U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
____________
Commission file number: 000-29518
SHOPPING.COM
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0733679
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2101 East Coast Highway, Garden Level
Corona Del Mar, California 92625
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 640-4393
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK NO PAR VALUE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ..X.. No .....
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
State issuer's revenues for the fiscal year ended January 31, 1998.....$850,724
Aggregate market value of the Registrant's Common Stock (based on the price at
which such equity was sold on December 5, 1997) held by non-affiliates of the
Registrant. -- $19,632,610.
Number of shares of common stock outstanding as of January 31, 1998...4,002,000
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Documents Incorporated By Reference
The information required by Part III of this report, to the extent not set forth
herein, is incorporated herein by reference from the issuer's definitive proxy
statement relating to the annual meeting of stockholders to be held in 1998,
which definitive proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
Exhibit Index on page 70
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TABLE OF CONTENTS
Page
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PART I
Item 1. DESCRIPTION OF BUSINESS.............................................4
Item 2. DESCRIPTION OF PROPERTY............................................17
Item 3. LEGAL PROCEEDINGS..................................................18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ..........20
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .........25
Item 7. FINANCIAL STATEMENTS...............................................41
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................64
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.........64
Item 10. EXECUTIVE COMPENSATION.............................................64
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................64
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................64
Item 13. EXHIBITS AND REPORTS ON FORM 8-K...................................64
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Annual Report on Form 10-KSB and the documents incorporated herein
by reference contain forward-looking statements 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 trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend," and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth in this Item 1 as well as under Item 6 "Management's
Discussion and Analysis or Plan of Operations --Factors That May Affect Future
Performance" and "-- Liquidity and Capital Resources." PARTICULAR ATTENTION
SHOULD BE PAID TO THE CAUTIONARY STATEMENTS INVOLVING THE COMPANY'S LIMITED
OPERATING HISTORY, THE UNPREDICTABILITY OF ITS FUTURE REVENUES, THE COMPANY'S
NEED FOR AND THE AVAILABILITY OF CAPITAL RESOURCES, THE EVOLVING NATURE OF ITS
BUSINESS MODEL, THE INTENSELY COMPETITIVE ONLINE COMMERCE AND RETAIL
ENVIRONMENTS, AND THE RISKS ASSOCIATED WITH CAPACITY CONSTRAINTS, SYSTEMS
DEVELOPMENT, MANAGEMENT OF GROWTH AND BUSINESS EXPANSION. 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 Securities and
Exchange Commission ("SEC").
GENERAL
Shopping.com (the "Company" or "Registrant") is an Internet-based
electronic retailer ("E-retailer") specializing in marketing a broad range of
products and services at wholesale prices to both consumers and trade customers.
Product categories currently available on the Company's Web site include:
computers & software, downloadable software, consumer electronics, office
furniture, office products, books, music CDs & cassettes, musical instruments,
movies, sheet music, cigar apparel & accessories, cigars, lighters, housewares,
gourmet foods, baby & nursery, auto accessories, auto electronics, auto parts
catalog, bath, hardware, kitchen, lawn & garden, lighting, patio furniture,
plumbing, heating & cooling, storage and organization, tools, luggage, men's
furnishing & accessories, travel bags & accessories, women's accessories, marine
supplies, bicycles, games & activities, golf & sporting goods, toys & hobbies,
video games, pet supplies, bath & body care, fragrances, personal health &
beauty care, medical equipment & supplies, vitamins, collectibles, gifts,
sunglasses, watches, and prints & posters. 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,
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music CDs and books. The Company believes that with the development of its
marketing strategy and merchandise plan, the sales of computers and software
will decrease as a percentage of the Company's total sales. There can be no
assurance that this will be the case.
The Company has experienced significant growth in customer traffic
since its inception. For example; although the Company only commenced selling on
the Internet on July 11, 1997, the number of visitors to the Company's Web site
increased from 5,796 during the second quarter to 299,320 during the fourth
quarter, while the number of Web site hits (pages viewed within the Shopping.com
Web site) increased from 183,951 during the second quarter to 11,645,662 during
the fourth quarter.
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 proprietary information systems to provide its
customers with access to an automated marketplace of products and services,
which consist of the inventories of multiple manufacturers and distributors,
price comparisons, detailed product descriptions, product availability, delivery
status of products ordered and back order information. Utilizing proprietary
technology, the Company has designed a fully-scalable systems architecture for
the Internet shopping marketplace.
Shopping.com generates revenues similar to a retail store when its
customers purchase goods from its Web site. The Company adjusts gross margins on
a product by product basis based on competitive prices and its cost of the goods
which is not set by the vendor. The experience of the Company's management as
retailers enables them to negotiate the vendors' prices and to make and adjust
selling prices thereby creating the gross profit margin for the sale of goods or
services. When a product is purchased by a customer on the Company's Web site,
the Company receives payment from the customer's credit card through a financial
institution intermediary usually within 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 generates 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") which is the Company's exclusive supplier for
the computer hardware, software, and network peripherals which En Pointe is
authorized to sell. The agreement with En Pointe extends for a term of five
years. The strategic advantage of not entering into exclusive supplier
agreements is that the Company retains its ability to source several of the same
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products from different vendors, providing lower prices for the Company's
customers. The three vendors which supplied the Company with the most inventory
as measured by cost of goods sold, each a vendor of computer and consumer
electronic products, supplied approximately 23%, 23% and 7%, respectively of the
total cost of goods purchased for resale for the period ending January 31, 1998.
Although these three vendors supplied approximately 53% of the Company's total
products purchased for resale for the period ending January 31, 1998, the
Company believes that it has no material vendors such that the termination of
any arrangement would materially adversely affect the Company's business or
results of operations. The Company believes that the large percentages
attributable to these three vendors will not recur over the next year, but
rather are the result of factors, such as large one-time sales in relation to
the Company's sales volume in its initial sales year that most likely will not
be repeated. In addition, in the event that the relationship with any one vendor
should terminate, the Company believes that it would be able to find other
comparable suppliers.
Customers order products and services on Shopping.com's Web site and
generally provide payment by either credit card over the Internet through
Verisign or by calling 1-888- LOVE-2-SHOP. Shipments are then made by the
manufacturer or distributor directly to the customer after verification by
Shopping.com that the payment has been properly credited. Because transactions
are accomplished without the need to maintain inventory, warehouse facilities,
retail store space or attendant personnel, the Company believes it will be able
to obtain market share by passing cost savings along to its customers, selling,
as a result, its products and services at a discount to typical retail and
warehouse/discount stores. For the same reasons, the Company is also able to
provide a broader merchandise mix than retail stores, warehouse/discount stores
and mail order catalogue 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.
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INDUSTRY BACKGROUND
According to the U.S. Department of Commerce report, The Emerging
Digital Economy [April 1998], "in 1994, three million people, most of them in
the United States, used the Internet. In 1998, 100 million people around the
world use the Internet. Some experts believe that one billion people may be
connected to the Internet by 2005."
The emergence of the Internet as a significant communications medium is
driving the development and adoption of Web content and commerce applications
that offer both convenience and value to consumers, as well as unique marketing
opportunities and reduced costs to business. A growing number of customers have
begun to conduct business on the Internet including paying bills, booking
airline tickets, trading securities and purchasing consumer goods (e.g.,
personal computers, consumer electronics, compact disks, books, groceries and
vehicles). Moreover, online transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
THE SHOPPING.COM SOLUTION
The Shopping.com solution is based on eliminating the retail store
intermediary and passing along associated cost savings to both consumer and
trade customers in the form of lower pricing on comparable goods and services.
The Company believes it will be able to accomplish these objectives because its
customer transactions are accomplished without the need to maintain inventory,
warehouse establishments, retail or discount store buildings and attendant
personnel. The sole source of funds for the Company from the date of inception
through January 31, 1998, other than the sale of equity and debt securities, has
been from sales of products in the amount of $850,724.
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:
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INCREASE MARKET AWARENESS AND BRAND NAME RECOGNITION. Shopping.com
believes that it is positioned to become a leader in Internet commerce due to
its management team's background and experience operating large retail and
discount store formats combined with its expertise in information systems
programming and technology. The Company operates in a market in which its name
recognition is critical to attracting high quality vendors and a high level of
customer traffic. Accordingly, the Company's strategy is to promote, advertise
and increase its visibility through a variety of marketing and promotional
techniques, including: advertising on leading Internet sites and in printed
media, conducting an ongoing public relations campaign and obtaining links from
other Web sites.
PROVIDE COMPELLING RETAILING EXPERIENCE FOR CUSTOMERS. The Company
believes buyers will be attracted by consistently low prices and desirable
merchandise in a user-friendly and entertaining environment. Accordingly, the
Company intends to continue offering its customers a wide array of opportunities
to buy desired merchandise at low prices through a visually stimulating and
user-friendly interface which is rich in both product stock keeping units
("SKUs") and product description content.
Shopping.com plans to increase the range of merchandise offered to
customers worldwide at low prices and collaborating in the development of a
shopping environment including multi-lingual content and multiple currency
exchange systems.
EXPAND AND STRENGTHEN LONG-TERM VENDOR RELATIONSHIPS. The Company's
ability to attract, secure, and obtain large quantities of branded merchandise
for its Web site is key to its success. The Company continues to build its
merchandising staff to facilitate securing long-term relationships with a
variety of vendors.
LEVERAGE LOW COST STRUCTURE. The Company is not required to pay the
expenses necessary to support a traditional retail operation which requires
inventory, warehouse facilities, retail store space and attendant personnel.
However, the Company acts as a principal with both its venders and customers and
arranges order fulfillment, payment verification, shipping functions and
customer support. By eliminating traditional retail expenses and undertaking
only selective point of sale functions, the Company believes it will be able to
control its gross margins, monitor its customer service and realize lower
operating costs than many of its competitors.
DEVELOP INCREMENTAL REVENUE OPPORTUNITIES. The Company believes that a
significant opportunity exists to develop incremental revenue opportunities,
including expanding its product mix with additional products and enabling
vendors to showcase new products that are well suited for its Web site. The
Company also believes that the anticipated high level of traffic on its Web site
will make that Web site an attractive alternative for other companies which wish
to advertise on the Web. In addition, the Company hopes to expand its customer
base to include 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.
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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 thousands of customers
simultaneously. The Company intends to further enhance its proprietary
technology to provide an even more compelling shopping experience, as well as to
streamline its order processing, distribution and customer support facilities as
new technology develops. Such enhancements will include integration of
multilingual content and developing multiple currency exchange systems.
MERCHANDISING STRATEGY
Shopping.com's merchandising strategy is designed to appeal to all
classes of consumer and trade customers. Shopping.com intends to become a one
stop shopping service by virtue of its broad merchandise mix and expects to
provide the Internet shopper with a selection of variety and pricing unmatched
by traditional retailers. With effective user-friendly search engine tools, the
Shopping.com customer enjoys a wide array of categories and specialty products
not typically offered to the general public under one store roof, while at the
same time allowing its customers the ease of virtual shopping from either home
or office, as well as substantial price discounts.
Shopping.com's merchandise strategy emphasizes what the Company
believes to be a competitive advantage, the combination of identifiably low
pricing with broad product selection. The Shopping.com merchandise strategy
builds upon the broader selection/lower price method of retailing initiated in
the warehouse/discount market of the 1980's and early 1990's. Shopping.com's
strategy is designed to allow the Company to compete with major retail leaders
including warehouse/discount stores, traditional retail chains, and mail order
catalog operators by:
o offering competitive prices and better values;
o offering a broader merchandise mix;
o providing a low cost venue for vendors to test market acceptance of new
products and services; and
o 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,
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mail order catalog operators and other providers using alternate forms of media
to sell products and services all represent significant market segments, no
single distribution channel of consumer products and services presently
dominates the entire market.
Shopping.com's marketing strategy is designed to promote the
Shopping.com name, increase customer traffic to its Web site, build strong
customer loyalty, maximize repeat purchases and develop incremental revenue
opportunities.
Shopping.com intends to build customer loyalty through the use of
customer preference and behavioral data obtained as a result of monitoring its
customers' activities online. The Company's proprietary technology allows for
rapid product experimentation, customer buying pattern analysis, instant user
feedback and customized data-based marketing for its customers, all of which the
Company incorporates in its merchandising. By offering customers compelling
values, the Company seeks to increase the number of visitors who make purchases
and encourage repeat visits and purchases. Loyal, satisfied customers also
generate word-of-mouth advertising and awareness and are able to reach thousands
of other customers and potential customers because of the reach of online
communication.
The Company currently employs and intends to employ a variety of media,
product development, business development and promotional activities to achieve
its marketing goals:
ONLINE SERVICE AND INTERNET ADVERTISING. The Company intends to
continue to place advertisements on various Web sites. These advertisements
usually take the form of banners that encourage readers to click through
directly to Shopping.com's Web site.
TRADITIONAL ADVERTISING. The Company has used traditional media for
advertising in the past and expects to use such media in the future.
CUSTOMER GIFTS. The Company may in the future send gifts to its
customers. These gifts will be designed to increase customer loyalty and provide
customers with a continuing reminder of the Shopping.com Web site.
CUSTOMER SERVICE AND ORDER FULFILLMENT
Retail shopping, as currently conducted, usually requires significant
investments of time, effort, and associated costs on the part of the consumer.
Generally the consumer is required to opt for either (1) limited selection/lower
price, or (2) broad selection/higher price. The Company believes that the
provider who can offer the consumer a broad selection and a lower price
alternative should be well positioned to capture a significant portion of the
online shopping market.
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
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be fast, offer a wide product selection targeted to a variety of individual
customer profiles and provide excellent customer service.
The Company believes that its ability to establish and maintain
long-term relationships with its customers and encourage repeat visits and
purchases depends, in part, on the strength of its customer support and service
operations and staff. Shopping.com encourages frequent communication with, and
feedback from, its customers in order to continually improve its product and
service offering. Shopping.com offers an e-mail address to enable customers to
request information and to encourage feedback and suggestions. The team of
customer support and service personnel is responsible for handling general
customer inquiries, answering customer questions about the ordering process, and
investigating the status of orders, shipments, and payments. Shopping.com also
offers a toll-free line for customers (1-888-LOVE-2-SHOP) who are reluctant to
enter their credit card numbers over the Internet. The Company has automated the
tools used by its customer support and service staff and intends to actively
pursue enhancements to, and further the automation of, its customer support and
service systems and operations.
Shopping.com's goal is to exploit the opportunity for online shopping
by establishing itself as a online low-price leader providing a broad range of
products and services over the Internet prior to the arrival of competitors
marketing similar offerings. While the Internet presently offers an increasing
amount of products, these offerings are generally limited to specialty providers
offering limited product and service categories (e.g., airline tickets, books,
music, CDs, flowers, and groceries). In addition, the Company believes that its
proprietary technology will afford a major advantage over existing and potential
Internet providers. See "Factors That May Affect Future Performance -
Competition."
The transmission, data presentation and shipping of the vast
merchandise categories E-retailed by the Company involves the maintenance,
continued development and efficient use of the Company's proprietary technology
and well trained customer service associates. Since the delivery of merchandise
sold to the customer is not within the direct control of the Company, logistics
in securing, transmitting and finalizing information necessary for delivery in a
manner which will satisfy the Shopping.com customer is important to the success
of the Company. The Company utilizes automated interfaces for sorting and
organizing its orders to enable it to achieve rapid and economic purchase and
delivery times. Under the Company's arrangements with its manufacturers and
distributors, electronically ordered products often are shipped by the vendor
within days and sometimes within hours of receipt of an order from Shopping.com.
The Company has also developed customized information systems and dedicated
ordering personnel that specialize in searching special orders for customers.
TECHNOLOGY
Shopping.com brings to the Internet commerce industry a combination of
(i) strong retail management experience, and (ii) computer and information
systems design, development, implementation and operation expertise. For the
fiscal years ended January 31, 1998 and 1997, the Company spent $893,923 and
$83,308 respectively on product development activities. While the Company
recognizes the importance of the Company's technology to the development and
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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 "Factors That May Affect Future
Performance -- Risk of Capacity Constraints; Reliance on Internally Developed
Systems; System Development Risks"; "--Risk of System Failure; Single Site and
Order Interface"; and "-- Online Commerce Security Risks."
INTELLECTUAL PROPERTY
The Company regards its Shopping.com name and related software as
proprietary and relies primarily on a combination of copyright, trademark, trade
secret, and confidential information laws, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect
against technologies that are substantially equivalent or superior to the
Company's technologies. The Company does not currently hold any patents or have
any patent applications pending for itself or its products and has not obtained
Federal registration for any of its trademarks. The Company enters into
non-disclosure and invention assignment agreements with certain of its employees
and enters into non-disclosure agreements with certain of its consultants and
subcontractors. However, there can be no assurance that such measures will be
adequate to prevent competitors from developing similar software.
The Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, the Company is a recent entrant in the sale of merchandise on the
Internet, and there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to
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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 "Factors That May Affect Future Performance -- Limited
Protection of Intellectual Property and Proprietary Rights."
COMPETITION
The online commerce industry, particularly on the Internet, is new,
rapidly evolving and intensely competitive. The Company expects such competition
to intensify in the future. Barriers to entry are minimal, allowing current and
new competitors to launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies. These
competitors include: (i) various online vendors of other consumer and trade
products and services including CUC International, Amazon.com, ONSALE,
NetGrocer, iMALL, Internet Shopping Network, Micro Warehouse, CDNow, QVC and
Home Shopping Network; (ii) a number of indirect competitors that specialize in
online commerce or derive a substantial portion of their revenues form online
commerce, including America Online, Microsoft Network, Prodigy and Compuserve;
(iii) mail order catalog operators such as Spiegel, Lands End, and Sharper
Image; (iv) retail and warehouse/discount store operators such as Wal-Mart, Home
Depot, Target and Price/Costco; and (v) other international catalog companies
which may enter the online commerce industry. Both Wal-Mart and Home Depot have
announced their intention to devote substantial resources to online commerce at
discount prices, which, if successful, could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations. However, the Company believes that retail and warehouse/discount
operators will be somewhat restricted in their ability to lower prices by the
need to protect their own pricing strategy to avoid cannibalizing their store
margins.
The Company believes that the principal competitive factors for its
market are price, speed of fulfillment, name recognition, wide selection,
personalized services, ease of use, 24-hour accessibility, customer service,
convenience, reliability, quality of search engine tools, and quality of
editorial and other site content. Many of the Company's current and potential
competitors have longer operating histories, larger customer bases, greater name
recognition and significantly greater financial, marketing and other resources
than the Company. In addition, online retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger,
well-established and well-financed companies as use of the Internet and other
online services increases. Certain of the Company's competitors may be able to
secure merchandise from vendors on more favorable terms, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to
the Web site and systems development than the Company. Increased competition may
result in reduced operating margins, loss of market share and a diminished
franchise value. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and competitive
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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
"Factors That May Affect Future Performance -- Competition."
GOVERNMENTAL REGULATION
The Company is not currently subject to regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet and
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for the Company's products and
services and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Moreover, the applicability to the Internet
and other online services of existing laws in various jurisdictions governing
issues such as property ownership, sales and other taxes, libel and personal
privacy is uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations jurisdictions whose laws do
not currently apply to the Company's business, or the application of existing
laws and regulations to the Internet and other online services could have a
material adverse effect on the Company's business, financial condition and
results of operations
Permits or licenses may be required from federal, state or local
governmental authorities to operate or to sell certain products on the Internet.
No assurances can be given that such permits or licenses will be obtainable. The
Company may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all or
specific countries throughout the world. No assurance can be made that the
Company will be able to comply with such legislation or statutes. See "Factors
That May Affect Future Performance -- Governmental Regulation and Legal
Uncertainties."
ENVIRONMENTAL ISSUES
The Company's operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.
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EMPLOYEES
As of January 31, 1998, the Company employed 67 full-time and 9
part-time employees, including 14 in Management Information Systems, five in
Marketing and nine in Accounting and Administration. One employee holds a
doctorate in education. Six additional employees hold master's degrees. The
number of employees has since grown to 70 full-time and 11 part-time employees.
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 "Factors That May Affect Future Performance -- Dependence on Key Personnel;
Need for Additional Personnel."
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages, and positions of the
executive officers, directors, and senior management of the Company.
Name Age Position
---- --- --------
Executive Officers And Directors
- --------------------------------
Frank W. Denny 63 Chairman of the Board
Robert J. McNulty 51 President, Chief Executive Officer
and Director
Douglas Hay 44 Executive Vice President and
Director
Kristine E. Webster 29 Senior Vice President, Chief
Financial Officer, and Secretary
Mark S. Winkler 39 Chief Information and Technology
Officer
Paul J. Hill 51 Director
Edward F. Bradley 57 Director
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 internationally. Group InterCom also is a
consulting firm specializing in retail concept development and implementation as
well as mergers and acquisitions. Mr. Denny is the president of Stilden Co.,
Inc., a consulting company which is wholly-owned by affiliates of Mr. Denny and
which has a contract to consult with the Company which terminates March 31,
2000.
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.
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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 a founder of the
Do It Yourself Research Institute based in Indianapolis, Indiana.
ROBERT J. MCNULTY. In November 1996 Mr. McNulty founded Shopping.com and has
been its President, Chief Executive Officer, and member of its Board of
Directors since its inception, and devotes substantially all of his business
time to the Company. Mr. McNulty also founded Cyber Depot in February 1996. From
September 1992 until November 1994, Mr. McNulty held senior management positions
with Auto Expo Inc., a privately held corporation which operated retail auto
parts stores in California and Nevada. After his resignation in June of 1994,
until March 1995, he continued in an advisory position as a consultant to that
company. The subsequent management, which did not include Mr. McNulty and was
unassociated with Mr. McNulty, filed an assignment for the benefit of creditors
in California on November 22, 1995. In 1983 Mr. McNulty founded and served as
Chief Executive Officer of HomeClub (now known as Home Base), until its merger
with Zayre Corp. in 1986. He also serves as Chairman of the Board of Directors
of U.S. Forest Industries, Inc., a forest products company. Mr. McNulty has also
founded and been involved with several other retail companies, both public and
private, in a broad range of merchandise categories including sporting goods,
home improvement, hardware, office products and automotive. Without admitting or
denying the allegations of a complaint filed against him by the SEC, Mr. McNulty
consented to an entry of a final decree in the U.S. District Court on October
10, 1995, enjoining him from violating certain provisions of the federal
securities laws.
DOUGLAS HAY. Mr. Hay joined the Company in May, 1997 as its Executive Vice
President and was elected as a member of the Board of Directors in July, 1997.
Mr. Hay has spent over 25 years in the field of marketing consumer products and
services. From 1990 to April 1997, Mr. Hay was General Manager of Projects Et Al
Inc., a business consulting firm that developed marketing and merchandising
programs for some of the nations leading retail companies. Mr. Hay has also
served as Vice President of Marketing for Northern Automotive, Inc., an
automotive parts retail company.
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.
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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 co- officer of many public and private
companies in both the United States and Canada. From 1978 to the present, Mr.
Hill has also been President of McCallum Hill Companies, a diversified company
with operations in real estate, oil and gas and brokerage. Mr. Hill received
both a Bachelor of Science and a 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. Mr.
Bradley has also functioned as a Special Consultant to the U.S. Environmental
Protection Agency in Washington, D.C. Mr. Bradley received both a Bachelor of
Science degree in Civil Engineering in 1961 and a Master of Science degree in
Civil Engineering in 1964 from the University of Notre Dame, and is a Registered
Professional Engineer. From 1988 to June 1996, Mr. Bradley was an Adjunct
Professor in Engineering Economics at the University of Utah.
ITEM 2. DESCRIPTION OF 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
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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.
ITEM 3. LEGAL PROCEEDINGS
In July 1997, a former consultant filed a lawsuit in the Orange county
superior Court seeking damages for termination of an alleged contractual
relationship. The complaint against the Company and a senior manager alleges
breach of consulting agreement, breach of employment agreement, breach of
implied covenant of good faith and fair dealing, violation of the California
Labor Code and prays for economic damages in the amount of $112,500 and 6,000
shares of common stock of the Company. The Company cross complained for
declaratory relief. The matter has settled and the parties are in the process of
finalizing the settlement.
On July 8, 1997, a former officer resigned. By letter dated July 10,
1997, the Company tendered payment to buy back 140,000 shares of Common Stock of
the Company pursuant to a shareholder agreement. The former officer rejected the
tender, claiming that the amount was not the fair market value of the shares. On
March 17, 1998, the former officer of the Company filed a lawsuit in Orange
County Superior Court for the State of California seeking 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 the former officer and intends to vigorously protect
its rights in this matter. On March 27, 1998, the Company filed a lawsuit in
Orange County Superior Court 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"), the principal
market maker in the Company's stock, or any of their officers, directors,
employees, affiliates or others had engaged in fraudulent activities in
connection with transactions in the Company's stock. 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. Waldron was given permission by the National Association of Securities
Dealers ("NASD") to resume trading in the Company's stock on the electronic
bulletin boards beginning on April 30, 1998. The Company and its officers and
directors believe that they have not been guilty of any fraudulent conduct in
connection with transactions in the Company's stock or otherwise. Nevertheless,
the investigation by the SEC, the interruption of the trading of the Company's
stock on the electronic bulletin boards 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
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carrying out its business plan. See "Factors That May Affect Future Performance
- - The Need For Additional Capital."
On April 16, 1998, Michael A. Martucci on behalf of all persons who
purchased shares of the Company's stock between November 25, 1997 and March 26,
1998 filed suit in the California Superior Court for the County of Orange
alleging violations of the California securities laws by the Company, Robert
McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those
firm's executives. The complaint charges that the defendants "participated in a
scheme and wrongful course of business to manipulate the price of [the
Company's] stock, which included: (i) defendant Waldron's refusal to execute
sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal
above-market buy-ins to intimidate and dissuade potential short sellers from
selling [Company] stock short; (iv) the sale of [Company] shares to
discretionary accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about [the Company's] operating
performance and its future prospects." The complaint further alleges that the
Company "secretly arranged to sell $250,000 of product to Waldron as part of
defendants' effort to have [the Company] post revenue growth prior to the
[Company's] planned [initial public offering]," that such sales constituted
almost 25% of the Company's revenues between its inception and March 26, 1998
and that the Company did not disclose such sales or their significance in the
Prospectus used in the Company's initial public offering. The plaintiff seeks
compensatory damages in an unspecified amount, attorneys' fees and costs,
injunctive relief, disgorgement or restitution of the proceeds of the Company's
IPO and the defendants' profits from trading in the Company' s stock, and the
imposition of a constructive trust over the Company's revenues and profits. The
Company does not believe that it is guilty of the acts alleged in the complaint
and intends to defend against this action vigorously. Nonetheless, and despite
the Company's insurance coverage for such actions, this class action suit 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. 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. See "Factors That May Affect Future Performance
- - The Need For Additional Capital."
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 1997, the Company's shareholders adopted by written
consent the Amended and Restated Articles of Incorporation (the "Articles")
which were filed with the Secretary of State of the State of California on
December 5, 1997. The number of shares voting in favor was 1,890,000 shares, or
66.76% of the Company's outstanding common stock, 1,500,000 shares, or 100%,
of the Company's outstanding Series A Preferred Stock and 543,000 shares, or
50.61%, of the Company's outstanding Series B Preferred Stock, 941,000 shares
of the Company's outstanding common stock, zero shares of the Company's
outstanding Series A Preferred Stock and 530,000 shares of the Company's
outstanding Series B Preferred Stock did not vote. Pursuant to Section 603(b)2
of the California Corporations Code, notice was mailed to all of the
shareholders who had not consented in writing to the action of the shareholders
taken by the written consent. In connection with the Company's initial public
offering during which all of the Company's outstanding Preferred Stock were
converted into the Company's Common Stock, the Articles eliminated the Company's
authorized Series A and Series B Preferred Stock and effected a 1-for-2
consolidation of the Company's outstanding Common Stock. Following the filing of
the Articles, the Company had one class of shares, Common Stock, and was
authorized to issue 20,000,000 shares.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
a. Market Information.
The Company's common stock began trading under the symbol "IBUY" in the
over-the-counter securities market on November 26, 1997. The over-the-counter
quotations reflect interdealer bid prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. The over-the-counter
market does not constitute active trading and trading in the Company's common
stock is limited and sporadic. The following table sets forth the range of high
bid and low bid quotations since the Company began trading on November 26, 1997
through the end of the fourth quarter January 31, 1998. The prices were
retrieved from "WWW.STOCKTOOLS.COM."
Common Stock
- ------------
For Fiscal Year Ended January 31, 1998 High Low
- -------------------------------------- ---- ---
Fourth Quarter $15.250 $8.500
Prior to November 1997 there was no active market for the Company's
securities.
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.
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The SEC's order stated that there appeared to be a "lack of current and accurate
information concerning the securities of Shopping.com because of recent market
activity in the stock that may have been the result of manipulative conduct."
Ref. SEC Release File No. 500-1. The Company became aware in March of 1998 that
the SEC had initiated a private inquiry to determine whether violations of
Section 17(a) of the Securities Act of 1933, as amended, Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder had
occurred in connection with alleged false and misleading statements concerning
the alleged control and manipulation of the Company's Common Stock. The SEC is
investigating the facts to determine whether violations, if any, have occurred.
The Company is fully cooperating with the SEC's inquiry. See "Legal
Proceedings."
Following the termination of the SEC's suspension, the NASD did not
immediately allow the Company's principal market maker, Waldron & Co., Inc.
("Waldron"), to resume trading in the Company's securities on the electronic
bulletin boards. Waldron was approved for such trading, and such trading resumed
on April 30, 1998.
b. Holders.
As of April 27, 1998, there were 43 shareholders of record of the
Company's common stock, however the Company is aware that the beneficial
shareholders of the Company's common stock exceeds 450.
c. Dividends.
The Company has never declared or paid cash dividends on its common
stock. The Company currently intends to retain all future earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.
d. 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:
DATE TITLE AMOUNT
(1)(a) March 1997-June 1997 Common Stock 1,282,500 Shares
(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 Bill Gross'
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; all of whom were
accredited investors and residents of the State of California.
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(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 $30,650.
(d) The issuer relied on Section 4(2) and 3(a)(11) of the Securities
Act of 1933, as amended.
(e) Not Applicable.
DATE TITLE AMOUNT
(2)(a) March 1997-April 1997 Series A Preferred Stock 750,000 Shares
Warrants for Common Stock 375,000 Warrants
(b) There were no underwriters used in connection with this offering.
The securities were offered and sold only to two accredited investors, Cyber
Depot, Inc., a corporation controlled by Robert J. McNulty, President and CEO of
the issuer, and Bill Gross' idealab! a corporation controlled by Bill Gross, a
director of Registrant. One Warrant was issued for each two shares.
(c) The securities were sold for forty cents ($.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.
DATE TITLE AMOUNT
(3)(a) April 1997-September 1997 Series B Preferred Stock 536,500 Shares
Warrants for Common Stock 268,250 Warrants
(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.
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DATE TITLE AMOUNT
(4)(a) June 1997-September 1997 Promissory Notes $1,150,000
Warrants for Common Stock 382,950 Warrants
(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.
(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.
DATE TITLE AMOUNT
(5)(a) April 1997 Common Stock 8,000 Shares
(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.
DATE TITLE AMOUNT
(6)(a) September 1997 Common Stock 125,000 Shares
Promissory Note $600,000
Warrants for Common Stock 199,800 Shares
(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.
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(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.
DATE TITLE AMOUNT
7(a) February 1998 Common Stock 47,059 Shares
(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.
- ---------
(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.
e. Use Of Proceeds.
The Company's registration statement, Registration No. 333-36215,
under the Securities Act of 1933, as amended, for its initial public offering
(the "Registration Statement") became effective on November 25, 1997, and the
initial public offering commenced on November 25, 1997. The offering terminated
after the sale of all securities that were registered under the Registration
Statement. Waldron & Co., Inc. was the managing underwriter of the offering. The
Company registered and sold 1,300,000 shares of common stock with an aggregate
price of $11.7 million. The Company incurred a total of approximately $2.3
million of expenses in connection with the registration and distribution of
common stock in the offering, of which approximately $1.1 million was paid in
underwriting discounts and commissions, approximately $400,000 was paid to the
underwriters, Waldron & Co., Inc., for expense reimbursement and approximately
$400,000 were paid to third parties for other expenses. Offering proceeds,
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net of aggregate expenses of approximately $2.3 million, was $9.4 million. The
Company has used approximately $1.6 million of the net offering proceeds for
advertising and marketing, approximately $1.7 million for repayment of
promissory notes, and approximately $300,000 for repayment of interim loans,
approximately $2.9 million for general administrative and working capital
expenses paid directly or indirectly to third parties, approximately $1.3
million for capital expenditures and systems architecture development,
approximately $50,000 for personnel, and approximately $60,000 for facilities.
The Company has not used any of the net offering proceeds for construction of
plant, building or facilities; purchases of real estate; or acquisition of other
businesses. Except in the form of wages to employees and ordinary business
expense reimbursement, none of the net offering proceeds and none of the
expenses paid in connection with the registration and distribution of the common
stock in the offering were paid directly or indirectly to directors, officers or
general partners of the Company or their associates, persons owning 10% or more
of any class of the Company's securities, or affiliates of the Company. With the
exception of capital expenditures and systems architecture development along
with additional costs associated with the initial public offering the use of
proceeds did not materially change from the use of proceeds described in the
prospectus.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's financial statements and the related notes thereto appearing elsewhere
herein. The Company is not providing any comparison of its results of operations
because the Company is in an early stage of development, and such comparisons
would not be meaningful.
FORWARD LOOKING STATEMENTS
The 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 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 "Factors That May Affect Future Performance"
herein.
RESULTS OF OPERATIONS
NET SALES
Although the Company commenced operations in February 1996, it did not
begin selling products and services on its Web site until July 11, 1997 prior to
which time it was still in the process of evaluating the technical features of
its Web site. For the twelve months ending January 31, 1998, the Company
generated $850,724 of net sales, approximately 40% of which were sales to
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Waldron & Co., Inc. ("Waldron"). 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 which allowed the Company to generate higher gross margins. The Company
believes that it is not dependent upon Waldron or any other customer and that
the loss of Waldron as a 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 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. As of January 31, 1998, the Company created a
reserve for sales returns of $10,000.
COST OF SALES
Cost of Sales includes the actual cost the Company pays its vendors for
the products and the actual shipping and handling charges incurred by the
Company to ship products to its customers. The cost of sales for the twelve
months ending January 31, 1998 was $793,957, or approximately 93.3% of net
sales. The Company's gross profit margin was approximately 6.7% for the twelve
months ending January 31, 1998. The failure to generate sales with sufficient
margins to cover its operating expenses will result in losses and could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
ADVERTISING AND MARKETING EXPENSES
Advertising and marketing expenses consist primarily of public
relations, media advertising, travel and costs of marketing literature.
Advertising and marketing expenses incurred by the Company for the twelve months
ending January 31, 1998 were $871,964 or approximately 102.5% of net sales. The
Company intends to significantly increase its advertising and marketing expenses
in future periods.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist primarily of expenses incurred by
the Company during the initial development and creation of its Web site. Product
development expenses include compensation and related expenses, depreciation and
amortization of computer hardware and software, and the cost of acquiring,
designing, and developing and editing Web site content. Product development
expenses incurred by the Company for the twelve months ending January 31, 1998
were $893,923 or approximately 105.1% of net sales. The Company believes that
significant investments in enhancing its Web site will be necessary to become
and remain competitive. As a result, the Company may continue to incur, or
increase the level of, product development expenses.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not otherwise attributable to
product development and advertising and marketing expenses consist primarily of
compensation, rent expense, fees for professional services and other general
corporate purposes. General and administrative expenses incurred by the Company
for the twelve months ended January 31, 1998 were $3,261,749 or approximately
383.4% of net sales.
INTEREST EXPENSE
Interest expense for the twelve months ending January 31, 1998 was
$580,679 or 68.3% of net sales and is primarily attributable to the Promissory
Notes issued by the Company from inception through January 31, 1998. Included in
interest expense is $221,000 of loan origination fees related to the Promissory
Notes and $299,700 of financing costs related to the issuance of certain
warrants in connection with $600,000 of Promissory Notes. The Promissory Notes
were paid using the proceeds of the Company's initial public offering.
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 January 31, 1998, other than the sale of equity and debt
securities, has been from sales of products in the amount of $850,724.
Capital expenditures for the twelve months ending January 31, 1998 were
$1,629,166. The Company has no material commitments for capital expenditures
other than a capital lease obligation for certain equipment as of January 31,
1998, the aggregate amount of which is $439,718. The Company does not anticipate
a substantial increase in its capital expenditures in 1998.
The Company experienced a net loss of $5,522,029 and generated net
sales of $850,724 for the year ended January 31, 1998. THE COMPANY'S ABILITY TO
SURVIVE AND GROW FOR THE IMMEDIATE FUTURE WILL DEPEND ON THE COMPANY'S ABILITY
TO RAISE ADDITIONAL CAPITAL FROM PUBLIC OR PRIVATE EQUITY OR DEBT SOURCES. IN
ADDITION, THE COMPANY BELIEVES THAT IT WILL NEED TO RAISE ADDITIONAL FUNDS IN
ORDER TO AVAIL ITSELF OF ANY UNANTICIPATED OPPORTUNITIES (SUCH AS MORE RAPID
EXPANSION, ACQUISITIONS OF COMPLEMENTARY BUSINESSES OR THE DEVELOPMENT OF NEW
PRODUCTS OR SERVICES), TO REACT TO UNFORESEEN DIFFICULTIES (SUCH AS THE LOSS OF
KEY PERSONNEL OR THE REJECTION BY INTERNET USERS OF THE COMPANY'S WEB SITE
CONTENT) OR TO OTHERWISE RESPOND TO UNANTICIPATED COMPETITIVE PRESSURES. THE
COMPANY HAS USED RATHER THAN PROVIDED CASH FROM ITS OPERATIONS. THESE FACTORS
RAISE A SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN. IN VIEW OF THE MATTERS DESCRIBED ABOVE, RECOVERABILITY OF A MAJOR
PORTION OF THE COMPANY'S RECORDED ASSET AMOUNTS IS DEPENDENT UPON THE COMPANY'S
ABILITY TO RAISE SUFFICIENT CAPITAL TO FUND ITS WORKING
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CAPITAL REQUIREMENTS UNTIL THE COMPANY CAN GENERATE SUFFICIENT SALES VOLUME TO
COVER ITS OPERATING EXPENSES.
IN ADDITION TO THE CAPITAL RAISED IN 1997 THROUGH PRIVATE DEBT AND
EQUITY OFFERINGS AND THE COMPANY'S INITIAL PUBLIC OFFERING, THE COMPANY IS
CURRENTLY NEGOTIATING WITH SEVERAL INVESTORS ABOUT RAISING ADDITIONAL CAPITAL
THROUGH PRIVATE PLACEMENT OFFERINGS. MANAGEMENT OF THE COMPANY BELIEVES THAT ITS
CURRENT CASH ON HAND PLUS THE ADDITIONAL CAPITAL THAT IS EXPECTED TO BE RAISED
IN THE FUTURE WILL BE SUFFICIENT TO COVER ITS WORKING CAPITAL NEEDS UNTIL THE
COMPANY'S SALES VOLUME REACHES A SUFFICIENT LEVEL TO COVER OPERATING EXPENSES.
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 INVESTIGATION BY THE SEC, THE INTERRUPTION OF THE
TRADING OF THE COMPANY'S STOCK ON THE ELECTRONIC BULLETIN BOARDS, THE PENDENCY
OF LAWSUITS AND THE ATTENDANT ADVERSE PUBLICITY MAY NOT ONLY REDUCE
SIGNIFICANTLY THE LIQUIDITY OF THE COMPANY'S STOCK BUT ALSO MAKE IT DIFFICULT
FOR THE COMPANY TO RAISE ADDITIONAL CAPITAL TO CONTINUE ITS DEVELOPMENT AND
EXPANSION. SEE "LEGAL PROCEEDINGS."
If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's then existing stockholders
will be reduced. Moreover, shareholders may experience additional and
significant dilution, and such equity securities may have rights, preferences or
privileges senior to those of the Company's common stock. There can be no
assurance that additional financing will be available on terms acceptable to the
Company. The Company may be unable to implement its business, sales or marketing
plan, respond to competitive forces or take advantage of perceived business
opportunities, which inability could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
EMPLOYEES
As of July 31, 1997, the Company employed 34 full-time and 10 part-time
employees, including nine in Management Information Systems and Research and
Development, two in Marketing, and five in Accounting and Administration. As of
January 31, 1998, the number of employees was 67 full-time and 9 part-time. The
number of employees has since grown to 70 full-time and 11 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 over the next twelve months.
Competition for such personnel in the online industry is intense. None of the
Company's employees is represented by a labor union, and the Company has never
experienced a work stoppage. The Company believes its relationship with its
employees to be good.
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FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company's business, financial condition and results of operations
may be impacted by a number of factors including, without limitation, the
factors discussed below.
THE NEED FOR ADDITIONAL CAPITAL
The Company must seek additional financing in order to sustain
operations or achieve planned expansion. While the Company believes that it will
be able to find the additional capital resources necessary to sustain
operations, 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
The Company commenced operations in February 1996, was incorporated on
November 22, 1996 and began selling products on its Web site on July 11, 1997.
Accordingly, the Company has a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly expanding markets such as online commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks, the Company must, among other things, obtain a customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology and transaction-processing systems, improve
its Web site, provide superior customer service and order fulfillment, respond
to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Since inception, the Company has incurred significant losses, and as of
January 31, 1998 had an accumulated deficit of approximately $5.7 million. The
Company believes that its success will depend in large part on its ability to
(i) obtain a 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 reduce its gross margins. Because the
Company has relatively low gross margins, achieving profitability depends upon
the Company's ability to generate and sustain substantially increased sales
levels. As a result, the Company believes that it will incur substantial
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operating losses for the foreseeable future, and that the rate at which such
losses will be incurred will increase significantly from current levels.
The Company incurred a net loss of $201,697 and had negative cash flows
from operations during the year ended January 31, 1997 of $136,546, and had a
shareholders deficit of $78,647 as of January 31, 1997. For the year ended
January 31, 1998 the Company had net losses totaling $5,522,029, negative cash
flows from operations of $4,842,628 and had an accumulated deficit of
$5,723,726. Management raised capital during 1997 through private placement
offerings of equity and debt securities and completed an initial public offering
in the latter part on 1997, which provided funding to continue present
operations, marketing and development activities.
The Company has used a portion of the net proceeds of its initial
public offering to fund its operating losses. As of January 31, 1998, the
Company had approximately $4.8 million remaining of the net proceeds and as of
April 30, 1998, the Company had approximately $1.4 million. Such net proceeds,
together with cash generated by operations, will, in the Company's view, be
insufficient to fund the Company's anticipated operating losses until its sales
increases to a sufficient level to cover operating expenses. In order to
continue to fund operating losses while it seeks to implement its business plan
until its sales increase to a sufficient level to cover operating expenses, the
Company must raise additional funds. There can be no assurance that such
financing will be available, if at all, in amounts or on terms acceptable to the
Company. In addition, the investigation by the SEC, the interruption of the
trading of the Company's stock on the electronic bulletin boards and the
attendant adverse publicity may also make it difficult for the Company to raise
additional capital to continue its development. See "Legal Proceedings."
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues. Sales and
operating results generally depend on the volume of, timing of, and ability to
fulfill orders received, which are difficult to forecast. The Company will not
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall until revenues grow substantially. Accordingly, any
significant shortfall in revenues in relation to the Company's planned
expenditures could have an immediate adverse effect on the Company's business,
prospects, financial condition and results of operations. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions that
could have a material adverse effect on its business, prospects, financial
condition and results of operations.
The Company expects to experience significant fluctuations in its
future quarterly operating results due to a variety of factors, many of which
are outside the Company's control. Factors which may adversely effect the
Company's quarterly operating results include: (i) the Company's ability to
obtain and retain customers, attract new customers at a steady rate, maintain
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customer satisfaction and establish consumer confidence in conducting
transactions on the Internet environment, (ii) the Company's ability to manage
fulfillment operations electronically and without warehouse facilities and to
establish competitive gross margins, (iii) the announcement or introduction of
new Web sites, services and products by the Company and its competitors, (iv)
price competition or higher vendor prices, (v) the level of use and consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (vii) the level of traffic on the
Company's Web site, (viii) technical difficulties, system downtime or Internet
brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to the expansion of the Company's business, operations and
infrastructure, (x) delays in revenue recognition at the end of a fiscal period
as a result of shipping or logistical problems, (xi) the level of merchandise
returns expected by the Company, (xii) governmental regulation and taxation,
(xiii) economic conditions specific to the Internet and online commerce, and
(xiv) general economic conditions.
The Company expects that it will experience seasonality in its
business, reflecting a combination of seasonal fluctuations in Internet usage
and traditional retail seasonality patterns. Internet usage and the rate of
Internet growth may be expected to decline during the summer. Further, sales in
the traditional retail industry are significantly higher in the quarter of each
year ending January 31 than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters, the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Common Stock
would likely be materially adversely affected.
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its Web site. Accordingly, the satisfactory performance,
reliability and availability of the Company's Web site, transaction-processing
systems and network infrastructure are critical to the Company's reputation and
its ability to attract and retain customers, as well as maintain adequate
customer service levels. The Company's revenues depend on the number of visitors
who shop on its Web site and the volume of orders it fulfills. Any systems
interruptions that result in the unavailability of the Company's Web site or
reduced order fulfillment process would reduce the volume of goods sold and the
attractiveness of the Company's product and service offerings. The Company may
experience periodic systems interruptions from time to time. Any substantial
increase in the volume of traffic on the Company's Web site or the number of
orders placed by customers will require the Company to expand and upgrade
further its technology, transaction-processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Web site or timely expand and upgrade its systems and infrastructure to
accommodate such increases.
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The Company uses an internally developed systems for its Web site,
search engine, and substantially all aspects of transaction processing,
including order management, cash and credit card processing, shipping,
accounting and financial systems. Any substantial disruptions or delays in any
of its systems would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE
The Company's success, in particular its ability to successfully
receive and fulfill orders and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of its computer and
communications hardware systems. Substantially all of the Company's computer and
communications hardware is located at a single leased facility in Corona del
Mar, California. Although the Company has redundant and back-up systems onsite
and a disaster recovery plan, the Company's systems and operations may be
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. The
Company does not carry business interruption insurance sufficient to compensate
fully for any or all losses from any or all such occasions. Despite the
implementation of network security measures by the Company, including a
proprietary firewall, its servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence of any of the foregoing risks could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
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 70 full time and 11
part time employees. The majority of the Company's senior management joined the
Company within the last year, and some officers have no prior senior management
experience at public companies. The Company's new employees include a number of
managerial, technical and operations personnel who have not yet been fully
integrated into the Company's operations. To manage the increase in personnel
and the expected growth of its operations, the Company will be required to
improve existing, and implement new, transaction-processing, operational and
financial systems, procedures and controls, and to train and manage its already
expanded employee base. Although the Company believes that there will not be a
significant increase in the number of employees over the next twelve months, the
Company may be required to increase its finance, administrative and operations
staff. Further, the Company's management will be required to maintain and expand
its relationships with various manufacturers, distributors, freight companies,
other Web sites, other Internet Service Providers and other third parties
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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 ON CONTINUED GROWTH OF ONLINE COMMERCE
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth in
the use of and interest in the Web, the Internet and other online services is a
recent phenomenon, and there can be no assurance that acceptance and use will
continue to develop or that a sufficiently broad base of consumers will adopt,
and continue to use, the Internet and other online services as a medium of
commerce. Demand and market acceptance for recently introduced 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.
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.
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RAPID TECHNOLOGICAL CHANGE
To remain competitive, the Company must continue to enhance and improve
the responsiveness, functionality and features of the Shopping.com online store.
The online commerce industry is characterized by rapid technological change,
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing Web
site and proprietary technology and systems obsolete. The Company's future
success will depend, in part, on its ability to license leading technologies
useful in its business, enhance its existing services, develop new services and
technologies that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. The
development of a Web site and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will
successfully use new technologies effectively or adapt its Web site, proprietary
technology and transaction-processing systems to customer requirements or
emerging industry standards. If the Company is unable, for technical, legal,
financial or other reasons, to adapt in a timely manner in response to changing
market conditions or customer requirements, its business, prospects, financial
condition and results of operations would be materially adversely affected.
YEAR 2000
The Company may be interacting with certain computer programs in
connection with credit card transactions and programs used by the Company's
vendors and suppliers. These programs may refer to annual dates only by the last
two digits, e.g.,"97 for "1997." Problems are anticipated to arise for many of
these programs in the year 2000 ("Year 2000 Problems"). The Company has taken
this problem into account with respect to its own internal programs and believes
that its own internal software is not susceptible to Year 2000 Problems.
However, the Company has not made a formal assessment of programs used by
service providers or other third parties, including the financial institutions
processing credit card transactions, with which the Company may have to
interact, nor the Company's vulnerability which may result from any such party's
failure to remediate their own year 2000 issues. There can be no guarantee that
the systems of other companies on which the Company relies will be converted
timely and will not have an adverse effect on the Company's systems and the
Company's business, prospects, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel, particularly Robert J. McNulty, its President and Chief Executive
Officer, and Mark S. Winkler, its Chief Information and Technology Officer. The
Company's performance also depends on the Company's ability to retain and
motivate its other officers and key employees. The loss of the services of any
of its executive officers or other key employees could have a material adverse
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effect on the Company's business, prospects, financial condition and results of
operations. The Company has entered into written employment agreements with Mr.
McNulty for five years terminating on April 30, 2002 and with Mr. Winkler for
one year ending May 20, 1998 with the contract automatically renewing
thereafter. Under his employment agreement, Mr. Winkler may only be terminated
for "cause." Additionally, a $1,000,000 "key person" life insurance policy on
the life of Mr. McNulty has been issued to the Company. The Company's future
success depends on its ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, editorial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
successfully attract, assimilate and retain sufficiently qualified personnel. In
particular, the Company may encounter difficulties in attracting 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 interruption of the trading of the Company's stock on the electronic
bulletin boards and the attendant adverse publicity may also make it difficult
for the Company to attract such developers and other qualified personnel to the
Company. 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.
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
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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 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
-36-
<PAGE>
online commerce or receive a substantial portion of their revenues from online
commerce, including America Online, Microsoft Network, Prodigy, and Compuserve;
(iii) mail order catalogue 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 catalogue
companies which may enter the online commerce industry. Both Wal-Mart and Home
Depot have announced their intention to devote substantial resources to online
commerce at discount prices, which, if successful, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. However, the Company believes that retail and 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 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
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<PAGE>
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 or brand quality of items that management
believes are optimum. The unavailability of certain product lines could
adversely impact the Company's operating results. Given its lack of operating
history, certain vendors of products sold by the Company may not be prepared to
advance normal levels of credit to the Company. An unwillingness to extend
credit may increase the amounts of capital required to finance the Company's
operations and reduce returns, if any on invested capital. The investigation by
the SEC, the interruption of the trading of the Company's stock on the
electronic bulletin boards and the attendant adverse publicity may also make
vendors reluctant to extend credit to the Company.
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.
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<PAGE>
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 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
-39-
<PAGE>
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.
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.
-40-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS
SHOPPING.COM
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................42
FINANCIAL STATEMENTS
Balance Sheet........................................................43
Statements of Operations.............................................44
Statements of Shareholders' Equity................................45-46
Statements of Cash Flows..........................................47-48
Notes to Financial Statements.....................................49-63
-41-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Shopping.com
We have audited the accompanying balance sheet of Shopping.com as of January 31,
1998, and the related statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shopping.com as of January 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended January 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $5,522,029, had negative cash flows from
operations for the year ended January 31, 1998, and is involved in a class
action lawsuit (see Note 10). These factors, among others, as discussed in Note
1 and Note 10 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 21, 1998
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<PAGE>
SHOPPING.COM
BALANCE SHEET
JANUARY 31, 1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,829,180
Accounts receivable, net of allowance for
doubtful accounts of $10,000 97,384
Other receivables 17,557
Prepaid advertising and other prepaid expenses 666,021
------------
Total current assets 5,610,142
FURNITURE AND EQUIPMENT, net 2,634,849
OTHER ASSETS 199,741
TOTAL ASSETS $ 8,444,732
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $ 207,589
Accounts payable 849,714
Accrued legal and related costs 436,035
Other accrued liabilities 139,029
------------
Total current liabilities 1,632,367
CAPITAL LEASE OBLIGATIONS, net of current portion 232,129
------------
Total liabilities 1,864,496
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A convertible, no par value
1,500,000 shares authorized
0 shares issued and outstanding --
Preferred stock, Series B convertible, no par value
4,000,000 shares authorized
0 shares issued and outstanding --
Common stock, no par value
20,000,000 shares authorized
4,002,000 shares issued and outstanding 12,303,962
Accumulated deficit (5,723,726)
Total shareholders' equity 6,580,236
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,444,732
-43-
<PAGE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
NET SALES $ 850,724 $ --
COST OF SALES 793,957 --
----------- -----------
GROSS PROFIT 56,767 --
----------- -----------
OPERATING EXPENSES
Advertising and marketing 871,964 --
Product development 893,923 83,308
General and administrative 3,261,749 118,389
----------- -----------
Total operating expenses 5,027,636 201,697
----------- -----------
LOSS FROM OPERATIONS (4,970,869) (201,697)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (580,679) --
Interest income 29,519 --
----------- -----------
Total other income (expense) (551,160) --
----------- -----------
NET LOSS $(5,522,029) $ (201,697)
=========== ===========
BASIC LOSS PER SHARE $ (3.05) $ (0.16)
=========== ===========
DILUTED LOSS PER SHARE $ (3.05) $ (0.16)
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING 1,807,874 1,282,500
=========== ===========
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<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock Additional
-------------------- ------------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1996 -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
ISSUANCE OF COMMON STOCK 1,152,500 23,050 23,050
CAPITAL CONTRIBUTED BY CYBER
DEPOT, INC. TO PURCHASE ASSETS
AND DEVELOP PROPRIETARY
SOFTWARE 100,000 -- 100,000
NET LOSS (201,697) (201,697)
------- ------- ------- ------- -------- -------- --------- --------- --------
BALANCE, JANUARY 31, 1997 -- -- -- -- 1,152,500 23,050 100,000 (201,697) (78,647)
ISSUANCE OF COMMON STOCK
FOR CASH 100,000 2,000 2,000
ISSUANCE OF COMMON STOCK
FOR SERVICES 38,000 54,000 54,000
ISSUANCE OF PREFERRED STOCK,
SERIES A FOR CASH 500,000 200,000 200,000
ISSUANCE OF PREFERRED STOCK,
SERIES A FOR ASSETS AND
PROPRIETARY SOFTWARE OF
CYBER DEPOT, INC. 250,000 100,000 (100,000) --
ISSUANCE OF PREFERRED STOCK,
SERIES B FOR CASH 536,500 1,609,500 1,609,500
OFFERING COSTS (126,219) (126,219)
ISSUANCE OF COMMON STOCK
FOR SOFTWARE 125,000 750,000 750,000
ISSUANCE OF COMMON STOCK
IN INITIAL PUBLIC OFFERING 1,300,000 11,700,000 11,700,000
OFFERING COSTS (2,325,512) (2,325,512)
</TABLE>
-45-
<PAGE>
SHOPPING.COM
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Convertible Series B Convertible Common Stock Additional
-------------------- ------------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONVERSION OF PREFERRED
STOCK, SERIES A TO COMMON
STOCK (750,000) $(300,000) $ 750,000 $ 300,000 $ $ $ --
CONVERSION OF PREFERRED
STOCK, SERIES B TO COMMON
STOCK (536,500)(1,483,281) 536,500 1,483,281 --
ISSUANCE OF WARRANTS FOR
FINANCING COSTS 299,700 299,700
COMPENSATION EXPENSES RELATED
TO ISSUANCE OF STOCK OPTIONS 17,443 17,443
NET LOSS (5,522,029) (5,522,029)
---------- ----------
BALANCE, JANUARY 31, 1998 -- $ -- -- $ -- 4,002,000 $12,303,962 $ -- $(5,723,726) $6,580,236
======== ======== ======= ======== ========= ========== ======= =========== ==========
</TABLE>
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<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,522,029) $ (201,697)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation of furniture and equipment 205,593 1,276
Amortization of loan origination fees 221,000 --
Common stock issued for services 54,000 --
Issuance of warrants for financing costs 299,700 --
Compensation expense related to stock
options granted 17,443 --
(Increase) decrease in
Accounts receivable (97,384) --
Other receivables (17,557) --
Prepaid advertising and other prepaid
expenses (666,021) --
Other assets (195,785) (3,956)
Increase (decrease) in
Accounts payable 638,728 35,986
Accrued legal and related costs 112,500
Other accrued liabilities 107,184 31,845
------------ ------------
Net cash used in operating activities (4,842,628) (136,546)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (1,629,166) (13,441)
------------ ------------
Net cash used in investing activities (1,629,166) (13,441)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of note payable - related party 305,000 50,000
Payments on note payable - related party (355,000) --
Payment on capital lease obligations (9,393) --
Issuance of notes payable 1,750,000 --
Payments on notes payable (1,750,000) --
Payment of loan origination fees (221,000) --
Proceeds from the issuance of preferred
stock, Series A 200,000 100,000
Proceeds from the issuance of preferred
stock, Series B 1,609,500 --
Payment of offering costs on preferred
stock, Series B (126,219) --
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<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JANUARY 31,
- --------------------------------------------------------------------------------
Proceeds from the issuance of common stock 11,725,000 50
Payment of offering costs on initial public
offering (1,826,977) --
------------ ------------
Net cash provided by financing activities 11,300,911 150,050
------------ ------------
Net increase in cash and cash equivalents 4,829,180 63
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,829,180 $ 63
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the years ended January 31, 1998 and 1997, the Company paid $280,979
(including $221,000 of loan origination fees) and $0 in interest, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended January 31, 1997, the Company issued common stock in the
amount of $23,000 for a subscription receivable.
During the year ended January 31, 1998, the Company entered into the following
non-cash transactions:
issued 250,000 shares of Series A convertible preferred stock in exchange
for certain assets and software research and development of Cyber Depot,
Inc. valued at $100,000.
entered into a capital lease obligation of $449,111.
issued 199,800 warrants to purchase common stock for financing costs
$299,700.
issued 38,000 shares of common stock for services valued at $54,000.
issued 125,000 shares of common stock for software valued at $750,000.
converted 750,000 and 536,500 shares of preferred stock, Series A and Series
B, respectively, into 1,286,500 shares of common stock.
-48-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- ---------------------------------
Shopping.com (the "Company") was incorporated in California on November 22,
1996. Cyber Depot, Inc. ("Cyber") was incorporated in California in January 1996
and among other business ventures commenced the design and development of
proprietary software for the Internet shopping marketplace in February 1996. In
March 1997, Cyber agreed to sell certain assets and liabilities and proprietary
software to Shopping.com for 250,000 shares of Series A convertible preferred
stock, and Shopping.com continued the design and development of the proprietary
software. The operations of Cyber devoted to the design and development of the
proprietary software are considered to be the predecessor operations of the
Company and have been included with the operations of the Company since February
1996. The propriety software acquired by the Company in this transaction has
been expensed as software research and development. The Company is engaged in
the design and development of proprietary software for marketing a broad range
of products and services at wholesale prices to both consumer and trade
customers over its Internet web site. On July 11, 1997, the Company commenced
selling products over the Internet through its web site at
http://www.shopping.com.
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of the
Company as a going concern. However, the Company has experienced net losses of
$5,522,029 and $201,697 for the years ended January 31, 1998 and 1997,
respectively. In addition, the Company has used, rather than provided, cash from
its operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. In view of the matters described above,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon the Company's ability to raise
sufficient capital to fund its working capital requirements until the Company
can generate sufficient sales volume to cover its operating expenses. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
In addition to the capital raised in 1997 through private debt and equity
offerings and the Company's initial public offering ("IPO"), the Company is
currently negotiating with several investors about raising additional capital
through private placement offerings. Management of the Company believes that its
current cash on hand plus the additional capital that is expected to be raised
in the future will be sufficient to cover its working capital needs until the
Company's sales volume reaches a sufficient level to cover operating expenses.
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<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purpose of the statements of cash flows, cash equivalents include amounts
invested in a money market account with a high-quality financial institution.
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
carried at cost, which approximates market.
Revenue Recognition
- -------------------
The Company recognizes revenue at the time the vendor ships the product to the
customer. Outbound shipping and handling charges are included in net sales. The
Company provides an allowance for sales returns, which have been insignificant
based on historical experience. A significant portion of the Company's sales are
from the United States. International sales are minimal.
Net Loss Per Share
- ------------------
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share amounts for all periods have
been restated to conform to SFAS No. 128 requirements.
Prior to SFAS No. 128, the Securities and Exchange Commission ("SEC") required
that, even where anti-dilutive, common and common equivalent shares issued
during the twelve-month period prior to the filing of an IPO be included in the
calculation of earnings per share as if they were outstanding for all periods
presented (using the treasury stock method and the IPO price). Because of new
requirements issued in 1998 by the SEC for companies that recently completed an
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<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
IPO and interpretation by FASB of the initial application of SFAS No. 128, the
number of shares used in the calculation of basic net loss per share has changed
to exclude common equivalent shares, even when anti-dilutive. Net loss per share
for the year ended January 31, 1997 has been restated to conform with SFAS No.
128 and Staff Accounting Bulletin No. 98.
Furniture and Equipment
- -----------------------
Furniture and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of three to fifteen years as follows:
Computer hardware 5 years
Computer software 3 years
Purchased software 5 years
Furniture and equipment 5 to 7 years
Leasehold improvements 15 years
Maintenance and minor replacements are charged to expense as incurred. Gains and
losses on disposals are included in the results of operations.
Advertising
- -----------
The Company expenses advertising costs as incurred. Advertising costs for the
years ended January 31, 1998 and 1997 were $871,964 and $0, respectively.
Prepaid advertising expense represents amounts paid for advertisements that were
not run prior to the balance sheet date.
Product Development
- -------------------
Product development expenses consist principally of payroll and related expenses
for development and maintenance of the Company's web site. All product
development costs have been expensed as incurred.
Income Taxes
- ------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
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<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Fair Value of Financial Instruments
- -----------------------------------
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash, accounts payable, and other accrued liabilities,
the carrying amounts approximate fair value due to their short maturities. The
amounts shown for note payable also approximate fair value because current
interest rates offered to the Company for debt of similar maturities are
substantially the same.
Stock Split
- -----------
At the completion of the Company's IPO on November 25, 1997, the Company
effected a one-for-two reverse stock split of its common stock. All share and
per share data have been retroactively restated to reflect this stock split.
Stock Options
- -------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current implicit
value accounting method specified in Accounting Principles Bulletin ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
stock-based compensation. The Company has elected to use the implicit value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
Risks and Uncertainties
- -----------------------
The Company's future revenues and any future profits are substantially dependent
upon the widespread acceptance and use of the Internet and other online services
as an effective medium of commerce by consumers. Rapid growth in the use of and
interest in the Web, the Internet, and other online services is a recent
phenomenon, and there can be no assurance that acceptance and use will continue
to develop or that a sufficiently broad base of consumers will adopt, and
continue to use, the Internet and other online services as a medium of commerce.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Shopping.com online store.
The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
-52-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card numbers.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data.
The online commerce market, particularly over the Internet, is new, rapidly
evolving, and intensely competitive, which competition the Company expects to
intensify in the future. Barriers to entry are minimal, and current and new
competitors can launch new Web sites at a relatively low cost. The Company
currently or potentially competes with a variety of other companies.
The Company carries no inventory, has no warehouse employees or facilities, and
relies on rapid fulfillment from its vendors. To satisfy customer orders, the
Company has no long-term contracts or arrangements with any of its manufacturers
or distributors that guarantee the availability of merchandise, the continuation
of particular payment terms, the extension of credit limits, or the shopping
schedules, except En Pointe.
The Company regards its Shopping.com brand name and related software as
proprietary and relies primarily on a combination of copyright, trademark, trade
secret and confidential information laws, and employee and third party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect
against technologies that are substantially equivalent or superior to the
Company's technologies. The Company does not currently hold any patents or have
any patent applications pending for itself or its products and has not obtained
federal registration for any of its trademarks.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 130
will not have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
-53-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will not have an effect on the Company's financial statements.
Developmental Stage Company
- ---------------------------
From inception to October 31, 1997, the Company was in the development stage.
Through October 31, 1997, the Company had a deficit accumulated during the
development stage of $2,595,785.
Concentrations
- --------------
During the year ended January 31, 1998, the Company had sales to Waldron & Co.,
Inc. ("Waldron"), the Company's lead underwriter in its IPO, that accounted for
approximately 40% of net sales for the period (see Note 9).
During the year ended January 31, 1998, the Company purchased inventory from
three vendors that accounted for approximately 23%, 23%, and 7% of cost of goods
sold. The Company has no long-term contracts or arrangements with any of its
vendors that guarantee the availability of merchandise (except for the vendor
mentioned in Note 4), the continuation of particular payment terms, or the
extension of credit limits. There can be no assurance that the Company's current
vendors will continue to sell merchandise to the Company on current terms or
that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If the Company were unable to develop
and maintain relationships with vendors that would allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, such inability could
have a material adverse effect on the Company's financial position, results of
operations, and cash flows.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash balances at financial institutions located in
California. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregated to $174,339
at January 31, 1998. The Company also has investments in a money market account
with a high-quality brokerage house of $4,293,979 at January 31, 1998. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
-54-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at January 31, 1998 consisted of the following:
Computer hardware $1,302,081
Computer software 494,070
Purchased software 750,000
Furniture and equipment 237,056
Leasehold improvements 58,511
-----------
2,841,718
Less accumulated depreciation and amortization 206,869
-----------
Total $2,634,849
==========
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
The Company settled a lawsuit filed in July 1997, against the Company, Cyber
Depot, and the Company's president, with a consultant seeking damages for breach
of an alleged contractual relationship. The matter has settled pursuant to a
settlement agreement dated March 26, 1998. The Company has accrued for the
settlement in the January 31, 1998 financial statements.
The Company is subject to a claim by a former officer for alleged breach of
contract, breach of implied covenant of good faith and fair dealing, and other
causes of action. In addition, the officer rejected a tender by the Company to
repurchase 140,000 shares of common stock pursuant to a shareholder agreement
claiming that the amount tendered was not the fair market value of the shares.
The exposure to the Company in this matter, if any, is uncertain as of the date
of this report. Management believes it has meritorious defenses against the
officer and has filed a lawsuit seeking damages on March 27, 1998, and believes
that the outcome of this matter will not have a material affect on the Company.
Also see Note 10 for additional litigation.
Leases
- ------
The Company leases a facility for its corporate offices under a non-cancelable
operating lease agreement that expires in 2002. Future minimum lease payments
under this non-cancelable operating lease are as follows:
-55-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
Year Ending January 31,
-----------------------
1999 $ 128,019
2000 136,590
2001 142,815
2002 149,043
2003 37,650
----------
Total $ 594,117
==========
Rent expense for the years ended January 31, 1998 and 1997 was $100,625 and
$13,451, respectively.
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:
Year Ending January 31,
-----------------------
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
==========
Included in furniture and equipment at January 31, 1998 is capital lease
equipment of $449,111 with accumulated amortization of $11,126.
Agreements
- ----------
On September 15, 1997 the Company entered into an agreement with En Pointe
Technologies, Inc. ("En Pointe") whereby:
o En Pointe made an investment in the Company by purchasing $600,000 of
subordinated notes (see Note 6). In connection therewith, the Company
issued 199,800 warrants to purchase the Company's common stock at $4.50
-56-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
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;
o 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;
o 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.
o 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.
o On April 13, 1998, the Company entered into an agreement
whereby the placement agent agreed to offer and sell on a best
efforts basis, up to $10,000,000, 8% convertible debentures of
the Company pursuant to Regulation D promulgated under the
Securities Act of 1993, as amended.
For the year ended January 31, 1997, the Company had a note payable to a related
party which was personally guaranteed by an officer of the Company. In addition,
the note was personally guaranteed by a vice president of the Company and
secured by a second deed of trust on a residence owned by the vice president.
The note accrued interest at the highest rate permitted by California law
(approximately 11% at January 31, 1997) and was due 90 days from January 13,
1997. During the year ended January 31, 1998, this note was repaid.
Also see Note 9.
NOTE 6 - NOTES PAYABLE
During June through September 1997, the Company issued $1,750,000 (which
includes the $600,000 mentioned in Note 4) of subordinated notes. The notes bear
interest at 10% per annum and are unsecured. The notes were due at the earlier
of nine months from the date of issuance or closing of the IPO. The notes were
repaid in December 1997.
In connection with the note agreement, each note holder is entitled to receive
333 warrants for each $1,000 loaned to purchase the Company's common stock for
$6.00 per share ($4.50 per share for the 199,800 warrants issued to En Pointe).
-57-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
There is a twelve-month "lock-up" on the warrants and the common stock
underlying these warrants. None of the 582,750 warrants issued to the note
holders were exercised as of January 31, 1998.
NOTE 7 - SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock
- ------------------------------------
In March 1997, the Company issued 250,000 shares of Series A convertible
preferred stock ("Series A Preferred") in connection with the acquisition of
certain assets and liabilities and proprietary software developed by Cyber (see
Note 1). The historical cost of the assets and liabilities and proprietary
software acquired was approximately $100,000 which is the amount used to value
the 250,000 shares of Series A Preferred. In April 1997, the Company sold
500,000 shares of Series A Preferred for a price of $0.40 per share. The holders
of the Series A Preferred were entitled to receive a non-cumulative dividend of
$0.04 per share per annum, payable in cash at the option of the Company. No
dividends were declared or paid during the year ended January 31, 1998.
Each share of Series A Preferred was convertible into shares of common stock at
the option of the holder. In addition, Series A Preferred will be automatically
converted into shares of common stock based upon the effective conversion price
immediately upon the closing of an IPO of not less than $6,000,000.
The Series A Preferred had a liquidation preference of $0.40 per share plus all
declared and unpaid dividends prior to the payment of any amount to the holders
of common stock.
Each holder of Series A Preferred was issued one warrant for every two shares of
Series A Preferred to purchase a share of the Company's common stock for $3.00
per share resulting in 375,000 warrants being issued. None of these warrants
were exercised as of January 31, 1998.
Upon the effective date of the Company's IPO, the 750,000 outstanding shares of
Series A Preferred were converted into 750,000 shares of the Company's common
stock.
Series B Convertible Preferred Stock
- ------------------------------------
During May through September 1997, the Company sold 536,500 shares (8,333 shares
to an officer of the Company) of Series B convertible preferred stock ("Series B
Preferred") for a price of $3.00 per share. The holders of the Series B
Preferred were entitled to receive a non-cumulative dividend of $0.30 per share
per annum, payable in cash at the option of the Company. No dividends were
declared or paid during the year ended January 31, 1998.
Each share of Series B Preferred was convertible into shares of common stock at
the option of the holder. In addition, Series B Preferred were automatically
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<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
converted into shares of common stock based upon the effective conversion price
immediately upon the closing of an IPO of not less than $6,000,000.
The Series B Preferred had a liquidation preference of $3.00 per share plus all
declared and unpaid dividends prior to the payment of any amount to the holders
of common stock.
Each holder of Series B Preferred was issued one warrant for every two shares of
Series B Preferred to purchase a share of the Company's common stock for $3.00
per share resulting in 268,250 warrants (4,166 warrants to an officer of the
Company) being issued. None of these warrants were exercised as of January 31,
1998.
Upon the effective date of the Company's IPO, the 536,500 outstanding shares of
Series B Preferred were converted into 536,500 shares of the Company's common
stock.
Common Stock
- ------------
During the year ended January 31, 1998, the Company issued 38,000 shares of
common stock for services valued at $54,000.
On November 25, 1997, the Company completed its IPO by issuing 1,300,000 shares
of common stock for gross proceeds of $11,700,000.
On February 19, 1998, the Company entered into an agreement with Premiere Radio
Networks, Inc. ("Premiere") whereby the Company issued to Premiere 47,059 shares
of the Company's common stock for advertising time valued at $1,000,000 that was
provided by Premiere.
Stock Options
- -------------
The Company's board of directors adopted the 1997 Stock Option Plan (the "Plan")
and reserved 250,000 shares of common stock for grants of stock options under
the Plan. Generally, options granted under the Plan expire upon the earlier of
ten years from the date of grant (five years in the case of an incentive stock
option granted to a holder of 10% or more of the Company's outstanding capital
stock) or three months after the optionee's termination of employment or
service.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to the pro
forma amounts indicated below for the year ended January 31, 1998:
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<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
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)
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended January 31, 1998: dividend yield of 0%; expected
volatility of 110%; risk-free interest rate of 5.4%; and expected life of 3.11
years. The weighted-average fair value of options granted during the year ended
January 31, 1998 was $3.87, and the weighted-average exercise price was $3.00.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Weighted-Average
Number Granted
of Shares Price Per Share
--------- ---------------
Outstanding, January 31, 1997 Granted -- $ --
232,500 $ 4.94
-----------
OUTSTANDING, JANUARY 31, 1998 232,500 $ 4.94
===========
EXERCISABLE, JANUARY 31, 1998 137,500 $ 3.00
===========
The weighted-average remaining contractual life of options outstanding issued
under the Plan is 4.46 years at January 31, 1998. Options available for future
grant at January 31, 1998 were 17,500.
During the year ended January 31, 1998, the Company issued 67,000 stock options
to employees where the exercise price was less than the fair value of the
Company's stock at the date of grant. The Company will recognize compensation
expense of $17,443, $112,750, $112,750, $112,750, and $95,307 during the years
ended January 31, 1998, 1999, 2000, 2001, and 2002, respectively, related to the
issuance of these 67,000 stock options.
-60-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
Warrants
- --------
Outstanding warrants as of January 31, 1998 were as follows:
Number of Weighted-Average
Warrants Exercise Price
-------- --------------
Issued in connection with
Series A preferred 375,000 $ 3.00
Series B preferred 268,250 $ 3.00
Subordinated notes 582,750 $ 5.49
TOTAL 1,226,000
=========
All of the above warrants are exercisable.
NOTE 8 - INCOME TAXES
For the years ended January 31, 1998 and 1997, the Company did not provide a
provision for income taxes due to the net loss incurred. At January 31, 1998,
the Company has approximately $5,600,000 and $2,800,000 in net operating loss
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 of a deferred tax
asset relating to the net operating loss carryforwards of approximately
$2,050,000. The other components of the Company's deferred tax assets and
liabilities are immaterial. The Company has established a valuation allowance of
approximately $2,014,000 to fully offset its deferred tax asset as the Company
does not believe the recoverability of this deferred tax asset is more likely
than not. The valuation allowance increased by approximately $2,068,000 during
the year ended January 31, 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended January 31, 1998, the Company incurred legal expenses of
approximately $546,000, which counsel was also a shareholder of the Company. At
January, 31, 1998, the Company had accounts payable balances of approximately
$324,000 related to such counsel.
In connection with its underwriting agreement, the Company paid Waldron
commissions and an allowance for expenses in the amount of 10% and 3%,
respectively, of the gross proceeds of the IPO. These expenses were recorded as
offering costs in the statement of shareholders' equity. Additionally, the
Company had product sales to Waldron of approximately $342,000 during the year
ended January 31, 1998, of which approximately $106,000 was included in accounts
receivable at January 31, 1998.
During the year ended January 31, 1998, the Company obtained short-term
non-interest bearing promissory notes in the amount of $305,000 from affiliates
-61-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
of Waldron, which were fully repaid subsequent to the IPO. No interest expense
was imputed due to the short period of time that the promissory notes were
outstanding.
The Company made advances to an officer of approximately $156,000, which were
fully repaid during the year ended January 31, 1998. Approximately $98,000 of
the repayments were made by Cyber Depot, a company in which the officer is a
controlling shareholder. Total employee advances outstanding at January 31, 1998
amounted to $17,557, which is included in other receivables on the balance
sheet.
During the year ended January 31, 1998, the Company made advances of $16,000 to
Cyber, which were fully repaid during the year.
During the year ended January 31, 1998, the Company retained the services of
certain consultants, which were also shareholders. Consulting expenses amounted
to approximately $91,000 and were substantially paid as of January 31, 1998. At
January 31, 1998, the Company had accounts payable to these consultants of
approximately $2,000.
As more fully described in Note 4, the Company entered into an agreement with En
Pointe, a shareholder. Additionally, the Company purchased various computer
hardware from En Pointe for approximately $223,000. At January 31, 1998, the
Company had accounts payable to En Pointe of approximately $114,000.
NOTE 10 - SEC INVESTIGATION / CLASS ACTION LAWSUIT
In March 1998, the Company became aware that the SEC had initiated a private
investigation to determine whether the Company, Waldron, or any its officers,
directors, employees, affiliates or others had engaged in fraudulent activities
in connection with transactions in the Company's common stock. Such
investigation resulted in the SEC temporarily suspending trading in the
Company's stock. The trading suspension has expired, and the Company and its
officers and directors believe that they have not been guilty of any fraudulent
conduct in connection with the transactions in the Company's stock.
On April 16, 1998, a class action lawsuit was filed against the Company, certain
officers of the Company, Waldron, two of Waldron's executives, and one other
broker-dealer ("Defendants") on behalf of all persons who purchased shares of
the Company's stock between November 25, 1997 and March 26, 1998 alleging
violations of the California securities laws by the Defendants. The complaint
charges that the Defendants participated in a scheme and wrongful course of
business to manipulate the price of the Company's stock. The Company does not
believe that it is guilty of the acts alleged in the complaint and intends to
defend against this action vigorously. Nonetheless, and despite the Company's
insurance coverage for such actions, management believes this class action suit
may be very harmful to the Company.
-62-
<PAGE>
SHOPPING.COM
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998
- --------------------------------------------------------------------------------
In addition, diversion of management time and effort from the Company's
operations and the implementation of the Company's business plan at this crucial
time in the Company's development may adversely and significantly affect the
Company and its business. The continued pendency of this litigation and private
investigation may make it difficult for the Company to raise additional capital
to continue its development and expansion. The inability of the Company to raise
additional capital would have a material adverse effect on the Company's
financial position and results of operations and may prevent the Company from
carrying out its business plan.
-63-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after the end of the fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after the end of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after the end of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed not later than 120 days after the end of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation of Shopping.com.
3.2(*) Bylaws of Shopping.com. Incorporated herein by reference from
Exhibit 3.02 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.1(*) See Articles of Incorporation (Exhibit 3.1) for definition of the
rights of the Preferred and Common Stock.
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<PAGE>
4.2(*) Stock Option Plan of 1997. Incorporated herein by reference from
Exhibit 4.01 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.3(*) Form of Incentive Stock Option Agreement form under Stock Option
Plan of 1997 (McNulty). Incorporated herein by reference from
Exhibit 4.02 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.4(*) Form of Incentive Stock Option Agreement form under Stock Option
Plan of 1997 (Hay). Incorporated herein by reference from Exhibit
4.03 to Registrant's Registration Statement on Form SB-2 filed on
September 24, 1997 (Registration No. 333-36215).
4.5(*) Form of Incentive Stock Option Agreement form under Stock Option
Plan of 1997 (Non-Employee). Incorporated herein by reference from
Exhibit 4.04 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.6(*) Form of Incentive Stock Option Agreement form under Stock Option
Plan of 1997 (Employee). Incorporated herein by reference from
Exhibit 4.05 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.7(*) Form of $3.00 Warrant Certificate. Incorporated herein by
reference from Exhibit 4.06 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.8(*) Form of $1.50 Warrant Certificate. Incorporated herein by
reference from Exhibit 4.07 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.9(*) Form of Underwriter's Warrant Certificate. Incorporated herein
by reference from Exhibit 4.08 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997 (Registration
No. 333-36215).
4.10(*) Form of Demand Registration Rights Agreement. Incorporated
herein by reference from Exhibit 4.09 to Registrant's Registration
Statement on Form SB- 2 filed on September 24, 1997 (Registration
No. 333-36215).
4.11(*) Form of Piggy Back Registration Rights Agreement. Incorporated
herein by reference from Exhibit 4.10 to Registrant's Registration
Statement on Form SB- 2 filed on September 24, 1997 (Registration
No. 333-36215).
4.12(*) Form of Irrevocable Proxy. Incorporated herein by reference from
Exhibit 4.11 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
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4.13(*) Form of Irrevocable Proxy. Incorporated herein by reference from
Exhibit 4.12 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.14(*) Domain Name Transfer and Stock Purchase Agreement. Incorporated
herein by reference from Exhibit 4.13 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997 (Registration
No. 333-36215).
4.15(*) Form of Lock-up Agreement. Incorporated herein by reference from
Exhibit 4.15 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
4.16(*) Specimen of Stock Certificate. Incorporated herein by reference
from Exhibit 4.16 to Registrant's Amendment No. 2 to Registration
Statement on Form SB- 2/A filed on November 21, 1997 (Registration
No. 333-36215).
10.1(*) Employment Agreement between the Company and Robert J. McNulty.
Incorporated herein by reference from Exhibit 10.01 to Registrant's
Registration Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.2(*) Employment Agreement between the Company and Mark S. Winkler.
Incorporated herein by reference from Exhibit 10.02 to Registrant's
Registration Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.3 Employment Agreement between the Company and Pat DeMicco.
10.4 Amendment to Employment Agreement between the Company and Pat
DeMicco.
10.5(*) Form of Indemnification Agreement. Incorporated herein by
reference from Exhibit 10.03 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
10.6(*) Form of Confidentiality and Non-Solicitation Agreement (independent
contractors/outside vendor). Incorporated herein by reference
from Exhibit 10.04 to Registrant's Registration Statement on Form
SB-2 filed on September 24, 1997 (Registration No. 333-36215).
10.7(*) Asset Purchase Agreement and Bill of Sale dated March 31, 1997 in
which Cyber Depot., Inc. sells to Shoppers Source title and
interest in the hardware, software, customer lists and vendor lists
in connection with retail sales operations through the Internet
.Form of Confidentiality and Non-Solicitation Agreement
(independent contractors/outside vendor). Incorporated herein by
reference from Exhibit 10.05 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
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10.8(*) Asset Purchase Agreement. Incorporated herein by reference from
Exhibit 10.06 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
10.9(*) Office lease between ARAI Corporation of American and the Shoppers
Source, and Amendment. Incorporated herein by reference from
Exhibit 10.07 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
10.10(*) Assignment of Property Rights. Incorporated herein by reference
from Exhibit 10.08 to Registrant's Registration Statement on Form
SB-2 filed on September 24, 1997 (Registration No. 333-36215).
10.11(*) Form of Subordinated Promissory. Incorporated herein by reference
from Exhibit 10.10 to Registrant's Registration Statement on Form
SB-2 filed on September 24, 1997 (Registration No. 333-36215).
10.12(*) En Pointe Agreement. (Confidential treatment requested for certain
portions.) Incorporated herein by reference from Exhibit 10.12 to
Amendment No. 1 to Registrant's Registration Statement on Form
SB-2/A filed on October 31, 1997 (Registration No. 333-36215).
10.13(*) Agreement with Typhoon Capital Consultants LLC. Incorporated
herein by reference from Exhibit 10.11 to Amendment No. 1 to
Registrant's Registration Statement on Form SB-2/A filed on October
31, 1997 (Registration No. 333- 36215).
10.14(*) Domain name Transfer. Incorporated herein by reference from
Exhibit 4.13 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
10.15 Marketing Agreement between the Company and En Pointe Technologies
Sales, Inc. dated February 10, 1998.
10.16 Subscription Agreement between the Company and Premiere Radio
Networks, Inc. dated February 19, 1998.
10.17 Master Lease Agreement No. 6325 between the Company and Insight
Investments, Corp. dated December 18, 1997 (Equipment lease).
10.18(*) Agreement with Home Network dated December 15, 1997. Incorporated
herein by reference from Exhibit 10.13 to Registrant's Current
Report on Form 8-K dated January 12, 1998. (Filed wit the SEC on
January 12, 1998, File No. 000-29518.)
10.19 Consulting Agreement among the Company, Cyber depot, Inc.,
Robert J. McNulty and Double 12, Ltd. Dated March 27, 1998.
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20.1(*) Resignation Letter of Bill Gross dated March 24, 1998. Incorporated
herein by reference from Exhibit 20.1 to Registrant's Current
Report on Form 8-K dated March 24, 1998. (Filed with the SEC on
March 31, 1998, File No. 000- 29518.)
27.1** Financial Data Schedule.
* Previously filed with the Securities and Exchange Commission.
** Filed electronically via EDGAR.
(b) Reports on Form 8-K
On January 22, 1998 a report on Form 8-K dated January 12, 1998 (the
"January Report") was filed with the Securities and Exchange Commission (the
"SEC"). Pursuant to Item 5 of Form 8-K, the January Report announced an 18-month
agreement with ATHome Corporation, a high speed interactive services provider
via its @Home Network. No financial statements were included with the January
Report.
On February 17, 1998 a report on Form 8-K dated February 10, 1998 (the
"February Report") was filed with the SEC. Pursuant to Item 5 of Form 8-K, the
February Report announced (1) a two year agreement with En Pointe, a national
provider of information technology and services, to use En Pointe's sales
network to sell business and office products directly to companies and (2) a
three year agreement with Profit Pro, Inc., a provider of cataloging software,
to use Profit Pro, Inc.'s cataloging software which will look up auto parts on
the Shopping.com Web site. No financial statements were included with the
February Report.
On March 31, 1998 a report on Form 8-K dated March 24, 1998 (the "March
Report") was filed with the SEC. The March Report was made pursuant to Item 5 of
Form 8-K. The Company reported that on March 24, 1998, the SEC had ordered
trading in the Company's securities suspended for the period from 9:30 a.m. EST,
March 24, 1998 through 11:59 p.m. EDT, on April 6, 1998. The SEC did not allege
any violations but alleged 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 also reported that Bill
Gross had resigned form Board of Directors for personal reasons unrelated to the
SEC inquiry. The Company announced that Frank W. Denny had been appointed to the
Board of Directors to fill the vacancy created by Mr. Gross' resignation.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHOPPING.COM
Date: April 30, 1998 /s/ Robert J. McNulty
--------------------------------------
Robert J. McNulty,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer
/s/ Robert J. McNulty President
- ------------------------ Director
Robert J. McNulty (Principal Executive Officer) April 30, 1998
/s/ Frank W. Denny Chairman of the Board of Directors April 30, 1998
- ------------------------
Frank W. Denny
Senior Vice President
/s/ Kristine Webster Chief Financial Officer
- ------------------------- Secretary
Kristine Webster (Principal Accounting Officer) April 30, 1998
/s/ Douglas Hay
- ------------------------- Director April 30, 1998
Douglas Hay
/s/ Paul J. Hill
- ------------------------- Director April 30, 1998
Paul J. Hill
/s/ Edward F. Bradley
- ------------------------- Director April 30, 1998
Edward F. Bradley
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<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
3.1 Amended and Restated Articles of Incorporation of 74
Shopping.com.
3.2(*) Bylaws of Shopping.com. Incorporated herein by reference
from Exhibit 3.02 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.1(*) See Articles of Incorporation (Exhibit 3.1) for definition
of the rights of the Preferred and Common Stock.
4.2(*) Stock Option Plan of 1997. Incorporated herein by reference
from Exhibit 4.01 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.3(*) Form of Incentive Stock Option Agreement form under Stock
Option Plan of 1997 (McNulty). Incorporated herein by
reference from Exhibit 4.02 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
4.4(*) Form of Incentive Stock Option Agreement form under Stock
Option Plan of 1997 (Hay). Incorporated herein by
reference from Exhibit 4.03 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
4.5(*) Form of Incentive Stock Option Agreement form under Stock
Option Plan of 1997 (Non-Employee). Incorporated herein by
reference from Exhibit 4.04 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
4.6(*) Form of Incentive Stock Option Agreement form under Stock
Option Plan of 1997 (Employee). Incorporated herein by
reference from Exhibit 4.05 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
4.7(*) Form of $3.00 Warrant Certificate. Incorporated herein by
reference from Exhibit 4.06 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
4.8(*) Form of $1.50 Warrant Certificate. Incorporated herein by
reference from Exhibit 4.07 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
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<PAGE>
4.9(*) Form of Underwriter's Warrant Certificate. Incorporated
herein by reference from Exhibit 4.08 to Registrant's
Registration Statement on Form SB-2 filed on September 24,
1997 (Registration No. 333-36215).
4.10(*) Form of Demand Registration Rights Agreement. Incorporated
herein by reference from Exhibit 4.09 to Registrant's
Registration Statement on Form SB-2 filed on September 24,
1997 (Registration No. 333-36215).
4.11(*) Form of Piggy Back Registration Rights Agreement. Incorporated
herein by reference from Exhibit 4.10 to Registrant's
Registration Statement on Form SB-2 filed on September 24,
1997 (Registration No. 333-36215).
4.12(*) Form of Irrevocable Proxy. Incorporated herein by reference
from Exhibit 4.11 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.13(*) Form of Irrevocable Proxy. Incorporated herein by reference
from Exhibit 4.12 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.14(*) Domain Name Transfer and Stock Purchase Agreement. Incorporated
herein by reference from Exhibit 4.13 to Registrant's
Registration Statement on Form SB-2 filed on September 24,
1997 (Registration No. 333-36215).
4.15(*) Form of Lock-up Agreement. Incorporated herein by reference
from Exhibit 4.15 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
4.16(*) Specimen of Stock Certificate. Incorporated herein by
reference from Exhibit 4.16 to Registrant's Amendment No.
2 to Registration Statement on Form SB-2/A filed on
November 21, 1997 (Registration No. 333-36215).
10.1(*) Employment Agreement between the Company and Robert J.
McNulty. Incorporated herein by reference from Exhibit
10.01 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
10.2(*) Employment Agreement between the Company and Mark S.
Winkler. Incorporated herein by reference from Exhibit
10.02 to Registrant's Registration Statement on Form SB-2
filed on September 24, 1997 (Registration No. 333-36215).
10.3 Employment Agreement between the Company and Pat DeMicco. 78
10.4 Amendment to Employment Agreement between the Company and Pat 84
DeMicco.
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<PAGE>
10.5(*) Form of Indemnification Agreement. Incorporated herein by
reference from Exhibit 10.03 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.6(*) Form of Confidentiality and Non-Solicitation Agreement
(independent contractors/outside vendor). Incorporated
herein by reference from Exhibit 10.04 to Registrant's
Registration Statement on Form SB-2 filed on September 24,
1997 (Registration No. 333-36215).
10.7(*) Asset Purchase Agreement and Bill of Sale dated March 31,
1997 in which Cyber Depot., Inc. sells to Shoppers Source
title and interest in the hardware, software, customer
lists and vendor lists in connection with retail sales
operations through the Internet. Form of Confidentiality
and Non-Solicitation Agreement (independent contractors/
outside vendor). Incorporated herein by reference from
Exhibit 10.05 to Registrant's Registration Statement on
Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
10.8(*) Asset Purchase Agreement. Incorporated herein by reference
from Exhibit 10.06 to Registrant's Registration Statement
on Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
10.9(*) Office lease between ARAI Corporation of American and
the Shoppers Source, and Amendment. Incorporated herein by
reference from Exhibit 10.07 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.10(*) Assignment of Property Rights. Incorporated herein by
reference from Exhibit 10.08 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.11(*) Form of Subordinated Promissory. Incorporated herein by
reference from Exhibit 10.10 to Registrant's Registration
Statement on Form SB-2 filed on September 24, 1997
(Registration No. 333-36215).
10.12(*) En Pointe Agreement. (Confidential treatment requested
for certain portions.) Incorporated herein by reference
from Exhibit 10.12 to Amendment No. 1 to Registrant's
Registration Statement on Form SB-2/A filed on October 31,
1997 (Registration No. 333-36215).
10.13(*) Agreement with Typhoon Capital Consultants LLC. Incorporated
herein by reference from Exhibit 10.11 to Amendment No. 1
to Registrant's Registration Statement on Form SB-2/A
filed on October 31, 1997 (Registration No. 333-36215).
10.14(*) Domain name Transfer. Incorporated herein by reference from
Exhibit 4.13 to Registrant's Registration Statement on
Form SB-2 filed on September 24, 1997 (Registration No.
333-36215).
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<PAGE>
10.15 Marketing Agreement between the Company and En Pointe 86
Technologies Sales, Inc. dated February 10, 1998.
10.16 Subscription Agreement between the Company and Premiere 92
Radio Networks, Inc. dated February 19, 1998.
10.17 Master Lease Agreement No. 6325 between the Company and 107
Insight Investments, Corp. dated December 18, 1997
(Equipment lease).
10.18(*) Agreement with Home Network dated December 15, 1997.
Incorporated herein by reference from Exhibit 10.13 to
Registrant's Current Report on Form 8-K dated January 12,
1998. (Filed wit the SEC on January 12, 1998, File No.
000-29518.)
10.19 Consulting Agreement among the Company, Cyber depot, Inc., 126
Robert J. McNulty and Double 12, Ltd. Dated March 27, 1998.
20.1(*) Resignation Letter of Bill Gross dated March 24, 1998.
Incorporated herein by reference from Exhibit 20.1 to
Registrant's Current Report on Form 8-K dated March 24,
1998. (Filed with the SEC on March 31, 1998, File No.
000-29518.)
27.1** Financial Data Schedule. 130
- ------------------
* Previously filed with the Securities and Exchange Commission.
** Filed electronically via EDGAR.
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<PAGE>
A501079
FILED
to the office of the Secretary of State
of the State of California
DEC 05 1997
//s// Bill Jones
BILL JONES, Secretary of State
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SHOPPING.COM
Robert J. McNulty and Kristine E. Webster 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 hereby Amended and Restated.
The Amended and Restated Articles of Incorporation as attached as
Exhibit A hereto and incorporated by reference herein as though set forth in
full herein shall be and constitute the Amended and Restated Articles of
Incorporation of Shopping.com.
3. The foregoing Amended and Restated Articles of Incorporation
(Exhibit A) have been duly approved by the Board of Directors.
4. The foregoing Amended and Restated Articles of Incorporation
(Exhibit A) have been duly approved by the required vote of shareholders in
accordance with Section 902 of the Corporations Code. The total number of
outstanding shares of this corporation is 5,337,330 of Common Shares which is
the only class of shares issued and outstanding. 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.
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<PAGE>
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 for our own knowledge.
Dated: December 5, 1997
//s// Robert J. McNulty
-------------------------------------
Robert J. McNulty, President
//s// Kristine E. Webster
-------------------------------------
Kristine E. Webster, Secretary
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-75-
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF SHOPPING.COM
I.
The name of the 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.
The Corporation is authorized to issue one class of shares
designated "Common Stock". The total number of shares which the Corporation is
authorized to issue in 20,000,000 shares. Upon the Amendment of these Articles,
each outstanding share of common stock is converted into 0.5 share.
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 expense 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 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
Exhibit A -- Page 1
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<PAGE>
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 317. 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 granted by
this Article V. The Corporation is authorized to indemnify the directors and
officers 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 stockholders of the Corporation by this
Articles of Incorporation are granted subject to the provisions of this Article
VI.
Exhibit A -- Page 2
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<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of
November __, 1997 by and between Shopping.com, a California corporation
("Company ") and Pat De Micco ("Employee").
1. Employment and Duties. Company hereby employs Employee as Senior
Vice President-Merchandising of the Company on the terms and subject to the
conditions contained in this Agreement. Employee shall be responsible for
merchandising products sold by Company. Employee hereby accepts such employment
and agrees to perform in good faith and to the best of Employee's ability all
services which may be reasonably required of Employee hereunder and to be
available to render services at all reasonable times and places in accordance
with such reasonable directions, requests, rules and regulations made by the
Company in connection with Employee's employment. Employee shall, during the
term hereof, devote Employee's full time and energy to performing his duties.
Employee shall be based at the Company's corporate offices, and he shall report
directly to Company's Chief Executive officer. Employee understands, however,
that Employee shall be required to travel to other locations.
2. Term of Employment. The term of this Agreement, shall commence as
of the date hereof and shall terminate on the first anniversary of the date
above, unless sooner terminated by the Company as provided herein.
3. Compensation. As full and complete compensation for Employee's
services hereunder and all the rights granted hereunder by Employee to Company,
Company shall pay Employee $15,833.33 per month payable in accordance with
Company's payroll practices for salaried employees. In addition, Employee shall
be entitled to bonus reasonably after the end of the first year of employment in
the amount of $50,000 as shall be determined by the Board of Directors of the
Company, based on Employee's achieving milestones mutually agreed by the Company
and Employee. The Company shall deduct and withhold from the compensation
payable to Employee hereunder any and all amounts required to be deducted or
withheld by the Company under the provisions of any statute, regulation,
ordinance, or order and any and all amendments hereinafter enacted requiring the
withholding or deducting from compensation payable to employees.
4. Expense Reimbursement; Automobile and Automobile Expenses. In
addition, to the compensation hereinabove provided, Employee shall be reimbursed
in a sum equal to the amount of all traveling, hotel, entertainment and other
expenses properly and necessarily incurred by Employee in the discharge of
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<PAGE>
Employee's duties hereunder, and Employee will supply the Company with vouchers,
receipts and other details of such expenses upon the Company's request therefor.
5. Death or Disability of Employee.
(a) In the event of Employee's death or disability while in
the employ of Company, this Agreement and the compensation due to Employee
pursuant to Paragraph 3 hereof shall terminate upon the date of said death
or disability and Company shall thereafter be required to make payments
only to Employee or Employee's estate, as the case may be, for all amounts
due to Employee as compensation for the services rendered hereunder
through the date of death or disability to the extent such amounts have
accrued but have not been theretofore paid. If Employee shall recover from
such disability prior to the expiration date of this Agreement set forth
in Paragraph 3 hereof, this Agreement and Employee's employment hereunder
shall be reinstated for the balance of term of this Agreement.
(b) Employee shall be deemed disabled if, Employee in the
opinion of Company, is unable to substantially perform the services
required of Employee hereunder for a period in excess of 60 consecutive
days or 120 days during any 210 day period. In such event, Employee shall
be deemed disabled as of such 120th day.
6. Restrictive Covenant. During the term of this Agreement, Employee
shall (i) devote Employee's full time and energy solely and exclusively to the
performance of Employee's duties described herein except during periods of
illness or vacation periods; (ii) not directly or indirectly provide services to
or through any company or firm except Company unless otherwise instructed by
Company; (iii) not directly or indirectly own, manage, operate, join, control or
participate in the ownership, management, operation or control of or be employed
by or connected in any manner with any enterprise which is engaged in any
business competitive with or similar to that of Company and (iv) not render any
services of any kind or character for Employee's own account or for any other
person, firm or corporation without first obtaining the Company's consent in
writing provided, however, that Employee shall have the right to perform such
incidental services as are necessary in connection with Employee's (a) private
passive investments where Employee is not obligated or required to, and shall
not in fact, devote any managerial efforts and provided such investments are not
geographically competitive when made with the business of Company or (b)
charitable or community activities, or in trade or professional organizations,
upon the condition, however, that such incidental services do not interfere with
the performance of Employee's services hereunder.
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<PAGE>
7. Confidentiality. Employee hereby acknowledges that during the
term hereof, Company may, from time to time, disclose to Employee confidential
information pertaining to the business and affairs of Company and its vendors,
customers and suppliers, including but not limited to, the customer lists and
accounts and other similar items indicating the source of income of Company. It
is understood that Employee shall not, at anytime during or after the term of
this Agreement, disclose to any third party -or directly or indirectly make use
of any such confidential information, including but not limited to, the names,
addresses, and telephone numbers of customers, suppliers or vendors of Company
other than in connection with, and in furtherance of the business and affairs of
Company. All documents and data (whether written, printed or otherwise
reproduced or recorded) containing or relating to any such information, whether
made or compiled by, or delivered or made available to, or otherwise obtained by
Employee, shall be returned by Employee to Company at the time of the
termination of this Agreement or upon any earlier request by Company, without
Employee retaining any copies, notes or excerpts thereof.
8. Ownership of Material and Ideas. Employee agrees that all
material, ideas, and inventions pertaining to the business of Company or of any
vendors, customers and suppliers of Company, including but not limited to, all
patents and copyrights thereon and renewals and extensions thereof, and the
names, addresses and telephone numbers of customers, suppliers or vendors of
Company, shall belong solely to Company.
9. Fringe Benefits. The Company shall provide to Employee throughout
the term of this Agreement the benefits of any group life insurance plan, group
medical insurance plan and other employee benefit plans available to executives
which the Company may adopt and for which Employee shall qualify. Employee shall
also be granted options to purchase 50,000 shares (prereverse split) of the
Company's common stock, exercisable over a five-year period at an exercise price
of $3.00 per share with vesting over a four-year period pursuant to the terms
and conditions of Company's Incentive Stock Option Plan.
10. Termination. The Company may without notice terminate this
Agreement and all of the Company's obligations hereunder for "cause" or "without
cause". Termination by the Company for "cause" shall mean termination because of
the Employee's conviction of a felony (which, through the lapse of time of
otherwise is not subject to appeal) or material refusal, failure or neglect
without proper cause to perform Employee's obligations under this Agreement or
material breach of any of Employee's fiduciary obligations as an officer or
employee of Company. Upon such termination, the Company shall thereafter be
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<PAGE>
required to make payment to Employee only for amounts due to Employee as
compensation for services rendered hereunder and not previously paid. In the
event, Employee is terminated "without cause" during the term of his employment
hereunder, the Company shall pay a severance payment equal to eighteen (18)
months compensation without any obligation on Employee's part to mitigate and
with Company having no right of offset in the event that Employee shall obtain
other employment. The said severance payment shall be Employee's only claim or
recourse against Company for such termination "without cause." In the event
Employee terminates his employment for any reason, he shall not be entitled to
any severance payment, and the Company shall not be entitled to any damages from
Employee by reason of Employees voluntary termination.
11. Services Unique. It is agreed that the services to be rendered
by Employee hereunder are of a special, unique, unusual, extraordinary and
intellectual character which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in an action at law
and that a breach by Employee of any of the provisions contained in sections 6
and 7 herein will cause the Company irreparable injury and damage. Employee
expressly agrees that the Company shall be entitled to injunctive or other
equitable relief to prevent a breach thereof. Resort to any such equitable
relief shall not be construed as a waiver of any of the rights or remedies which
the company may have against Employee for damages or otherwise.
12. Key Man Life Insurance. During the term of this Agreement, the
Company may at any time effect insurance on Employee's life and/or health in
such amounts and in such form as the Company may in its sole discretion decide.
Employee shall not have any interest in such insurance, but shall, if the
Company requests, submit to such medical examinations, supply such information
and execute such documents as may be reasonably required in connection with or
so as to enable the Company to effect such insurance.
13. Vacation. Employee shall have the right during the first (1)
year of the term of this Agreement to take an aggregate of two (2) weeks of
vacation, with pay, at such times mutually convenient to him and to the Company.
Employee shall have the right, however, to accumulate his vacation from one
period to the next period with the Company's consent.
14. Notices. Any and all notices, demands or other communications
required or desired to be given hereunder by any party shall be in writing and
shall be validly given or made to another party if given by personal delivery,
telex, facsimile, telegram or if deposited in the United States mail, certified
or registered, postage prepaid, return receipt requested. If such notice, demand
or other communication be given by personal delivery, telex, facsimile,
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telegram, service shall be conclusively deemed made at the time of such personal
service. If such notice, demand or other communication be given by mail, such
shall be conclusively deemed given forty-eight (48) hours after the deposit
thereof in the United States mail addressed to the party to whom such notice,
demand or other communication is to be given as hereinafter set forth:
To Company: Shopping.com
2101 E. Coast Highway, Garden Level
Corona Del Mar, California 92625
To Employee: _______________________
_______________________
_______________________
Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given in
the manner aforesaid to the other party or parties hereto.
15. Applicable Law and Severability. This document shall, in all
respects, be governed by the laws of the State of California applicable to
agreements executed and to be wholly performed within the State of California.
Nothing contained herein shall be construed so an to require the commission of
any act contrary to law, and wherever there is any conflict between any
provision contained herein and any present or future statute, law, ordinance or
regulation contrary to which the parties have no legal right to contract, the
latter shall prevail but the provision of this document which is affected shall
be curtailed and limited only to the extent necessary to bring it within the
requirements of the law.
16. Attorneys' Fees. In the event any action be instituted by a
party to enforce any of the terms and provisions contained herein, the
prevailing party in such action shall be entitled to such reasonable attorneys'
fees, costs and expenses as may be fixed by the Court.
17. Modifications or Amendments. No amendment, change or
modification of this document shall be valid unless in writing and signed by all
of the parties hereto.
18. Successors and Assigns. All of the terms and provisions
contained herein shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, personal representatives, successors
and assigns.
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19. Entire Agreement. This document constitutes the entire
understanding and agreement of the parties with respect to the subject matter of
this Agreement, and any and all prior agreements, understandings or
representations are hereby terminated and canceled in their entirety and are of
no further force or effect.
IN WITNESS WHEREOF, the parties hereto have duly executed them, Agreement
as of the day and year first above written.
Shopping.Com
a California corporation
By: _________________________
"Company"
Pat De Micco
By: _________________________
"Employee"
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AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment) entered into and
shall be effective as of November 28, 1997, by and between Shopping.com, a
California corporation Company") and Pat De Micco ("Employee").
WHEREAS, Company and Employee desire to amend the Employment
Agreement, a copy of which is attached hereto as Exhibit "A", and incorporated
herein by this reference Agreement), pursuant to the terms of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein and
for good and valuable consideration, receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend the Agreement on the following
terms and conditions:
Section 9 of the Agreement shall be amended and restated to read as
follows:
9. Fringe Benefits. The Company shall provide to Employee through the term
of this Agreement the benefits of any group life insurance plan, group
medical insurance plan and other employee benefit plans available to
executives which the Company may adopt and for which Employee shall
qualify. Employee shall also be granted options to purchase Fifty Thousand
(50,000) shares, (in share denomination calculated following the reverse
split of the Company's shares taking place on or about December 5, 1997),
of the Company's common stock, exercisable over a five (5) year period
commencing with the effective date of this Agreement, at an exercise price
of Three Dollars ($3.00) per share, pursuant to the terms and conditions
of the Company's Incentive Stock Option Plan of 1997, as amended, and the
Incentive Stock Option Agreement under Stock Option Plan of 1997, between
Company and Employee.
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In witness whereof, the parties have entered into this Amendment, to
be effective as set forth in the first paragraph of this Agreement, and each
acknowledged receipt of a fully signed original hereof.
COMPANY:
Shopping.com, a California corporation
By: /s/ Robert J. McNulty
----------------------------------
Robert J. McNulty, President
EMPLOYEE:
Pat De Micco
By: /s/ Pat De Micco
----------------------------------
Pat De Micco, an individual
(Interlineation: "Options vest over four (4) years beginning of first year
anniversary at 25% to 100% on fourth year." Initialed by both parties.)
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MARKETING AGREEMENT
THIS MARKETING AGREEMENT (this "Agreement") is made as of this 10th day of
February, 1998, by and between En Pointe Technologies Sales, Inc., a Delaware
corporation ("En Pointe"), with its principal offices at 100 No. Sepulveda
Blvd., 19th Floor, El Segundo, California 90245, and SHOPPING.COM, a California
corporation ("Shopping"), with its principal offices at 2101 East Coast Hwy.,
Garden Level, Corona del Mar, California 92625.
BACKGROUND
Shopping desires En Pointe to assist in marking the full range of
Shopping's products on Shopping's behalf throughout the United States and En
Pointe agrees to assist in said marketing.
IN CONSIDERATION OF THE FOREGOING and of the mutual covenants, conditions,
and agreements hereinafter set forth, the parties intending to be legally bound
do hereby agree as follows.
1. DEFINITIONS. The following words shall have the following meanings when used
in this Agreement:
1.1 "Products" shall mean any products or services offered for sale by
Shopping to the public through Shopping's website or otherwise.
1.2 "Territory" shall mean the United States and its territories and
possessions.
2. APPOINTMENT AND ACCEPTANCE OF EXCLUSIVITY. Subject to the terms herein,
Shopping hereby grants En Pointe a non-exclusive right and license to market and
license the Products. En Pointe hereby accepts its non-exclusive appointment to
market and license the Products in the Territory.
3. GRANT OF LICENSE TO EN POINTE. Subject to the terms herein, Shopping hereby
grants En Pointe the non-exclusive license to utilize Shopping's trademarks and
service marks associated with the Products as reasonably necessary in connection
with any sales or as reasonably necessary to satisfy its obligations hereunder.
En Pointe may use Shopping's trademarks and service marks in the presentation
and sales of the Products.
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4. TERM. This Agreement shall become effective on February 10, 1998 and continue
for two (2) years therefrom. This Agreement shall automatically renew for
continuous one (1) year periods unless one party gives the other party three (3)
months' prior written notice of its intent to terminate this Agreement.
5. FURTHER ASSISTANCE. Subject to the terms herein, Shopping agrees to furnish
En Pointe all such information, assistance, and cooperation as may be reasonably
required in negotiating agreements with customers.
6. MARKETING. En Pointe shall use good faith efforts to market those of the
Products appropriate to it. In the event Shopping requires to distribute or
otherwise utilize any marketing programs or materials, including any reference
to En Pointe after the termination of this Agreement, Shopping must remove any
such reference prior to such utilization.
7. COSTS AND OBLIGATIONS OF THE PARTIES. En Pointe and Shopping will each bear
their own costs incurred in advertising and marketing the Products.
Notwithstanding the previous sentence, Shopping will provide approximately two
(2) to three (3) days of Products existing at all En Pointe locations to support
the launch of a sales and marketing campaign and approximately two (2) to three
(3) days at Shopping's office for marketing-oriented technical system
walk-through without cost to En Pointe.
8. INTELLECTUAL PROPERTY AND PATENT INDEMNIFICATION. The following terms apply
to any infringement or claim of infringement of any patent, trademark,
copyright, trade secret, or other proprietary interest based on the licensing,
use or sale of any Products furnished to customers under this Agreement.
Shopping will indemnify En Pointe for any loss, damage, expense or liability,
including costs and reasonable attorneys' fees, that may result by reason of any
such infringement or claim of infringement.
9. INDEMNITY. Shopping agrees to indemnify and save harmless En Pointe, its
parents, subsidiaries and affiliates, and its and their directors, officers and
employees from any liabilities, lawsuits, penalties, claims, or damages
(including the costs, expenses and reasonable attorneys' fees on account
thereof) that may be made (1) by any third party for injuries, including death
to persons or damage to property, including theft, resulting from the
indemnifying party's negligent or willful acts or omissions; or (2) by any
employee or former employee of the indemnifying party or any of its
subcontractors for which the indemnifying party or subcontractor's liability to
such employee or former employee would otherwise be subject to payments under
such worker's compensation or similar laws. Shopping agrees to defend En Pointe,
at En Pointe's request, against any such liability, claim or demand. The
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foregoing indemnity shall be in addition to any other indemnity obligations of
Shopping set forth in this Agreement.
10. REPRESENTATIONS AND WARRANTIES OF SHOPPING
10.1 In order to induce En Pointe to enter into this Agreement, Shopping
represents and warrants to En Pointe (i) that it owns all right, title and
interest in and to the Products; (ii) that the Products are free from defects in
workmanship and materials; (iii) Shopping further warrants that any services
provided by Shopping under this Agreement shall be performed in a fully
workmanlike manner to Customer's satisfaction and in accordance with the
prevailing professional standards of the applicable industry; (iv) En Pointe's
use or sale of the Products will not violate the intellectual property rights of
any third party.
11. LIMITATION OF LIABILITY. Except as expressly provided in this Agreement, En
Pointe, its parents, subsidiaries and affiliates and its and their directors,
officers and employees, shall not be liable for any indirect, special,
incidental, or consequential damages (including, but not limited to, loss of
profits), whether based on tort, warranty, contract, or otherwise, arising out
of or in any way related to this Agreement or the providing of its Products,
even if such party has been advised of the possibility of such damages.
Notwithstanding any provision contained in this Agreement, Shopping agrees that
En Pointe's liability hereunder for damages shall be Shopping's conclusive
remedy and that such liability, regardless of the source of action, shall not
exceed $10,000.00. No action, regardless of form, arising under this Agreement,
may be brought by either party more than two (2) years after the cause of action
has arisen, except that an action for nonpayment may be brought within one (1)
year after the date of the most recent payment. EN POINTE DOES NOT MAKE ANY
EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. NO FURTHER RELATIONSHIPS. This Agreement shall not constitute, give effect
to, or otherwise imply a joint venture, pending arrangement, partnership, or
formal or informal business organization of any kind.
13. TERMINATION. In the event of the termination of this Agreement, En Pointe
shall be entitled to complete all sales already under contract and receive all
revenue generated from such sales, less the purchase price to be paid for such
sales to Shopping, within two (2) years of the termination of this Agreement. In
addition, En Pointe shall be entitled to receive compensation as provided in
this Agreement for all sales completed within six (6) months of the termination
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of this Agreement for all customers with which En Pointe had a letter of intent,
responded to a Request for Proposal (RFP), or made a presentation to
representatives of the eventual Pointe.
14. TRANSFER OF OBLIGATIONS. Shopping hereby approves the transfer and
pass-through of its obligations under Sections 8, 9 and 10 to En Pointe's
customers and agrees to provide such indemnification and warranty to En Pointe's
customers without charge to En Pointe.
15. SALES ACTIVITY REPORTING. Shopping shall provide En Pointe, no later than
the twentieth (20th) day following the end of each calendar month, a report of
En Pointe's activity during the prior calendar month. Such report shall include
information on receipts, billings, bookings, and sales contracts. En Pointe
shall have the right to audit all Shopping records pertaining to the Products
during normal business hours provided three (3) days' prior written notice is
provided to Shopping. Shopping shall bear the expense of such audit unless the
results of such reveal an error of less that 5 percent of the revenues to be
received by En Pointe, in which event En Pointe shall bear the expense of such
audit.
16. PAYMENT. During the term, En Pointe shall be entitled to payment or
retention of (i) the first two percent (2%) of sales price to customer,
exclusive of sales tax; (ii) thirty percent (30%) of the Gross Profit Margin on
all Products. Gross Profit Margin includes sales price to customer, exclusive of
tax, minus invoice cost, exclusive of tax. Shopping and En Pointe shall split
the remaining Gross Profit Margin on all Products fifty/fifty (50/50). En Pointe
will remit any payments due Shopping once per month based on En Pointe's actual
receipt of good payment funds from customers within the prior month.
17. CUSTOMER, CONTRACT, SHIPPING AND PACKING LABELS. En Pointe shall contract
directly with customers for all sales of Products. All shipping and packing
labels on all products shipped to customers hereunder shall bear En Pointe's
name as the shipping party.
18. BACKGROUND, ENUMERATIONS AND HEADINGS. The "Background," enumerations and
headings contained in the terms and conditions are for convenience of reference
only and are not intended to have any substantive significance in interpreting
this Agreement.
19. SURVIVAL. The license granted by Shipping to En Pointe and its customers
shall survive the termination of this Agreement except as amended by the joint
agreement of both parties.
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20. PUBLICITY. No release shall be made to the news media or to the general
public relating to this Agreement without the prior written approval of an
authorized executive party for the other party.
21. ASSIGNMENT. Neither party shall assign or transfer in any manner its
obligations, rights, or interests or any part thereof under this Agreement
whether by written agreement or operation of law without the prior written
consent of an authorized executive officer of the nonassigning party, which
consent may not be unreasonably withheld. Any assignment in contravention of
this Agreement is null and voice. The foregoing shall not apply to the
assignment by En Pointe to any parent, successor affiliate.
22. GOVERNING LAW; VENUE. The agreements contained herein shall be governed by
and construed in accordance with, the laws of the State of California without
giving effect to the principles of conflicts of law. As to any disputes between
En Pointe and Shopping, the parties hereto irrevocably agree that any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, other than matters pertaining to injunctive relief, including without
limitation, temporary restraining orders, preliminary injunctions and permanent
injunctions, shall be determined by binding arbitration before the Judicial
Arbitration and Mediation Services in Los Angeles County, California. The
parties hereto waive any right to trial by jury with regard to any disputes
between them hereunder. Judgments upon any arbitration award rendered shall be
and may be entered in any court having jurisdiction thereof, provided that no
awards for punitive damages may be rendered or entered as judgments. It is
hereby agreed that the parties shall be permitted to conduct such discovery as
the arbitrator may permit. The parties submit to the exclusive jurisdiction of
the United States District Court for the Central District of California, Western
Division, over any action, suit or proceeding or matter pertaining to injunctive
relief, including, without limitation, temporary restraining orders, preliminary
injunctions and permanent injunctions, arising out of or relating to this
Agreement or the transactions contemplated by this Agreement, except to the
extent that said Court does not have subject matter jurisdiction, in which case
the parties irrevocably submit to the jurisdiction of the Superior Court of the
County of Los Angeles, State of California, over any such actions, suit or
proceeding, pertaining to injunctive relief, including, without limitation,
temporary restraining orders, preliminary injunctions and permanent injunctions.
23. ENTIRE AGREEMENT. This document contains the entire agreement between the
parties and supersedes any previous understandings, commitments, or agreements,
oral or written, with respect to agreements between the parties. No alternation
of an amendment to this Agreement shall be effective unless in writing and
signed by an authorized executive officer of each party.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EN POINTE TECHNOLOGIES SALES, INC.
By: //s//
------------------------------
SHOPPING.COM
By: //s//
------------------------------
ROBERT McNULTY
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SUBSCRIPTION AGREEMENT
This Subscription Agreement, dated as of February 19, 1998, is by and
among, SHOPPING.COM, 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 47,059 shares of
Common Stock of the Company (the "Shares") at the purchase price per share of
$21.25 (the "Subscription Price") in consideration for radio advertising
services, valued at $1,000,000, acquired by the Company from the Shareholder on
February 19, 1998. Exhibit A hereto sets forth $500,000 of the advertising time
to be provided; the Company and the Shareholder will negotiate in good faith
with respect to the remaining $500,000 of advertising time. 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
issue to the Shareholder 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 February 19, 1999, the average closing price
of the Company's Common Stock for the previous ten trading days (the "Average
Closing Price") is less than $21.25 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) 47,059, provided,
however, that the Company shall not be obligated in any case to issue more than
52,941 Additional Shares; provided further that if the Shareholder shall have
sold any of the Shares prior to February 19, 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
8,000,000 shares of Common Stock of which approximately 4,002,000 shares are
currently issued and outstanding. The Company does not have the authority to
issue another class of capital stock.
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 legal 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 restriction 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
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not and will not (a) violate the articles of incorporation or bylaws of the
Company or any order, 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
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 or other agreement of 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 report on Form 10-QSB for the interim period
ended October 31, 1997 as filed herein ("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 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 Investments Intent. The Shareholder 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.
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 exemption 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 the applicable state 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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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 February 19, 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 thereof 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 sot hat 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," as that term is defined in Rule 501 under the Securities Act.
3.6 Access to Information. The Shareholder has had the opportunity to
review all documents and information which the Shareholder has requested
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concerning its investment and the Company. The Shareholder has had the
opportunity to ask the Company's management, which questions were answered to
its satisfaction. The Shareholder has relied only on 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 understands that there
is no market for the Shares and that there is no assurance that a market will
develop. 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.
ARTICLE IV
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
4.1 Definitions. For 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 (a) 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
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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.
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 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.
4.3 Furnish Information. It shall be a condition precedent of 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 of 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
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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 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 offer 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 or 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, (iii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein no misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
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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, 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
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
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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, 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 omission 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 are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and the Holders under this
Section 4.7 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 4.7, and otherwise.
4.8 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders and benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
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sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
(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
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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 Holder or Holders under this Section 4.9; provided, however, that the
Company shall not utilize this right more than once in 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 receive 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 to 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 provision 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, 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
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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:
(a) all officers and directors of the Company and all other persons
with registration rights (whether or not pursuant to this Agreement) 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 party
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.
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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 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 address below stated of the party to which
notice is given, or to such changed address as such party may have fixed by
notice, 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; 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 retired
judges who were or are active in the securities business or are experienced in
dispute resolution regarding the securities business, that prearbitration
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 damage shall be awarded. The parties understand that
any party's right to appeal or to seek modification of rulings in an arbitration
is severally 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 in Los Angeles at the time such award is rendered.
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IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the date first above written.
Dated: 3/2/98 PREMIERE RADIO NETWORKS, INC.
By: //ss// Illegible
----------------------------------
Name:
----------------------------
Address:
[Illegible]
The Company hereby [illegible].
Dated: 3/2/98 SHOPPING.COM
By: //ss// Robert J. McNulty
---------------------------------
Its: CEO
Address:
_____ [Illegible] East Coast Highway
Corona Del Mar, CA _____
Attention: President
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INSIGHT INVESTMENTS, CORP.
MASTER LEASE NO. 6325
MASTER LEASE AGREEMENT No. 6325, dated December 18, 1997, by and between INSIGHT
INVESTMENTS, CORP., a California corporation ("Lessor"), 265 South Anita Drive,
Suite 200, Orange, California 92868 and Shopping.com, a California corporation
("Lessee"), 2101 W. Coast Highway, Newport Beach, CA 92625.
For and in consideration of the mutual covenants and promises set forth herein
and the payment of Rent as provided herein, Lessor and Lessee agree as follows:
1. LEASE OF EQUIPMENT. Lessor leases to Lessee, and Lessee leases from Lessor,
all of the personal property, together with all replacements, parts and repairs
incorporated therein (collectively, the "Equipment"; and individually, an
"Item") described in each Equipment Schedule ("Schedule") executed and delivered
from time to time pursuant to this Master Lease.
2. SCHEDULES. Each Schedule shall incorporate the terms and conditions of this
Master Lease and such other terms and conditions as Lessor and Lessee shall
agree upon. Each Schedule is a separate and independent lease and contractual
obligation. In the event of a conflict between the provisions of the Master
Lease and those of any Schedule, the provisions of the Schedule shall control.
The term "Lease" shall mean an individual Schedule which incorporates the terms
and conditions of this Master Lease. The Lease shall be effective upon execution
by Lessee and subsequent acceptance by Lessor at its principal place of
business.
3. LEASE TERM. The term of lease ("Lease Term") for each Item shall begin on its
Acceptance Date and continue after the Commencement Date for that number of
months specified in the Schedule as the "Initial Lease Term", and thereafter
until terminated by either party upon not less than ninety (90) days prior
notice (which notice shall apply to all the Equipment and may not be revoked
without the consent of the other party). The term "Commencement Date" means the
first day of the month immediately following the month during which the
Acceptance Date occurs for the Item to be last installed or delivered, as
applicable.
4. ACCEPTANCE. The Acceptance Date for each Item shall be the earliest of (i)
the date the manufacturer, or other party acceptable to Lessor, installs the
Item and certifies that Item to be in good working order, or (ii) if Lessee has
caused a delay in the installation of an Item, then the fifth day after the Item
is delivered to the location specified in the Schedule, or (iii) if Lessee is to
install the Item, the fifth day after delivery; or (iv) if the Item does not
require installation, the third day after the day the Item is delivered to
Lessee. If the Equipment is already installed at the Lessee's location, the
Acceptance Date shall be the date on which the Lessor pays for the Equipment. On
each Acceptance Date, Lessee shall execute and deliver to Lessor a Certificate
of Acceptance.
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5. RENT.
(a) "Rent" as used herein shall mean and include all of the following:
(1) Interim Rent. Lessee's interim rental obligation for each Item shall
commence on its Acceptance Date and continue through the day immediately
preceding the Commencement Date ("Interim Rent"). Interim Rent for each Item
shall be one-thirtieth (1/30) of the Monthly Rent for that Item, with the
Interim Rent for all Items being due and payable on the Commencement Date. If
the Acceptance Date for all the Equipment is the first day of a calendar month,
there shall be no Interim Rent.
(2) Monthly Rent. Lessee shall pay Lessor Monthly Rent for the Equipment in the
amount set forth in the Schedule. Monthly Rent shall begin to accrue on the
Commencement Date and shall be due and payable by Lessee in advance on the
Commencement Date and on the first day of each month thereafter during the Lease
Term.
(3) Additional Rent. Lessee shall also owe to Lessor, as additional rent
("Additional Rent") any and all charges, expenses, indemnities and other sums
which become due by Lessee to Lessor under the terms of this Lease. Any such
Additional Rent shall be paid to Lessor within thirty (30) days after the date
that Lessor gives notice to Lessee that such Additional Rent is due, unless a
longer or shorter period is otherwise specified herein.
(b) Late Charge. If Lessee fails to pay to Lessor within ten (10) days after the
due date thereof (and without regard as to whether Lessor has given Lessee
notice of such failure of whether an Event of Default has occurred) any Rent due
hereunder, then Lessee shall also owe to Lessor Late Charges on such delinquent
payment from the due date until paid at the lower of two percent (2%) per month
or the maximum rate permitted by applicable law.
(c) Method of Payment. All payment of Rent, Late Charges or other amounts
required to be paid by Lessee shall be paid to Lessor by check or wire transfer
so as to constitute immediately available funds at the address of Lessor set
forth above or at such other place as Lessor shall designate in writing, or, if
to an Assignee of Lessor, at such place as such Assignee shall designate in
writing.
6. USE AND LOCATION.
(a) Use. Lessee shall use the Equipment in a careful and proper manner in
conformance with all manufacturer's specifications and shall comply with all
federal, state, municipal and other laws, ordinances and regulations in any way
relating to the possession, use or maintenance of the Equipment, and in
compliance with all requirements of the insurance policies required to be
maintained by Lessee pursuant to Section 12 herein.
(b) Location. Each Item will at all times be and remain in Lessee's sole
possession and control at the place of installation/location shown in the
Schedule. The Equipment may be moved to another location of Lessee within the
continental contiguous United states with Lessor's prior written consent; such
consent shall not be unreasonably withheld but as a condition of such consent
Lessor may require Lessee to execute such documents, including, but not limited
to, Uniform Commercial Code ("UCC") financing statements, as Lessor may
reasonably require to provide notice, perfect, or maintain the notification or
perfection of, Lessor's or Assignee's interest in such Equipment. Any relocation
of the Equipment pursuant to this Section and all UCC financing statement filing
fees shall be at the sole expense of Lessee.
7. MAINTENANCE AND REPAIR. Lessee hereby assumes the sole duty to maintain the
Equipment and shall not look to Lessor or any Assignee for such maintenance. At
its own expense, Lessee shall maintain and keep the Equipment in good repair,
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condition and working order and shall furnish any and all parts, mechanisms,
devices and labor required therefor, and shall enter into and maintain during
the Lease Term a maintenance agreement with the Equipment manufacturer or other
party acceptable to Lessor. Lessee shall furnish a copy of such agreement to
Lessor upon Lessor's request.
8. QUIET ENJOYMENT. Lessor hereby covenants that so long as no Event of Default
has occurred, Lessee shall and may quietly have, hold and enjoy the Equipment in
accordance with the terms and conditions of the Lease, free from disturbance by
Lessor or anyone claiming by or through Lessor.
9. LESSOR'S RIGHT TO INSPECT. Lessor shall at all times during business hours,
and subject to Lessee's reasonable security requirements, have the right to
enter upon the premises where an Item may be located for the purpose of
inspecting such Item.
10. EQUIPMENT IMPROVEMENTS.
(a) Lessee may, with the prior consent of Lessor and subject to compliance with
this Section 10, affix or install any accessory, feature or device to the
Equipment and make any improvement, upgrade, modification, alteration or
addition to the Equipment (each of the foregoing being an "Improvement"). The
affixing or installation of the Improvement must not adversely affect the
Equipment manufacturer's warranties or maintenance agreement, or require that
substantial original parts of the Equipment be removed; nor can it impair the
originally intended function, value or use of the Equipment. Title to each
Improvement shall, without further action, upon the affixing or installing of
such Improvement, vest solely in Lessor. Upon the expiration or earlier
termination of this Lease, Lessee may remove and retain any readily detachable
Improvement provided that: (i) no Event of Default has occurred; (ii) by such
removal the Equipment is not rendered any less useful or valuable to Lessor than
if such Improvement had not been made and later removed, and (iii) the Equipment
is returned in compliance with Section 13 herein. Upon Lessee's permitted
removal of a detachable Improvement and compliance with this Section 10, title
shall thereupon revert to Lessee free and clear of any claims of Lessor
whatsoever.
(b) Lessee shall notify Lessor not less than sixty (60) days prior to the
anticipated Acceptance Date of the type of Improvement Lessee desires to obtain.
Lessor may, within fifteen (150) days after receipt of such notice, offer to
lease or sell the Improvement to Lessee upon mutually agreeable terms and
conditions. If Lessee leases the Improvement from Lessor, such Improvement shall
be on a separate Schedule with an Initial Lease Term co-terminus with that of
the Equipment.
11. LOSS AND DAMAGES; STIPULATED LOSS VALUE.
(a) Lessee's Assumption of Risk. Lessee hereby assumes and shall bear the entire
risk of loss, damage, theft or destruction to the Equipment from any cause
whatsoever, or governmental taking. No loss, damage, theft or destruction to the
Equipment, or any part thereof, or governmental taking shall affect any
obligation of Lessee under this Lease, which shall continue in full force and
effect notwithstanding any such loss or damage. Lessee's assumption of risk of
loss shall commence when the Equipment or Item is placed in transit to Lessee
and shall continue until Lessor has received and accepted the surrendered
Equipment pursuant to Section 13.
(b) Notice of Loss or Damage. Lessee shall promptly notify Lessor of the loss,
damage, destruction, theft or governmental taking of any Item.
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(c) Duty to Repair. Unless such Item is lost, stolen, damaged beyond repair or
there is a governmental taking ("Casualty Loss"), Lessee shall promptly repair
and restore such Item to the same condition, working order and appearance as
of the Acceptance Date.
(d) Casualty Loss; Payment of Stipulated Loss Value. If the Equipment or any
Item is a Casualty Loss, then Lessee, at Lessee's option:
(1) shall pay Lessor in cash the Stipulated Value (as per Attachment A to this
Master Lease) for such Equipment or Item calculated as of the next Monthly Rent
payment date, which amount shall be due and payable not later than thirty (30)
days after the date of the occurrence of the Casualty Loss. Upon payment of the
Stipulated Loss Value, and provided that no Event of Default (as hereinafter
defined) has occurred:
(i) Lessee's obligation to pay Rent for all remaining Items shall remain in
full force and effect and shall terminate only with respect to such Casualty
Loss Item.
(ii) Lessee shall become entitled to such Item, as-is, where-is, without
warranty, express or implied, with respect to any matter whatsoever; OR
(2) shall continue all payments under the Lease without interruption as if no
such loss had occurred, and shall request that Lessor, within thirty (30) days
after the date of the occurrence of the Casualty Loss, replace the Casualty Loss
Item with a "Replacement Item". Lessee shall pay all costs of such Replacement
Item; provided, however, that the cost of the Replacement Item shall not exceed
Lessor's list price. Unless otherwise mutually agreed, the Replacement Item
shall be of the same manufacture, model and type and of at least equal capacity,
function and value as the Casualty Loss Item.
(e) Insurance Proceeds. Lessee's obligation to repair or pay Stipulated Loss
Value shall not be contingent upon receipt of any insurance proceeds.
12. INSURANCE. Lessee shall at its expense keep each Item insured from every
cause whatever for not less than the Stipulated Loss Value thereof, and shall
carry public liability and property damage insurance in amounts acceptable to
Lessor. All such insurance shall be with companies acceptable to Lessor, and
shall name Lessor and any Assignee as additional insureds and, as to the
all-risk insurance, loss payees as their interests may appear. Such insurance
policies shall provide that they may not be invalidated against Lessor or any
Assignee by reason of any violation of a condition or breach of warranty of the
policies or the application therefor by Lessee and that Lessor shall be given
written notice thirty (30) days prior to any alteration or cancellation of such
policies. The proceeds of such insurance, if Lessee is not in default hereunder,
shall be applied to reimburse Lessee for Stipulated Loss Value to the extent
previously paid by Lessee; or shall be paid to Lessor or Assignee to the extent
of Stipulated Loss Value not previously paid by Lessee; or shall be applied to
repair the Equipment or to reimburse Lessee for repairs for which Lessee
previously paid. If Lessee is in default hereunder, then such insurance proceeds
shall be paid to Lessor or Assignee to be applied to the satisfaction of
Lessee's obligations under the Lease.
13. DELIVERY AND SURRENDER. Lessee hereby assumes all cost and expense of
transportation, rigging, drayage, unpacking and in-transit insurance to Lessee's
premises and installation of the Equipment. Upon the expiration of the Lease
Term, or sooner termination of this Lease with respect to any Item, Lessee shall
(unless Lessee had paid Lessor the Stipulated Loss Value of such Item pursuant
to Section 11) return as its expense, including but not limited to the expenses
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of deinstallation, packing, transportation and in-transit insurance, the Item to
a location designated by Lessor in the same repair, condition, appearance and
working order as of the Acceptance Date, ordinary wear and tear from proper use
alone excepted, and certified as acceptable by the Equipment manufacturer for
the standard manufacturer's maintenance agreement.
14. TAX BENEFITS. Lessee acknowledges that Lessor or other owner of the
Equipment shall be entitled to claim for federal tax purposes (i) deductions on
Lessor's cost of the Equipment for each of its tax years during the Lease Term
under any method of depreciation or other cost recovery formula permitted by the
Internal Revenue code of 1986, as amended (the "Code"); (ii) interest deductions
as permitted by the code on the aggregate interest paid to any Assignee; and
(iii) investment tax credit, or similar credit, as may be available as of the
Acceptance Date to the owner of the Equipment (all the foregoing being hereafter
referred to as the "Tax Benefits"). Lessee agrees to take no action inconsistent
with the foregoing or which would result in the loss, disallowance, recapture or
unavailability of the Tax Benefits to Lessor or other owner of the Equipment.
Lessee hereby indemnifies Lessor other owner of the Equipment from and against
(a) any loss, disallowance, unavailability or recapture of any Tax Benefit
resulting from any action or failure to act of Lessee, plus (b) all interest,
penalties, costs (including legal fees) or additions to tax resulting from such
loss, disallowance, unavailability or recapture.
15. TAXES. In addition to the rent as provided in Section 5, Lessee shall be
responsible for the payment of all taxes (exclusive of taxes based on Lessor's
net income), fees, charges, licenses and assessments whatsoever, however
designated, whether based on the Rent or levied, assessed or imposed upon the
Equipment or upon or in respect of the manufacture, purchase, delivery,
ownership, leasing, use or return of the Equipment, now or hereafter levied,
assessed or imposed during the Lease Term by a federal, state or local taxing
jurisdiction, regardless of when and by whom payable, and Lessee shall timely
prepare, file and pay all applicable tax returns.
16. LESSOR'S PAYMENT. If Lessee fails to procure or maintain insurance or to pay
fees, assessments, charges, taxes or expenses, all as herein required, Lessor
shall have the right, but not the obligation, to pay the premiums for such
insurance and such fees, assessments, charges, taxes and expenses. In such
event, the cost thereof shall be Additional Rent payable to Lessor with the next
installment of rent, plus interest, taxes and penalties, if any, imposed by the
charging entity, and the Late charge from the date of such payment by Lessor
until receipt by Lessor of reimbursement from Lessee.
17. DISCLAIMER OF WARRANTIES. (a) The following acknowledgments by Lessee are
integral to this Lease and are made to induce Lessor to enter into and perform
under this Lease:
(1) EACH ITEM IS, AS OF ITS ACCEPTANCE DATE, OF A SIZE, DESIGN, TYPE AND
MANUFACTURE SELECTED BY LESSEE AND, AS BETWEEN LESSOR AND LESSEE, LESSEE HAS
UNCONDITIONALLY ACCEPTED SUCH ITEM.
(2) SINCE LESSOR IS NOT THE MANUFACTURER OF THE EQUIPMENT OR AGENT OF THE
MANUFACTURER, LESSEE ACCEPTS THE EQUIPMENT FROM LESSOR "AS IS".
(3) LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY CLAIM, LOSS OR DAMAGE
CAUSED OR ALLEGED TO BE CAUSED DIRECTLY, INDIRECTLY, INCIDENTLY OR
CONSEQUENTIALLY BY THE EQUIPMENT, BY ANY INADEQUACY THEREOF OR DEFECT THEREIN,
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OR BY ANY INCIDENT WHATSOEVER IN CONNECTION THEREWITH, ARISING IN STRICT
LIABILITY, NEGLIGENCE OR OTHERWISE, OR IN ANY WAY RELATING TO OR ARISING OUT OF
THE LEASE, WHETHER OR NOT KNOWN OR DISCLOSED TO LESSOR.
(4) LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING THOSE
OF MERCHANTABILITY, DURABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, OR
RELATING TO PATENT INFRINGEMENT OR THE LIKE WITH RESPECT TO THE EQUIPMENT AND
EXPRESSLY DISCLAIMS THE SAME.
(5) IT IS AGREED AND UNDERSTOOD THAT LESSOR SHALL HAVE NO OBLIGATION TO INSTALL,
TEST, ADJUST, REPAIR OR SERVICE THE EQUIPMENT.
(b) Lessor warrants that Lessor has the right to lease the Equipment to Lessee
under the terms of this Lease. So long as no Event of Default has occurred,
Lessee shall have the right during the Lease Term to obtain the benefit of and
enforce in Lessee's own name and at Lessee's sole expense any manufacturer's
warranty in respect of the Equipment to the extent such warranty is assignable.
18. INDEMNIFICATION. Except for the gross negligence of Lessor, Lessee hereby
assumes liability for and indemnifies, protects, saves and keeps harmless Lessor
and its Assignees from and against any and all liabilities, losses, damages,
penalties, claims, actions, suits, costs and expenses, including attorney's fees
and other legal expenses, imposed on, incurred by, or asserted against Lessor or
its Assignees (whether or not also indemnified against by any other person) in
any way relating to or arising out of this Lease or the manufacture, purchase,
ownership, delivery, lease, possession, use, operation, condition, return or
other disposition of the Equipment by Lessor or Lessee, including without
limitation, latent and other defects, whether or not discoverable by Lessor or
Lessee, any claim for patent, trademark or copy infringement, or any claim
arising out of strict liability. Lessee agrees to give Lessor, and Lessor agrees
to give Lessee, prompt written notice of any claim or liability hereby
indemnified against. The indemnities and assumptions of liability set forth in
this Section 18 do not guarantee a residual value of the Equipment; nor shall
they be construed to limit or restrict Lessee's right to prosecute any claim,
action or suit against the manufacturer of the Equipment.
19. EVENTS OF DEFAULT; REMEDIES.
(a) Events of Default. Occurrent of any of the following events or conditions
shall constitute an Event of Default hereunder:
(1) Lessee's failure to pay, when due, any Rent, and such failure continues for
a period of ten (10) days after notice that such Rent is overdue; or
(2) Except as expressly permitted in the Lease, Lessee attempts to remove, sell,
encumber, assign or sublease or fails to insure the Equipment, or fails (within
five (5) days after notice of such failure) to deliver any document required of
Lessee under the Lease; or
(3) Failure of Lessee to perform, within thirty (30) days after Lessor gives
Lessee notice of such failure (or, with respect to performance which cannot be
completed in such time, failure to commence such performance within such time
and to pursue such performance diligently thereafter) any other obligation, term
or condition of this Lease; or
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(4) A writ, order of attachment, execution or other legal process is levied on
or charged against any Item and not released or satisfied within ten (10) days
after Lessee is notified thereof; or
(5) The filing by or against Lessee of a petition under any federal or state
bankruptcy or insolvency law or law providing for the relief of debtors, the
making by Lessee of any general assignment for the benefit of creditors, the
appointment of a receiver or trustee for Lessee or for any of Lessee's assets,
or any formal or informal proceeding for the dissolution, liquidation,
settlement of claims against, or winding up of the affairs of Lessee, any of
which remains undismissed for forty-five (45) days; or the making by Lessee of a
transfer of all or a material portion of Lessee's assets or inventory not in the
ordinary course of business, or the admission by Lessee of inability to pay
debts as they become due; or
(6) The occurrent of any event described in Subsection 19(a)(5) with respect to
any guarantor or any other party liable for payment or performance of this
Lease; or
(7) If any certificate, statement, representation, warranty or financial
information previously or hereafter furnished by or on behalf of Lessee or any
guarantor or other party liable for payment or performance of the Lease proves
to have been false or misleading in any material respect as of the time made or
furnished to Lessor, or to have been afterward breached; or
(8) The giving to Lessee of three (3) notices pursuant to one or more of
Subsections 19(a)(1), (2) or (3) within any consecutive twelve (12) month
period, notwithstanding Lessee's cure of the defaults within the notice periods
applicable.
(b) Remedies. Upon the occurrence of an Event of Default:
(1) Lessee hereby authorizes Lessor without notice or process of law to enter
any premises where the Equipment is located and take possession of and remove
the Equipment; and
(2) Lessee shall forthwith and without demand pay to Lessor as liquidated
damages for loss of a bargain and not as a penalty an amount equal to the
Stipulated Loss Value for the Equipment computed as of the date of the Monthly
Rent payment last received by Lessor, plus all previously due but unpaid Rent
and all legal and other expenses incurred by Lessor in enforcing its remedies
hereunder, and
(3) Lessor may upon notice to Lessee effective immediately terminate the Lease,
but such termination shall not affect Lessor's right to enforce the remedies
granted to Lessor in this Subsection 19(b); and
(4) Lessor may pursue any other remedy available at law or in equity.
(5) Lessor may sell the Equipment at public or private sale, without notice and
without having the Equipment present at the place of sale; or Lessor may lease,
otherwise dispose of or keep idle all or part of the Equipment; subject,
however, to Lessor's obligation to mitigate damages. The proceeds of any such
sale, lease or other disposition, if any, of the Equipment shall be applied as
follows: FIRST, to Lessor's costs and expenses incurred in taking, removing,
holding, repairing and selling, leasing or otherwise disposing of the Equipment
including legal fees and costs; SECOND, to pay to Lessor the Stipulated Loss
Value to the extent not previously paid by Lessee and all previously due but
unpaid Rent; THIRD, to reimburse to Lessee the Stipulated Loss Value to the
extent previously paid by Lessee pursuant to Subsection 19(b)(2); and FOURTH,
any surplus to Lessor. Notwithstanding repossession or any other action which
Lessor may take, Lessee shall be and remain labile for the full performance of
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all its obligations under this Lease. Lessee hereby waives any requirement of
law, now or hereafter in effect which might limit or modify any of the remedies
herein provided, to the extent that such waiver is permitted by law. No right or
remedy of Lessor herein granted is exclusive of any other right or remedy herein
or by law or equity provided or permitted; but each shall be cumulative of every
other right or remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise, and may be enforced concurrently or from time
to time, and in any order.
(c) Lessor's Expenses. Lessee shall pay Lessor all costs and expenses, including
attorneys' fees, incurred by Lessor in exercising any of its rights or remedies
hereunder or enforcing any of the terms, conditions, or provisions hereof.
20. ASSIGNMENT.
(a) By Lessee. LESSEE SHALL KEEP THE LEASE AND THE EQUIPMENT FREE AND CLEAR OF
ALL LIENS AND ENCUMBRANCES OF WHATSOEVER KIND (EXCEPT THOSE CREATED BY OR
THROUGH LESSOR) AND LESSEE SHALL NOT ASSIGN, TRANSFER, SUBLEASE OR IN ANY WAY
TRANSFER OR DISPOSE OF ITS INTERESTS OR OBLIGATIONS UNDER THE LEASE OR IN THE
EQUIPMENT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. NO ASSIGNMENT, TRANSFER,
SUBLEASE OR OTHER DISPOSITION BY LESSEE SHALL IN ANY MANNER WHATSOEVER RELIEVE
LESSEE OF ANY OBLIGATION HEREUNDER, AND LESSEE SHALL REMAIN PRIMARILY LIABLE TO
PAY RENT AND PREFORM ALL ITS OBLIGATIONS HEREUNDER.
(b) By Lessor. All rights of Lessor hereunder or to the Equipment may be sold,
assigned, pledged, mortgaged or otherwise transferred, either in whole or in
part, without notice to Lessee but always, however, subject to the rights of
Lessee under this Lease. If Lessor sells the Equipment or assigns this Lease or
the rent due or to become due hereunder or any other interest herein, whether as
security for any of its indebtedness or otherwise, no breach or default by
Lessor hereunder or pursuant to any other agreement between Lessor and Lessee,
should there be one, shall excuse performance by Lessee of any provision hereof.
No such vendee or assignee (each an "Assignee") shall be obligated to perform
any duty, covenant or condition required to be performed by Lessor under the
terms of this Lease; except that Lessor covenants with Lessee not to transfer
any interest in the Lease or the Equipment to any Assignee unless such Assignee
agrees in writing not to disturb Lessee's quiet enjoyment of the Equipment while
no Event of Default has occurred. Lessee acknowledges that any such sale,
assignment or grant of security interest shall not materially change Lessee's
obligations under this Lease nor materially increase the burdens imposed Lessee.
Lessee agrees and acknowledges that any such Assignee shall rely on and be
entitled to the benefit of the provisions of this Lease. Lessee agrees to
acknowledge any such assignment within five (5) days of receipt of written
request to do so in the form requested by Lessor. LESSEE'S OBLIGATION TO PAY
RENT IS ABSOLUTE AND UNCONDITIONAL AND LESSEE SHALL NOT ASSERT AGAINST ANY
ASSIGNEE ANY DEFENSE, COUNTERCLAIM OR SETOFF THAT THE LESSEE MAY HAVE AGAINST
THE LESSOR OR ANY OTHER PARTY, AND LESSEE ACKNOWLEDGES THAT ANY ASSIGNEE IS
RELYING ON THE FOREGOING.
21. OWNERSHIP. Lessee shall have no right, title or interest in the Equipment
except as expressly set forth in the Lease, which interest is a leasehold
interest. Lessor and Lessee agree, and Lessee represents for the benefit of
Lessor and its Assignees, that the Lease is intended to be a "finance lease" and
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not a "lease intended as security" as those terms are used in Article 2A of the
UCC. Lessor may upon notice to Lessee advise Lessee that certain Items are
leased to Lessor and provided to Lessee under the Lease as a sublease. Lessee
agrees to execute and deliver such acknowledgments and assignments in connection
with such Lease as are reasonably required. If, at any time during the Lease
Term, Lessor's right to lease the Equipment expires, Lessor may remove the
Equipment from Lessee's premises and immediately provide identical substitute
equipment. All expenses of such substitution shall be borne by Lessor.
22. PERSONAL PROPERTY. The Equipment is, and shall at all times be and remain,
personal property, notwithstanding that the Equipment or any Item or part
thereof may now be, or hereafter become, in any manner affixed or attached to
any real property. If requested by Lessor prior to or at any time during the
Lease Term, Lessee will obtain and deliver to Lessor waivers of interest or
liens in recordable form and satisfactory to Lessor, from all persons claiming
any interest in the real property on which such Item or Equipment is installed
or located.
23. NET LEASE; OFFSET. This lease is a net lease, it being the intention of the
parties that all costs, expenses and liabilities associated with the Equipment
or its lease shall be the obligations of Lessee. Except in the event of a
Casualty Loss and payment of Stipulated Loss Value pursuant to Section 11,
Lessee shall not be entitled, and hereby waives any right it may have, to any
abatement of Rent or other payments due hereunder or any reduction thereof under
any circumstances or for any reason whatsoever.
24. FINANCIAL AND OTHER COVENANTS.
(a) Lessee hereby represents, warrants and agrees with Lessor and any Assignee
as follows:
(1) Lessee is a legal entity, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and in each
jurisdiction where the Equipment will be located and has adequate power to enter
into and perform the Master Lease and each Schedule.
(2) The Master Lease and each Schedule have been duly authorized, executed and
delivered by Lessee, and constitute valid, legal and binding agreements of
Lessee, enforceable in accordance with their terms.
(3) The entering into and performance of the Master Lease and each Schedule does
not and will not violate any judgment, order, law or regulation applicable to
Lessee or any provision of Lessee's Articles of Incorporation or Bylaws, or
result in any breach of, or constitute a default under, or result in the
creation of any lien, charge, security interest or other encumbrance upon any
assets of Lessee or on the Equipment pursuant to any instrument to which Lessee
is a party or by which it or its assets may be bound.
(4) There are no actions, suits or proceedings pending, or to the knowledge of
Lessee threatened, before any court, administrative agency, arbitrator or
governmental body which will, if determined adversely to Lessee, materially
adversely affect its ability to perform its obligation sunder this Master Lease,
any Schedule or any related agreement to which it is a party.
(5) No consent or approval of, giving of notice to, registration with, or taking
of any other action in respect of any state, federal or other governmental
authority or agency is required with respect to the execution, delivery and
performance by Lessee of the Master Lease or any Schedule, or, if any such
approval, notice, registration or action is required, it has been obtained.
(6) Prior to and during the Lease Term, Lessee will furnish Lessor with Lessee's
audited financial statements. If Lessee is a subsidiary of another company,
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Lessee shall supply such company's financial statements and guarantees as are
reasonably acceptable to Lessor. Lessor's obligation to perform under any Lease
is subject to the condition that the financial statements furnished to Lessor by
Lessee present the financial condition and results of operations of Lessee and
its affiliated corporations, if any, and any guarantor of Lessee's obligations
under any Lease, as of the date of such financial statements, and that since the
date of such statements there have been no material adverse changes in the
assets or liabilities, the financial condition or other condition which in
Lessor's or Assignee's sole discretion are deemed to be materially adverse.
(b) Upon Lessor's request, Lessee shall, with respect to each Lease, deliver to
Lessor (i) a certificate of a secretarial officer of Lessee certifying the
bylaws, resolution (specific or general) or corporate action authorizing the
transaction contemplated in the Lease; (ii) an incumbency certificate certifying
that the person signing this Master Lease and the Schedule holds the office the
person purports to hold and has authority to sign on behalf of Lessee; (iii) an
opinion of counsel with respect to the representations in this Section 24, (iv)
an agreement with Lessor's Assignee with regard to any assignment as referred to
in Subsection 20(b), (v) purchase documents if Lessee has sold or assigned its
interest in the Equipment to Lessor; (vi) an insurance certificate evidencing
the insurance provided by Lessee pursuant to Section 12; and (vii) Certificate
of Acceptance(s) duly executed by Lessee.
(c) The foregoing representations, warranties and agreements shall continue
through the Lease Term and shall, upon request of Lessor, be made to any
Assignee.
25. LESSEE CHANGE OF OWNERSHIP; FINANCIAL CONDITION.
(a) During the Lease Term should controlling interest in Lessee be acquired by
another company, or should a substantial portion of Lessee's assets be acquired
by another entity, such other company or entity shall (i) agree in writing to be
bound by the terms and conditions of this Lease and, if requested by Lessor,
shall (ii) execute and deliver to Lessor a guaranty in form and substance
acceptance to Lessor.
(b) If, at any time during the Lease Term, upon the occurrence of an event
described in Subsection 25(a) or for any other reason, Lessor reasonably
determines that there has been a material adverse change in the financial
condition of Lessee or Lessee's ability to meet current or future obligations
under the Lease, then Lessee, upon Lessor's request, shall provide to Lessor
additional security acceptable to Lessor for Lessee's obligations hereunder.
26. ADDITIONAL DOCUMENTS.
(a) Notice of Perfection of Interest. Lessee shall execute and deliver to Lessor
such documents as Lessor shall deem necessary or desirable to protect Lessor's
or Assignee's title to or interest in the Equipment and the Lease including,
without limitation, UCC financing statements, which shall be filed at Lessee's
expense.
(b) Other documents. Lessee shall execute and deliver to Lessor, duly
acknowledged and in recordable form if so requested, any other document
reasonably requested by Lessor.
27. NON-WAIVER. No covenant or condition of this Lease can be waived except by
written consent of Lessor. The waiver by Lessor of any breach of Lessee shall
not be a waiver of any other breach of the same or any other obligation. The
subsequent acceptance of Rent by Lessor shall not be deemed a waiver of any such
prior existing breach at the time of acceptance of such Rent payment.
28. NOTICES. Any notice, consent or request required or permitted hereunder
shall be in writing and will be conclusively deemed to have been received by a
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party hereto on the day it is delivered to such party at the address set forth
above (or at such other address as such party specifies to the other in writing)
and shall be sent by registered mail, return receipt requested, overnight
courier service, or facsimile (with telephonic verification of receipt).
29. SEVERABILITY. Any provision of the Lease prohibited by or unlawful or
unenforceable under any applicable law or any jurisdiction shall be ineffective
as to such jurisdiction without invalidating the remaining provisions of the
Lease.
30. SECURITY INTEREST. Each Schedule shall be executed in three counterparts,
consecutively numbered. To the extent, if any, that a Schedule constitutes
chattel paper (as such term is defined in the UCC) no security interest may be
created through the transfer of possession of any counterpart other than that
designated "Counterpart No. 1". The Master Lease, in the form of a photocopy, is
incorporated into the Schedule and is not chattel paper by itself.
31. SUSPENSION OF OBLIGATIONS OF LESSOR. Prior to delivery of any Item
hereunder, the obligations of Lessor will be suspended to the extent that it is
hindered or prevented from complying therewith because of labor disturbances,
including but not limited to, strikes and lockouts, or acts of God, fires,
storms, accidents, failure of the manufacturer to deliver any Item, governmental
regulations or interference or any cause whatsoever not within the exclusive
control of Lessor.
32. NON-SPECIFIED FEATURES. If Equipment delivered pursuant to any Lease
contains any feature not specified therein, Lessee grants Lessor, at Lessor's
option and expense, the right to remove or deactivate any such feature. Such
removal or deactivation shall be performed by the manufacturer or other
acceptable party at the request of Lessor at a time convenient to Lessee,
provided that Lessee shall not unreasonably delay the removal or deactivation of
such feature.
33. MISCELLANEOUS.
(a) Lessor and Lessee acknowledge that there are no agreements or
understandings, written or oral, between Lessor and Lessee with respect to the
Equipment, other than as set forth in the Lease, and the Lease contains the
entire agreement between Lessor and Lessee with respect thereto. NEITHER THE
MASTER LEASE NOR ANY SCHEDULE MAY BE ALTERED, MODIFIED, TERMINATED OR DISCHARGED
EXCEPT BY A WRITING SIGNED BY BOTH PARTIES, AND AGREEMENT TO THE FOREGOING IS
EVIDENCED BY THE FOLLOWING INITIALS:
Lessor: //ss// Lessee: //ss//
------------- -------------
(b) If there is more than one Lessee named in this Lease, the liability of each
shall be joint and several.
(c) Section headings are for convenience only and shall not be construed as part
of the Lease.
(d) Time is of the essence of this Lease and each and all of its provisions.
(e) This Lease shall be governed by the laws of the state of California without
giving effect to the principles of conflict of laws, and shall be deemed to have
been made in California. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE
UCC WILL BE CONFERRED ON LESSOR OR LESSEE UNLESS EXPRESSLY GRANTED IN THIS
MASTER LEASE OR THE SCHEDULE.
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(f) Lessee's obligations and liabilities hereunder shall not be affected by, and
shall survive, the expiration or earlier termination of this Lease.
(g) This Lease shall inure to the benefit of and shall be binding upon Lessee
and Lessor and their respective successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Master Lease as of the date
first above written.
LESSOR: INSIGHT INVESTMENTS, CORP. LESSEE: SHOPPING.COM
By: //ss// Richard M. Heard By: //ss// Kristine Webster
------------------------------- ----------------------------
Name: RICHARD M. HEARD Name: Kristine Webster
Title: CHIEF FINANCIAL OFFICER Title: CFO
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AMENDMENT TO MASTER LEASE AGREEMENT NO. 6325
DATED DECEMBER 18, 1997, (THE "LEASE") BY AND BETWEEN
INSIGHT INVESTMENTS, CORP. AS LESSOR AND
SHOPPING.COM AS LESSEE
The terms and conditions of the Lease are hereby modified and amended as
follows:
Section 5. RENT. Subsection (a)3 Additional Rent. Line 6 add the word "written"
before the word "notice".
Section 11. LOSS AND DAMAGES; STIPULATED LOSS VALUE. Add to the beginning of the
second sentence, "Other than as set forth herein,"
Section 13. DELIVERY AND SURRENDER. Add to the beginning of this paragraph,
"Unless otherwise indicated in the applicable Schedule". Line 2 Add after the
words "in-transit insurance" the words "if applicable".
Section 14. TAX BENEFITS. Add to the end of this Section "resulting from any
action or failure to act of Lessee".
Section 19. EVENTS OF DEFAULT; REMEDIES. Subsection (b)(1) Delete this
subsection and add in its place, "Lessee hereby authorizes Lessor with notice,
due process of law and reasonable care, to enter any premises where the
Equipment is located and take possession of and remove the Equipment."
All other terms and conditions of the Lease shall remain the same.
INSIGHT INVESTMENTS, CORP. SHOPPING.COM
LESSOR LESSEE
By //ss// John Ford By //ss// Kristine Webster
-------------------------- --------------------------
Name: JOHN FORD Name: Kristine Webster
Title: PRESIDENT Title: CFO
Date: Feb. 28, 1998 Date: 2/22/98
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CERTIFICATE OF INCUMBENCY
The undersigned hereby certifies (a) that I am Kristine Webster, CFO of
Shopping.com, duly organized and validly existing under the laws of the State of
California, and that as such officer I have access to the original books and
records of said corporation and am authorized to make and deliver this
certificate; (b) that the individual named below has been duly appointed to and
currently holds the position of said corporation set forth oppose his name; (c)
and further, the person designated below has been given authority to act on
behalf of and to bind the corporation with respect to the transaction involving
the leasing of equipment between Insight Investments, Corp. as "Lessor" and
Shopping.com as "Lessee" for Master Lease Agreement Number 6325, dated December
18, 1997, and (d) that the following is the genuine signature of said individual
or of an individual authorized to sign said individual's name to wit:
Name Office Signature
---- ------ ---------
Kristine Webster CFO & Secretary //ss// Kristine Webster
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the sale of
said corporation this 10th day of February, 1998.
//ss// [Illegible] (Corporate Seal)
- ------------------------------
Signature
EVP/EDO
-------
Title
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EQUIPMENT SCHEDULE NO. 1
TO
MASTER LEASE AGREEMENT NO. 6325 DATED December 18, 1997 (THE "LEASE")
BETWEEN INSIGHT INVESTMENTS, CORP. ("LESSOR")
and SHOPPING.COM ("LESSEE")
- ------------------------------------------------------------------------------
EQUIPMENT SCHEDULE NO. 1
- ------------------------------------------------------------------------------
[OMITTED]
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CERTIFICATE OF ACCEPTANCE
The Lessee certifies that as of the date hereof, the Equipment set forth on
Schedule #1, in Master Equipment Lease Agreement Number 6325 dated December 18,
1997, by and between Shopping.com, as Lessee and Insight Investments, Corp., as
Lessor, is accepted by the Lessee as being installed and meeting the
manufacturer's standard acceptance criteria. This certificate substantially
agrees with the manufacturer's notice to Lessor (if provided) of the Equipment's
installation date.
IN WITNESS WHEREOF, on January 6, 1998, Lessee certifies that the averments
contained herein are true and correct.
LESSEE: Shopping.com
BY: //ss// Kristine Webster
-------------------------------------
TITLE: CFO
----------------------------------
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NOTICE OF ASSIGNMENT AND
LESSEE'S ACKNOWLEDGMENT
To: Shopping.com
2101 E. Coast Highway
Newport Beach, CA 92625
Please be advised that Insight Investments Corporation ("Lessor") has assigned
to Data Sales Co. Inc. all rights of Lessor in the equipment schedules listed
below ("the Schedules") to the Lease No. 6325 between you and Lessor dated,
December 18, 1997 ("the Lease"), including all rights to receive the lease
payments listed below payable by you commencing with the first payment
referenced below and continuing up to and including the last payment referenced
below and all other sums which may become due and payable from you to Lessor
under the Schedule.
SCHEDULE PAYMENT NO. OF MONTHS FIRST PAYMENT/LAST PAYMENT
- -------- ------- ------------- --------------------------
1 $13,152.00 24 February 1, 1998/January 1, 2000
Except as otherwise directed by the Data Sales Co. Inc., please pay any and all
rents including the interim rent and any other amounts payable by you under the
Schedule directly to the address listed below:
Data Sales Co. Inc.
3450 West Burnsville Parkway
Burnsville, MN 55337
Please acknowledge this assignment on the following page.
INSIGHT INVESTMENTS, CORP.
(Lessor)
By: //ss//
----------------------------------
JOHN FORD
Title: PRESIDENT
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The undersigned acknowledges receipt of the foregoing Notice of Assignment and
in consideration of the financing extended by Data Sales Co. Inc. to Lessor and
the benefits derived there from to the undersigned agrees: (1) to be bound by
the provision of the Lease, the Schedule and the foregoing Notice of Assignment;
(2) that the undersigned has received no notice of any other assignments or
claims relating to the Schedule and has no reason to refuse to make payments of
rent and other proceeds due thereunder to Data Sales Co. Inc., (3) not to amend
the Lease or Schedule or substitute the equipment subject to the Schedule
without prior written consent of Data Sales Co. Inc.; (4) that the Lease and
Schedule as executed are binding and legally enforceable against the undersigned
in accordance with their terms; and (5) to make payments to Date Sales Co. Inc.
until instructed to do otherwise by Data Sales Co. Inc. without any set-off or
deduction whatsoever, notwithstanding any defect in, damage to or requisition of
any of the equipment leased under the Schedule, or any other similar or
dissimilar event, or any defense, set-off, counterclaim or recoupment arising
out of any claim the undersigned may have against Lessor, It being understood
that the undersigned retains the right to assert any such claim In a separate
action against Lessor.
The undersigned further acknowledges that Data Sales Co. Inc. has not assumed
any duties of Lessor under the Lease or Schedule and has made no representations
or warranties whatsoever as to the Lease, the Schedule or any of the leased
equipment.
Shopping.com
(Lessee)
By: //ss// Kristine Webster
--------------------------------
Title:CFO
Date: 2/22/98
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<PAGE>
Attachment A
to Master Lease No. 6325, dated, December 18, 1997
between INSIGHT INVESTMENTS, CORP., as Lessor
and Shopping.com, as Lessee
Stipulated Loss Value is calculated by multiplying the percentage set forth
opposite the applicable Monthly Rent payment number by the list price of the
Equipment or Item, as applicable.
Rent Payment Stip. Loss Rent Payment Stip. Loss Rent Payment Stip. Loss
Number Percent Number Percent Number Percent
- ------ ------- ------ ------- ------ -------
1 108.20% 21 87.80% 41 67.40%
2 107.18% 22 86.78% 42 66.38%
3 106.15% 23 85.76% 43 65.36%
4 105.14% 24 84.74% 44 64.34%
5 104.12% 25 83.72% 45 63.32%
6 103.10% 26 82.70% 46 62.30%
7 102.08% 27 81.68% 47 61.28%
8 101.06% 28 80.66% 48 60.26%
9 100.04% 29 79.64% 49 59.24%
10 99.02% 30 78.62% 50 58.22%
11 98.00% 31 77.60% 51 57.20%
12 96.98% 32 76.58% 52 56.18%
13 95.96% 33 75.56% 53 55.16%
14 94.94% 34 74.54% 54 54.14%
15 93.92% 35 73.52% 55 53.12%
16 92.90% 36 72.50% 56 52.10%
17 91.88% 37 71.48% 57 51.08%
18 90.86% 38 70.46% 58 50.06%
19 89.84% 39 69.44% 59 49.04%
20 88.82% 40 68.42% 60 48.02%
AND THEREAFTER
LESSOR: //ss// John Ford LESSEE: //ss// Kristine Webster
-------------------------- ---------------------------
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CONSULTING AGREEMENT
This Consulting Agreement dated March 27, 1998 is made by and among Double
12, Ltd., a California corporation ("Consultant") Shopping.com, a California
corporation (the "Company"), Cyber Depot, Inc., a California corporation and
Robert J. McNulty and shall be effective as of the date when signed by both the
Consultant and the Company.
The parties to this Agreement agree to the following terms and conditions:
1. Services. Consultant shall provide the Company with advice, counsel,
and recommendations only regarding matters relating to strategic partnerships,
public relations, communications, and business development.
2. Term. The term ("Term") of this Agreement shall be twelve (12) months.
Consultant shall have the option (the "Option") to extend the Term for an
additional six (6) months.
3. Method of Performance. Consultant will determine the method, details
and means of performing the above-described services. Consultant shall only
devote to the Company so much of its time and attention as it, in its sole
discretion, deem to be necessary or advisable to accomplish the goals and
purposes of the Company.
4. Employment of Assistants; Subcontractors. Consultant may employ the
services of any third party for the rendering of services or products for the
benefit of the Company. The Company will pay Consultant a fee of twenty percent
(20%) in addition to the fee charged by the third party in advance of any
services rendered and C.O.D. for any goods purchased and delivered. No third
party will be engaged by the Consultant to render services or for the sale of
goods without the prior express written consent of the Company.
5. Compensation. In consideration of the services to be rendered by the
Consultant on behalf of the Company, the Company hereby agrees to pay Consultant
Forty Thousand Dollars ($40,000) on the thirtieth day prior to the beginning of
each three month period during the Term (which may be extended pursuant to
Option). The first such payment shall be made upon execution of this Agreement.
The Company shall make a total of four (4) such payments during the initial Term
and an additional two (2) such payments if the Option is exercised. Upon
execution of this Consulting Agreement, the Company, Cyber Depot, Inc. and/or
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Robert J. McNulty shall also issue and deliver to Consultant Six Thousand
(6,000) shares of the Company's common stock.
6. Independent Contractor Status. Consultant shall perform the Services
hereunder as an independent contractor and, as such, shall not represent or
consider itself as an office, employee, partner, agent or principal of the
Company. Nothing herein shall be deemed or construed as creating a joint
venture, fiduciary relationship, agency, partnership or unincorporated
association between Consultant and the Company. Company shall not be obligated
to, and shall no, withhold any amounts from Consultant's compensation for the
payment of taxes. Consultant is solely responsible for all taxes which may be
due as a result of payment of the Consultant's compensation.
7. Other Business Ventures. To the extent consistent with the other terms
of this Agreement, Consultant or any affiliate or other person holding a legal
or beneficial interest in Consultant, may engage in or possess an interest in
other business ventures of every nature and description, independently or with
others, whether such ventures are competitive with the Company or otherwise; and
neither the Company nor any affiliate of the company shall have any right by
virtue of this Agreement in or to such independent ventures or to the income or
profits derived therefrom.
8. Release of Specific Liability. Consultant, for itself and its
successors and assigns, does hereby release and forever discharge Cyber Depot,
Inc. and Robert J. McNulty of and from any and all claims, demands, damages,
debts, liabilities, accounts, reckonings, obligations, costs, expenses, fees,
liens, actions, suits, proceedings, controversies, contracts and causes of
action of every kind and nature whatsoever, whether known or unknown, suspected
or unsuspected, which Consultant and its respective successors and assigns may
have arising out of nonperformance by the Company of its obligation to make
payment of cash compensation pursuant to Paragraph 5 hereinabove.
9. Miscellaneous.
(a) Entire Agreement; Waiver. This Consulting Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior or contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Consulting Agreement shall be binding unless executed in
writing by all of the parties. No waiver of any of the provisions of this
Consulting Agreement shall be deemed, or shall constitute, a waiver of any other
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<PAGE>
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
(b) Binding Effect and Assignability. This Consulting Agreement
shall be binding on, and shall inure to the benefit of, the parties to it, and
their respective heirs, legal representatives and successors. This Consulting
Agreement or any right hereunder is not assignable to any party.
(c) Legal Fees. If any legal action or arbitration or other
proceeding is brought for the enforcement of this Consulting Agreement, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Consulting Agreement, the
successful or prevailing party or parties as defined by the California Code of
Civil Procedure shall be entitled to recover reasonable attorneys fees and other
costs incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.
(d) Interpretation. To the extent that this Consulting Agreement
modifies or conflicts with the terms of any prior agreement between the parties
hereto, or any of them, the terms of this Consulting Agreement shall control.
This Consulting Agreement has been negotiated at arms' length between persons
knowledgeable in the matters dealt with herein. In addition, each party has been
represented or had the opportunity to be represented by experienced and
knowledgeable legal counsel. Accordingly, any rule of law, including, but not
limited to, California Civil Code Section 1654, or any other statutes, legal
decisions, or common law principles of similar effect, that would require
interpretation of any ambiguities in this Consulting Agreement against the party
that has drafted it is of no application and is hereby expressly waived. The
provisions of this Consulting Agreement shall be interpreted in a reasonable
manner to effect the intentions of the parties hereto and of this Consulting
Agreement.
(e) Governing Law. This Consulting Agreement shall be construed in
accordance with, and governed by the, the laws of the State of California.
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IN WITNESS WHEREOF, the parties have executed this Settlement Agreement as
of the date and year set forth adjacent to each of their respective signatures.
Dated: March 27, 1998 SHOPPING.COM,
a California corporation
By: ___________________________
Name:
Title:
Dated: March 27, 1998 SHOPPING.COM,
a California corporation
By: ___________________________
Name:
Title:
Dated: March 27, 1998 CYBER DEPOT, INC.,
a California corporation
By: ___________________________
Name:
Title:
Dated: March 27, 1998 //s// Robert J. McNulty
---------------------------------
ROBERT J. MCNULTY
Dated: March 27, 1998 DOUBLE 12 LTD.,
a California corporation
By: //s// Illegible
Name: _________________
Title: President
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<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 4,829,180
<SECURITIES> 0
<RECEIVABLES> 107,384
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,610,142
<PP&E> 2,841,718
<DEPRECIATION> 206,869
<TOTAL-ASSETS> 8,444,732
<CURRENT-LIABILITIES> 1,632,367
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0
0
<COMMON> 12,303,962
<OTHER-SE> (5,723,726)
<TOTAL-LIABILITY-AND-EQUITY> 8,444,732
<SALES> 850,724
<TOTAL-REVENUES> 850,724
<CGS> 793,957
<TOTAL-COSTS> 5,027,636
<OTHER-EXPENSES> (29,519)
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<INCOME-PRETAX> (5,522,029)
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<NET-INCOME> (5,522,029)
<EPS-PRIMARY> (3.05)
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</TABLE>
