an
opportunity to investigate the allegations of the complaint. Accordingly, a
reasonable assessment of the Company's potential exposure cannot be made at this
time. The action will, however, require the engagement of defense counsel and it
is estimated that substantial attorney fees may be incurred should litigation
proceed to trial.
On November 24, 1998 the Company was alerted via an online service that
Ray Fisk had filed a complaint in Orange County Superior Court of California.
The Company has not been able to review the complaint, but believes that the
complaint alleges failure to pay interest and principal and seeks damages in the
amount of $50,000.
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. 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
For Fiscal Year Ending January 31, 1999 High Low
- --------------------------------------- ---- ---
First Quarter $39.00 $14.75
Second Quarter $25.50 $17.00
Third Quarter $25.25 $ 1.00
</TABLE>
Prior to November 1997 there was no active market for the Company's securities.
-44-
<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 at the time, 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 for the six months ended July 31,
1998 and 1997, is derived from 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.
-45-
<PAGE>
Shopping.com
SUMMARY FINANCIAL DATA
FORM S-1
(in thousands, except balance sheet and per share data)
The data set forth below is qualified by reference to, and should be read in
conjunction with, the Financial Statements of the Company and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Registration Statement. The
following selected financial data of the Company for the fiscal years ended
January 31, 1998 and 1997 are derived from the financial statements of the
Company audited by Singer Lewak Greenbaum & Goldstein LLP, independent certified
public accountants which are included elsewhere in this Registration Statement.
The selected financial data as of July 31, 1998 and for the six month periods
ended July 31, 1998 and 1997 have been derived from the Company's unaudited
interim financial statements which, in the opinion of management, reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the results of operations for such periods. The results of the
interim periods are not necessarily indicative of the results of a full
year.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31
January 31 (unaudited)
-------------------- -----------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ - $ 851 $ 56 $ 1,952
Cost of sales - 794 51 1,922
Gross profit - 57 5 30
Total operating
expenses 202 5,028 1,070 12,285
Loss from operations (202) (4,971) (1,065) (12,255)
Total other income
(expense) - (551) (7) (1,036)
-------- -------- --------- ----------
Net loss $ (202) $(5,522) $ (1,072) $ (13,291)
======== ======== ========= ==========
Basic and diluted
loss per common
share $ (0.16) $ (3.05) $ (0.88) $ (3.28)
======== ======== ========= ==========
Weighted-average
shares outstanding 1,283 1,808 1,219 4,051
======== ======== ========= ==========
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
January 31 July 31 (unaudited)
-------------------------- --------------------
1997 1998 1998
--------- ---------- --------------------
BALANCE SHEET DATA:
Actual
-------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 63 $ 4,829,180 $ 1,035,699
Working capital (deficit) (94,768) 3,977,775 1,115,068
Total assets 39,184 8,444,732 6,600,845
Promissory Notes 50,000 - 1,325,000
Long term liabilities - - 2,716,734
Total shareholders' equity
(deficit) $ (78,647) $ 6,580,236 $ (218,924)
</TABLE>
-47-
<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.
-48-
<PAGE>
The Company began generating sales on July 11, 1997. Since inception
through July 31, 1998, the Company has generated sales of $2,802,341. The
Company anticipates that sales from the Company's Web site will constitute
substantially all of the Company's sales. Over the next twelve months, the
Company intends to increase its revenues by pursuing an aggressive advertising
and marketing campaign aimed at attracting customers to shop on its Web Site and
to co-brand with other commercial partners which will help increase the
Company's brand name recognition as well as increase traffic on the Company's
Web Site. The Company must seek additional financing estimated at $14 million
over the next twelve months in order to sustain operations or achieve planned
expansion. This figure is lower than previously anticipated due to the
Management's change in the Company's choice of advertising media. Previously,
the Company had used portal advertising which Management has subsequently
determined is not as effective as using "referral site" advertising. Therefore,
Management has changed its planned advertising expenditures and program to
primarily utilize referral site advertising thus reaping the benefits of
substantially lower advertising costs. 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 July 31, 1998, had an accumulated deficit of approximately $19 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 Factors -
-49-
<PAGE>
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
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 six months ended July 31, 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
- ---------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
$ 1,951,617 $ 55,541 3,414%
</TABLE>
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 six months
ended July 31, 1998, the Company generated net sales of $850,724 and $1,951,617,
respectively. For the twelve months ended January 31, 1998, 40% of the Company's
sales were to Waldron, the Company's former underwriter and market maker in the
Company's Common Stock. 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 six months ended July 31, 1998, sales of $120,637, or
approximately 6%, were sales to Waldron, the company's former underwriter and
market maker. Such sales consisted primarily of computer equipment and office
supplies; some of these transactions allowed the Company to generate higher
gross margins. Also during the six months ended July 31, 1998 sales of $108,707
were made to CCI a computer and computer supply reseller. The sale to CCI
constituted approximately 5.6% of net sales for the six months ended July 31,
1998. The Company also had sales of $15,722 to Aubry Hanson, a partnership in
which one of the partners is a shareholder of the Company. In addition, the
Company had sales of $3,266 for the six months ended July 31, 1998 to Mark
Asdourian, the Company's general counsel and a shareholder of the Company. The
sales to Aubry Hanson and Mark Asdourian were in the aggregate less than 1% of
net sales of the Company for six months ended July 31, 1998. The Company
believes that it is not dependent upon Waldron or any other customer related or
otherwise and that the loss of Waldron as a customer or any other customer would
not have a material adverse impact on the Company. The Company expects the sales
to 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
-50-
<PAGE>
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
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
$ 1,922,023 $ 50,509 3,705%
</TABLE>
Net sales are composed of the selling price of merchandise sold by the
Company, net of returns, and includes freight charged to the Company's
customers. Growth in net sales reflects a significant increase over the prior
year primarily due to the growth of the Company's customer base, as well as
reflecting a full six months of sales whereas in 1997 the Company only began
selling on the Internet July 11, 1997.
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 six months
ending July 31, 1998 was $1,922,023 or approximately 98.5% of net sales.
However, the Company experienced a negative gross margin for the three months
ended July 31, 1998, due, in part, from the unavailability of certain products.
These products were obtained through other channels of distribution and from
alternate suppliers at higher prices. In addition, the Company encountered
additional price competition from other E-commerce retailers in several product
categories. In addition, the decline in the Company's gross profit margin was
due primarily to an overall increase in the percentage of sales for those
products and categories which had highly promotional pricing. The failure to
generate sales with sufficient margins to cover its operating expenses in the
future will result in losses and have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Advertising and Marketing Expenses
- ----------------------------------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
$ 2,451,307 $ 11,603 21,027%
</TABLE>
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 six months ending July 31,
1998 were $2,451,307 or approximately 125.6% of net sales. The Company intends
to significantly increase its advertising and marketing expenses in future
periods including the issuance of Common Stock in exchange for $1,000,000 of
advertising to run during the third quarter ending October 31, 1998. While the
Company is hopeful that its net sales will also increase in future periods so
that its advertising 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.
-51-
<PAGE>
Product Development Expenses
- ----------------------------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
$ 2,071,112 $ 264,742 682%
</TABLE>
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 six months ended July 31, 1998, were $2,071,112, or
approximately 106.1% of net sales. The Company experienced a significant
increase in actual dollars for product development expenses from prior periods
primarily due to the utilization of additional temporary personnel to enhance
features, content and functionality of the Company's Web site, transaction
processing systems and proprietary customer service software. 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
- -----------------------------------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
$ 7,762,421 $ 793,863 878%
</TABLE>
General and administrative expenses consist primarily of compensation,
rent expense, fees for professional services and other general corporate
expenses. General and administrative expenses incurred by the Company for the
six months ended July 31, 1998 were $4,949,795 or approximately 253.6% of net
sales excluding a nonrecurring, noncash compensation charge to earnings of
$2,812,626 related to the issuance of below market stock options primarily on
June 1, 1998. In addition, the Company experienced an increase in expenses
related to legal and other professional fees incurred by the Company from prior
periods. In addition, the Company recorded $660,000 of nonrecurring expenses
related to the termination and buy-out agreements of the Company's former Chief
Executive Officer and other management, of which $560,000 remains payable as of
July 31, 1998. The increase in such expenses from prior periods resulted
primarily from the Company commencing actual sales and accordingly incurring
higher operating costs. General and administrative expenses should significantly
increase in future periods if the Company is successful in raising additional
capital and able to, among other things, increase hiring and expansion of
facilities.
-52-
<PAGE>
Interest Income and Expense
- ---------------------------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1998 July 31, 1997 % Change
------------- ------------- --------
<S> <C> <C>
Interest Income $ 47,986 $ 0 N/A
Interest expense 993,774 6,538 15,100%
</TABLE>
Interest income on cash and cash equivalents was $47,986 for the six
months ended July 31, 1998 or approximately 2.5% of net sales. Interest income
earned was due to the Company having certain interest-bearing cash and cash
equivalents accounts and decreased from the previous six months ended July 31,
1997 due to the Company having lower cash and cash equivalent balances. Interest
expense for the six months ended July 31, 1998 was $993,774 or approximately
50.9% of net sales and is primarily attributable to accrued interest on
Promissory Notes and 8% Convertible Debentures and the issuance of below market
stock warrants.
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. The sole source of funds for the Company from the date of
inception through July 31, 1998, other than the sale of equity and debt
securities, has been from sales of product.
Capital expenditures from February 1, 1998 through July 31, 1998 were
$635,753. The Company has current and long-term capital lease obligations for
certain office equipment, the aggregate amount of which, as of July 31, 1998 was
$421,102. The Company anticipates a substantial increase in its capital
expenditures in 1998 consistent with its anticipated growth; provided that the
Company is able to raise sufficient capital to fund that growth.
The Company experienced a net loss of $13,290,947 and generated net
sales of $1,951,617 for the six month period ended July 31, 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 PROMPTLY
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.
Subsequent to July 31, 1998, the Company entered into various
agreements related to the issuance of debt and equity securities which include
the issuance of a $500,000 Convertible Promissory Note on August 25, 1998 which
has a due date of six months from the date of issuance. The Convertible
Promissory Note carries an interest rate of 8% per annum and may be converted
for the principal and accrued interest into common stock at $10.00 per share. In
connection with the issuance of the Convertible Promissory Note, the Company
issued 50,000 warrants to purchase shares of common stock at an exercise price
of $10.00 per share when the Company's common stock was trading at $15.25 per
share. The warrants expire on August 20, 2001. Subsequently, on November 5,
1998, the Company agreed to revise the Convertible Promissory Note, Warrant
Agreement, and Subscription Agreement to reflect an exercise price of $3.30 per
share and a conversion price of $3.30 per share when the Company's common stock
was trading at $1.97 per share. The Company also issued warrants to purchase
10,000 shares of common stock to Waldron for acting as the placement agent. The
warrants issued to Waldron were issued under the same terms and conditions as
the warrants issued with the Convertible Promissory Note. The exercise price of
these warrants were below market at the time of issuance and will therefore
result in additional interest charges of approximately $315,000 over the term of
the Convertible Promissory Note. In addition, the conversion price was below
market at the time of the issuance and will result in an additional charge of
$262,500 on August 25, 1998 as the Convertible Promissory Note is available for
conversion immediately upon the issuance of the Note.
In September 1998, the Company executed an agreement whereby it issued
66,667 shares of common stock for $1,000,000 of radio advertising based on the
average fair market value of the common stock as of that date. The
advertisements were aired during the three months ending October 31, 1998, and
accordingly, $1,000,000 will be expensed during this period. Up to 133,333
additional shares of common stock may be issuable under the radio advertising
agreement on the one-year anniversary of the agreement, if on such date the
average closing price of the Company's common stock for the previous ten days is
less than $15.00 per share (as adjusted for any stock splits or
recapitalizations).
On September 15, 1998, the Company issued a Promissory Note in the
amount of $500,000 which is due at the earlier of the Company receiving $500,000
in additional financing from another source or October 14, 1998. During October
1998, the Company repaid $200,000. On November 2, 1998, the Company renegotiated
the outstanding balance of $300,000 and entered into a new Note which is due at
the earlier of the Company receiving $300,000 in additional financing from
another source or December 2, 1998. In connection with the renegotiations and
issuance of the $300,000 Promissory Note, the Company also issued 30,000
additional warrants to purchase shares of the Company's common stock at an
exercise price of $1.65 when the Company's common stock was trading at $1.81 per
share. These warrants expire on November 2, 2003. On The exercise price of these
warrants was below market at the time of issuance and will therefore result in
additional interest charges of $4,860. One of the Company's directors is also a
member of the Board of Directors of the corporation to which the Company issued
the Promissory Note. The Promissory Note carries an interest rate of 10% per
annum and is secured by a Non-Recourse Guaranty and Pledge Agreement by Mr.
Robert J. McNulty, a consultant of the Company. In connection with the issuance
of the original $500,000 Promissory Note, the Company also issued 30,000
warrants to purchase shares of common stock at an exercise price of $2.25 per
share. The warrants expire on September 15, 2003.
On September 24, 1998, the Company agreed to issue warrants to purchase
10,000 shares of the Company's common stock at an exercise price of $2.00 per
share as consideration to Typhoon Capital Consultants for its services related
to securing additional capital for the Company.
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<PAGE>
On September 25, 1998, the Company approved the conversion of $350,000
of its liability related to the Robert McNulty Termination and Buy Out
Agreement, as previously discussed in Note 4, for common stock at a market price
of $1.37 (the stock price on September 25, 1998), resulting in an issuance by
the Company of 255,474 common shares.
On October 1, 1998, the Company borrowed $900,000 from the Empire
Group. On November 10, 1998, this amount was repaid out of the proceeds received
from the issuance of 8% Convertible Debentures in the principal amount of
$1,750,000.
On November 16, 1998, the Company issued 300,000 warrants in connection
with the issuance of 8% Convertible Debentures to purchase shares of the
Company's common stock at an exercise price of $2.00 when the Company's common
stock was trading at $7.25 per share. The exercise price of these warrants was
below market at the time of issuance and will therefore result in additional
interest charges of approximately $1,575,000.
As of October 31 1998, the Company's available cash and cash
equivalents was minimal. Subsequent to October 31, 1998, the Company issued an
additional $1,750,000 of 8% Convertible Debentures to existing Debenture
holders. The Company received net proceeds of approximately $1,500,000 of which
$900,000 was used to repay certain existing Debentures and the balance was used
to fund ongoing operations. At the present time, the Company's available cash
and cash equivalents is not sufficient to sustain operations beyond November
1998. Accordingly, 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 funds will be on terms acceptable to the
Company. In addition, the pendency of lawsuits and the attendant adverse
publicity, and the recent decline in the market price of the Company's common
stock 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 sustain
its operations and achieve its planned expansion. See "Factors That May Affect
Future Performance - SEC Investigation, Interruption Of Trading and Shareholder
Litigation."
If additional funds are raised through the issuance of equity or
convertible debt 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
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<PAGE>
capital to fund its working capital requirements until the Company can generate
sufficient sales volume to cover its operating expenses.
EMPLOYEES
As of October 23, 1998, the Company employed 125 full-time and 19
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 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.
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
- -------------------------------------------------------------------------------------------------------------
Howard S. Schwartz 51 Executive Vice President - Finance and Administration
- -------------------------------------------------------------------------------------------------------------
Pat J. Demicco 33 Executive Vice President - Merchandising
- -------------------------------------------------------------------------------------------------------------
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>
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
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<PAGE>
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.
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 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.
PAT J. DEMICCO. Mr. DeMicco joined the Company in December, 1997 as its Senior
Vice President of Merchandising and was promoted to Executive Vice President of
Merchandising on November 20, 1998. Mr. DeMicco brings to Shopping.com 12 years
of retail merchandising experience. From 1989 to November 1997, Mr. DeMicco held
positions of Senior Merchandise and Merchandise Manager at The Home Depot where
he was responsible for inventory in excess of one billion dollars and gained
extensive knowledge of vendor programs, vendor line assortment mix
determination, retail price points, and return on investment goals. Mr.
DeMicco's merchandising experience covered both the West Coast and the East
Coast and he reported directly to the Executive Senior Vice President. Mr.
DeMicco brings a track record of consistently exceeding annual sales forecasts
and return on investment goals, the ability to analyze and solve problems in a
constantly changing work environment, and a talent for balancing long-range
vision with an attention to detail.
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<PAGE>
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 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
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<PAGE>
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.
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<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 END
POSITION 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 $ 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 $14,508 automobile allowance.
(3) Resigned June 12, 1998.
(4) Automobile allowance.
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OPTION GRANTS IN THE LAST FISCAL YEAR
The following table shows, as to each of the Named Officers,
information concerning stock options granted during the fiscal year ended
January 31, 1998.
Option Grants in Fiscal 1998
(Individual Grants)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF TOTAL EXERCISE VALUE AT ASSUMED
NAME AND PRINCIPAL SECURITIES OPTIONS GRANTED OR BASE EXPIRATION ANNUAL RATES OF STOCK
POSITION UNDERLYING TO EMPLOYEES IN PRICE DATE PRICE APPRECIATION FOR
OPTIONS FISCAL YEAR 1998 ($/SH) OPTION TERM
---------------------------
5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert McNulty, CEO (1) 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.
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<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
NAME AND PRINCIPAL POSITION UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END /(1)/
---------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert McNulty, CEO /(2)/ 25,000 0 $ 293,750 0
- -----------------------------------------------------------------------------------------------------------------------------
Mark S. Winkler, Chief Information 0 0 0 0
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
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automobile allowance of $1,000 per month and a 12-month housing allowance of
$1,500 per month.
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 October 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 31.8%
2401 Bayshore Drive
Newport Beach, California
- ----------------------------------------------------------------------------------------------------------------
Mark S. Winkler 25,000 *
27863 Longhill Drive
Rancho Palos Verdes, California
- ----------------------------------------------------------------------------------------------------------------
Douglas A. Hay (3) 220,000 4.8%
4630 East Sunnyside Lane
Phoenix, Arizona
- ----------------------------------------------------------------------------------------------------------------
Paul J. Hill (4) 404,751 9.0%
2000-1874 Scarth Street
Regina, Saskatchewan
Canada
- ----------------------------------------------------------------------------------------------------------------
Edward F. Bradley (5) 304,750 6.8%
1515 N. 600 E.
Mapleton, Utah
- ----------------------------------------------------------------------------------------------------------------
Kristine E. Webster (6) 45,000 1.0%
25510 Buckly
Murrieta, CA 92563
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS (1) NUMBER OF SHARES PERCENTAGE OF TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
idealab! (7) 787,500 17.1%
130 West Union Street
Pasadena, CA 91103
- ----------------------------------------------------------------------------------------------------------------
Cyber Depot, Inc. (8) 350,000 7.8%
3334 E. Coast Highway, #306
Corona del Mar, CA 92625
- ----------------------------------------------------------------------------------------------------------------
Edward F. Harris (9) 326,431 7.41%
P.O. Box 593
Glenbrook, Nevada
- ----------------------------------------------------------------------------------------------------------------
William D. Long (10) 321,301 7.3%
P.O. Box 522
Glenbrook, Nevada
- ----------------------------------------------------------------------------------------------------------------
John H. Markley (11) 454,750 9.8%
120 Eastlake Drive
Palm Springs, CA 92264
- ----------------------------------------------------------------------------------------------------------------
Frank W. Denny (12) 604,750 13.5%
8221 Pimlico
Boerne, Texas
- ----------------------------------------------------------------------------------------------------------------
Howard S. Schwartz 0 *
1701 South El Molino Avenue
San Marino, CA 91108
- ----------------------------------------------------------------------------------------------------------------
All directors and executive officers as a 1,839,001 41.75%
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 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, Cyber
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<PAGE>
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. Reflects the proxy for
204,750 shares granted by Mr. McNulty subsequently granted to Frank Denny. As of
September 30, 1998, Mr. Hay resigned as a Director and as Executive Vice
President of the Company.
(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.
(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.
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<PAGE>
(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. Includes the proxy for 204,750 shares granted by Mr. McNulty
to Doug Hay which was subsequently granted by Mr. Hay to Frank Denny.
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.
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,
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<PAGE>
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, 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 and granted Waldron 122,000
warrants to purchase common stock at an exercise price of $14.40 per share.
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 $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.
-66-
<PAGE>
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 recorded 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitation of Liability and Indemnification Matters
- ---------------------------------------------------
-67-
<PAGE>
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 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.
-68-
<PAGE>
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 $30,650.
(d) The issuer relied on Section 4(2) and 3(a)(11) of the Securities
Act of 1933, as amended.
(e) Not Applicable.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(2) (a) March 1997-April 1997 Series A Preferred Stock 750,000 Shares
Warrants for 375,000 Warrants
Common Stock
</TABLE>
____________
1/ All share amounts and related information reflect a one-for-two reverse
stock split effective upon the effective date of the Company's initial
public offering. The warrants to purchase 122,500 shares of the
Company's Common Stock issued to Waldron & Co., Inc. as the
Underwriters' Representative are not included because such warrants
were registered in connection with the Company's initial public
offering. As of July 31, 1998, the Company had issued 1,186,000
options, largely to employees, officers and directors.
-69-
<PAGE>
(b) There were no underwriters used in connection with this offering.
The securities were offered and sold only to two accredited investors, Cyber
Depot, Inc., a corporation controlled by Robert J. McNulty, President and CEO of
the issuer, and idealab! a corporation controlled by Bill Gross, a director of
Registrant. One Warrant was issued for each two shares.
(c) The securities were sold for forty cents ($.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>
(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 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.
-70-
<PAGE>
(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.
(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.
-71-
<PAGE>
<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.
-72-
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(9) (a) June and July 1998 8% Convertible $5,000,000
Debentures Due ($ 750,000 subject
in 2 years to conditions)
Warrants for 1 share for every
Common Stock 2 shares issued upon
conversion of the
Debenture
</TABLE>
(b) Trautman, Kramer & Company, Incorporated acted as placement agent
in connection with this private placement, receiving 9% of the net proceeds. In
addition, Waldron received 1% of the net proceeds of the first tranche. The
Debentures in the amount of $500,000 were sold to each of four Investors listed
in "Selling Stockholders." Six Investors purchased Debentures in the amount of
$375,000, and the remaining $125,000 of the Debentures for such Investors is
subject to conditions related to this Registration Statement. 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 $5,000,000, subject to funding of the
last $750,000..
(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.
-73-
<PAGE>
(e) The warrants are exercisable after December 15, 1998 until June
15, 2003 at $21.92 per share.
<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 and for waiver of certain of its
contractual rights.
(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.
-74-
<PAGE>
<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.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(14) (a) August 1998 Warrants for
Common Stock 60,000 shares
Convertible
Promissory Note $500,000
</TABLE>
(b) Waldron & Co., Inc. acted as placement agent in connection with
this private placement and received 10% of the total amount
raised, $50,000, and warrants to purchase 10,000 shares of Common
Stock. The securities were sold to an accredited investor.
(c) The shares were offered pursuant to a Subscription Agreement and
Convertible Promissory Note dated August 25, 1998 and Warrant
Agreement dated as of August 20, 1998. Pursuant to the
Subscription Agreement, the investor purchased 20 units
consisting of a promissory note in the principal amount of
$25,000 and warrants to purchase 2,500 shares of the Company's
Common Stock at an exercise price of $10.00 per share. The
Convertible Promissory Note bears interest at an annual rate of
8% and the principal amount, plus any accrued interest, is
payable six months from the date of the note. The promissory note
may be converted at the option of the investor into a number of
shares of Common Stock equal to the quotient of the principal
amount divided by the Conversion Price. The initial Conversion
Price is $10.00 per share.
(d) The Company relied on Section 4(2) of the Securities Act of 1933,
as amended, as the exemption from registration.
-75-
<PAGE>
(e) The warrants issued to Waldron & Co., Inc. are exercisable for
$10.00 per share and have all the rights and privileges received
by the investor. The all warrants issued in the offering expire
August 20, 2001.
<TABLE>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(15) (a) August 1998 Common Stock 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 August 12, 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 August 12, 1999 is less
than $15.00 per share, the Company will issue to PRN up to
133,333 additional shares.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(16) (a) September 1998 Warrants for 10,000 Shares
Common Stock
</TABLE>
(b) There were no underwriters in connection with that offering. The
warrants were issued to a consultant retained to assist the
Company in securing additional capital.
(c) The consideration was the provision of consulting 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 $2.00 per share until October 1,
2003.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(17) (a) September 1998 Common Stock 255,474 Shares
</TABLE>
(b) There were no underwritings in connection with that
offering.
-76-
<PAGE>
(c) The consideration was conversion of $350,000 of debt owed to
Robert McNulty at a price of $1.37 per share.
(d) The Company relied on Section 4(2) of the Securities Act of 1933,
as amended, and Regulation D promulgated under the Act.
<TABLE>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(18) (a) October and Warrants for Common 300,000 Shares
November 1998 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 and designees 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 $2.00 per share for five years
from their issuance.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
<S> <C> <C> <C>
(19) (a) November 1998 Promissory Note $300,000
Warrants for 30,000 Shares
Common Stock
</TABLE>
(b) There were no underwriters used in connection with this offering.
The securities were issued to USFI Holdings, Inc. in connection with partial
repayment of a loan to the Company. Robert McNulty, the former Chief Executive
Officer of the Company, is a director of the note holder.
(c) The Note was issued at face value for the outstanding balance of
a loan to the Company. One warrant was issued for each $10 principal amount of
the Note.
(d) The issuer relied on Section 4(2) of the Securities Act of 1933,
as amended.
(e) The Warrants are exercisable for five years for the purchase of
one share of stock at a strike price of $1.65 per share.
-77-
<PAGE>
SHOPPING.COM
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JANUARY 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED
JULY 31, 1998 AND 1997 (UNAUDITED)
<PAGE>
SHOPPING.COM
CONTENTS
January 31, 1998
================================================================================
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-2 - F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5 - F-6
Statements of Cash Flows F-7 - F-9
Notes to Financial Statements F-10 - F-36
<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 certain class
action lawsuits. 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.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 21, 1998
F-1
<PAGE>
SHOPPING.COM
BALANCE SHEETS
January 31, 1998 and 1997 and
July 31, 1998
================================================================================
<TABLE>
<CAPTION>
ASSETS
January 31,
--------------------- July 31,
1998 1997 1998
----------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $4,829,180 $ 63 $1,035,699
Accounts receivable, net of allowance for doubtful
accounts of $10,000, $0, and $60,600 (unaudited) 97,384 - 72,570
Other receivables 17,557 - 10,482
Stock subscription receivable - 23,000 -
Prepaid advertising and other prepaid expenses 666,021 - 95,928
Inventories - - 45,580
Current portion of loan origination fees - - 1,727,708
---------- ------- ----------
Total current assets 5,610,142 23,063 2,987,967
Furniture and equipment, net 2,634,849 12,165 2,945,055
Deposits 167,175 - 322,800
Other assets 32,566 3,956 29,534
Loan origination fees, net of current portion - - 315,489
---------- ------- ----------
Total assets $8,444,732 $39,184 $6,600,845
========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SHOPPING.COM
BALANCE SHEETS (Continued)
January 31, 1998 and 1997 and
July 31, 1998
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
January 31,
------------------------ July 31,
1998 1997 1998
----------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Current liabilities
Current portion of capital lease obligations $ 207,589 $ - $ 204,368
Accounts payable 849,714 35,986 1,415,518
Subordinated notes payable - related parties - 50,000 1,325,000
Accrued legal and related costs 436,035 - 323,535
Accrued termination and severance - related parties - - 560,000
Other accrued liabilities 139,029 31,845 274,614
----------- --------- ------------
Total current liabilities 1,632,367 117,831 4,103,035
Capital lease obligations, net of current portion 232,129 - 216,734
8% Convertible Debentures - - 2,500,000
----------- --------- ------------
Total liabilities 1,864,496 117,831 6,819,769
----------- --------- ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, no par value
5,000,000 shares authorized
0 shares issued and outstanding - - -
Common stock, no par value
20,000,000 shares authorized
4,002,000, 1,152,500, and 4,069,854 (unaudited)
shares issued and outstanding 12,303,962 23,050 18,795,749
Additional paid-in capital - 100,000 -
Accumulated deficit (5,723,726) (201,697) (19,014,673)
----------- --------- ------------
Total shareholders' equity (deficit) 6,580,236 (78,647) (218,924)
----------- --------- ------------
Total liabilities and shareholders' equity
(deficit) $ 8,444,732 $ 39,184 $ 6,600,845
=========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
January 31, July 31,
------------------------ ----------------------------
1998 1997 1998 1997
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Net sales $ 850,724 $ - $ 1,951,617 $ 55,541
Cost of sales 793,957 - 1,922,023 50,509
----------- ---------- ------------ -----------
Gross profit 56,767 - 29,594 5,032
----------- ---------- ------------ -----------
Operating expenses
Advertising and marketing 871,964 - 2,451,307 11,603
Product development 893,923 83,308 2,071,112 264,742
General and administrative 3,261,749 118,389 4,949,795 793,863
Compensation expense, nonrecurring - - 2,812,626 -
----------- ---------- ------------ -----------
Total operating expenses 5,027,636 201,697 12,284,840 1,070,208
----------- ---------- ------------ -----------
Loss from operations (4,970,869) (201,697) (12,255,246) (1,065,176)
----------- ---------- ------------ -----------
Other income (expense)
Loss on disposal of assets - - (89,913) -
Interest expense (580,679) - (993,774) (6,538)
Interest income 29,519 - 47,986 -
----------- ---------- ------------ -----------
Total other income (expense) (551,160) - (1,035,701) (6,538)
----------- ---------- ------------ -----------
Net loss $(5,522,029) $ (201,697) $(13,290,947) $(1,071,714)
=========== ========== ============ ===========
Basic loss per share $ (3.05) $ (0.16) $ (3.28) $ (0.88)
=========== ========== ============ ===========
Diluted loss per share $ (3.05) $ (0.16) $ (3.28) $ (0.88)
=========== ========== ============ ===========
Weighted-average shares
outstanding 1,807,874 1,282,500 4,050,636 1,219,240
=========== ========== ============ ===========
</TABLE>
F-4
<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock
---------------------- --------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1996 - $ - - $ - - $ -
Issuance of common stock 1,152,500 23,050
Capital contributed by Cyber
Depot, Inc. to purchase
assets
and develop proprietary
software
Net loss
---------- ---------- -------- ---------- ---------- -----------
Balance, January 31, 1997 - - - - 1,152,500 23,050
Issuance of common stock
for cash 100,000 2,000
Issuance of common stock
for services 38,000 54,000
Issuance of Preferred Stock,
Series A for cash 500,000 200,000
Issuance of Preferred Stock,
Series A for assets and
proprietary software of
Cyber Depot, Inc. 250,000 100,000
Issuance of Preferred Stock,
Series B for cash 536,500 1,609,500
Offering costs (126,219)
Issuance of common stock
for software 125,000 750,000
Issuance of common stock
in initial public offering 1,300,000 11,700,000
Offering costs (2,325,512)
Conversion of preferred
stock, Series A to common
stock (750,000) (300,000) 750,000 300,000
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
---------- ----------- ------------
Balance, February 1, 1996 $ - $ - $ -
Issuance of common stock 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 100,000 (201,697) (78,647)
Issuance of common stock
for cash 2,000
Issuance of common stock
for services 54,000
Issuance of Preferred Stock,
Series A for cash 200,000
Issuance of Preferred Stock,
Series A for assets and
proprietary software of
Cyber Depot, Inc. (100,000) -
Issuance of Preferred Stock,
Series B for cash 1,609,500
Offering costs (126,219)
Issuance of common stock
for software 750,000
Issuance of common stock
in initial public offering 11,700,000
Offering costs (2,325,512)
Conversion of preferred
stock, Series A to common
stock -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock
---------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
Compensation expenses related
to issuance of below-market
stock options 17,443
Net loss
---------- ---------- ---------- ----------- ---------- -----------
Balance, January 31, 1998 - - - - 4,002,000 12,303,962
Issuance of common stock for
advertising (unaudited) 47,059 1,000,000
Conversion of warrants to
common stock (unaudited) 13,295
Compensation expense related
to issuance of below-market
warrants (unaudited) 2,812,626
Compensation expense
related to issuance of
below-market stock options
(unaudited) 56,250
Issuance of below-market
warrants and common stock for loan
origination fees (unaudited) 7,500 1,329,161
Beneficial conversion
feature of Convertible Debentures 1,293,750
Net loss (unaudited)
---------- ---------- ---------- ----------- ---------- -----------
Balance, July 31, 1998
(unaudited) - $ - - $ - 4,069,854 $18,795,749
========== ========== ========== =========== ========== ===========
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
---------- ------------ ------------
Conversion of Preferred Stock, $ $ $ -
Series B to common stock
Issuance of warrants for
financing costs 299,700
Compensation expenses related
to issuance of below-market
stock options 17,443
Net loss (5,522,029) (5,522,029)
--------- ------------ ------------
Balance, January 31, 1998 - (5,723,726) 6,580,236
Issuance of common stock for
advertising (unaudited) 1,000,000
Conversion of warrants to
common stock (unaudited) -
Compensation expense related
to issuance of below-market
warrants (unaudited) 2,812,626
Compensation expense
related to issuance of
below-market stock options
(unaudited) 56,250
Issuance of below-market
warrants and common stock for
loan origination fees (unaudited) 1,329,161
Beneficial conversion feature of
Convertible Debentures 1,293,750
Net loss (unaudited) (13,290,947) (13,290,947)
--------- ------------ ------------
Balance, July 31, 1998
(unaudited) $ - $(19,014,673) $ (218,924)
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
January 31, July 31,
------------------------- ----------------------------
1998 1997 1998 1997
------------ ---------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(5,522,029) $(201,697) $(13,290,947) $(1,071,714)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation of furniture and
equipment 205,593 1,276 325,547 23,848
Common stock issued for
advertising - - 1,000,000 -
Amortization of loan origination
fees 221,000 - 61,712 13,722
Amortization of deferred financing
costs related to beneficial
conversion feature of Debentures - - 537,140 -
Expense recognized for issuing
below-market stock options - - 2,812,626 -
Common stock issued for
services 54,000 - - -
Issuance of below-market
warrants and common stock
for loan origination fees - - 375,862 -
Issuance of warrants for
financing costs 299,700 - - -
Compensation expense related
to stock options granted 17,443 - 56,250 -
Expense recognized from issuing
common stock below market value - - - 6,000
(Increase) decrease in
Accounts/advances receivable (97,384) - 24,814 -
Other receivables (17,557) - 7,075 -
Prepaid advertising and other
prepaid expenses (666,021) - 570,093 (115,286)
Deposits and other assets (195,785) (3,956) (152,593) (103,858)
Inventories - - (45,580) -
Increase (decrease) in
Accounts payable 638,728 35,986 565,804 271,273
Accrued legal and related costs 112,500 - - -
Other accrued liabilities 107,184 31,845 583,085 21,984
Deferred revenue - - - 52,500
----------- --------- ------------ -----------
Net cash used in operating activities (4,842,628) (136,546) (6,569,112) (901,531)
----------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
January 31, July 31,
------------------------ ------------------------
1998 1997 1998 1997
------------ --------- ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from investing activities
Purchase of furniture and equipment $(1,629,166) $(13,441) $ (635,753) $ (722,421)
----------- -------- ----------- ----------
Net cash used in investing activities (1,629,166) (13,441) (635,753) (722,421)
----------- -------- ----------- ----------
Cash flows from financing activities
Issuance of note payable - related
party 305,000 50,000 1,325,000 -
Payments on note payable - related
party (355,000) - - (50,000)
Payment on capital lease obligations (9,393) - - -
Proceeds from the issuance of notes
payable 1,750,000 - - 950,000
Payments on notes payable (1,750,000) - - -
Payment of loan origination fees (221,000) - (395,000) (123,500)
Payments on capital lease obligations - - (18,616) -
Proceeds from the issuance of
Preferred Stock, Series A 200,000 100,000 - 200,000
Proceeds from the issuance of
Preferred Stock, Series B 1,609,500 - - 1,030,000
Proceeds from the issuance of 8%
Convertible Debentures - - 2,500,000 -
Payment of offering costs on
Preferred Stock, Series B (126,219) - - -
Proceeds from the issuance of
common stock 11,725,000 50 - 25,000
Payment of offering costs on
initial public offering (1,826,977) - - (118,219)
----------- -------- ----------- ----------
Net cash provided by financing
activities 11,300,911 150,050 3,411,384 1,913,281
----------- -------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 4,829,117 63 (3,793,481) 289,329
Cash and cash equivalents,
beginning of period 63 - 4,829,180 63
----------- -------- ----------- ----------
Cash and cash equivalents, end
of period $ 4,829,180 $ 63 $ 1,035,699 $ 289,392
=========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
During the years ended January 31, 1998 and 1997 and the six months ended July
31, 1998 and 1997, the Company paid $280,979 (including $221,000 of loan
origination fees), $0, $415,327 (including $395,000 of loan origination fees)
(unaudited), and $1,000 (unaudited) in interest, respectively.
Supplemental schedule of non-cash investing and financing activities
During the six months ended July 31, 1998, the Company:
. issued 47,059 shares of common stock in exchange for advertising to
Premiere Radio Networks, Inc. valued at $1,000,000 (unaudited).
. issued 7,500 shares of common stock related to the private placement of 8%
Convertible Debentures.
. entered into an equipment capital lease obligation of $222,733, of which
$155,913 was financed.
. converted 16,650 warrants on a cashless exercise to 13,295 shares of common
stock.
. issued 1,857 warrants to Leasing Ventures, LLC for placement of an
equipment capital lease.
. issued 1,079 warrants to Leasing Ventures, LLC for placement of an
equipment capital lease.
. issued 152,500 warrants related to the private placement of unsecured
Promissory Notes.
. issued 33,000 warrants related to the private placement of 8% Convertible
Debentures.
. issued 20,000 warrants related to the private placement of 8% Convertible
Debentures.
. issued 850,000 options, some of which have exercise prices below fair value
at issuance, resulting in a non-cash compensation charge of $2,812,626.
During the year ended January 31, 1998, the Company:
. 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 an equipment 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.
During the year ended January 31, 1997, the Company issued common stock in the
amount of $23,000 for a subscription receivable.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Shopping.com (the "Company") was incorporated in California on November 22,
1996. Cyber Depot, Inc. ("Cyber") was incorporated in California in January
1996 and among other business ventures commenced the design and development
of proprietary software for the Internet shopping marketplace in February
1996. In March 1997, Cyber agreed to sell certain assets and liabilities
and proprietary software to Shopping.com for 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, $201,697, and $13,290,947 (unaudited) for the years
ended January 31, 1998 and 1997 and for the six months ended July 31, 1998,
respectively. The Company had a working capital deficit of $1,115,068
(unaudited) as of July 31, 1998. In addition, the Company has used, rather
than provided, cash from its operations and is involved in certain class
action lawsuits as more fully described in Note 10. 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
sheets 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.
F-10
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Presentation (Continued)
---------------------
In addition to the capital raised in 1997 and 1998 through private debt and
equity offerings and the Company's initial public offering ("IPO"), the
Company is currently negotiating with certain investors about raising
additional capital through private placement offerings. Management of the
Company believes that its current cash on hand, which subsequently
decreased to a minimal amount, will be insufficient to cover its working
capital needs until the Company's sales volume reaches a sufficient level
to cover operating expenses, unless the Company raises additional funds,
either by debt or equity issuances.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements, 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.
F-11
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 all
periods presented has been restated to conform with SFAS No. 128 and Staff
Accounting Bulletin No. 98.
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.
F-12
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
-----------
The Company expenses advertising costs when advertisements are aired.
Advertising costs for the years ended January 31, 1998 and 1997 and the six
months ended July 31, 1998 and 1997 were $871,964, $0, $2,451,307
(unaudited), and $11,603 (unaudited), 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, consulting
fees, and related expenses for development and maintenance of the Company's
web site, including depreciation of computer hardware and certain software.
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, if any, and the change during the period in
deferred tax assets and liabilities.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments, including cash, accounts payable, and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for subordinate notes payable and 8%
Convertible Debentures also approximate fair value because current interest
rates offered to the Company for debt of similar maturities are
substantially the same.
F-13
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Origination Fees
---------------------
Loan origination fees are amounts paid to placement agents or financial
consultants to obtain debt financing. Additionally, certain below-market
warrants and common stock were issued to placement agents and investors in
connection with debt financing which resulted in the Company capitalizing
additional loan origination fees. These fees are being amortized as
additional interest expense on the statement of operations over the terms
of the respective notes payable/Debentures.
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.
F-14
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties (Continued)
-----------------------
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Shopping.com online
store. The Internet and the online commerce industry are characterized by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices
that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in
part, on its ability to license leading technologies useful in its
business, enhance its existing services, develop new services and
technology that address the increasingly sophisticated and varied needs of
its prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely
basis.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect
secure transmission of confidential information, such as customer credit
card numbers. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events
or developments will not result in a compromise or breach of the algorithms
used by the Company to protect customer transaction data.
The online commerce market, particularly over the Internet, is new, rapidly
evolving, and intensely competitive, which competition the Company expects
to intensify in the future. Barriers to entry are minimal, and current and
new competitors can launch new Web sites at a relatively low cost. The
Company currently competes with a variety of other companies.
The Company generally carries no inventory, has no warehouse employees or
facilities, and primarily relies on rapid fulfillment from its vendors.
From time to time, the Company may have inventory at one or more of its
vendors, which the Company records at cost. 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.
F-15
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties (Continued)
-----------------------
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
-----------------------------------------
SFAS No. 130, "Reporting Comprehensive Income," is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
The Company does not expect adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements with fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public entities report selected information about operating
segments, products and services, geographic areas, and major customers in
interim and annual financial reports. The Company does not expect adoption
of SFAS No. 131 to have a material effect, if any, on its financial
position or results of operations.
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 (see Note 9). During the six
months ended July 31, 1998, the Company had sales to Waldron that accounted
for approximately 16% (unaudited) of net sales (see Note 9).
During the year ended January 31, 1998, the Company purchased inventory
from three vendors that accounted for 23%, 23%, and 7% of cost of goods
sold. During the six months ended July 31, 1998, the Company purchased
inventory from three vendors that accounted for 12% (unaudited), 11%
(unaudited), and 9% (unaudited) of cost of goods sold.
F-16
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations (Continued)
--------------
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 primarily
located in California and in the Netherlands. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Uninsured balances aggregated to $174,339, $0, and $5,293 (unaudited) at
January 31, 1998, January 31, 1997, and July 31, 1998. The Company also
has investments in a money market account in the amount of $4,293,979, $0,
and $799,073 (unaudited) at January 31, 1998, January 31, 1997, and July
31, 1998, respectively. Additionally, the Company's cash balances have
decreased to nil subsequent to July 31, 1998 (unaudited). The Company has
not experienced any losses in these accounts and believes it is not exposed
to any significant risk on cash and cash equivalents.
F-17
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
January 31,
-------------------- July 31,
1998 1997 1998
---------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Computer hardware $1,302,081 $12,761 $1,779,632
Computer software 494,070 - 547,882
Purchased software 750,000 - 750,000
Furniture and equipment 237,056 680 297,248
Leasehold improvements 58,511 - 102,708
---------- ------- ----------
2,841,718 13,441 3,477,470
Less accumulated depreciation
and amortization 206,869 1,276 532,415
---------- ------- ----------
Total $2,634,849 $12,165 $2,945,055
========== ======= ==========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Litigation
----------
The Company settled a lawsuit filed in July 1997, against the Company,
Cyber, and the Company's founder and former chief executive officer, with a
consultant seeking damages for breach of an alleged contractual
relationship. The matter was settled pursuant to a Settlement Agreement
dated March 26, 1998. The Company has accrued $112,500 for the settlement
as of January 31, 1998, which is included in accrued legal and related
costs.
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.
F-18
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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 of Arbitration" in connection with legal services
performed on behalf of the Company. The law firm claims legal fees and
costs in the amount of $328,819 are due. The Company disputes 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 likely that the Company will proceed with its election to have the
matter submitted to arbitration before the Los Angeles County Bar
Association. Management does not believe this issue will materially affect
the operations and financial position of the Company.
By written contracts dated December 12, 1997, the Company retained
SoftAware, Inc. to provide facilities and services related to the
maintenance, location, and supply of T-1 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 a letter dated May 22, 1998,
SoftAware, Inc.'s counsel made written demand upon the Company for $120,000
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. Management does not believe this issue
could materially affect the operations and financial position of the
Company.
On September 12, 1998, the Company was served with a summons and complaint
by MTS, Incorporated filed in Sacramento County Superior Court of
California for damages arising out of the Company's, as well as two other
merchants' sale of the video Titanic at below cost, thereby purportedly
-------
constituting violation of section 17043 and 17044 of California's Business
and Professions Code, as well as the Unfair Business Practices Act (Bus. &
Prof. Code section 17200 et. seq.). The complaint alleges damages in
excess of $25,000, that sum trebled should a statutory violation be
established, and attorneys' fees and costs. The Company has not had an
opportunity to investigate the allegations of the complaint. Accordingly,
a reasonable assessment of the Company's potential exposure cannot be made
at this time. The action will, however, require the engagement of defense
counsel, and it is estimated that substantial attorneys' fees may be
incurred should litigation proceed to trial. Management does not believe
this issue will materially affect the operations and financial position of
the Company.
F-19
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
The Company is involved in certain other labor-related disputes. Although
it is not possible to predict the outcome of these disputes, or any future
claims against the Company related thereto, 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.
As more fully described in Note 10, the Company is subject to certain class
action lawsuits and investigation by the SEC, the outcomes of which could
have a material adverse effect on the operations of the Company.
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 and the six
months ended July 31, 1998 and 1997 was $100,625, $13,451, $91,475
(unaudited), and $29,422 (unaudited), respectively.
F-20
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
The Company also leases certain office equipment under a non-cancelable
capital lease arrangement. Future minimum lease payments under this lease
agreement are as follows:
<TABLE>
<CAPTION>
Year Ending
January 31,
-----------
<S> <C>
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.
Vendor Agreement
----------------
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 5). 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 and is recorded as a prepaid expense;
F-21
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Vendor Agreements (Continued)
-----------------
. 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.
. 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 February 10, 1998, the Company entered into a two-year agreement with En
Pointe to market and license products or services offered for sale by the
Company to the public through the Company's website. This agreement shall
automatically renew for a continuous one-year period unless one party gives
written notice of its intent to terminate the agreement three months prior
to the termination date. During the term, En Pointe will be entitled to
payment or retention of i) the first 2% of the sales price to the customer,
exclusive of tax, plus ii) 30% of the gross profit margin on all products.
The Company and En Pointe will split the remaining gross profit margin on
all products on a 50%-50% basis. During the six months ended July 31,
1998, there has been no activity with respect to this agreement.
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.
Frank Denny, a director of the Company, is the president, principal
shareholder, and a director of Stilden.
F-22
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Consulting Agreements (Continued)
---------------------
On June 1, 1998, the Company entered into a three-year Consulting Agreement
with Cyber (the "Cyber Agreement"). Pursuant to the Cyber Agreement, Cyber
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. Robert
McNulty, a former officer and director of the Company, is the principal
shareholder of Cyber.
On August 1, 1998, the Company entered into a one-year Consulting Agreement
with Lorica Ltd. (the "Lorica Ltd. Agreement"). Pursuant to the Lorica Ltd.
Agreement, Lorica Ltd. will receive $3,500 per month, plus reimbursement
for out-of-pocket expenses for providing general consulting services
relating to the merchandising operations and specifically relating to the
sourcing of toys and games. Mr. Matthew Hill is the president of Lorica
Ltd. and the son of Mr. Paul Hill, a director of the Company. This
agreement was subsequently terminated on October 1, 1998.
Employment Agreements
---------------------
During the six months ended July 31, 1998, the Company entered into
employment agreements with certain executives. The estimated future
minimum payments related to these agreements for the years ended January
31, 1998, 2000, 2001, and 2002 are $387,000, $436,000, $479,000, and
$210,000, respectively.
On June 1, 1998, Mr. Robert McNulty resigned as president, chief executive
officer, 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 a
below-market exercise price of $16.00 per share. The issuance of the below-
market stock options pursuant to Mr. McNulty's Termination and Buy Out
Agreement resulted in a nonrecurring compensation charge of $750,000 during
the six months ended July 31, 1998 as more fully described in Note 7.
During the same period ended July 31, 1998, $100,000 was paid pursuant to
Mr. McNulty's Termination and Buy Out Agreement. As more fully described
in Note 11, the Company settled its remaining obligation with the Company's
common stock.
F-23
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED NOTES PAYABLE - RELATED PARTIES
As of January 31, 1997, the Company had a note payable to a related party
which was personally guaranteed by an officer of the Company. 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.
During June through September 1997, the Company issued $1,750,000 (which
includes the $600,000 En Pointe subordinated notes discussed 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. At January 31, 1998 and
July 31, 1998, there were 582,750 and 566,100 warrants outstanding,
respectively, all of which are exercisable.
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 Company's 10%
unsecured Promissory Notes in the principal amount of $1,225,000 were due
on November 15, 1998, together with accrued interest thereon. The Company
has not paid the amounts due, which constitutes an Event of Default under
the terms of the Notes. The Company is negotiating with certain of the
Note holders to either extend the term of the Notes or convert the Notes to
equity. In addition, on June 30, 1998, the Company issued a $100,000
Promissory Note that is also due six months from the date of issuance. The
Promissory Notes are unsecured, subordinated to the 8% Convertible
Debentures, and carry an interest rate of 10% per annum. The Promissory
Notes include issuances to certain existing shareholders of the Company.
F-24
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED NOTES PAYABLE - RELATED PARTIES (Continued)
In connection with the issuance of the $1,225,000 of Promissory Notes,
warrants to purchase 122,500 shares of common stock were issued, which are
exercisable until May 15, 2001 at an exercise price of $14.00 per share of
common stock. In addition, warrants to purchase 10,000 shares of common
stock were issued relating to the $100,000 Promissory Note dated June 30,
1998, which are exercisable until June 8, 2001 at an exercise price of
$14.00 per share of common stock. The exercise price of these warrants was
below market at the time of issuance and therefore resulted in additional
interest charges of approximately $837,500 over the term of the Promissory
Notes, of which $331,875 was expensed as interest during the three months
ended July 31, 1998. In addition, the Company issued warrants to purchase
20,000 shares of common stock at a then below-market exercise price of
$14.00 per share of common stock to Waldron for acting as the placement
agent. These below-market warrants will result in additional interest
charges of approximately $80,000 over the term of the Promissory Notes, of
which $33,333 was expensed as interest during the three months ended July
31, 1998.
NOTE 6 - 8% CONVERTIBLE DEBENTURES
In June 1998, the Company entered into an agreement whereby the Company
issued 8% Convertible Debentures due May 31, 2000 in the principal amount
of $1,250,000. In addition, in July 1998, the Company entered into an
agreement whereby the Company issued 8% Convertible Debentures due July 10,
2000 in the principal amount of $1,250,000, for a total of $2,500,000,
which represents the first "traunch" in a possible series of up to four
traunches for a total of $10,000,000 of Debenture financing. The 8%
Convertible Debentures (the "Debentures") are convertible into shares of
common stock at a conversion price equal to the lower of (i) the lowest
market price for any three days in the 30 days preceding conversion; or
(ii) $16.00 per share (the "Base Rate"), which is subject to a 10%
reduction if certain breaches of the Debenture agreements occur. The
holders of the Debentures may convert up to 20% of the original principal
amount of the Debentures between 30 days and 90 days after issuance, up to
an additional 25% (45% cumulative) thereafter until 120 days after
issuance, up to an additional 35% (80% cumulative) thereafter until 150
days after issuance, with the balance being convertible thereafter. The
holders of the Debentures 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.
F-25
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 6 - 8% CONVERTIBLE DEBENTURES (Continued)
The Company expects to complete the second and final traunch of Debenture
financing of $2,500,000, for a total of $5,000,000, during November or
December 1998, on or before the effective date of the Company's related
registration statement to be filed with the SEC. As more fully described
in Note 11, the Company received $1,750,000 of the second traunch of
financing during November 1998.
In connection with the issuance of the 8% Convertible Debentures, the
Company issued certain below-market warrants and common stock to investors
and placement agents and made certain payments to placement agents, which
resulted in the Company capitalizing such financing costs as loan
origination fees on the balance sheet. These loan origination fees will be
amortized as additional interest expense ratably over the term of the
Debenture agreements, or until the Debentures are converted to common
stock, at which time a charge to interest expense for the balance of any
unamortized loan origination fees will be recorded as additional interest
expense.
The Company has the right to redeem all or any portion of the Debentures,
subject to certain "Redemption Premium" provisions of the agreement. The
holder of the Debentures may require the Company to redeem the outstanding
portion of this Debenture if certain breaches occur.
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 the Series A Preferred. In April
1997, the Company sold 500,000 shares of the 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.
Each share of the Series A Preferred was convertible into shares of common
stock at the option of the holder. In addition, the 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.
F-26
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Series A Convertible Preferred Stock (Continued)
------------------------------------
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 the Series A Preferred was issued one warrant for every two
shares of the 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 or
July 31, 1998.
Upon the effective date of the Company's IPO, the 750,000 outstanding
shares of the 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 the Series B Preferred was convertible into shares of common
stock at the option of the holder. In addition, the Series B Preferred was
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 the Series B Preferred was issued one warrant for every two
shares of the 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 or July 31, 1998.
Upon the effective date of the Company's IPO, the 536,500 outstanding
shares of the Series B Preferred were converted into 536,500 shares of the
Company's common stock.
F-27
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
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.
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 prepaid advertising time
valued at $1,000,000, which was fully expensed during the period ended July
31, 1998.
Common shares reserved for issuance include those common shares to be
issued in connection with:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Warrants issued in connection with
Series A preferred stock 375,000 $ 3.00
Series B preferred stock 268,250 $ 3.00
IPO, placement agent 122,000 $14.40
Subordinated notes 582,750 $ 5.49
Incentive stock options 232,500 $ 3.00
Other stock options - $ -
---------
Reserved, January 31, 1998 1,580,500 $ 4.80
=========
Warrants issued in connection with (unaudited)
Series A preferred stock 375,000 $ 3.00
Series B preferred stock 268,250 $ 3.00
IPO, placement agent 122,000 $14.40
Subordinated notes 718,600 $ 7.28
Incentive stock options (unaudited) 211,000 $ 3.00
Other stock options (unaudited) 975,000 $17.31
---------
Reserved, July 31, 1998 (unaudited) 2,669,850 $ 9.90
=========
</TABLE>
The table above excludes those common shares issuable on conversion of the
8% Convertible Debentures and those warrants to be issued in connection
with such conversion as more fully described in Note 6.
F-28
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Incentive 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. At the Company's Annual Meeting of Shareholders
held July 15, 1998, the shareholders of the Company approved an amendment
to the Plan to increase the number of shares available under the Plan to an
aggregate of 750,000. 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 up to 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 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 No. 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>
<CAPTION>
<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.
F-29
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Incentive Stock Options (Continued)
-----------------------
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.
A summary of the activity related to the Company's stock option
transactions is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Number Price
of Shares Per Share
------------- -----------
<S> <C> <C>
Outstanding, January 31, 1997 - $ -
Granted 232,500 $ 3.00
-------
Outstanding, January 31, 1998 232,500 $ 3.00
Cancelled/expired (unaudited) (21,500) $ 3.00
-------
Outstanding, July 31, 1998
(unaudited) 211,000 $ 3.00
=======
</TABLE>
The weighted-average remaining contractual life of options outstanding
issued under the Plan is 4.46 years at January 31, 1998. At January 31,
1998 and July 31, 1998, 137,500 and 137,500 (unaudited) stock options,
respectively, were exercisable at weighted-average exercise prices of $3.00
and $3.00 (unaudited) per share, respectively.
During the year ended January 31, 1998, the Company issued 67,000 stock
options to employees when 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 stock options. This
compensation expense is included in general and administrative expenses in
the statement of operations.
F-30
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Other 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, when the closing price of the Company's common stock
was $14.75, 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
equal to the closing price ($21.00) of the Company's common stock on June
1, 1998, the effective date of grant.
In June 1998, Mr. John Markley became a director and was named the
Company's president and chief executive officer 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 equal to
the closing price ($21.00) of the Company's common stock on June 1, 1998,
the effective date of grant.
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 equal to the closing price ($21.00) of the Company's common
stock on June 1, 1998, the effective date of grant.
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, which was below the closing price ($21.00) of the
Company's common stock on June 1, 1998, the effective date of grant.
In May 1998, Kipling Isle, Ltd., a corporation controlled by Mr. 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, which was below the
closing price ($21.00) of the Company's common stock on June 1, 1998, the
effective date of grant.
As more fully described in Note 4, the Company granted certain stock
options to Mr. McNulty and Cyber in connection with a Termination and Buy
Out Agreement and the Cyber Agreement.
F-31
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Other Stock Options (Continued)
-------------------
As a result of the issuance of the above described below-market stock
options, the Company recorded a compensation charge of $2,812,626 during
the six months ended July 31, 1998, of which $2,062,626 is a nonrecurring
and non-cash charge relating to the option grants described above and
$750,000 is a nonrecurring and non-cash charge relating to those options
issued in connection with Mr. McNulty's Termination and Buy Out Agreement,
as more fully described in Note 4.
At July 31, 1998, the Company had outstanding stock options, exclusive of
incentive stock options, to purchase an aggregate of 975,000 shares of
common stock.
NOTE 8 - INCOME TAXES
For the years ended January 31, 1998 and 1997 and the six months ended July
31, 1998 and 1997, the Company did not provide a provision for income taxes
due primarily to the net losses incurred.
At January 31, 1998, the Company has approximately $5,600,000 and
$2,800,000 in net operating loss carryforwards 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 primarily 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 at January 31, 1998 to fully offset its net deferred tax assets
as the Company does not believe the recoverability of these deferred tax
assets is more 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 and July 31, 1998, the Company had accrued
legal and related cost balances of approximately $324,000 related to such
counsel. Management is currently seeking arbitration related to these fees
due to certain disputes.
F-32
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)
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 and granted Waldron 122,000
warrants to purchase common stock with an exercise price of $14.40 per
share. These expenses were recorded as offering costs in the statement of
shareholders' equity during the year ended January 31, 1998. 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 six months
ended July 31, 1998, the Company had sales to Waldron of $121,000
(unaudited), of which $32,000 (unaudited) was included in accounts
receivable at July 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, a company in which the
officer is a controlling shareholder. Total employee advances outstanding
at January 31, 1998 and July 31, 1998 amounted to $17,557 and $9,943
(unaudited), respectively, which is included in other receivables on the
balance sheets.
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.
F-33
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 10 - SEC INVESTIGATION / CLASS ACTION LAWSUITS
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 in violation of federal securities laws. Such investigation
resulted in the SEC temporarily suspending trading of 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. Because the
SEC has not alleged any violations, the ultimate resolutions of this matter
remains uncertain.
During the six months ended July 31, 1998, various similar class action
lawsuits were filed against the Company, certain officers of the Company,
Waldron, certain Waldron's executives, and one other broker-dealer ("the
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 various state and federal securities laws by the Defendants. The
complaints charge that the Defendants participated in a scheme and wrongful
course of business to manipulate the price of the Company's stock, and the
Defendants seek compensatory damages in unspecified amounts. The Company
does not believe that it is guilty of the acts alleged in the complaints
and intends to defend against these actions vigorously. Nonetheless, and
despite the Company's insurance coverage for such actions, management
believes these class action suits 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 and attendant adverse publicity
may adversely and significantly affect the Company and its business. The
continued pendency of this litigation and SEC 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 material adverse effect on the Company's
financial position, cash flows, and results of operations, and may prevent
the Company from carrying out its business plan.
F-34
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS
On August 25, 1998, the Company issued a $500,000 Convertible Promissory
Note which has a due date of six months from the date of issuance. The
Convertible Promissory Note carries an interest rate of 8% per annum and
may be converted for the principal and accrued interest into common stock
at $10.00 per share. In connection with the issuance of the Convertible
Promissory Note, the Company issued 50,000 warrants to purchase shares of
common stock at an exercise price of $10.00 per share when the Company's
common stock was trading at $15.25 per share. The warrants expire on
August 20, 2001. Subsequently, on November 5, 1998, the Company agreed to
revise the Convertible Promissory Note, Warrant Agreement, and Subscription
Agreement to reflect an exercise price of $3.30 per share and a conversion
price of $3.30 per share when the Company's common stock was trading at
$1.97 per share. The Company also issued warrants to purchase 10,000 shares
of common stock to Waldron for acting as the placement agent. The warrants
issued to Waldron were issued under the same terms and conditions as the
warrants issued with the Convertible Promissory Note. The exercise price
of these warrants were below market at the time of issuance and will
therefore result in additional interest charges of approximately $315,000
over the term of the Convertible Promissory Note. In addition, the
conversion price was below market at the time of the issuance and will
result in an additional charge of $262,500 on August 25, 1998 as the
Convertible Promissory Note is available for conversion immediately upon
the issuance of the Note.
On August 31, 1998, Mr. Michael Miramontes resigned his employment
effective June 12, 1998. Pursuant to a Resignation Agreement dated August
31, 1998 between the Company and Mr. Miramontes, Mr. Miramontes will
receive one year's salary in the total amount of $162,000. The Company
will make equal installments of $13,067 beginning September 1, 1998 for a
period of ten months.
In September 1998, the Company executed an agreement whereby it issued
66,667 shares of common stock for $1,000,000 of radio advertising based on
the average fair market value of the common stock as of that date. The
advertisements were aired during the three months ending October 31, 1998,
and accordingly, $1,000,000 will be expensed during this period. Up to
133,333 additional shares of common stock may be issuable under the radio
advertising agreement on the one-year anniversary of the agreement, if on
such date the average closing price of the Company's common stock for the
previous ten days is less than $15.00 per share (as adjusted for any stock
splits or recapitalizations).
On September 30, 1998, Mr. Douglas Hay resigned as Executive Vice President
and as a director effective September 30, 1998. Pursuant to a Resignation
Agreement dated September 30, 1998 between the Company and Mr. Douglas Hay,
Mr. Hay will receive a total amount of $80,000. The Company agreed to make
2 equal payments of $20,000 payable on October 1 and November 1 and the
remaining $40,000 will be paid equally on the first of each month December
1, 1998 through March 1, 1999.
F-35
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
For the Years Ended January 31, 1998 and 1997
and for the Six Months Ended July 31, 1998 and 1997 (unaudited)
(The information with respect to the six months ended
July 31, 1998 and 1997 is unaudited.)
- --------------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS (Continued)
On September 15, 1998, the Company issued a Promissory Note in the amount
of $500,000 which is due at the earlier of the Company receiving $500,000
in additional financing from another source or October 14, 1998. During
October 1998, the Company repaid $200,000. On November 2, 1998, the
Company renegotiated the outstanding balance of $300,000 and entered into a
new Note which is due at the earlier of the Company receiving $300,000 in
additional financing from another source or December 2, 1998. In
connection with the renegotiations and issuance of the $300,000 Promissory
Note, the Company also issued 30,000 additional warrants to purchase shares
of the Company's common stock at an exercise price of $1.65 when the
Company's common stock was trading at $1.81 per share. These warrants
expire on November 2, 2003. On The exercise price of these warrants was
below market at the time of issuance and will therefore result in
additional interest charges of $4,860. One of the Company's directors is
also a member of the Board of Directors of the corporation to which the
Company issued the Promissory Note. The Promissory Note carries an interest
rate of 10% per annum and is secured by a Non-Recourse Guaranty and Pledge
Agreement by Mr. Robert J. McNulty, a consultant of the Company. In
connection with the issuance of the original $500,000 Promissory Note, the
Company also issued 30,000 warrants to purchase shares of common stock at
an exercise price of $2.25 per share. The warrants expire on September 15,
2003.
On September 24, 1998, the Company agreed to issue warrants to purchase
10,000 shares of the Company's common stock at an exercise price of $2.00
per share as consideration to Typhoon Capital Consultants for its services
related to securing additional capital for the Company.
On September 25, 1998, the Company approved the conversion of $350,000 of
its liability related to the Robert McNulty Termination and Buy Out
Agreement, as previously discussed in Note 4, for common stock at a market
price of $1.37 (the stock price on September 25, 1998), resulting in an
issuance by the Company of 255,474 common shares.
On October 1, 1998, the Company borrowed $900,000 from the Empire Group.
On November 10, 1998, this amount was repaid out of the proceeds received
from the issuance of 8% Convertible Debentures in the principal amount of
$1,750,000.
On November 16, 1998, the Company issued 300,000 warrants in connection
with the issuance of 8% Convertible Debentures to purchase shares of the
Company's common stock at an exercise price of $2.00 when the Company's
common stock was trading at $7.25 per share. The exercise price of these
warrants was below market at the time of issuance and will therefore result
in additional interest charges of approximately $1,575,000.
F-36
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of Shopping.com filed September
8, 1998.
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 Certificate of Amendment of Bylaws dated August 13, 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-QSB. 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-QSB. 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.
4.8 Promissory Note dated November 2, 1998 by the Company in favor of
USFI Holdings, Inc.
4.9 Warrant for the Purchase of Shares of Common Stock dated November
2, 1998 by the Company in favor of USFI Holdings, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.10 Form of Placement Agent Warrants dated November, 1998.
4.11 Subscription Agreement dated November 5, 1998 between the Company
and Carlos Beharie.
4.12 Convertible Promissory Note dated November, 1998 made by the
Company payable to Carlos Beharie.
4.13 Warrant Agreement dated August 20, 1998 between the Company and
Carlos Beharie.
10.1* Agreement between the Company and Howard S. Schwartz dated August
1, 1998.
10.2 Subscription Agreement between the Company and Premiere Radio
Networks, Inc. August 12, 1998.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP dated November
24, 1998.
</TABLE>
- ---------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
<S> <C>
F-1 Report of Independent Certified Public Accountants
F-2 Balance Sheets as of January 31, 1998 and 1997 and July 31, 1998
F-3 Statements of Operations for the Years Ended January 31, 1998 and
1997 and the Six Months Ended July 31, 1998 and 1997
F-4 Statement of Shareholders' Equity for the Years Ended January 31,
1998 and 1997 and the Six Months Ended July 31, 1998
F-5 Statements of Cash Flows for the Years Ended January 31, 1998 and
1997 and the Six Months Ended July 31, 1998 and 1997
F-6 Notes to Financial Statements
</TABLE>
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 o 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 25 day of November, 1998.
SHOPPING.COM
By: /s/ John H. Markley
--------------------------------------
John H. Markley
President, Chief Executive Officer
and Director
By: /s/ Kristine E. Webster
--------------------------------------
Kristine E. Webster
Senior Vice President, Chief Financial
and Secretary (Principal Accounting
Officer)
II-5
<PAGE>
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 November 25,
1998
/s/ JOHN H. MARKLEY
- -------------------------------
John H. Markley Chief Executive Officer, November 25,
President and Director 1998
/s/ KRISTINE K. WEBSTER
- -------------------------------
Kristine E. Webster Senior Vice President, November 25,
Chief Financial Officer 1998
and Secretary (Principal
Accounting Officer)
/s/ PAUL J. HILL
- -------------------------------
Paul J. Hill Director November 25,
1998
/s/ EDWARD F. BRADLEY
- -------------------------------
Edward F. Bradley Director November 25,
1998
/s/ HOWARD S. SCHWARTZ
- -------------------------------
Howard S. Schwartz
Executive Vice President, November 25,
Finance and 1998
Administration
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
3.1 Restated Articles of Incorporation of Shopping.com filed
September 8, 1998.
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 Certificate of Amendment of Bylaws dated August 13, 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-QSB. 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-QSB.
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. Incorporated
herein by reference from Exhibit 4.4 to Registrant's
Registration Statement on Form S-1(Filed with the SEC on
August 18, 1998, File No. 333-61777.)
4.5* Form of Warrant Agreement dated July 13, 1998 between the
Company and Trautman, Rosenblum and Stephansky.
Incorporated herein by reference from Exhibit 4.5 to
Registrant's Registration Statement on Form S-1(Filed with the
SEC on August 18, 1998, File No. 333-61777.)
4.6* Form of Warrant Agreement dated June 9, 1998 between the
Company and Trautman, Rosenblum, Stephansky, Soich and
Calicchia. Incorporated herein by reference from Exhibit 4.6
to Registrant's Registration Statement on Form S-1(Filed with
the SEC on August 18, 1998, File No. 333-61777.)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.7* Form of Warrants dated April 10, 1998, between the Company
and Leasing Ventures, LLC. Incorporated herein by reference
from Exhibit 4.7 to Registrant's Registration Statement on
Form S-1(Filed with the SEC on August 18, 1998, File
No. 333-61777.)
4.8 Promissory Note dated November 2, 1998 by the Company
in favor of USFI Holdings, Inc.
4.9 Warrant for the Purchase of Shares of Common Stock dated
November 2, 1998 by the Company in favor of USFI
Holdings, Inc.
4.10 Form of Placement Agent Warrants dated November, 1998.
4.11 Subscription Agreement dated November 5, 1998 between
the Company and Carlos Beharie.
4.12 Convertible Promissory Note dated November, 1998 made
by the Company payable to Carlos Beharie.
4.13 Warrant Agreement dated August 20, 1998 between the
Company and Carlos Beharie.
10.1* Agreement between the Company and Howard S. Schwartz
dated August 1, 1998. Incorporated herein by reference from
Exhibit 10.1 to Registrant's Registration Statement on Form S-
1(Filed with the SEC on August 18, 1998, File No. 333-
61777.)
10.2 Subscription Agreement between the Company and Premiere
Radio Networks, Inc. August 12, 1998.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP dated
November 24, 1998.
</TABLE>
______________
* Previously filed.
<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: August 13, 1998 /s/ John H. Markley
------------------------------
John H. Markley, President
/s/Kristine E. Webster
------------------------------
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 July 15, 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 13th day August, 1998.
/s/ Kristine E. Webster
--------------------------------------
Kristine E. Webster, Secretary
<PAGE>
EXHIBIT 4.8
PROMISSORY NOTE
---------------
Chicago, Illinois
$300,000 November 2, 1998
THIS PROMISSORY NOTE (this "Note") is made in Chicago, Illinois, as of
November 2, 1998, for Three Hundred Thousand Dollars ($300,000), with interest
as provided herein.
RECITALS:
A. This Note is made by SHOPPING.COM, a California corporation
("Maker"), and is payable to the order of USFI HOLDINGS, INC., a Delaware
corporation (the "Lender"). The holder from time to time of this Note is
referred to as "Payee."
B. This Note evidences the obligation of Maker to pay to the Lender
the principal amount of Three Hundred Thousand Dollars ($300,000), with interest
on the balance remaining from time to time unpaid at the rate hereinafter set
forth. The loan evidenced by this Note is referred to herein as the "Loan."
C. The Loan is secured by a certain Non-Recourse Guaranty and Pledge
Agreement, dated September 15, 1998, as confirmed as of even date herewith (the
"Pledge Agreement"), by Robert J. McNulty in favor of the Lender. All of the
agreements, conditions, covenants, provisions and stipulations contained in the
Pledge Agreement are hereby made a part of this Note to the same extent and with
the same force and effect as if they were fully set forth herein and Maker
covenants and agrees to keep and perform them, or cause them to be kept and
performed, strictly in accordance with their respective terms.
1. Payment.
-------
a. Maker hereby promises to pay to the order of Payee on the terms
set forth herein (i) the principal sum of Three Hundred Thousand Dollars
($300,000), (ii) all accrued and unpaid interest thereon at a rate per annum
equal to ten percent (10%) (the "Interest Rate"), and (iii) all other sums, if
any, due to Payee with respect to the Loan.
-1-
<PAGE>
b. All outstanding principal, accrued but unpaid interest and other
sums of any kind payable under the terms of this Note shall be due and payable
upon the Maturity Date (as herein defined). As used herein, the "Maturity Date"
means the earlier to occur of:
(i) the date that Maker receives at least $300,000 in cash by
reason of one or more sales of Marker's stock, convertible
securities, debentures or other instruments of any kind or
by reason of one or more loans or other financing
transactions of any kind; and
(ii) December 2, 1998.
Without limiting the foregoing, in the event that Maker receives any
net proceeds by reason of one or more sales of Maker's stock, convertible
securities, debentures or other instruments of any kind or by reason of one or
more loans or other financing transactions, such net proceeds shall be
immediately applied to the Loan.
c. In the event any installment of principal or interest hereunder
shall become overdue, Maker shall pay to the Payee interest on the then
outstanding balance from the date such amount was due and payable at the rate
equal to fifteen percent (15%) per annum (the "Default Rate").
d. Payment of all amounts due under this Note shall be made at the
office of the Lender, 901 Warrenville Road, Lisle, IL 60532, or such other place
as Payee may from time to time designate in writing. Except as otherwise
provided herein, all payments (whether of principal, interest or other amounts)
which are applied at any time by Payee to indebtedness evidenced by this Note
may be allocated by Payee to principal, interest or other amounts then due and
payable as Payee may determine in Payee's sole discretion.
e. This Note may be prepaid, in whole or in part, without premium or
penalty. All prepayments hereunder shall be applied first to any unpaid
interest, fees or other similar amounts due hereunder, and then to the
outstanding principal installments hereunder in inverse order of maturity.
f. Notwithstanding any provisions of this Note or any instrument
securing payment of the indebtedness evidenced by this Note to the contrary, it
is the intent of Maker and Payee that Payee shall never be entitled to receive,
collect or apply, as interest on principal of the indebtedness, any amount in
excess of the maximum, rate of interest permitted to be charged by applicable
law; and if under any circumstance whatsoever, fulfillment of any provision of
this Note, at the time
-2-
<PAGE>
performance of such provision shall be due, shall involve transcending the limit
of validity prescribed by applicable law, then, ipso facto, the obligation to be
----------
fulfilled shall be reduced to the limit of such validity; and in the event Payee
ever receives, collects or applies as interest any such excess, such amount
which would be excess interest shall be deemed a permitted partial prepayment of
principal and treated hereunder as such; and if the principal of the
indebtedness secured hereby is paid in full, any remaining excess funds shall
forthwith be paid to Maker.
2. Default and Remedies.
--------------------
a. The occurrence of any one or more of the following shall
constitute an Event of Default hereunder and under the Pledge Agreement:
(a) Maker shall fail to pay any installment of principal or
interest or other amount hereunder when the same becomes due.
(b) Maker shall fail or neglect to perform, keep or observe any
other provision of this Note.
(c) Pledgor (as such term is defined in the Pledge Agreement)
shall sell, assign or otherwise transfer any of its interest in the Pledged
Collateral (as such term is defined in the Pledge Agreement) except as
explicitly permitted in the Pledge Agreement, or the security interest
granted to Payee therein, or any part thereof, shall not be or shall cease
to be a first priority perfected security interest, or Pledgor shall fail
or neglect to perform, keep or observe any provision of the Pledge
Agreement.
(d) Either of Maker or Pledgor shall make an assignment for the
benefit of creditors, or shall admit in writing its or their inability to
pay its or their debts as they become due, or shall file a voluntary
petition in bankruptcy, or any order for relief finding maker or Pledgor
bankrupt or insolvent shall be entered, or Maker or Pledgor shall file any
petition or answer seeking for it or them any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any present or future statute, law, rule or regulation, or shall file any
answer admitting or not contesting the material allegations or a petition
filed against it or them in any such proceeding, or shall seek, consent to
or acquiesce in the appointment of any trustee, receiver or liquidator of
itself or of all or any substantial part of its or their properties or
assets.
(e) An order, judgment or decree shall be entered against maker
or Pledgor, without its or their application, approval or consent, by any
court or governmental agency of competent jurisdiction, approving a
petition
-3-
<PAGE>
seeking its or their reorganization, or appointing a receiver, trustee,
liquidator or the like of a substantial part of its assets, and such order,
judgement or decree shall continue unstayed and in effect for a period of
15 consecutive days; or an involuntary petition in bankruptcy shall have
been filed against Maker or Pledgor seeking reorganization under the
federal Bankruptcy Code, and the same shall not have been dismissed within
15 days.
b. Upon and after the occurrence of an Event of Default, Payee shall
have the option, without demand or notice, to declare the unpaid principal of
this Note, together with all accrued interest and other sums owing hereunder, at
once due and payable, and to exercise any and all other rights and remedies
available hereunder or under the Pledge Agreement, or otherwise available at law
or in equity.
c. The remedies of Payee, as provided herein, shall be cumulative
and concurrent, and may be pursued singularly, successively or together, at the
sole discretion of Payee, and may be exercised as often as occasion therefor
shall arise. No act of omission or commission of Payee, including specifically
any failure to exercise any right, remedy or recourse, shall be deemed to be a
waiver or release of the same, such waiver or release to be effected only
through a written document executed by Payee and then only to the extent
specifically recited therein. A waiver or release with reference to any one
event shall not be construed as continuing, as a bar to, or as a waiver or
release of, any subsequent right, remedy or recourse as to a subsequent event.
3. Costs and Attorneys Fees.
------------------------
Maker promises to pay all costs of collection of every kind, including
but not limited to all reasonable attorneys' fees, court costs, and expenses of
every kind, incurred by Payee in connect with such collection or the protection
or enforcement of any or all of the security for this Note, whether or not any
lawsuit is filed with respect thereto. All such costs and expenses shall be
payable by Maker to Payee upon demand.
4. Waiver.
------
Except as otherwise provided herein, each maker, surety, guarantor and
endorser hereon waives grace, notice, notice of intent to accelerate, notice of
default, protest, demand, presentment for payment and diligence in the
collection of this Note, and in the filing of suit hereon, and agrees that his
or its liability and the liability of his or its heirs, beneficiaries,
successors and assigns for the payment hereof shall not be affected or impaired
by any release or change in the security or by any increase, modification,
renewal or extension of the indebtedness or its mode and time of payment.
-4-
<PAGE>
5. Notices.
-------
All notices or other communications required or permitted hereunder
shall be (a) in writing and shall be deemed to be given (i) when delivered in
person, (ii) three (3) business days after deposit, in a regularly maintained
receptacle of the United States mail as registered or certified mail, postage
prepaid, (iii) one (1) business day after being sent by private courier service,
or (iv) on the day on which the party to whom such notice is addressed refuses
delivery by mail or by private courier service and (b) addressed as follows:
If to Maker: 2101 East Coast Highway
- ----------- Corona Del Mar, CA 92625
Attn: President
If to Lender: 901 Warrenville Road
- ------------ Lisle, IL 60532
Attn: President
or to each such party at such other addresses as such party may designate in a
written notice to the other parties.
6. Headings.
--------
The headings of the paragraphs of this Note are inserted for
convenience only and shall not be deemed to constitute a part hereof.
7. Governing Law.
-------------
This Note shall be governed by and consumed under the laws of the
State of Illinois.
8. Successors and Assigns.
----------------------
This Note shall be binding upon Maker and its permitted assigns and
successors and shall inure to the benefit of Payee and its successors and
assigns. Maker may not assign its rights hereunder without the prior written
consent of Payee, in its sole discretion. Payee may assign all or a part of its
interest in this Note and its rights hereunder.
9. CONSENT TO JURISDICTION.
-----------------------
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS NOTE OR THE PLEDGE
-5-
<PAGE>
AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF PAYEE OR MAKER SHALL BE BROUGHT AND MAINTAINED
EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. MAKER HEREBY EXPRESSLY AND
IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS
AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS
FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. MAKER FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTER MAIL AT MAKER'S
ADDRESS SET FORTH IN PARAGRAPH 5 HEREOF, POSTAGE PREPAID. MAKER HEREBY EXPRESSLY
AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
10. Severability.
------------
If any provision of this Note or any payments pursuant to the terms
hereof shall be invalid or unenforceable to any extent, the remainder of this
Note and any other payments hereunder shall not be affected thereby and shall be
enforceable to the greatest extent permitted by law.
11. Replacement Note.
----------------
This Note is issued in substitution for and replacement of that
certain Promissory Note dated September 15, 1998 from Maker to Lender in the
original principal amount of $500,000 (the "Original Note"). The indebtedness
represented by the Original Note is continuing indebtedness and nothing
contained herein shall be deemed to constitute payment, settlement or novation
of the Original Note, or release or otherwise adversely affect any lien or
security interest securing such indebtedness.
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of
the date and year first above written.
SHOPPING.COM, a California corporation
By: /s/Frank W. Denny
----------------------------------------------
Name: FRANK W. DENNY
Title: Chairman of Board
-6-
<PAGE>
EXHIBIT 4.9
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
--------------------------------------------------
30,000 Shares
FOR VALUE RECEIVED, Shopping.com (the "Company"), a California corporation,
hereby certifies that USFI Holdings, Inc., or its permitted assigns are entitled
to purchase from the Company, at any time or from time to time commencing
November 2, 1998, and prior to 5:00 p.m., New York City time then current, on
November 2, 2003, fully paid and non-assessable shares of the common stock, no
par value, of the Company at the purchase price of $1.65 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.
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(a) This Warrant may be exercised, in whole at any time or in part from
time to time, commencing November 2, 1999 (the "Commencement Date"),
and prior to 5:00 p.m., New York City time then current, on November
2, 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 10(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 exercisced
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
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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.
(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 fonn 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 sham 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
detemiine), 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
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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.
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3. Protection Against Dilution.
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(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 hold 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) 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
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.
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(c) Except as provided in 3(c), 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 shams of Common Stock outstanding after such issuance or
sale.
(d) Except as provided in 3(e), in case, the Company shall hereafter issue
of 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
of 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
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continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as in entirety of
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 amount 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 stork 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.
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(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.
(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.
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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.
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(a) The Company agrees that if, at any two times during the period
commencing on September 15, 1998 and ending on September 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
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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 Holden, 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
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
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Company shall (i) 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 went 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 required 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, an 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.
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(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
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them may become subject under the Act or otherwise and to reimburse
the persons indemnified as above for 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
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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 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 indemnified 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
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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 pony 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 sections (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, (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
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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. Transferability.
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(a) This Warrant is 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 a 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 am 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.
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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
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lost, stolen or destroyed, and upon surrender and cancellation of this Warrant,
if mutilated, and upon 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 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 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 901 Warrenville Road, Lisle, Illinois 60532, 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 Illinois without giving effect to the principles of conflicts of
law thereof.
-13-
<PAGE>
IN WITNESS WHEREOF, Shopping.com 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 2nd day of November, 1998.
SHOPPING.COM, a California corporation
By: /s/Frank W. Denny
----------------------------------
Name: FRANK W. DENNY
Title: Chairman of Board
ATTEST:
By: /s/ Kristine Webster, CPO
---------------------------------
Secretary
-14-
<PAGE>
EXHIBIT 4.10
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 EXCHANGE 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 THE
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
California corporation (the "Company"), TRAUTMAN KRAMER & COMPANY, INCORPORATED
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 November 30, 2003, thirty
thousand (30,000) fully paid and nonassessable shares of the Company's Common
Stock, no par value (the "Common Stock"), at an initial exercise price per share
(the "Exercise Price") of $2.00 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 Form 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").
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,
1
<PAGE>
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 and 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 entity (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 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
2
<PAGE>
(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 nor any of the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged 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 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:
3
<PAGE>
(i) if the to 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:
TRAUTMAN KRAMER & COMPANY, INCORPORATED
500 Fifth Avenue
14th Floor
New York, NY 10110
Attn: Richard
Rosenblum
Telephone: (212) 575-5500
Telecopier: (212) 271-0611
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, NY 10016
Attn: Samuel M. Krieger, Esq.
Telephone: (212) 689-3322
Telecopier: (212) 213-2077
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
___________th day of November, 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 4.11
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES REFERRED TO HEREIN.
SUBSCRIPTION AGREEMENT
Shopping.com
2101 East Coast Highway
Garden level
Corona Del Mar, CA 92625
Re: Prospective Purchase of Notes and Warrants
------------------------------------------
Shopping.com, a California corporation
--------------------------------------
Gentlemen:
The undersigned, by signing the Signature Page attached hereto, hereby
irrevocably tenders this subscription and applies to purchase 20 units (the
"Units") of Shopping.com, a California corporation (the "Company"), at a
purchase price of $25,000 per Unit. Each Unit consists of a Promissory Note in
-------
the principal amount of $25,000 and warrants to purchase 2,500 shares of the
Company's Common Stock, no par value (the "Common Stock"), at an exercise price
of $3.30 per share.
Enclosed, in cash or good funds (in the case of a check, the check should
be payable to the order of "Shopping.com") as tender of the purchase price for
the Units, is the aggregate amount of $500,000.00 ($25,000 minimum).
The undersigned hereby acknowledges receipt of a copy of the Company's
Annual Report on form 10-KSB for the period ending January 31, 1998 (the
"Report"), relating to and describing the terms and conditions of the offer and
sale of the Units.
The undersigned hereby represents and warrants to, and covenants with, the
Company as follows, recognizing that the Company will rely to a material degree
upon such representations, warranties and covenants, each of which shall survive
any acceptance of this subscription in whole or in part by the Company and the
issuance and sale of any Units to the undersigned:
1. All statements made in the Prospective Investor Questionnaire which
has been or is concurrently being furnished to the Company by the undersigned
continue to be and are true, accurate and complete as of the date hereof.
-1-
<PAGE>
2. The undersigned has been informed and is aware that an investment in
the Units involves a degree of risk and speculation, and has carefully read and
considered the Report in its entirety.
3. The undersigned confirms that he has been advised that he should rely
on, and that he has consulted and relied upon, his own accounting, legal and
financial advisors with respect to this investment in the Units. The
undersigned and his professional advisor(s) (as defined in Section 260.102.12(g)
of the Rules of the California Corporations Commissioner), if any, have been
afforded an opportunity to meet with the officers and directors of the Company
and to ask and receive answers to any questions about this offering and the
proposed business and affairs of the Company, and to obtain any additional
information which the Company possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of information
provided in the Report, and have therefore obtained, in the judgement of the
undersigned and/or his or her professional advisor(s), sufficient information to
evaluate the merits and risks of investment in the Units. The undersigned
acknowledges and agrees that he/she has had an opportunity to meet and speak
with officers or representatives and to ask questions and get answers with
respect to the Company and this offering.
4. The undersigned understands and acknowledges that no federal or state
agency has made any finding or determination as to the fairness or suitability
for investment in, nor any recommendation or endorsement of, the Company or the
Units.
5. On the basis of the review of the materials and information described
above, and relying solely thereon and upon the knowledge and experience of the
undersigned and/or his or her professional advisor(s), if any, in business and
financial matters, the undersigned has evaluated the merits and risks of
investment in the Units and has determined that he or she is both willing and
able to undertake the economic risk of this investment.
6. The Units are being acquired by the undersigned for the personal
account of the undersigned for investment and not with a view to, or for resale
in connection with, any distribution thereof or of any interest therein, and no
one else has any beneficial ownership or interest in the Units being acquired by
the undersigned, nor are they to be subject to any lien or pledge. The
undersigned has no present obligation, indebtedness or commitment pending, nor
is any circumstance in existence which will compel the undersigned to secure
funds by the sale, transfer or other distribution of any of the Units or any
interest therein or any Stock that may be distributed in respect thereof.
7. The undersigned understands and agrees that the Units cannot be
transferred or assigned that there is and will be no public market therefor,
and, accordingly, that it may not be possible for the undersigned readily, if at
all, to liquidate this investment in the Units in case of an emergency or
otherwise. The undersigned has the net worth, past income and estimated future
income set forth in the Prospective Investor Questionnaire, can afford to bear
the risks of an investment in the Units, including the risk of losing the entire
investment, for an indefinite period of time, and has adequate means of
providing for his or her current needs and personal contingencies and has no
need for liquidity in this investment.
-2-
<PAGE>
8. The undersigned understands and acknowledges that the Units are being
offered and sold pursuant to one or more exemptions from the registration and
qualification requirements of the Securities Act of 1933 and the California
Corporate Securities Act of 1968, the availability of which depend upon the
truth and completeness of the information provided to the Company in the
Prospective Investor Questionnaire and the bona fide nature of the foregoing
representations and warranties. With such realization, the undersigned hereby
authorizes the Company to act as it may see fit in reliance on such information,
representations and warranties, including the placement of the following legend
on the stock certificate(s) issued to the undersigned in addition to any other
legends that may be imposed thereon which, in the reasonable opinion of
Company's counsel, may be required by applicable securities laws:
"THE UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSIONS UNDER THE SECURITIES ACT OF 1933 OR WITH THE
CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE SECURITIES LAW OF
1968, AS AMENDED. THE UNITS MAY NOT BE PLEDGED, SOLD OR TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS COVERING THE
UNITS OR AN OPINION OR QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
9. The undersigned hereby indemnifies and holds harmless the Company, and
its respective officers, directors, shareholders, employees and agents, as the
case may be, from and against any and all damages suffered and liabilities
incurred by any of them (including costs of investigation and defense and
attorneys' fees) arising out of any inaccuracy in the agreements,
representations, covenants and warranties made by the undersigned herein.
10. If the undersigned is purchasing the Units subscribed for hereby in a
fiduciary capacity, the above representations and warranties shall be deemed to
have been made on behalf of the person or persons for whom the undersigned is so
purchasing.
11. The undersigned hereby acknowledges and agrees that the undersigned is
not entitled to cancel, terminate or revoke this subscription or any agreements
of the undersigned hereunder and that such subscription and agreements shall
survive the death or disability of the undersigned.
12. The undersigned understands and acknowledges that this subscription
may be accepted or rejected by the Company in its sole discretion, together with
a completed and executed Prospective Investor Questionnaire and all information
required by the provisions hereof and payment of the full amount of the
subscription price for the Units subscribed for. Any amounts tendered in excess
of the total payable as the purchase price for Units as to which this
subscription has been accepted will thereafter be delivered to the undersigned
as soon as is practicable, all as described in the Confidential Private
Placement Memorandu. The Company shall signify its rejection by returning to
the undersigned this Subscription Agreement and all funds (without interest or
deduction) submitted by the undersigned.
-3-
<PAGE>
NEITHER THE COMPANY, NOR ANY OFFICER, DIRECTOR, SHAREHOLDER, EMPLOYEE OR
AGENT OF ANY OF THEM SHALL BE LIABLE TO ANY PIERSON FOR THE REJECTION, IN WHOLE
OR IN PART, OF ANY OFFER TO SUBSCRME TO PURCHASE UNITS, NOTWITHSTANDING THAT THE
UNDERSIGNED MAY OTHERWISE BE QUALEFIED AS A PROSPECTIVE INVESTOR.
13. If, prior to the sale of any Units to the undersigned, there is a
material change in die undersigned's investment intention as expressed herein,
or if there occurs any change which would make either the representations or
warranties made by the undersigned herein or the information provided by the
undersigned in the Prospective Investor Questionnaire materially untrue or
misleading, the undersigned agrees to immediately so notify the Company, and any
prior acceptance of the subscription of the undersigned shall be voidable at the
option of the Company.
IN WITNESS WHEREOF, the undersigned executes and agrees to be bound by this
Subscription Agreement by executing the Signature Page attached hereto on the
date therein indicated.
-4-
<PAGE>
SIGNATURE PAGE
(All information must be completed)
Date: August 20, 1998
/s/ Carlos Beharie $500,000 50,000 $500,000
- ----------------------- --------------- -------------- --------
Signature of Purchaser Purchase Price # of Warrants Total $ Investment
Charles Schwab & Co., Inc.
FBO Carlos Beharie Keogh Plan 1463-1994
__________________________________ ----------------------------------------
Signature of Joint Owner (if any) Name(s) of Purchaser (Print)
If Joint Ownership, check one: 101 Montgomery Street
San Francisco, CA 94104
----------------------------------------
_____ Joint Tenants, with Address:
Right of Survivorship
_____ Tenants in Common
_____ Community Property 022-448-4484
Social Security No. or Taxpayer I.D. No.
ACCEPTED AND AGREED:
SHOPPING.COM
By /s/Frank Denny
--------------------------------
Date: 11-5-98
-5-
<PAGE>
EXHIBIT 4.12
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE
THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION.
SHOPPING.COM
CONVERTIBLE PROMISSORY NOTE
$500,000.00 CORONA DEL MAR, CALIFORNIA
AUGUST 25, 1998
1. PRINCIPAL.
---------
FOR VALUE RECEIVED, the undersigned, SHOPPING.COM ("Maker"), promises
to pay to Charles Schwab & Co., Inc. FBO Carlos Beharie Keogh Plan 1463-1994
("Payee"), or order, at 2101 East Coast Highway, Corona Del Mar, CA 92625 or
such other place as the holder of this Note shall specify, in lawful money of
the United States of America, the principal amount of FIVE HUNDRED THOUSAND
DOLLARS ($500,000.00), together with interest at the rate of eight percent (8%)
per annum, payable as hereinafter provided.
2. PAYMENT OF INTEREST.
-------------------
Except as otherwise specifically provided below, interest will accrue
at the rate of eight percent (8%) per annum, simple interest, on the unpaid
principal amount of this Note. The Company agrees to pay all interest accrued on
the principal hereof six months from the date of this Note. Any accrued but
unpaid interest shall be payable on the earliest of (i) maturity and (ii)
conversion of this Note into shares of Common Stock as provided in paragraph 5
below if Payee does not elect to also convert the interest into Common Stock.
Unless prohibited by law, any accrued interest which is not paid on the date
when is due and payable shall bear interest at the same rate at which interest
is then accruing on the principal amount of this Note.
3. PAYMENT OF PRINCIPAL OF NOTE.
----------------------------
The Company agrees to pay the principal amount hereof, plus any
accrued and unpaid interest, to the holder of this Note six months from the date
of this Note. Any payment pursuant hereto shall first be applied to interest
due and owing at the date of such payment, and whatever remains after the amount
of such interest is deducted from such payment shall be applied to the principal
balance due hereunder, and the interest upon the portion of principal so
credited shall thereupon cease. Subject to the provisions of the following
paragraph, the
-1-
<PAGE>
Company shall have the right, without penalty, to prepay the indebtedness
represented hereby in part or in full at any time or times during the term
hereof. Any prepayment pursuant hereto shall first be applied to interest due
and owing at the date of such payment, and whatever remains after the amount of
such interest is deducted from such prepayment shall be applied to the principal
balance due hereunder, and the interest upon the portion of principal so
credited shall thereupon cease.
In the event the Company elects to prepay the principal of and interest
accrued on this Note, the Company shall notify the Payee in writing fifteen (15)
days in advance of its intention to repay any amount hereof, stating the
proposed payment date (the "Payment Date") and the amount to be repaid. At any
time prior to the Payment Date, the Lender may, but shall not be obligated to,
elect to convert all or any portion of the principal and interest to be repaid
on the Payment Date into shares of Common Stock at the Conversion Price then in
effect, by delivering to the Company, to the attention of the President, written
notice of its election to convert.
4. REGISTRATION RIGHTS.
-------------------
The Company and Lender shall enter into that certain Registration
Rights Agreement of even date herewith pursuant to which Lender will be
entitled, upon conversion of this Note into Common Stock, to cause the Company
to register such shares of Common Stock pursuant to Section 5 of the Securities
Act of 1933, as amended, at the cost and expenses of the Company, in the event
that the Company is registering shares of Common Stock for sale, except in
connection with employee benefit plans or an acquisition transaction.
5. CONVERSION.
----------
(a) Conversion Procedure. In lieu of accepting any repayment of the
--------------------
principal amount of, and accrued interest on, this Note, the Lender may convert
all or any portion of any principal or interest repayment into a number of
shares of the Company's Common Stock, no par value (the "Common Stock"),
determined by dividing the principal amount designated for conversion by the
"Conversion Price" (as defined below). Lender, in his sole discretion, may
elect to convert the principal and accrued interest into Common Stock (i) at any
time, (ii) upon notification by the Company that it intends to repay this Note
or any portion thereof or (iii) upon maturity of this Note. Lender shall notify
the Company of its intention to convert into Common Stock in writing delivered
to the Company at its principal executive offices, attention John Markley, Chief
Executive Officer.
(b) Deliveries by the Company. On the Payment Date, the Company will
-------------------------
pay to the Lender any principal amount proposed to be repaid on such date which
the Lender has not elected to convert into shares of Common Stock and all
interest accrued to date on the principal amount of this Note. As soon as
reasonably possible after a conversion has been effected, the Company will
deliver to the Lender:
-2-
<PAGE>
(i) a certificate representing the number of shares of Common
Stock (excluding fractional shares) issuable by reason of the conversion,
which shares shall be validly issued, fully paid and nonassessable; and
(ii) payment for any fractional shares of Common Stock that would
otherwise have been issued upon conversion of the principal amount so
converted.
(c) Conversion Price.
----------------
(i) The initial Conversion Price shall be three dollars and
thirty cents ($3.30) per share. In order to prevent dilution of the
conversion rights granted under this Note, the Conversion Price will be
subject to adjustment from time to time pursuant to this paragraph 5(c).
(ii) If any capital reorganization, reclassification,
consolidation or merger or any sale of substantially all of the Company's
assets (collectively, the "Corporate Transactions") is effected in such a
way that the holders of Common Stock become entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then,
as a condition to such Corporate Transaction, lawful and adequate provision
will be made whereby the Lender will thereafter have the right to acquire
and receive in lieu of shares of Common Stock, such shares, securities or
assets as would have been issuable to the Lender if it had converted the
principal amount of, and accrued interest on, this Note immediately prior
to such Corporate Transaction.
6. WAIVER.
------
Maker and all endorsers, guarantors and all persons liable, or to
become liable on this Note (each hereinafter referred to in this Section as the
"Applicable Party"), jointly and severally, waive presentment, protest and
demand, notice of protest, demand, dishonor and nonpayment of this Note, notice
of acceleration, notice of intent to accelerate, and any and all other notices
or matters of a like nature, and consent to any and all renewals and extensions
of the time of payment hereof. Each Applicable Party agrees that at any time and
from time to time, without notice, (i) the terms of payment herein, or (ii) the
terms of any guaranty of this Note, or (iii) the security described in any
documents at any time securing this Note, may be modified, increased, changed or
exchanged, in whole or in part, without in any way affecting the liability of
any Applicable Party.
7. LATE CHARGE.
-----------
If any payment of interest and/or principal hereunder is not received
by Payee within ten (10) days after the due date thereof, Maker agrees to pay
Payee a late charge equal to five percent (5%) of the unpaid amount. Maker
acknowledges that it would be extremely difficult to fix Payee's actual damages
for the failure of Maker to timely pay any amount due under this Note.
Accordingly, such late charge shall be deemed to be Payee's damages for any such
late payment, provided that such late charge shall not limit Payee's right to
compel prompt performance by Maker or to exercise other remedies available to
Payee.
-3-
<PAGE>
8. DEFAULT BY MAKER.
----------------
Any one or more of the following shall constitute an "Event of Default"
by Maker under the terms of this Note:
A. If Maker fails to pay any payment, whether at maturity or otherwise,
of principal and/or interest upon the due date thereof.
B. If Maker defaults in the performance or observance of any of the
covenants, conditions or agreements set forth in this Note.
C. If Maker institutes proceedings to be adjudicated a voluntary
bankrupt; consents to the filing of a bankruptcy proceeding against Maker; files
or consents to filing of a petition or answer or consent seeking reorganization
under the federal bankruptcy laws or any other similar applicable federal or
state law; consents to the appointment or a receiver of liquidator or trustee or
assignee in bankruptcy or insolvency of the Maker or a substantial part of
Maker's property; an assignment for the benefit of creditors is made by the
Maker; or Maker admits in writing of Maker's inability to pay Maker's debts
generally as they become due.
9. REMEDIES UPON DEFAULT.
---------------------
If an Event of Default occurs, at the option of Payee, and upon written
demand, the Payee may accelerate the due date of this Note and declare the
entire outstanding principal balance hereof, including all fees and costs (if
any), and accrued but unpaid interest, immediately due and payable in full.
Each of the options, rights and remedies provided herein or available
at law or in equity which may be exercised by Payee may be exercised separately
or concurrently with any one or more other options, rights or remedies available
to Payee. Failure to exercise any option, right or remedy shall not constitute a
waiver of the right of the Payee to exercise such option, right or remedy in the
event of or with respect to any prior, subsequent or concurrent transaction or
occurrence of the same or a different kind or character.
10. ATTORNEYS' FEES.
---------------
Maker agrees to pay all costs of collection or enforcement of this Note
when incurred, including, but not limited to, reasonable attorneys' fees. If any
suit or action is instituted to enforce this Note, Maker promises to pay, in
addition to the costs and disbursements allowed by law, such sum as the court
may adjudge as reasonable attorneys' fees in such suit or action. Maker shall
also pay all reasonable attorneys' fees and costs incurred by Payee in
connection with any modification, amendment or consent related to any
renegotiation or modification of this Note.
-4-
<PAGE>
11. SEVERABILITY.
------------
Every provision of this Note is intended to be severable. If any term
or provision hereof is declared by a court of competent jurisdiction to be
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
12. GOVERNING LAW.
-------------
This Note shall be governed by and construed in accordance with the
laws of the State of California.
13. NOTICES.
-------
All notices, statements or demands shall be in writing and shall be
served in person, by telegraph, by express mail, by certified mail or by private
overnight delivery. Service shall be deemed conclusively made (i) at the time
of service, if personally served, (ii) at the time (as confirmed in writing by
the telegraphic agency) of delivery thereof to the addressee, if served
telegraphically, (iii) twenty-four (24) hours (exclusive of weekends and
national holidays) after deposit in the United States mail, properly addressed
and postage prepaid, if served by express mail, (iv) five (5) calendar days
after deposit in the United States mail, properly addressed and postage prepaid,
return receipt requested, if served by certified mail, (v) twenty-four (24)
hours after delivery by the party giving the notice, statement or demand to the
private overnight deliverer, if served by private overnight delivery and (vi) at
the time of electronic transmission, if a copy of such notice is mailed within
twenty-four (24) hours after the transmission.
Any notice or demand to Maker shall be given to:
Howard S. Schwartz, Executive Vice President
Shopping.com
2101 E. Coast Hwy., Garden Level
Corona del Mar, CA 92625
Any notice or demand to Payee shall be given to:
Charles Schwab & Co., Inc.
FBO Carlos Beharie Keogh Plan 1463-1994
101 Montgomery Street
San Francisco, CA 94104
Any party hereto may change its address for the purpose of receiving
notices, demands or other communications as herein provided by a written notice
given in the manner aforesaid to the other party or parties hereto.
-5-
<PAGE>
14. SUCCESSORS AND ASSIGNS.
----------------------
All the terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
15. ASSIGNABILITY.
-------------
Maker's obligation hereunder are nontransferable and nonassignable
without the prior written consent of Payee.
16. AMENDMENT.
---------
Neither this Note nor any term or provision hereof may be modified,
amended or altered except by a written instrument approved by Payee and signed
by Maker.
17. HEADINGS.
--------
Headings at the beginning of each numbered Paragraph of this Note are
intended solely for convenience and are not to be deemed or construed to be a
part of this Note.
18. PURPOSE OF LOAN.
---------------
The proceeds of this Note are to be used by Maker exclusively for
business purposes, and not for personal, family or household purposes.
19. TIME OF THE ESSENCE.
-------------------
TIME IS EXPRESSLY DECLARED TO BE THE ESSENCE of each obligation of the
Maker hereunder and in all matters concerning this Note, including all acts or
things to be done or performed in connection herewith, and specifically of every
provision of this Note in which time is an element.
20. COMPLIANCE WITH USURY LAWS.
--------------------------
Maker and Payee intent to comply with all applicable usury laws. In
fulfilling this intention, all agreement between Maker and Payee are expressly
limited so that the amount of interest paid or agreed to be paid to Payee for
the use, forbearance, or detention of money under this Note shall not exceed the
maximum amount permissible under applicable law.
If for any reason payment of any amount required under this Note shall
be prohibited by law, then the obligation shall be reduced to the maximum
allowable bylaw. If for any reason Payee receives as interest an amount that
would exceed the highest lawful rate, then the amount which would constitute
excessive interest shall be applied to the reduction of the principal of this
Note and not to the payment of interest. If any conflict arises between this
provision and any provision of any other agreement between Maker and Payee, then
this provision shall control.
-6-
<PAGE>
21. LEGAL REPRESENTATION.
--------------------
Maker agrees and represents that such party has been represented by
such party's own legal counsel with regard to all aspects of this Note, or if
such party is acting without legal counsel, that such party has had adequate
opportunity and has been encouraged to seek the advice of such party's own legal
counsel prior to the execution of this Agreement.
22. JURISDICTION.
------------
Any action whatsoever brought upon or relating to this Note shall be
instituted and prosecuted in the state courts of California, County of Orange,
or the federal district court therefore, and each party waives the right to
change the venue. The parties hereto further consent to accept service of
process in any such action or proceeding by certified mail, return receipt
requested.
"MAKER" "PAYEE"
SHOPPING.COM Charles Schwab & Co., Inc.
FBO Carlos Beharie Keogh Plan
1463-1994
By: /s/ Frank W. Denny By: /s/ Carlos Beharie
------------------- -------------------
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<PAGE>
EXHIBIT 4.13
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 20th day of
August, 1998 by and between, SHOPPING.COM, a California corporation (the
"Company"), and Charles Schwab & Co., Inc. FBO Carlos Beharie Keogh Plan 1463-
1994 (the "Holder").
RECITALS
--------
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
50,000 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 an initial purchase price of Three Dollars and Thirty
Cents ($3.30) 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. TERM 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 August 20, 2001 (the "Expiration
Date").
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
-1-
<PAGE>
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 a 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 any 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 adjustment 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 Three Dollars and Thirty Cents ($3.30)
per Share, adjusted as provided below. The Exercise Price may 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:
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.
-2-
<PAGE>
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 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 if the controlling corporation
shall agree 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 been 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 Warrants and (y) any Common Stock issued as 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 shares of Common Stock which
have previously been registered or which have been sold to the public.
-3-
<PAGE>
(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 rules 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
limitation, 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.
(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 firm 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 a registration on 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 Holder's 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.
-4-
<PAGE>
6.4 Exclusion of Registrable Securities. Notwithstanding any other
-----------------------------------
provisions of this Section 6, if the representative of the underwriters 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) 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 be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account 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 to 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 effected 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-days 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 statement
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 permit, in lieu of filing a post-effective
amendment that (I) includes any prospectus required by Section 10(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.
-5-
<PAGE>
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement 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 statement 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,
prepare 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 reasonably 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.
7. FRACTIONAL SHARES; ISSUANCE OF SHARES; LEGENDS.
----------------------------------------------
7.1 Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares 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 on the exercise 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
-6-
<PAGE>
on any national securities exchange, the average of the per share closing bid
prices of the 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 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.
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 it
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 of 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.
-7-
<PAGE>
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 addresses:
If to the Company: SHOPPING.COM
2101 E. Coast Hwy., Garden Level
Corona del Mar, California 92625
Attention: Mr. Howard Schwartz
With a copy to: Jeffers, Wilson, Shaff & Falk, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Attention: Barry D. Falk, Esq.
If to the Holder: Charles Schwab & Co., Inc.
FBO Carlos Beharie Keogh Plan 1463-1994
101 Montgomery Street
San Francisco, CA 94104
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 notices shall be deemed to be 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 them
in writing at any time.
9.3 Entire Agreement. This Agreement, and any documents, 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 agreements, 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.
-8-
<PAGE>
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 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
affecting 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, a California corporation
By: /s/ Frank W. Denny
----------------------
"HOLDER"
/s/ Carlos Beharie
----------------------
Charles Schwab & Co., Inc.
FBO Carlos Beharie Keogh Plan 1463-1994
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EXHIBIT 10.2
SUBSCRIPTION AGREEMENT
This Subscription Agreement, dated as of August 12, 1998, is by and among,
SHOPPING.COM, INC., a California corporation (the "Company"), and PREMIERE RADIO
NETWORKS, INC., a Delaware corporation (the "Shareholder").
ARTICLE I
SUBSCRIPTION
1.1 SUBSCRIPTION. Subject to the terms and conditions set forth herein, the
Shareholder hereby subscribes for and agrees to purchase 66,667 shares of Common
Stock of the Company (the "Shares") at the purchase price per share of $15.00
(the "Subscription Price") in consideration for radio advertising services,
valued at $1,000,000, acquired by the Company from the Shareholder on August 12,
1998. Exhibit A hereto sets forth $1,000,000 of advertising time to be
provided. The Subscription Price shall be payable on a date mutually acceptable
to the parties that is within five days of the date of execution of this
agreement (the "Closing Date"). Upon receipt of the Subscription Price for the
Shares, the Company shall cause its transfer agent to issue to the Shareholder,
within five days of the Closing Date, a -certificate representing the Shares.
The Company represents and warrants to the Shareholder that, upon payment and
issuance and delivery of the Shares in accordance with this Agreement, the
Shares will be duly authorized, validly issued, fully paid and nonassessable.
1.2 ADDITIONAL SHARES. If on August 12, 1999, the average closing price of
the Company's Common Stock for the previous ten trading days (the "Average
Closing Price") is less than $15.00 per share (as adjusted for any stock splits
or recapitalization), then the Company shall issue additional shares of Common
Stock to the Shareholder (the "Additional Shares") in an amount equal to (i)
$1,000,000 divided by the Average Closing Price minus (ii) 66,667, provided,
however that the Company shall not be obligated in any case to issue more than
133,333 Additional Shares; provided further that if the Shareholder shall have
sold any of the Shares prior to August 12, 1999, then the number of Additional
Shares to be issued shall be reduced by a number of shares equal to the product
of (x) the proceeds received by Seller on account of such sale, divided by (y)
the Average Closing Price.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants as of the date hereof that:
2.1 ORGANIZATION; GOOD STANDING; QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own and operate its properties and assets and to carry on its business as now
conducted, to execute and deliver this Agreement, to issue and sell the Shares
at the Closing, and the Additional Shares when due and to carry out the
provisions of this Agreement. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure to so
qualify would have a material adverse effect on its business, properties,
prospects or financial conditions.
2.2 CAPITALIZATION; SUBSIDIARIES. The Company has the authority to issue
20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The
Company has at least 200,000 authorized and unissued shares of Common Stock.
The Company will reserve 133,333 shares of its authorized and unissued Common
Stock at all times for issuance pursuant to Section 1.2 hereof.
2.3 AUTHORIZATION. All Corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder at the Closing and the authorization, issuance, sale and
delivery of the Shares and the Additional Shares (together, the "Purchased
Shares") being sold hereunder has been taken or will be taken prior to the
Closing, and this Agreement constitutes a valid and legally binding obligation
of the Company, enforceable in accordance with its terms except (i) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws
of general application affecting enforcement of creditors' rights generally, and
(ii) as limited by or relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
2.4 VALID ISSUANCE OF SHARES. The Purchased Shares, when issued, sold and
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and non-
assessable, and will be free of restrictions on transfer other than restrictions
on transfer under this Agreement and under applicable state and federal
securities laws.
2.5 NO CONFLICT. The execution, delivery and performance by the Company
under this Agreement and the issuance and delivery of the Purchased Shares do
not and will not (a) violate the articles of incorporation or bylaws of the
Company or any order,
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judgment or decree of any governmental or regulatory authority or agency binding
upon the Company or upon any assets of the Company, (b) violate any provision of
law, or any rules or regulations of any governmental or regulatory body,
department or agency, applicable to the Company of which the Company is aware,
(c) violate, conflict with, result in a material breach or constitute a default
under any contract or other agreement to which the Company is a party or (d)
require the approval of any person under any material indenture, mortgage,
instrument, contract or other agreement to which the Company is a party.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, qualification, order or
authorization of, or filing with, any local, state or federal government
authority is required on the part of the Company in connection with the
Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of Purchased Shares by the Company, except such filings
which will be made prior to the Closing, except that any notices of sale
required to be filed with the Securities Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "Securities Act"), or such post-
closing filings as may be required under applicable state securities laws, which
will be timely filed within the applicable periods therefor.
2.7 LITIGATION. There is no action, suit, proceeding or investigation
pending or currently threatened against the Company that questions the validity
of this Agreement, or the consummation of the transactions contemplated hereby.
2.8 DISCLOSURE; REPORTS AND FINANCIAL STATEMENTS. The Company has provided
Shareholder with all the information reasonably available to it without undue
expense that Shareholder has requested for deciding whether to purchase the
Common Stock. The Company has previously furnished Shareholder with true and
complete copies of its most recent reports on Form 10-KSB for the year ended
January 31, 1998, on Forms 8-K filed subsequently thereto and on Form 10-QSB for
the interim period ended April 30,1998 and the proxy statement for the Company's
1998 Annual Meeting of Shareholders (the "SEC Reports"). The Company's SEC
Reports have been filed with the SEC and as of such date and to the best of the
Company's knowledge, the SEC Reports complied in all material respects with the
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "1934 Act"), as the case may be, and the rules and regulations of
the SEC thereunder applicable to such the Company SEC Reports. As of their
respective dates and to the best of the Company's knowledge, the SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein. The financial statements contained in the
SEC Reports have been prepared in accordance with generally accepted accounting
principles, except for the absence of footnotes from interim period statements
and customary year-end adjustments, and present fairly the financial position
and results of operations of the Company as of the applicable dates thereto.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER
The Shareholder hereby represents, warrants, acknowledges and agrees as
follows:
3.1 INVESTMENT INTENT. The Shareholder is the sole and true party in
interest and is acquiring the Purchased Shares for its own account, for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of the Purchased Shares. No other person has any
direct or indirect beneficial ownership interest in the Purchased Shares.
3.2 NO REGISTRATION UNDER FEDERAL OR STATE SECURITIES LAWS. The Shareholder
acknowledges that the Shares have not and the Additional Shares when issued will
not be registered under the Securities Act of 1933, as amended (the "Securities
Act"), or the securities laws of any state by reason of a specific exemption or
exemptions from registration under the Securities Act and applicable state
securities laws, and that the Company's reliance on such exemptions is
predicated on the accuracy and completeness of the Shareholder's
representations, warranties, acknowledgments and agreements herein. Accordingly,
the Purchased Shares may not be offered, sold, transferred, pledged or otherwise
disposed of by the Shareholder without an effective registration statement under
the Securities Act and any applicable state securities laws or an opinion of
counsel to the Company that the proposed transaction will be exempt from
registration.
3.3 RESTRICTIONS ON RESALE. The Shareholder acknowledges that since the
Shares are not and the Additional Shares will not be registered under the
Securities Act and applicable mate securities laws, they must be held by the
Shareholder indefinitely unless they are subsequently registered under the
Securities Act and applicable state securities laws or unless an exemption from
registration is available. The Shareholder acknowledges that except as set
forth in Article IV, the Company is not required to register the Purchased
Shares under the Securities Act or any applicable state securities law or to
make any exemption from registration available. The Shareholder acknowledges
that to the extent the exemption from registration provided by Rule 144 under
the Securities Act becomes available for the resale of the Purchased Shares, any
such resales may be made only in accordance with the terms and conditions of
that rule, including, among other things, the existence of a public market for
the Purchased Shares, the availability of current public information about the
Company, the resale occurring not less than two years after the Purchased Shares
were purchased and paid for, the sale being effected in a specified manner and
the number of Purchased Shares being sold not exceeding specified limitations.
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<PAGE>
3.4 RESTRICTIVE LEGEND AND STOP TRANSFER ORDER. The Shareholder
acknowledges that the certificates representing the Purchased Shares will bear
the following legends:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state. The shares may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel for the Company that the
proposed transaction will be exempt from such registration."
"The shares evidenced by this certificate are subject to the terms of
certain Subscription Agreements by and between Shopping.Com, Inc. and
Premiere Radio Networks, Inc., effective as of August 12,1998, a copy of
which is on file at the principal office of the Corporation. The sale,
transfer or other disposition of such shares is subject to the terms of
said agreement and such shares are transferable only upon proof of
compliance therewith."
The Shareholder further acknowledges that the Company reserves the right to
place a stop order against the certificate representing the Purchased Shares and
to refuse to effect any transfers there of in the absence of an effective
registration statement with respect to the Purchased Shares or in the absence of
an opinion of counsel to the Company that such transfer is exempt from
registration under the Securities Act and under applicable state securities laws
and that the Corporation is authorized to refuse to honor any transfer or
alienation of any shares of Common Stock unless and until it is satisfied that
the transfer is in compliance with the terms of this Agreement.
3.5 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR. The Shareholder has
knowledge and experience in financial and business matters so that the
Shareholder is capable of evaluating the merits and risks of its investment in
the Company and of protecting its own interests in connection therewith. The
Shareholder acknowledges and represents to the Company that it is an "Accredited
Investor," under Rule 501(a)(3) under the Securities Act, by reason of the fact
that the Shareholder is a corporation with total assets in excess of $5,000,000.
3.6 ACCESS TO INFORMATION. The Shareholder has had the opportunity to
review all documents and information which the Shareholder has requested
concerning its investment in the Company. The Shareholder has had the
opportunity to ask questions of the Company's management, which questions were
answered to its satisfaction. The
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Shareholder has, relied only on the SEC Reports and the foregoing information in
determining to make its investment in the Company.
3.7 INVESTMENT RISKS. The Shareholder acknowledges that an investment in
the Company involves substantial risks. The Shareholder is able to bear the
economic risk of its investment for an indefinite period of time.
3.8 COMMISSIONS AND ADVERTISING. The Shareholder has not received any
public media advertisements and has not been solicited by any form of mass
mailing solicitation, including any leaflet, public promotional meeting,
television or radio advertisement or other form of general advertising.
ARTICLE IV
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
4.1 DEFINITIONS. For the purposes of this Agreement:
"Form S-3" means such form under the Securities Act as in effect on the
date hereof or any registration form under the Securities Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the
SEC.
"Holder" means any person owning or having the right to acquire
Registrable Securities or any assignee thereof in accordance with Section
4.10 hereof.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement or similar document
in compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"Registrable Securities" means (i) the Purchased Shares, and (ii) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of the Purchased Shares, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his rights
under this Section 4 are not assigned.
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4.2 COMPANY REGISTRATION. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its stock or
other securities under the Securities Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities or a registration in which the only Common Stock being
registered is Common Stock issued upon conversion of debt securities which are
also being registered), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of each
Holder given within 20 days after mailing of such notice by the Company, the
Company shall, subject to the provisions of Section 4.5, cause to be registered
under the Act all of the Registrable Securities that each such Holder has
requested to be registered, unless (i) the proposed registration is being made
following demand by shareholders other than the Shareholder pursuant to a
contract with the Company and (ii) the Company is restricted from registering
some or all of such Registrable Securities pursuant to Such contract.
4.3 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 4 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
4.4 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
4.2 for each Holder (which right may be assigned as provided in Section 4.10),
including (without limitation) all registration, filing, and qualification fees,
printers and accounting fees relating or apportionable thereto and the fees and
disbursements of one counsel for the selling Holders selected by them, but
excluding underwriting discounts and commissions relating to Registrable
Securities.
4.5 UNDERWRITING REQUIREMENTS. In connection with any offering involving an
underwriting of shares of the Company's capital stock, the Company shall not be
required under Section 4.2 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success
of the offering by the Company. If the total amount of Registrable Securities
requested by shareholders to be included in such offering exceeds the amount of
securities that the underwriters determine in their sole discretion is
compatible with the
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success of the offering, then the Company shall be required to include in the
offering, only that number of Registrable Securities which the underwriters
determine in their sole discretion will not jeopardize the success of the
offering (the securities so included to be apportioned pro rata among the
selling shareholders according to the total amount of securities entitled to be
included therein owned by each selling stockholder or in such other proportions
as shall mutually be agreed to by such selling shareholders) but in no event
shall the amount of securities of the selling Holders included in the offering
of the Company's securities be less than 25 percent of the number of shares
originally requested to be included. For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder which is a
holder of Registrable Securities and which is a partnership or corporation, the
partners, retired partners and shareholders of such holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
stockholder," and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
4.6 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 4.
4.7 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under this Section 4:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, any underwriter (as defined in the Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Act, or the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect, thereof) arise out of
or are based upon any of the following statements, omissions or violations
(collectively a "Violation"); (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, or the
1934 Act or any state securities law; and the Company will pay to each such
Holder, underwriter or controlling person, as incurred any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage,
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liability, or action; provided, however, that the indemnity agreement
contained in this subsection 4.7(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability, or action to the
extent that it, arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder, underwriter
or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers
who has signed the registration statement, each person, if any, who controls
the Company within the meaning of the Act, any underwriter, any other Holder
selling securities in such registration statement and any controlling person
of any such underwriter or other Holder, against any losses, claims, damages,
or liabilities (joint or several) to which any of the foregoing persons may
become subject, under the Act, or the 1934 Act or other federal or state i
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Holder
expressly for use in connection with such registration; and each such Holder
will pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this subsection 4.7(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement
contained in this subsection 4.7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, that, in no event shall any indemnity
under this subsection 4.7(b) exceed the gross proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
4.7 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 4.7, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party,
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if representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 4.7, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
4.7.
(d) If the indemnification provided for in this Section 4.7 is held by a
court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent. that the provisions on
indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering am in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section 4.7
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
4.8 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act aud
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
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(a) file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the 1934 Act; and
(b) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company
that it has complied with the reporting requirements of SEC Rule 144 (at any
time after 90 days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after
it has become subject to such reporting requirements), or that it qualifies
as a registrant whose securities may be resold pursuant to Form S-3 (at any
time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant
to such form.
4.9 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 4.9: (1)
if Form S-3 is not available for such offering by the Holders; (2) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$25,000; (3) if the Company shall furnish to the Holders a certificate signed
by the President of the Company stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such Form S-3 Registration to be
effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not
more than 60 days after receipt of the request of the
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Holder or Holders under this Section 4.9; provided, however, that the Company
shall not utilize this right more than once it any twelve month period; (4)
if the Company has, within the 12 month period preceding the date of such
request, already effected two registrations on Form S-3 for the Holders
pursuant to this Section 4.9; (5) if such registration would require an
additional audit of the financial statements of the Company; or (6) in any
particular jurisdiction in which the Company would be required to qualify to
do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with
a registration requested pursuant to Section 4.9, including (without
limitation) all registration, filing, qualification, printer's and accounting
fees and the reasonable fees, and disbursements of counsel for the selling
Holder or Holders and counsel for the Company, shall be borne pro rata by the
Holder or Holders participating in the Form S-3 Registration.
4.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities pursuant to this Section 4.10 may be assigned
(but only with all related obligations) by a Holder to a transferee or assignee
of such securities, provided: (a) the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 4.11 below;
(c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act; and (d) the Company consents to such
transfer, which consent shall not be unreasonably withheld.
4.11 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that, during
the period of duration specified by the Company and an underwriter of Common
Stock or other securities of the Company, following the date of the first sale
to the public pursuant to a registration statement of the Company filed under
the Act pursuant to this Agreement, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to, sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
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(a) all officers and directors of the Company enter into similar
agreements; and
(b) such market stand-off time period shall not exceed 180 days. In
order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of each Investor (and
the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this Section 4.12
shall not apply to a registration relating solely to employee benefit plans on
Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or
a registration relating solely to a Commission Rule 145 transaction on Form S-14
or Form S-15 or similar forms which may be promulgated in the future.
ARTICLE V
MISCELLANEOUS
5.1 ENTIRE UNDERSTANDING. This Subscription Agreement states the entire
understanding between the parties with respect to the subject matter hereof, and
supersedes all prior oral and written communications and agreements, and all
contemporaneous oral communications and agreements, with respect to the subject
matter hereof.
5.2 PARTIES IN INTEREST. This Subscription Agreement, upon acceptance by
the Company, shall bind, benefit, and be enforceable by and against each parry
hereto and its successors, assigns, heirs, administrators and executors.
5.3 SEVERABILITY. If any provision of this Subscription Agreement is
construed to be invalid, illegal or unenforceable, then the remaining provisions
hereof shall not be affected thereby and shall be enforceable without regard
thereto.
5.4 SECTION HEADINGS. Article and section headings in this Subscription
Agreement are for convenience of reference only, do not constitute a part of
this Subscription Agreement, and shall not affect its interpretation.
5.5 REFERENCES. All words used in this Subscription Agreement shall be
construed to be of such number and gender as the context requires or permits.
Unless a particular context clearly provides otherwise, the words "hereof" and
"hereunder" and
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similar references refer to this Subscription Agreement in its entirety and not
to any specific Section or subsection.
5.6 CONTROLLING LAW. THIS SUBSCRIPTION AGREEMENT IS MADE UNDER, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
5.7 NOTICES. All notices under this Agreement shall be in writing and shall
be deemed to have been given at the time when mailed by registered or certified
mail, addressed to the party to which notice is given, to the address set forth
above (in the case of the Corporation) and at the address set forth on the
signature pages to this Agreement in the case of the Shareholder, or to such
changed address as such party may have fixed by notice; provided, however, that
any notice of change of address shall be effective only upon receipt.
5.8 ARBITRATION. The parties waive their right to seek remedies in court,
including any right to a jury trial. The parties agree that in the event of any
dispute arising between or among any of the parties in connection with this
Agreement, such dispute shall be settled only by arbitration to be conducted
only in Los Angeles County or Orange County, in accordance with the rules of the
American Arbitration Association ("AAA") applying the laws of California. The
parties agree that such arbitration shall be conducted by one or more refired
judges who were or are active in the securities business or are experienced in
dispute resolution regarding the securities business, that prearbitraiton
discovery shall be limited to the greatest extent provided by the rules of AAA,
that the arbitration award shall not include factual findings or conclusions of
law, and that no punitive damages shall be awarded. The parties understand that
any party's right to appeal or to seek modification of rulings in an arbitration
is severely limited. Any award rendered by the arbitrators shall be final and
binding and judgment may be entered upon it in any court of competent
jurisdiction at the time such award is rendered.
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IN WITNESS WHEREOF, the Shareholder has executed this Subscription Agreement
as of the date first written above.
SHAREHOLDER: PREMIERE RADIO NETWORKS, INC.
By: ______________________________________
Title: _______________________________
Address: 15620 Ventura Boulevard, 5th
Floor Sherman Oaks, CA 91403
Attention: President
The Company hereby accepts the foregoing subscription and acknowledges
receipt of the Subscription Price as of the date set forth thereon.
SHOPPING.COM, INC.
By: ______________________________________
Title: _______________________________
Address: 2101 East Coast Highway
Corona Del Mar, CA 92625
Attention: President
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EXHIBIT 23.1
CONSENT OF SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
We have issued our report dated April 21, 1998, accompanying the financial
statements of Shopping.com contained in the Registration Statement and
prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTIEN LLP
Los Angeles, California
November 24, 1998
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