UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 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 Registrant 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, CORONA DEL MAR, CALIFORNIA 92625
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 640-4393
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ..X.. No .....
As of August 12, 1998, there were 4,136,521 shares of the Registrant's no par
value common shares outstanding.
Exhibit Index on Page 55
Page 1 of 114
<PAGE>
FORM 10-QSB
For the Quarterly Period Ended July 31, 1998
Item Page
----
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (condensed) 4
Balance Sheet at July 31, 1998 4
Statements of Operations for the six months
ended July 31, 1997 and 1998 5
Statements of Cash Flows for the six months
ended July 31, 1997 and 1998 6
Notes to Financial Statements 7
2. MANAGEMENT DISCUSSION AND ANALYSIS 15
Forward Looking Statements 15
Overview 16
Results of Operations 17
Liquidity and Capital Resources 21
Employees 23
Factors That May Affect Future Performance 23
PART II. OTHER INFORMATION
1. Legal Proceedings 39
2. Changes in Securities 42
3. Defaults Upon Senior Securities 49
4. Submission of Matters to a Vote of Security Holders 50
5. Other Information 51
Page 2 of 114
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6. Exhibits and Reports on Form 8-K 51
Signature 54
Exhibit Index 55
Page 3 of 114
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SHOPPING.COM
BALANCE SHEET
As of July 31, 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,035,699
Accounts/ advances receivable, net 72,570
Other receivables 10,482
Prepaid expenses 95,928
Inventories 45,580
Current portion of loan origination fees 212,975
------------
Total current assets 1,473,234
Furniture and equipment, net 2,945,055
Deposits 147,800
Other assets 204,534
Loan origination fees net of current portion 120,313
------------
Total assets $ 4,890,936
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation $ 204,368
Accounts payable 1,415,518
Subordinated notes payable 1,325,000
Accrued legal fees and related costs 323,535
Accrued termination and severance 560,000
Other accrued liabilities 274,614
------------
Total current liabilities 4,103,035
Capital lease obligation, net of current portion 216,734
8% convertible debentures 2,500,000
------------
Total liabilities 6,819,769
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, no par value, 5,000,000 share
authorized, shares issued and outstanding - none --
Common stock, no par value, 20,000,000 shares
authorized, 4,069,854 shares issued and outstanding 16,548,700
Accumulated deficit (18,477,533)
------------
Total shareholders' equity (deficit) (1,928,833)
------------
Total liabilities and shareholders' equity $ 4,890,936
============
The accompanying notes are an integral part of these financial statements.
Page 4 of 114
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<TABLE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JULY 31, JULY 31
------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 1,034,372 $ 55,541 $ 1,951,617 $ 55,541
Cost of sales 1,057,726 50,509 1,922,023 50,509
------------ ------------ ------------ ------------
Gross profit (deficit) (23,354) 5,032 29,594 5,032
Operating expenses:
Advertising and marketing 613,318 11,603 2,451,307 11,603
Product development 1,436,518 231,434 2,071,112 264,742
General and administrative 5,441,503 480,763 7,762,421 793,863
------------ ------------ ------------ ------------
Total operating expenses 7,491,339 723,800 12,284,840 1,070,208
------------ ------------ ------------ ------------
Loss from operations (7,514,693) (718,768) (12,255,246) (1,065,176)
Other income (expense):
Loss on disposition of assets (89,913) -- (89,913) --
Interest Income 11,568 -- 47,986 --
Interest Expense (455,182) (5,537) (456,634) (6,538)
------------ ------------ ------------ ------------
Total other income (expense) (533,527) (5,537) (498,561) (6,538)
------------ ------------ ------------ ------------
Net Loss $ (8,048,220) $ (724,305) $(12,753,807) $ (1,071,714)
============ ============ ============ ============
Basic Loss Per Share $ (1.98) $ (.57) $ (3.15) $ (.88)
============ ============ ============ ============
Diluted Loss Per Share $ (1.98) $ (.57) $ (3.15) $ (.88)
============ ============ ============ ============
Weighted Average Shares
Outstanding 4,061,880 1,267,500 4,050,636 2,435,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 114
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SHOPPING.COM
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31,
1998 1997
------------- ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net loss $(12,753,807) $ (1,071,714)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation of furniture and equipment 325,547 23,848
Common stock issued for advertising 1,000,000 --
Amortization of loan origination fees 61,712 13,722
Expense recognized from issuing below-market
stock options 2,868,876 --
Expense recognized from issuing warrants
below market value 375,862 --
Expense recognized from issuing common stock
below market value -- 6,000
Decrease (Increase) in prepaid expenses 570,093 (115,286)
Decrease (Increase) in inventories (45,580) --
Decrease (Increase) in other assets (152,593) (103,858)
Decrease (Increase) in accounts/advances receivable 24,814 --
Decrease (Increase) in other receivables 7,075 --
Increase (Decrease) in accounts payable 565,804 271,273
Increase (Decrease) in other accrued liabilities 583,085 21,984
Increase (Decrease) in deferred revenue -- 52,500
------------ ------------
Net cash used in operating activities (6,569,112) (901,531)
------------ ------------
Cash flows from investing activities
Purchase of furniture and equipment (635,753) (722,421)
------------ ------------
Net cash used in investing activities (635,753) (722,421)
------------ ------------
Cash flows from financing activities
Payments on note payable - related party -- (50,000)
Proceeds from the issuance of notes payable 1,325,000 950,000
Payments of loan origination fees (395,000) (123,500)
Payments on capital lease obligations (18,616) --
Proceeds from the issuance of preferred
stock, Series A -- 200,000
Proceeds from the issuance of preferred
stock, Series B -- 1,030,000
Proceeds from the issuance of 8% convertible
debentures 2,500,000 --
Payment of offering costs -- (118,219)
Proceeds from the issuance of common stock -- 25,000
------------ ------------
Net cash provided (used) by financing activities 3,411,384 1,913,281
------------ ------------
Net increase (decrease) in cash (3,793,481) 289,329
Cash, beginning of period 4,829,180 63
------------ ------------
Cash, end of period $ 1,035,699 $ 289,392
============ ============
The accompanying notes are an integral part of these financial statements.
Page 6 of 114
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SHOPPING.COM
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
as contemplated by the SEC under Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of management, all normal,
recurring adjustments considered necessary for a fair presentation have been
included. The interim financial statements should be read in conjunction with
the Company's January 31, 1998 annual report on Form 10-KSB. The results of
operations for the six months ended July 31, 1998 are not necessarily indicative
of the operating results that may be expected for the fiscal year ending January
31, 1999.
NOTE 2: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
July 31, 1998
-------------
Computer hardware $1,779,632
Computer software 1,297,882
Furniture & equipment 297,248
Leasehold improvements 102,708
----------
3,477,470
Less: Accumulated depreciation 532,415
----------
$2,945,055
==========
NOTE 3: ADVANCES - RELATED PARTIES
During the second quarter of 1998, officers were advanced $79,941 from the
Company of which $79,479 was repaid during the second quarter of 1998. Total
advances to related parties as of July 31, 1998 were $9,943 which was included
in "Other receivables" in the balance sheet.
During the three month period ending July 31, 1998 the Company forgave the
balance of $16,500 of advances as part of a severance package.
Page 7 of 114
<PAGE>
NOTE 4: CONSULTING FEES - RELATED PARTY
For the six months ended July 31, 1998, the Company retained the services of
certain consultants, which were also shareholders. Consulting expenses amounted
to approximately $126,748 of which $40,348 was unpaid as of July 31, 1998.
NOTE 5: SHAREHOLDERS' EQUITY
In July, 1998 the Company issued 7,500 shares of Common Stock for commissions
related to the private placement of the Company's 8% Convertible Debentures
based on the then fair market value of the Common Stock.
NOTE 6: PROMISSORY NOTES
On May 15, 1998 the Company issued $1,225,000 of Promissory Notes, which have a
due date of six months from the date of issuance. In addition, on June 30, 1998
the Company issued a $100,000 Promissory Note that is also due six months from
the date of issuance. The Promissory Notes are unsecured, subordinated and carry
an interest rate of 10% per annum. The Promissory Notes include issuances to
certain existing shareholders of the Company.
In connection with the issuance of the $1,225,000 of Promissory Notes, warrants
to purchase 122,500 shares of Common Stock were issued which warrants are
exercisable until May 15, 2001 at a below-market exercise price of $14.00 per
share of Common Stock. In addition, warrants to purchase 10,000 shares of Common
Stock were issued relating to the $100,000 Promissory Note dated June 30, 1998
which are exercisable until June 8, 2001 at a below-market exercise price of
$14.00 per share of Common Stock. The exercise price of these warrants were
below market at the time of issuance and will therefore result in additional
interest charges of approximately $837,500 over the term of the Promissory Notes
of which $331,875 was expensed as interest during the quarter ended July 31,
1998.
In addition, the Company issued warrants to purchase 20,000 shares of Common
Stock at a then below-market exercise price of $14.00 per share of Common Stock
to Waldron & Co., Inc. for acting as the placement agent. These below-market
warrants will result in additional interest charges of approximately $80,000
over the term of the Promissory Notes of which $33,333 was expensed as interest
during the quarter ended July 31, 1998.
NOTE 7: 8% CONVERTIBLE DEBENTURES
In June, 1998 the Company entered into an agreement whereby the Company issued
8% Convertible Debentures due May 31, 2000 in the principal amount of
$1,250,000. In addition, in July, 1998 the Company entered into an agreement
whereby the Company issued 8% Convertible Debentures due July 10, 2000 in the
principal amount of $1,250,000. The 8% Convertible Debentures (the "Debentures")
are convertible into shares of Common Stock at a conversion price not to exceed
$16.00 per share (the "Base Rate"). The holders of the Debentures will receive
Page 8 of 114
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one warrant to purchase a share of Common Stock for each two shares of Common
Stock issued in connection with the corresponding conversion of the Debentures
(the "Warrants"). The Warrants attributable to each conversion shall have an
exercise price equal to the lesser of (a) 120% of the lowest market price for
any three trading days prior to conversion or (b) 125% of the Base Rate. The
Warrants expire on June 5, 2003. The Company may incur additional interest
charges over the term of the Debentures.
NOTE 8: STOCK OPTIONS
In April 1998, Mr. Frank Denny joined the Board of Directors as Chairman of the
Board to replace Bill Gross. In May, 1998, Mr. Denny was granted options to
purchase 100,000 shares of the Company's Common Stock at a below-market exercise
price of $16.00 per share and 50,000 shares of Common Stock at an exercise price
equal to the closing price of the Company's Common Stock on the effective date
of grant ($21.00). The effective date of grant was June 1, 1998.
In May 1998, Mr. Douglas Hay, a Director and Executive Vice President of the
Company, was granted options to purchase 50,000 shares of the Company's Common
Stock at a below-market exercise price of $16.00 per share and 50,000 shares of
Common Stock at an exercise price of the closing price of the Company's Common
Stock on the effective date of grant ($21.00). The effective date of grant was
June 1, 1998.
In May 1998, Mr. Edward Bradley, a Director of the Company, was granted options
to purchase 50,000 shares of the Company's Common Stock at a below-market
exercise price of $16.00. The effective date of grant was June 1, 1998.
In May 1998, Kipling Isle, Ltd., a corporation controlled by Paul J. Hill, a
Director, was granted options to purchase 50,000 shares of the Company's Common
Stock at a below-market exercise price of $16.00. The effective date of grant
was June 1, 1998.
In June 1998, Mr. John Markley became a Director and was named the Company's
President and Chief Executive Officer following Mr. Robert McNulty's departure
on June 1, 1998. Mr. Markley was granted options to purchase 150,000 shares of
the Company's Common Stock at a below-market exercise price of $16.00 and
100,000 shares of Common Stock at an exercise price equal to the closing price
of the Company's Common Stock on the effective date of grant ($21.00). The
effective date of grant was June 1, 1998.
As a result of the issuance of the below-market stock options, including those
described above and those issued during the fiscal year ended January 31, 1998
to employees, directors and consultants, the Company recorded a compensation
charge of $2,778,188 during the three months ended July 31, 1998 of which
$2,000,000 is a nonrecurring charge relating to the option grants described
above and $750,000 is a nonrecurring charge relating to Mr. McNulty's
Termination and Buy-Out Agreement more fully described in Note 9 below. Such
charge was included in general and administrative expense in the statement of
operations during the quarter ended July 31, 1998. Refer to Note 9 for a
description of additional similar charges recorded during the quarter ended July
31, 1998.
Page 9 of 114
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At the Company's Annual Meeting of Shareholders held July 15, 1998, the
shareholders of the Company approved the Stock Option Plan of 1997 (the "Plan"),
amended to increase the number of shares available under the Plan to an
aggregate of 750,000 shares of Common Stock.
At July 31, 1998, the Company had outstanding options and warrants to purchase
an aggregate of 2,641,850 shares of Common Stock.
NOTE 9: COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS
On June 1, 1998, the Company entered into a three-year Consulting Agreement with
Cyber Depot (the "Cyber Depot Agreement"). Pursuant to the Cyber Depot
Agreement, Cyber Depot will receive $21,500 per month plus reimbursement for
out-of-pocket expenses and options to purchase 100,000 shares of the Company's
Common Stock at an exercise price equal to the closing market price of the
Company's Common Stock on June 1, 1998 ($21.00). Mr. McNulty, a former officer
and director of the Company, is the principal shareholder of Cyber Depot.
On August 1, 1998, the Company entered into a one-year Consulting Agreement with
Lorica Ltd. (the "Lorica Ltd. Agreement"). Pursuant to the Lorica Ltd.
Agreement, Lorica Ltd. will receive $3,500 per month plus reimbursement for
out-of-pocket expense for providing general consulting services relating to the
merchandising operations and specifically relating to the sourcing of toys and
games. Mr. Matthew Hill is the President of Lorica Ltd. and the son of Mr. Paul
Hill, a Director of the Company.
EMPLOYMENT AGREEMENTS
On August 1, 1998, the Company entered into an agreement with Mr. Howard
Schwartz to serve as Executive Vice President. The term of the agreement is for
three years and is automatically renewed for one-year terms unless terminated by
either party with written notice given by June 1 of any year beginning June 1,
2001. The agreement provides for a bi-weekly base salary of $5,385 for the first
year, $7,692 for the second year and $8,461 for the third year. The agreement
also provides that Mr. Schwartz will participate in a formula based bonus
program to be approved annually by the Board of Directors and provides the
opportunity to receive up to an amount equal to his base compensation for
exceeding the Company's annual business plan net profit. In addition, Mr.
Schwartz will receive an automobile allowance of $1,000 per month.
LEGAL PROCEEDINGS
As more fully described in Part I of the Company's Annual Report on Form 10-KSB
for the fiscal year ended January 31, 1998, Part II of the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended April 30, 1998 and Part II
of this Form 10-QSB, the Company is subject to various litigation and SEC
investigations.
On July 8, 1997, Brian Leneck, a former officer of the Company, resigned. By
letter dated July 10, 1997, Robert McNulty tendered payment to Leneck to buy
back 140,000 shares of Common Stock of the Company pursuant to a shareholder
agreement. Leneck rejected the tender, claiming that the amount was not the fair
Page 10 of 114
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market value of the shares. On March 17, 1998, Leneck filed a lawsuit in Orange
County Superior Court of California against the Company, Robert McNulty and
three members of the Board of Directors at the time, Bill Gross, Edward Bradley
and Paul Hill. Leneck's lawsuit seeks damages for breach of contract,
conversion, and breach of fiduciary duty with respect to 70,000 shares. The
Company believes that it has meritorious defenses, as well as affirmative
claims, against Leneck and intends to vigorously protect its rights in this
matter. On March 27, 1998, the Company filed a lawsuit in Orange County Superior
Court against Leneck asserting, inter alia, breach of contract, breach of
implied covenant of good faith and fair dealing, fraud and deceit, declaratory
relief and specific performance.
In March of 1998, the Company became aware that the Securities and Exchange
Commission (the "SEC") had initiated a private investigation to determine
whether the Company, Waldron & Co., Inc. ("Waldron"), the principal market maker
in the Company's stock, or any of their officers, directors, employees,
affiliates or others had engaged in activities in connection with transactions
in the Company's stock in violation of the federal securities laws. The SEC
suspended trading in the Company's stock from 9:30 a.m. EST, March 24, 1998
through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the
Securities Exchange Act of 1934. On April 30, 1998, the National Association of
Securities Dealers ("NASD") permitted the Company's Common Stock to resume
trading on the electronic bulletin boards beginning on April 30, 1998. Because
the SEC has not alleged any violations, it is difficult to predict the outcome
of their investigation. The Company continues, however, to fully cooperate with
the SEC inquiry. Nevertheless, the investigation by the SEC, 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 carrying out its business plan.
On April 16, 1998, Michael A. Martucci on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the California Superior Court for the County of Orange alleging
violations of the California securities laws by the Company, Robert McNulty,
Douglas Hay, Waldron and one other broker-dealer and two of those firm's
executives. The complaint charges that the defendants "participated in a scheme
and wrongful course of business to manipulate the price of [the Company's]
stock, which included: (i) defendant Waldron's refusal to execute sell orders;
(ii) the use of illegal stock parking; (iii) the use of illegal above-market
buy-ins to intimidate and dissuade potential short sellers from selling
[Company] stock short; (iv) the sale of [Company] shares to discretionary
accounts without regard to suitability; and (v) the dissemination of materially
false and misleading statements about [the Company's] operating performance and
its future prospects." The complaint further alleges that the Company "secretly
arranged to sell $250,000 of product to Waldron as part of defendants' effort to
have [the Company] post revenue growth prior to the [Company's] planned [initial
Page 11 of 114
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public offering]," that such sales constituted almost 25% of the Company's
revenues between its inception and March 26, 1998 and that the Company did not
disclose such sales or their significance in the Prospectus used in the
Company's initial public offering. The plaintiff seeks compensatory damages in
an unspecified amount, attorneys' fees and costs, injunctive relief,
disgorgement or restitution of the proceeds of the Company's IPO and the
defendants' profits from trading in the Company' s stock, and the imposition of
a constructive trust over the Company's revenues and profits.
On May 6, 1998 Steven T. Moore on behalf of all persons who purchased shares of
the Company's stock between November 25, 1997 and March 26, 1998 filed suit in
United States District Court for the Central District of California alleging
violations of the federal securities laws by the Company, Robert McNulty,
Douglas Hay, Waldron and one other broker-dealer and two of those firm's
executives. The complaint charges that the defendants "participated in a scheme
and wrongful course of business to manipulate the price of [the Company's]
stock, which included: (i) defendant Waldron's refusal to execute sell orders;
(ii) the use of illegal stock parking; (iii) the use of illegal above-market
buy-ins to intimidate and dissuade potential short sellers from selling
[Company] stock short; (iv) the sale of [Company] shares to discretionary
accounts without regard to suitability; and (v) the dissemination of materially
false and misleading statements about [the Company's] operating performance and
its future prospects." The complaint further alleges that the Company "secretly
arranged to sell $250,000 of product to Waldron as part of defendants' effort to
have [the Company] post revenue growth prior to the [Company's] planned [initial
public offering]," that such sales constituted almost 25% of the Company's
revenues between its inception and March 26, 1998 and that the Company did not
disclose such sales or their significance in the Prospectus used in the
Company's initial public offering. The plaintiff seeks compensatory damages in
an unspecified amount, attorneys' fees and costs, injunctive relief,
disgorgement or restitution of the proceeds of the Company's IPO and the
defendants' profits from trading in the Company' s stock, and the imposition of
a constructive trust over the Company's revenues and profits.
On April 28, 1998, Abraham Garfinkel on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that
defendants acted in concert with each other to manipulate the price of the
Company's stock by, INTER ALIA, "work[ing] closely with defendant McNulty on a
weekly basis whereby defendant McNulty would pass the supposedly confidential
information of those who had 'hit' or contacted Shopping's website." The
complaint alleges that the defendants also manipulated the market by engaging in
conduct similar to that alleged in the Martucci and Moore actions. The complaint
also alleges that the Company's prospectus was misleading by the failure to
disclose sales to Waldron as discussed above. The plaintiffs seek damages
similar to that sought by Martucci and Moore.
On July 1, 1998, Mr. Garfinkel filed a companion state court complaint in the
Orange County Superior Court based on virtually the same operative facts as the
federal court claim . The state court action alleges claims for negligent
misrepresentation, common law fraud and deceit as well as violation of sections
25400, 25402 and 25500 of the California Corporations Code.
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On May 18, 1998, Kate McCarthy, on behalf of all persons who purchased shares of
the Company's stock between November 25, 1997 and March 26, 1998, filed suit in
the United States District Court for the Central District of California alleging
violation of the federal securities laws by the Company, Robert McNulty, Douglas
Hay, Waldron and Cery Perle. The complaint alleges that defendants acted in
concert with each other to manipulate the price of the Company's stock by, INTER
ALIA, "work[ing] closely with defendant McNulty on a weekly basis whereby
defendant McNulty would pass the supposedly confidential information of those
who had 'hit' or contacted Shopping's website." The complaint alleges that the
defendants also manipulated the market by engaging in conduct similar to that
alleged in the Martucci and Moore actions. The complaint also alleges that the
Company's prospectus was misleading by the failure to disclose sales to Waldron
as discussed above. The plaintiffs seek damages similar to that sought by
Martucci and Moore.
The Company denies that it engaged in any of the acts alleged in any of the
above complaints and intends to defend against these actions vigorously.
Nonetheless, and despite the Company's insurance coverage for such actions,
these class action suits may be very harmful to the Company. Diversion of
management time and effort from the Company's operations and the implementation
of the Company's business plan at this crucial time in the Company's development
may adversely and significantly affect the Company and its business. The
continued pendency of this litigation may make it difficult for the Company to
raise additional capital to continue its development and expansion and to
attract and retain talented executives. The inability of the Company to raise
additional capital would have material adverse effect on the Company's business,
prospects, financial condition and results of operations and may prevent the
Company from carrying out its business plan.
Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois &
Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice
of Client's Right to Arbitration" in connection with legal services performed on
behalf of the Company. The law firm claims legal fees and costs in the amount of
$328,818.97 are due. The Company disputes the amount of fees owed and is in the
process of exploring whether the matter can be informally resolved. However, the
Company has accrued the claimed amount as of January 31, 1998. Though settlement
negotiations have occurred, it is more probable than not that the Company will
proceed with its election to have the matter submitted to arbitration before the
Los Angeles County Bar Association.
By written contracts dated December 12, 1997, the Company retained SoftAware,
Inc. to provide facilities and services relative to the maintenance, location
and supply of T1 lines to the Company's servers. Subsequent to the execution of
the contracts, SoftAware, Inc. experienced a prolonged electrical outage which
resulted in the disruption of Internet access and communications. Based upon
this and other factors, the Company determined that SoftAware, Inc. was
incapable of performing under the agreements and declined to proceed. By letter
dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon the
Company for $120,000.00 which purportedly reflected the compensatory damages
SoftAware suffered as a direct and proximate result of the Company's refusal to
proceed with performance under the contract. The Company rejected this demand
and offered to reimburse SoftAware, Inc. for reasonable costs incurred in
reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has yet
to respond to this offer.
Page 13 of 114
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On September 12, 1998 the Company was served with a summons and complaint by
MTS, Incorporated filed in Sacramento County Superior Court of California for
damages arising out of the Company's as well as two other merchants' sale of the
video "Titanic" at below cost thereby purportedly constituting violation of
section 17043 and 17044 of California's Business and Professions Code as well as
the Unfair Business Practices Act (Bus. & Prof. Code section 17200 ET. SEQ.).
The complaint alleges damages in excess of $25,000, that sum trebled should a
statutory violation be established, and attorneys' fees and costs. Due to the
recent nature of this claim, the Company has not had an opportunity to
investigate the allegations of the complaint. Accordingly, a reasonable
assessment of the Company's potential exposure cannot be made at this time. The
action will, however, require the engagement of defense counsel; and it is
estimated that substantial attorney fees may be incurred should litigation
proceed to trial.
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.
As the outcome of these matters is uncertain and damages, if any, are not
estimable and the Company believes its insurance coverage is adequate to cover
any resulting liability, the Company did not maintain any reserves for such
matters at July 31, 1998.
TERMINATION AND BUY-OUT AGREEMENT
On June 1, 1998 Mr. McNulty resigned as President, Chief Executive Officer and
Director of Shopping.com. Pursuant to a Termination and Buy-Out Agreement dated
as of June 1, 1998 between the Company and Mr. McNulty, Mr. McNulty will receive
$500,000, with $100,000 payable on or before July 31, 1998 and the balance due
in $50,000 increments on or before each succeeding fiscal quarter end beginning
October 31, 1998 until fully paid. Amounts payable under this agreement are
payable on demand in one lump-sum payment at the option of Mr. McNulty upon
thirty days written notice to the Company in the event a majority of the current
members of the Board of Directors are replaced by new members. In addition, Mr.
McNulty received options to purchase 150,000 shares of the Company's Common
Stock at a below-market exercise price of $16.00 per share. The issuance of the
below-market stock options pursuant to Mr. McNulty's Termination and Buy-out
Agreement resulted in a nonrecurring charge of $750,000 included in general and
administrative expense in the Statement of Operations during the quarter ended
July 31, 1998. During the three month period ended July 31, 1998, $100,000 was
paid pursuant to Mr. McNulty's Termination and Buy-out Agreement.
NOTE 10: SUBSEQUENT ISSUANCES OF SECURITIES
In August 1998, the Company issued 66,667 shares of Common Stock for $1,000,000
of radio advertising based on the then fair market value of the Common Stock.
The advertisements will be aired primarily during the three months ending
October 31, 1998 and accordingly, approximately $1,000,000 will be expensed
during the quarter ending October 31, 1998. Up to 133,333 additional shares of
Common Stock may be issuable under the radio advertising agreement on August 12,
1999 if on such date the average closing price of the Company's Common Stock for
the previous ten days is less than $15.00 per share.
Page 14 of 114
<PAGE>
On August 25, 1998 the Company issued a $500,000 Convertible Promissory Note
which has a due date of six months from the date of issuance. The Convertible
Promissory Note carries an interest rate of 8% per annum. The Convertible
Promissory Note may be converted for the principal and accrued interest into
Common Stock at $10.00 per share. In connection with the issuance of the
Convertible Promissory Note, the Company issued 50,000 warrants to purchase
shares of Common Stock at an exercise price of $10.00 per share. The warrants
expire on August 20, 2001. The Company also issued warrants to purchase 10,000
shares of Common Stock to Waldron & Co., Inc. ("Waldron") for acting as the
placement agent. The warrants issued to Waldron were issued under the same terms
and conditions as the warrants issued with the Convertible Promissory Note.
On September 15, 1998, the Company issued a Promissory Note in the amount of
$500,000 which is due at the earlier of the Company receiving $500,000 in
additional financing from another source or October 14, 1998. One of the
Company's Directors is also a member of the board of directors of the
corporation to which the Company issued the Promissory Note. The Promissory Note
carries an interest rate of 10% per annum and is secured by a Non-Recourse
Guaranty and Pledge Agreement by Robert J. McNulty, a consultant of the Company.
In connection with the issuance of the $500,000 Promissory Note, the Company
also issued 30,000 warrants to purchase shares of Common Stock at an exercise
price of $2.25 per share. The warrants expire on September 15, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements and the related notes thereto appearing elsewhere herein.
FORWARD LOOKING STATEMENTS
The following statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" include "forward looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
and are subject to the safe harbor created by those sections. The forward
looking statements are based on current expectations, estimates and projections
about the Company's industry, management's beliefs and certain assumptions made
by management. All statements, trends, analyses and other information contained
in this report relative to the actual future results of the Company could differ
materially from those projected in the forward looking information. For a
discussion of certain factors that could cause actual results to differ
materially from those projected by the forward looking information, see "Factors
That May Affect Future Performance" herein. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the SEC.
Page 15 of 114
<PAGE>
OVERVIEW
Shopping.com (the "Company") began operations in February, 1996, was
incorporated on November 22, 1996 and commenced selling on the Internet on July
11, 1997. The Company is an innovative Internet-based electronic retailer
("E-retailer") specializing in retail marketing a broad range of products and
services at wholesale prices to both consumer and trade customers. Utilizing
proprietary technology, the Company has designed a fully-scalable systems
architecture for the Internet shopping marketplace.
The Company's management team combines the experiences of:
o Executives with extensive background in both retail and
warehouse/discount store formats.
o Executives who have experience in computer and information systems
design and development.
o Directors with entrepreneurial skills who currently oversee and manage
their own existing companies.
The Company has a limited history of operations, thus making an evaluation of
the Company and its prospects difficult to calculate. The Company anticipates
that sales from the Company's Web site will continue to constitute substantially
all of the Company's sales. Over the next twelve months, the Company intends to
increase its revenues by pursuing an aggressive advertising and marketing
campaign aimed at attracting customers to shop on its Web Site and to co-brand
with other commercial partners which will help increase the Company's brand name
recognition as well as increase traffic on the Company's Web Site.
The Company must seek additional financing in order to sustain operations or
achieve planned expansion. There can be no assurance that such additional funds
will be available or that, if available, such additional funds will be on terms
acceptable to the Company.
The Company anticipates that its operations will incur significant operating
losses for the foreseeable future. The Company believes that its success will
depend upon its ability to increase sales on its Web site significantly over the
next twelve months, which cannot be assured. The Company's ability to generate
sales is subject to substantial uncertainty. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks, the Company must, among other things, obtain a customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology and transaction-processing systems, improve
its Web site, provide superior customer service and order fulfillment, respond
to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks; and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results of
Page 16 of 114
<PAGE>
operations. Additionally, the Company's relatively brief operating history makes
predictions of future operating results difficult to ascertain. Accordingly,
there can be no assurance that the Company will be able to generate sufficient
sales to, or that the Company will otherwise be able to, achieve or maintain
profitability. Since inception, the Company has incurred significant losses and,
as of July 31, 1998, had an accumulated deficit of approximately $18.5 million.
The Company substantially increased its operating expenses over the past quarter
in order to, among other things, expand and improve its Internet operations and
user support capabilities, and develop new Internet content and applications. In
addition, the Company incurred, primarily on June 1, 1998, a non-cash and
substantially nonrecurring charge of approximately $2.8 million related to the
issuance of below-market stock options. The Company expects to continue to incur
significant operating expenses on a quarterly and annual basis for the
foreseeable future. To the extent such increases in operating expenses are not
offset by revenues, the Company will continue to incur significant losses.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside of the Company's
control. See "Factors That May Affect Future Performance - Unpredictability Of
Future Revenues; Potential Fluctuations In Quarterly Operating Results;
Seasonality."
In seeking to effectively implement its business plan, the Company may elect,
from time to time, to make certain marketing or acquisition decisions that could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. Due to all of the foregoing factors, it is
likely that in some future quarters, the Company's results of operations may be
below the expectations of securities analysts and shareholders. In such event,
the price of the Company's Common Stock could be materially adversely affected.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the three months
ended July 31, 1998. While the Company is providing some comparisons of its
results of operations with the prior year, such comparisons may have a limited
utility as the Company only commenced selling products over the Internet on July
11, 1997.
Net Sales
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Quarter Six Months
Ended Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 13, 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,034,372 55,541 1,762 1,951,617 55,541 3414
- ---------------------------------------------------------------------------------------------
</TABLE>
Page 17 of 114
<PAGE>
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 six months ended July 31, 1998, the Company generated net sales of
$1,951,617. Net sales are composed of the selling price of merchandise sold by
the Company, net of returns, and includes freight charged to the Company's
customers. Growth in net sales reflects a significant increase over the prior
year primarily due to the growth of the Company's customer base, as well as
reflecting a full three months of sales whereas in 1997 the Company only began
selling on the Internet July 11, 1997. The sole source of funds for the Company
from the date of inception through July 31, 1998, other than the sale of equity
and debt securities, has been from sales of products. For the three months ended
July 31, 1998, sales of $36,475, or approximately 4%, were sales to Waldron &
Co., Inc. ("Waldron"), the Company's former underwriter and market maker. Such
sales consisted primarily of computer equipment and office supplies and some of
these transactions allowed the Company to generate higher gross margins. In
addition, the Company had sales of $6,320 to Aubry Hansen, Inc., a corporation
in which one of the principals is a shareholder of the Company. In addition, the
Company had sales of $3,266 for the three months ended July 31, 1998 to Mark
Asdourian, the Company's general counsel and a shareholder of the Company. The
sales to Mark Asdourian and Aubry Hansen, Inc. each approximated less than 1% of
net sales of the Company for three months ended July 31, 1998. The Company
believes that it is not dependent upon Waldron or any other customer, related or
otherwise, and that the loss of Waldron as a customer 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.
Cost of Sales
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Quarter Six Months
Ended Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 13, 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,057,726 $ 50,509 1994 $ 1,922,023 $ 50,509 3705
- ---------------------------------------------------------------------------------------------
</TABLE>
Cost of sales include the actual cost the Company pays its vendors for the
products and the actual shipping and handling charges incurred by the Company to
ship products to its customers. The cost of sales for the three months ending
July 31, 1998 was $1,057,726 or approximately 102.3% of net sales. The Company's
gross profit deficit was approximately a negative 2.3% for the three months
ended July 31, 1998. The Company experienced a negative gross margin due, in
part, from the unavailability of certain products. These products were obtained
through other channels of distribution and from alternate suppliers at higher
prices. In addition, the Company encountered additional price competition from
Page 18 of 114
<PAGE>
other E-commerce retailers in several product categories. Finally, the decline
in the Company's gross margin was due primarily to an overall increase in the
percentage of sales for those products and categories which had highly
promotional pricing. The failure to generate sales with sufficient margins to
cover its operating expenses 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
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Quarter Six Months
Ended Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 13, 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 613,318 $ 11,603 5186 $ 2,451,307 $ 11,603 21026
- ---------------------------------------------------------------------------------------------
</TABLE>
Advertising and marketing expenses consist primarily of media costs related to
advertising, promotion and marketing literature. Advertising and marketing
expenses incurred by the Company for the three months ending July 31, 1998 were
$613,318 or approximately 59.3% of net sales. The Company intends to
significantly increase its advertising and marketing expenses in future periods,
including the issuance of Common Stock in exchange for $1,000,000 of advertising
to run during the third quarter ending October 31, 1998. While the Company is
hopeful that its net sales will also increase in future periods so that its
advertising and marketing expense will represent a decreasing percentage of net
sales, the Company is not able to predict whether its sales will increase by a
sufficient amount for this to occur. No assurance can be given that the Company
will achieve increased net sales or that marketing expense will decrease as a
percentage of sales.
Product Development Expenses
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Quarter Six Months
Ended Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 13, 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,436,518 $ 231,434 521 $ 2,071,112 $ 264,742 682
- ---------------------------------------------------------------------------------------------
</TABLE>
Product development expenses consist primarily of costs incurred by the Company
to develop and enhance its Web site. Product development expenses include
compensation and related expenses, depreciation and amortization of computer
Page 19 of 114
<PAGE>
hardware and software, and the cost of acquiring, designing, developing and
editing Web site content. Product development expenses incurred by the Company
for the three months ended July 31, 1998 were approximately $1,436,518 or
approximately 138.9% of net sales. The significant increase of product
development expenses from prior periods was primarily related to the utilization
of additional temporary personnel to enhance features, content and functionality
of the Company's Web site, transaction processing systems and proprietary
customer service software. The Company believes that significant investments in
enhancing its Web site will be necessary to become and remain competitive. As a
result, the Company may continue to incur, or increase the level of, product
development expenses.
General and Administrative Expenses
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Quarter Six Months
Ended Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 13, 1997 % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5,441,503 $ 480,763 1032 $ 7,762,421 $ 793,863 878
- ---------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses consist primarily of compensation, rent
expense, fees for professional services and other general corporate expenses.
General and administrative expenses incurred by the Company for the three months
ended July 31, 1998 were $5,441,503, or approximately 526.1% of net sales. Such
expenses included a nonrecurring, non-cash compensation charge to earnings of
$2,750,000 related to the issuance of below-market stock options primarily on
June 1, 1998. In addition, the Company recorded $660,000 of nonrecurring
expenses related to the termination and buy-out agreements of the Company's
former Chief Executive Officer and other management, of which $560,000 remains
payable as of July 31, 1998. The approximately ten-fold increase in such
expenses from the prior periods resulted primarily from the Company commencing
actual sales. General and administrative expenses should significantly increase
in future periods if the Company is successful in raising additional capital and
able to, among other things, increase hiring and expansion of facilities. In
addition, the Company experienced an increase in expenses related to legal and
other professional fees incurred by the Company from prior periods.
Page 20 of 114
<PAGE>
Interest Income and Expense
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
July 31, 1998 July 31, 1997 % Change July 31, 1998 July 31, 1997 % Change
------------- ------------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Expense $ 455,182 $ 5,537 8121 $ 456,634 $ 6,538 6884
Interest Income $ 11,568 -0- N/A $ 47,986 -0- N/A
</TABLE>
Interest income on cash and cash equivalents was $11,568 or approximately 1.1%
of net sales. Interest income earned was due to the Company having certain
interest-bearing cash and cash equivalents accounts and decreased from the
previous quarter due to lower cash and cash equivalent balances.
Interest expense for the three months ended July 31, 1998 was $455,182 or
approximately 44.0% of net sales and is primarily attributable to accrued
interest on Promissory Notes and 8% Convertible Debentures and the issuance of
below market stock warrants.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity were cash and cash equivalents
derived from public and private sales of the Company's equity and debt
securities. The sole source of funds for the Company from the date of inception
through July 31, 1998, other than the sale of equity and debt securities, has
been from sales of product.
Capital expenditures from February 1, 1998 through July 31, 1998 were $635,753.
The Company has current and long-term capital lease obligations for certain
office equipment, the aggregate amount of which, as of July 31, 1998, was
$421,102. The Company anticipates a substantial increase in its capital
expenditures in 1998 consistent with its anticipated growth; provided that the
Company is able to raise sufficient capital to fund that growth.
The Company experienced a net loss of $12,753,807 and generated net sales of
$1,951,617 for the six month period ended July 31, 1998. THE COMPANY'S ABILITY
TO SURVIVE AND GROW FOR THE IMMEDIATE FUTURE WILL DEPEND ON THE COMPANY'S
ABILITY TO PROMPTLY RAISE ADDITIONAL CAPITAL FROM PUBLIC OR PRIVATE EQUITY OR
DEBT SOURCES. IN ADDITION, THE COMPANY BELIEVES THAT IT WILL NEED TO RAISE
ADDITIONAL FUNDS IN ORDER TO AVAIL ITSELF OF ANY UNANTICIPATED OPPORTUNITIES
(SUCH AS MORE RAPID EXPANSION, ACQUISITIONS OF COMPLEMENTARY BUSINESSES OR THE
DEVELOPMENT OF NEW PRODUCTS OR SERVICES), TO REACT TO UNFORESEEN DIFFICULTIES
(SUCH AS THE LOSS OF KEY PERSONNEL OR THE REJECTION BY INTERNET USERS OF THE
COMPANY'S WEB SITE CONTENT) OR TO OTHERWISE RESPOND TO UNANTICIPATED COMPETITIVE
PRESSURES. THE COMPANY HAS USED RATHER THAN PROVIDED CASH FROM ITS OPERATIONS.
THESE FACTORS RAISE A SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE
AS A GOING CONCERN. IN VIEW OF THE MATTERS DESCRIBED ABOVE, RECOVERABILITY OF A
MAJOR PORTION OF THE COMPANY'S RECORDED ASSET AMOUNTS IS DEPENDENT UPON THE
COMPANY'S ABILITY TO RAISE SUFFICIENT CAPITAL TO FUND ITS WORKING CAPITAL
REQUIREMENTS UNTIL THE COMPANY CAN GENERATE SUFFICIENT SALES VOLUME TO COVER ITS
OPERATING EXPENSES.
Page 21 of 114
<PAGE>
As of July 31, 1998, the Company had cash and cash equivalents of $1,035,699. In
addition, the Company filed an initial registration statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission covering
shares of Common Stock issuable upon conversion of the 8% Convertible Debentures
(the "Debentures") in the aggregate amount of $10,000,000 of which $2,500,000
have been issued to date. The buyers of the Debentures which have been issued
(the "Buyers") are contractually obligated to purchase an additional principal
amount of Debentures equal to $2,500,000 after the date that the Registration
Statement is declared effective (the "Effective Date"). On September 14, 1998,
the Company gave notice to the Buyers that the Company commits to issuing
$2,500,000 of additional Debentures five business days following the Effective
Date, unless a different date is agreed upon by the Company and the Buyers.
Management of the Company believes that its current cash on hand plus the
existing working capital, plus commitments for the balance of the 8% Convertible
Debentures in the amount of $7,500,000 will be sufficient to sustain current
operations for the current fiscal quarter ending October 31, 1998. The
$7,500,000 has been committed in the amounts of $2,500,000 by the original
buyers and the Company has recently received a term sheet for the remaining
$5,000,000. Of the $5,000,000, $1,500,000 is to be available and funded in the
form of a bridge loan which the Company anticipates will take place within the
next seven days. The $1,500,000 bridge loan is to be repaid out of the
$5,000,000 proceeds from the issuance of the additional Convertible Debentures
which are anticipated to be funded within five days following the effective date
of the Registration Statement. However, if the Effective Date of the
Registration Statement is delayed for any reason or if the Buyers fail to
purchase the additional Debentures, the Company will require additional
financing immediately in order to continue operations. In addition, the Company
may need to obtain additional financing to sustain operations for the balance of
the fiscal year ending January 31, 1999. Accordingly, the Company is currently
negotiating with several investors about raising additional capital through
private placement offerings. However, there can be no assurance that such
capital resources will be available to the Company or that if available, such
funds will be on terms acceptable to the Company. In addition, the investigation
by the SEC, the interruption of the trading of the Company's stock on the
over-the-counter electronic bulletin board, the pendency of lawsuits and the
attendant adverse publicity, and the recent decline in the market price of the
Company's common stock may not only reduce significantly the liquidity of the
Company's stock but also make it difficult for the Company to raise additional
capital to sustain its operations and achieve its planned expansion. See
"Factors That May Affect Future Performance - SEC Investigation, Interruption Of
Trading and Shareholder Litigation."
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of the Company's then existing
shareholders will be reduced. Moreover, shareholders may experience additional
and significant dilution, and such equity securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. These
factors raise a substantial doubt about the Company's ability to continue as a
going concern. In view of the matters described above, recoverability of a major
portion of the Company's recorded asset amounts is dependent upon the Company's
ability to raise sufficient capital to fund its working capital requirements
until the Company can generate sufficient sales volume to cover its operating
expenses.
Page 22 of 114
<PAGE>
EMPLOYEES
As of September 15, 1998, the Company employed 87 full time and 6 part time
employees. This is an increase from January 31, 1998 when the number of
employees was 67 full time and 9 part time employees. The Company believes that
its future success will depend in part on its ability to attract, hire and
maintain qualified personnel. However, the Company believes there will not be a
significant increase in employees over the next twelve months. Competition for
such personnel in the on-line industry is intense. None of the Company's
employees is represented by a labor union, and the Company has never experienced
a work stoppage. The Company believes its relationship with its employees to be
good.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company's business, financial condition and results of operations may be
impacted by a number of factors including, without limitation, the factors
discussed below.
The Need for Additional Capital
The Company must seek additional financing in order to sustain
operations or achieve planned expansion. The Company anticipates that it needs
to raise at least $26 million during the next twelve months in the form of debt
and/or equity investments in the Company's securities. There can be no assurance
that such additional funds will be available or that if available, such
additional funds will be on terms acceptable to the Company.
Limited Operating History; Accumulated Deficit; Anticipated Losses; Ability to
Continue as a Going Concern
The Company commenced operations in February, 1996, was incorporated on
November 22, 1996 and began selling products on its Web site on July 11, 1997.
Accordingly, the Company has a limited operating history on which to base an
evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly expanding markets such as online commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks, the Company must, among other things, obtain a customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology and transaction-processing systems, improve
its Web site, provide superior customer service and order fulfillment, respond
to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Page 23 of 114
<PAGE>
Since inception, the Company has incurred significant losses, and as of
July 31, 1998 had an accumulated deficit of approximately $18.5 million. The
Company believes that its success will depend in large part on its ability to
(i) obtain wide-spread name recognition, (ii) provide its customers with an
outstanding value and a superior shopping experience, (iii) achieve sufficient
sales volume to realize economies of scale, and (iv) successfully coordinate the
fulfillment of customer orders without the need to maintain expensive real
estate warehousing facilities and personnel. Accordingly, the Company intends to
invest heavily in marketing and promotion, site development and technology and
operating infrastructure development. The Company also intends to offer
attractive pricing programs, which will result in low gross margins. Because the
Company has relatively low gross margins, achieving profitability depends upon
the Company's ability to generate and sustain substantially increased sales
levels. As a result, the Company believes that it will incur substantial
operating losses for the foreseeable future, and that rate at which such losses
will be incurred may increase significantly from current levels based primarily
on marketing expenditures and the timing of those expenditures.
The Company incurred a net loss of $5,552,029 and had negative cash
flows from operations during the year ended January 31, 1998 and had a
shareholders deficit of $6,530,236 as of January 31, 1998. For the quarter ended
July 31, 1998 the Company had net losses totaling $8,048,220, negative cash
flows from operations of $6,899,394 and an accumulated deficit of $18,477,533.
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 for operations, marketing and
development activities. Management has subsequently raised additional capital
during 1998 through offerings of equity and debt securities in private
placements providing thereby 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 July 31, 1998, the Company had used
all of the proceeds from the Company's initial public offering. Although the
Company has obtained additional financing subsequent to its initial public
offering, the proceeds of such financings, together with cash generated by
operations, will, in the Company's view, be insufficient to fund the Company's
anticipated operating losses until its sales increase to a sufficient level to
cover operating expenses. Accordingly, in order to continue to sustain
operations and implement its business plan, the Company must raise additional
funds. There can be no assurance that such financing will be available, if at
all, in amounts or on terms acceptable to the Company. In addition, the
investigation by the SEC, the pendency of several class action suits against the
Company, and the attendant adverse publicity, and the recent decline in the
market price of the Company's common stock may also make it difficult for the
Company to raise additional capital to continue its development. See "Factors
That May Affect Future Performance - SEC Investigation, Interruption Of Trading
and Shareholder Litigation."
Page 24 of 114
<PAGE>
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 be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall until revenues grow substantially. Accordingly, any
significant shortfall in revenues in relation to the Company's planned
expenditures could have an immediate adverse effect on the Company's business,
prospects, financial condition and results of operations. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions that
could have a material adverse effect on its business, prospects, financial
condition and results of operations.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors which may adversely effect the Company's
quarterly operating results include: (i) the Company's ability to obtain and
retain customers, attract new customers at a steady rate, maintain customer
satisfaction and establish consumer confidence in conducting transactions on the
Internet environment, (ii) the Company's ability to manage fulfillment
operations electronically and without warehouse facilities and to establish
competitive gross margins, (iii) the announcement or introduction of new Web
sites, services and products by the Company and its competitors, (iv) price
competition or higher vendor prices, (v) the level of use and consumer
acceptance of the Internet and other online services for the purchase of
consumer products such as those offered by the Company, (vi) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (vii) the level of traffic on the
Company's Web site, (viii) technical difficulties, system downtime or Internet
brownouts, (ix) the amount and timing of operating costs and capital
expenditures relating to the expansion of the Company's business, operations and
infrastructure, (x) delays in revenue recognition at the end of a fiscal period
as a result of shipping or logistical problems, (xi) the level of merchandise
returns expected by the Company, (xii) governmental regulation and taxation,
(xiii) economic conditions specific to the Internet and online commerce, and
(xiv) general economic conditions.
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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.
The Company uses a combination of industry supplied software and
internally developed software and systems for its Web site, search engine, and
substantially all aspects of transaction processing, including order management,
cash and credit card processing, shipping and accounting and financial systems.
Any substantial disruptions or delays in any of its systems would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Risk of System Failure; Single Site and Order Interface
The Company's success, in particular its ability to successfully receive
and fulfill orders and provide high-quality customer service, largely depends on
the efficient and uninterrupted operation of its computer and communications
hardware systems. Substantially all of the Company's computer and communications
hardware is located at a single leased facility in Corona del Mar, California.
Although the Company has redundant and back-up systems onsite and a disaster
recovery plan, the Company's systems and operations may be vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure,
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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 October 31, 1997
to July 31, 1998, the Company expanded from 50 to approximately 87 full-time
employees. The majority of the Company's senior management, including its
President and CEO, John H. Markley, joined the Company within the last several
months, and some officers have no prior senior management experience at public
companies. The Company's new employees include a number of key managerial,
technical and operations personnel who have not yet been fully integrated into
the Company's operations. To manage the increase in personnel and expected
growth of its operations, the Company will be required to improve existing, and
implement new, transaction-processing, operational and financial systems,
procedures and controls, and to train and manage its already expanded employee
base. Although the Company believes that there will not be a significant
increase in the number of employees over the next twelve months, the Company may
be required to increase its finance, administrative and operations staff.
Further, the Company's management will be required to maintain and expand its
relationships with various manufacturers, distributors, freight companies, other
Web sites, other Internet Service Providers and other third parties necessary to
the Company's operations. There can be no assurance that the Company's current
and planned personnel, systems, procedures and controls will be adequate to
support the Company's future operations, that management will be able to hire,
train, retain, motivate and manage required personnel or that the Company's
management will be able to successfully identify, manage and exploit existing
and potential market opportunities. If the Company is unable to manage growth
effectively, its business, prospects, financial condition and results and
operations would be materially adversely affected.
Dependence of Continued Growth of Online Commerce
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid growth in
the use of and interest in the Web, the Internet and other online services is a
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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.
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
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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.
All of the information systems that have been designed and integrated
into the Company's infrastructure were built to be Year 2000 compliant. The
company believes that at the present time, substantially all of its information
systems are year 2000 compliant and that additional costs to bring the systems
to full compliance will not be significant. The Company is in the process of
implementing a general ledger and financial accounting software package which
has received Year 2000 certification.
The Company recognizes that it could be exposed to some risk arising
from vendors or suppliers who may not be Year 2000 compliant. In these
instances, the Company may have to implement system modifications to handle
these issues when data is exchanged. The Company believes that the additional
costs to implement such system modifications will not be significant. The
Company currently does business with over four hundred vendors and suppliers.
The Company believes that due to its ongoing practice of multiple product
sourcing, no one vendor or supplier would have a material effect on the
Company's business, results of operations, or financial condition if they do not
timely become Year 2000 compliant.
SEC Investigation, Interruption of Trading and Shareholder Litigation.
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 activities in connection with
transactions in the Company's stock in violation of the federal securities laws.
The SEC suspended trading in the Company's stock from 9:30 a.m. EST, March 24,
1998 through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the
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Securities Exchange Act of 1934. On April 30, 1998, the National Association of
Securities Dealers ("NASD") permitted the Company's Common Stock to resume
trading on the electronic bulletin boards beginning on April 30, 1998. Because
the SEC has not alleged any violations, it is difficult to predict the outcome
of their investigation. The Company continues, however, to fully cooperate with
the SEC inquiry. The Company is also a party to various lawsuits initiated by
shareholders including those more fully described herein under "Legal
Proceedings." Nevertheless, 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 that stock but also make it difficult for the
Company to raise additional capital to continue its development and expansion.
The inability of the Company to raise additional capital would have material
adverse effect on the Company's business, prospects, financial condition and
results of operations and may prevent the Company from carrying out its business
plan. The Company is devoting management time and effort in its cooperation with
the SEC investigation and its vigorous defense of the lawsuits to which it is a
party. Diversion of management time and effort from the Company's operations and
the implementation of the Company's business plan may adversely and
significantly affect the Company and its business. The continued pendency of
litigation may make it difficult for the Company to raise additional capital to
continue its development and expansion and to attract and retain talented
executives.
Debentures, Warrants and Options; Potential Dilution and Adverse Impact on
Additional Financing.
As of July 31, 1998, the Company had outstanding options and warrants to
purchase an aggregate of 2,641,850 shares of Common Stock. The Company is also
obligated to issue a currently indeterminate number of shares of Common Stock
upon conversion of the Debentures. The exact number of shares of Common Stock
issuable pursuant to such conversion cannot be estimated with certainty because,
generally, such issuances of Common Stock will vary inversely with the market
price of the Common Stock at the time of such conversion. The Debentures are
also subject to various adjustments to prevent dilution resulting from stock
splits, stock dividends or similar transactions. Further, the Company may, at
its election, choose to issue additional shares of Common Stock in lieu of cash
payments of accrued interest due to the holders of the Debentures. If all of the
Debentures had been converted and warrants issued pursuant thereto had been
converted on July 31, 1998, the Company would have been obligated to issue
543,750 shares of Common Stock in respect thereto exclusive of shares issuable
upon exercise of warrants by the Placement Agent, its affiliates and one
unaffiliated individual.
Each holder of the Debentures has agreed contractually not to convert
the Debentures to the extent that such conversion would result in such holder
beneficially owning more than 9.99% of the then outstanding Common Stock unless
at such time the Company shall be in default under any provision of the
Debentures or under the Securities Purchase Agreement, dated June 26, 1998,
between the Company and the Investor, or any of the agreements contemplated
therein.
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To the extent that such options and warrants are exercised, shares of
Common Stock are issued in lieu of payment of accrued interest or the Debentures
converted (and the warrants issuable upon such conversion are exercised),
substantial dilution of the interests of the Company's shareholders is likely to
result and the market price of the Common Stock may be materially adversely
affected. Such dilution will be greater if the future market price of the Common
Stock decreases. For the life of the warrants, options and Debentures, the
holders will have the opportunity to profit from a rise in the price of the
Common Stock. The existence of the warrants, options and Debentures is likely to
affect materially and adversely the terms on which the Company can obtain
additional financing and the holders of the warrants, options and Debentures can
be expected to exercise them at a time when the Company would otherwise, in all
likelihood, be able to obtain additional capital by an offering of its unissued
capital stock on terms more favorable to the Company than those provided by the
warrants, options and Debentures.
Dependence on Key Personnel; Need for Additional Personnel
The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel, particularly John H. Markley, its President and Chief Executive
Officer, Mark S. Winkler, its Chief Information and Technology Officer, Douglas
A. Hay, an Executive Vice President, and Howard S. Schwartz, an Executive Vice
President. The Company's performance also depends on the Company's ability to
retain and motivate its other officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. The Company has entered into written
employment agreements with Mr. Markley for three years terminating on May 31,
2001, and with Mr. Winkler for one year ending May 20, 1998 which subsequently
renewed for one year pursuant to an automatic renewal provision therein. Under
his employment agreement, Mr. Winkler may only be terminated for "cause."
Additionally, a $1,000,000 "key man" life insurance policy on the life of Mr.
Markley is being issued to the Company. The Company entered into a two-year
employment agreement with Douglas Hay, its Executive Vice President, as of June
1, 1998. The agreement automatically renews for one year terms unless terminated
by either party. The Company entered into a three-year employment agreement with
Howard Schwartz, its Executive Vice president, as of August 1, 1998. The
agreement automatically renews for one year terms unless terminated by either
party. The Company's future success depends on its ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to successfully attract, assimilate and retain sufficiently
qualified personnel. In particular, the Company may encounter difficulties in
attracting and retaining a sufficient number of software developers for its Web
site and transaction-processing systems, and there can be no assurance that the
Company will be able to retain and attract such developers. The investigation by
the SEC, the pending class action litigation, and the attendant adverse
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publicity may also make it difficult for the Company to attract such developers
and other qualified personnel to the Company. See "Legal Proceedings." The
failure to attract and retain the necessary technical, managerial, editorial,
merchandising, marketing and customer service personnel could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
Online Commerce Security Risks
A significant barrier to online commerce and communications is the need
for secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information, such as credit card numbers. There can
be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments will not result in a
compromise or breach of the algorithms used by the Company to protect customer
transaction data. A party who is able to circumvent the Company's security
measures could misappropriate confidential information or cause interruptions in
the Company's operations. The Company may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. If any such compromise of the
Company's security were to occur, it could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Concerns over the security of transactions conducted on the Internet and
other online services as well as users' desires for privacy may also inhibit the
growth of the Internet and other online services generally, and the Web in
particular, especially as a means of conducting commercial transactions. The
activities of the Company and third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers and other
confidential information. Any such security breaches could damage the Company's
reputation and expose the Company to a risk of loss, litigation and/or possible
liability. There can be no assurance that the Company's security measures will
prevent security breaches or that failure to prevent such security breaches will
not have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Merchants on the Internet are subject to the risk of credit card fraud
and other types of theft and fraud perpetrated by hackers and online thieves.
Credit card companies may hold merchants fully responsible for any fraudulent
purchases made when the signature cannot be verified. Although credit card
companies and others are in the process of developing anti-theft and anti-fraud
protections, and while the Company itself is continually monitoring this problem
and developing internal controls, at the present time the risk from such
activities could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Risks of International Expansion
The Company is currently contemplating expanding its presence in Europe
and other foreign markets. To date, the Company has limited experience in
sourcing, marketing and distributing products on an international basis and in
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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
online commerce or receive a substantial portion of their revenues from online
commerce, including America Online, Microsoft Network, Prodigy, and Compuserve;
(iii) mail order catalog operators such as Spiegel, Lands End, and Sharper
Image; (iv) retail and warehouse/discount store operators such as Wal-Mart, Home
Depot, Target and Price/Costco; and (v) other international retail or catalog
companies which may enter the online commerce industry. Both Wal-Mart and Home
Depot have announced their intention to devote substantial resources to online
commerce at discount prices, which, if successful, could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. However, the Company believes that retail and discount/warehouse
operators will be somewhat restricted in their ability to lower prices by the
need to protect their own pricing strategy to avoid cannibalizing their own
store margins.
The Company believes that the principal competitive factors in its
market are price, speed of fulfillment, name recognition, wide selection,
personalized services, ease of use, 24-hour accessibility, customer service,
convenience, reliability, quality of search engine tools, and quality of
editorial and other site content. Many of the Company's current and potential
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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, has no warehouse employees or
facilities, and relies on primarily on rapid fulfillment from its vendors. As of
July 31, 1998, the Company had approximately $46,000 of inventory consisting
primarily of housewares and kitchen products which is being held at the vendor's
distribution facility. While the Company's philosophy, in general, is not to
maintain inventory, it has deemed it advisable, in certain instances, to
purchase limited quantities of merchandise to take advantage of opportunistic
purchasing terms or which are in short supply or difficult to obtain. The
Company has no long term contracts or arrangements with any of its vendors or
shippers that guarantee the availability of merchandise, the continuation of
particular payment terms, the extension of credit limits or shipping schedules.
There can be no assurance that the Company's current vendors will continue to
sell merchandise to, or that shippers will be able to provide delivery service
for, the Company on current terms or that the Company will be able to establish
new, or extend current, vendor and shipper relationships to ensure acquisition
and delivery of merchandise in a timely and efficient manner and on acceptable
commercial terms. If the Company were unable to develop and maintain
relationships with vendors and shippers that would allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, or in the event of
labor disputes or natural catastrophes, its business, prospects, financial
condition and results of operations would be materially adversely affected.
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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 the Company will
be able to obtain the quantity of brand or quality of items that management
believes are optimum. The unavailability of certain product lines could
adversely impact the Company's operating results. Given its lack of operating
history and the uncertainty of the Company's ability to continue as a going
concern, certain vendors of products sold by the Company may not be prepared to
advance normal levels of credit to the Company. An unwillingness to extend
credit may increase the amounts of capital required to finance the Company's
operations and reduce returns, if any, on invested capital. The interruption of
the trading of the Company's stock on the over-the-counter bulletin board during
March and April, 1998 made vendors reluctant to extend credit to the Company. In
addition, the investigation by the SEC and the continuation of the attendant
adverse publicity may continue to make vendors reluctant to extend credit to the
Company.
Risks Associated with Entry into New Business Areas
The Company may choose to expand its operations by developing new Web
sites, promoting new or complementary products or sales formats, expanding the
breadth and depth of products and services offered or expanding its market
presence through relationships with third parties. Although it has no present
understandings, commitments or agreements with respect to any material
acquisitions or investments, the Company may pursue the acquisition of new or
complementary businesses, products or technologies. There can be no assurance
that the Company would be able to expand its efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site launched by the
Company that is not favorably received by consumer or trade customers could
damage the Company's reputation or the Shopping.com brand name. Expansion of the
Company's operations in this manner would also require significant additional
expenses and development, operations and editorial resources and would strain
the Company's management, financial and operational resources. The lack of
market acceptance of such efforts or the Company's inability to generate
satisfactory revenues from such expanded services or products could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Limited Protection of Intellectual Property and Proprietary Rights
The Company regards its Shopping.com name and related technology as
proprietary and relies primarily on a combination of copyright, trademark, trade
secret and confidential information laws as well as employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
There can be no assurance that these protections will be adequate to protect
against technologies that are substantially equivalent or superior to the
Company's technologies. The Company does not currently hold any patents or have
any patent applications pending for itself or its products and has not obtained
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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
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.
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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 Associates with Domain Names
The Company currently holds various Web domain names relating to its
brand, including the "Shopping.com" domain name. The acquisition and maintenance
of domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the ".com",
".net", and ".org" generic top-level domains. The regulation of domain names in
the United States and in foreign countries is subject to change. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. The
Company, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of its
trademarks and other proprietary rights. Any such inability could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Risks of Business Combinations and Strategic Alliances
The Company may choose to expand its operations or market presence by
entering into business combinations, investments, joint ventures or other
strategic alliances with third parties. Any such transactions would be
accompanied by the risks commonly encountered in such transactions. These
include, among others, the difficulty of assimilating operations, technology and
personnel of the combined companies, the potential disruption of the Company's
ongoing business, the inability to retain key technical and managerial
personnel, the inability of management to maximize the financial and strategic
position of the Company through the successful integration of acquired
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businesses, additional expenses associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls and policies
and the impairment of relationships with existing employees and customers. There
can be no assurance that the Company would be successful in overcoming these
risks or any other problems encountered in connection with such business
combinations, investments, joint ventures or other strategic alliances, or that
such transactions will not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Possible Volatility of Stock Price
The trading price of the Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet, online service or retail
companies, announcements by the Company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, additions or departures of
key personnel, sales of Common Stock and other events or factors, many of which
are beyond the Company's control. In addition, the stock market in general, and
the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. There can
be no assurance that these trading prices and price earnings ratios will be
sustained. These broad market and industry factors may materially and adversely
affect the market price of the Common Stock, regardless of the Company's
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such company. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Shares Eligible for Future Sale
The Company has filed a registration statement on Form S-1 with the SEC.
Sales of substantial amounts of the Company's Common Stock in the public market
after the registration statement is declared effective could adversely affect
prevailing market prices for the Common Stock and, as a consequence, the ability
of the Company to raise the additional financing needed by the Company or the
ability to raise such additional financing on terms acceptable to the Company.
See "The Need for additional Capital."
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 8, 1997, Brian Leneck, a former officer of the Company,
resigned. By letter dated July 10, 1997, Robert McNulty tendered payment to
Leneck to buy back 140,000 shares of Common Stock of the Company pursuant to a
shareholder agreement. Leneck rejected the tender, claiming that the amount was
not the fair market value of the shares. On March 17, 1998, Leneck filed a
lawsuit in Orange County Superior Court of California against the Company,
Robert McNulty and three members of the Board of Directors at the time, Bill
Gross, Edward Bradley and Paul Hill. Leneck's lawsuit seeks damages for breach
of contract, conversion, and breach of fiduciary duty with respect to 70,000
shares. The Company believes that it has meritorious defenses, as well as
affirmative claims, against Leneck and intends to vigorously protect its rights
in this matter. On March 27, 1998, the Company filed a lawsuit in Orange County
Superior Court against Leneck asserting, inter alia, breach of contract, breach
of implied covenant of good faith and fair dealing, fraud and deceit,
declaratory relief and specific performance.
In March of 1998, the Company became aware that the Securities and
Exchange Commission (the "SEC") had initiated a private investigation to
determine whether the Company, Waldron & Co., Inc. ("Waldron"), the principal
market maker in the Company's stock, or any of their officers, directors,
employees, affiliates or others had engaged in activities in connection with
transactions in the Company's stock in violation of the federal securities laws.
The SEC suspended trading in the Company's stock from 9:30 a.m. EST, March 24,
1998 through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the
Securities Exchange Act of 1934. On April 30, 1998, the National Association of
Securities Dealers ("NASD") permitted the Company's Common Stock to resume
trading on the electronic bulletin boards beginning on April 30, 1998. Because
the SEC has not alleged any violations, it is difficult to predict the outcome
of their investigation. The Company continues, however, to fully cooperate with
the SEC inquiry. Nevertheless, the investigation by the SEC, 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 carrying out its business plan.
On April 16, 1998, Michael A. Martucci on behalf of all persons who
purchased shares of the Company's stock between November 25, 1997 and March 26,
1998, filed suit in the California Superior Court for the County of Orange
alleging violations of the California securities laws by the Company, Robert
McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those
firm's executives. The complaint charges that the defendants "participated in a
scheme and wrongful course of business to manipulate the price of [the
Company's] stock, which included: (i) defendant Waldron's refusal to execute
sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal
above-market buy-ins to intimidate and dissuade potential short sellers from
selling [Company] stock short; (iv) the sale of [Company] shares to
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discretionary accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about [the Company's] operating
performance and its future prospects." The complaint further alleges that the
Company "secretly arranged to sell $250,000 of product to Waldron as part of
defendants' effort to have [the Company] post revenue growth prior to the
[Company's] planned [initial public offering]," that such sales constituted
almost 25% of the Company's revenues between its inception and March 26, 1998
and that the Company did not disclose such sales or their significance in the
Prospectus used in the Company's initial public offering. The plaintiff seeks
compensatory damages in an unspecified amount, attorneys' fees and costs,
injunctive relief, disgorgement or restitution of the proceeds of the Company's
IPO and the defendants' profits from trading in the Company' s stock, and the
imposition of a constructive trust over the Company's revenues and profits.
On May 6, 1998 Steven T. Moore on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998 filed
suit in United States District Court for the Central District of California
alleging violations of the federal securities laws by the Company, Robert
McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those
firm's executives. The complaint charges that the defendants "participated in a
scheme and wrongful course of business to manipulate the price of [the
Company's] stock, which included: (i) defendant Waldron's refusal to execute
sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal
above-market buy-ins to intimidate and dissuade potential short sellers from
selling [Company] stock short; (iv) the sale of [Company] shares to
discretionary accounts without regard to suitability; and (v) the dissemination
of materially false and misleading statements about [the Company's] operating
performance and its future prospects." The complaint further alleges that the
Company "secretly arranged to sell $250,000 of product to Waldron as part of
defendants' effort to have [the Company] post revenue growth prior to the
[Company's] planned [initial public offering]," that such sales constituted
almost 25% of the Company's revenues between its inception and March 26, 1998
and that the Company did not disclose such sales or their significance in the
Prospectus used in the Company's initial public offering. The plaintiff seeks
compensatory damages in an unspecified amount, attorneys' fees and costs,
injunctive relief, disgorgement or restitution of the proceeds of the Company's
IPO and the defendants' profits from trading in the Company' s stock, and the
imposition of a constructive trust over the Company's revenues and profits.
On April 28, 1998, Abraham Garfinkel on behalf of all persons who
purchased shares of the Company's stock between November 25, 1997 and March 26,
1998, filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that
defendants acted in concert with each other to manipulate the price of the
Company's stock by, INTER ALIA, "work[ing] closely with defendant McNulty on a
weekly basis whereby defendant McNulty would pass the supposedly confidential
information of those who had 'hit' or contacted Shopping's website." The
complaint alleges that the defendants also manipulated the market by engaging in
conduct similar to that alleged in the Martucci and Moore actions. The complaint
also alleges that the Company's prospectus was misleading by the failure to
disclose sales to Waldron as discussed above. The plaintiffs seek damages
similar to that sought by Martucci and Moore.
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On July 1, 1998, Mr. Garfinkel filed a companion state court complaint
in the Orange County Superior Court based on virtually the same operative facts
as the federal court claim. The state court action alleges claims for negligent
misrepresentation, common law fraud and deceit as well as violation of sections
25400, 25402 and 25500 of the California Corporations Code.
On May 18, 1998, Kate McCarthy, on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that
defendants acted in concert with each other to manipulate the price of the
Company's stock by, INTER ALIA, "work[ing] closely with defendant McNulty on a
weekly basis whereby defendant McNulty would pass the supposedly confidential
information of those who had 'hit' or contacted Shopping's website." The
complaint alleges that the defendants also manipulated the market by engaging in
conduct similar to that alleged in the Martucci and Moore actions. The complaint
also alleges that the Company's prospectus was misleading by the failure to
disclose sales to Waldron as discussed above. The plaintiffs seek damages
similar to that sought by Martucci and Moore.
The Company denies that it engaged in any of the acts alleged in any of
the above complaints and intends to defend against these actions vigorously.
Nonetheless, and despite the Company's insurance coverage for such actions,
these class action suits may be very harmful to the Company. Diversion of
management time and effort from the Company's operations and the implementation
of the Company's business plan at this crucial time in the Company's development
may adversely and significantly affect the Company and its business. The
continued pendency of this litigation may make it difficult for the Company to
raise additional capital to continue its development and expansion and to
attract and retain talented executives. The inability of the Company to raise
additional capital would have material adverse effect on the Company's business,
prospects, financial condition and results of operations and may prevent the
Company from carrying out its business plan.
Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois &
Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice
of Client's Right to Arbitration" in connection with legal services performed on
behalf of the Company. The law firm claims legal fees and costs in the amount of
$328,818.97 are due. The Company disputes the amount of fees owed and is in the
process of exploring whether the matter can be informally resolved. However, the
Company has accrued the claimed amount as of January 31, 1998. Though settlement
negotiations have occurred, it is more probable than not that the Company will
proceed with its election to have the matter submitted to arbitration before the
Los Angeles County Bar Association.
By written contracts dated December 12, 1997, the Company retained
SoftAware, Inc. to provide facilities and services relative to the maintenance,
location and supply of T1 lines to the Company's servers. Subsequent to the
execution of the contracts, SoftAware, Inc. experienced a prolonged electrical
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outage which resulted in the disruption of Internet access and communications.
Based upon this and other factors, the Company determined that SoftAware, Inc.
was incapable of performing under the agreements and declined to proceed. By
letter dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon
the Company for $120,000.00 which purportedly reflected the compensatory damages
SoftAware suffered as a direct and proximate result of the Company's refusal to
proceed with performance under the contract. The Company rejected this demand
and offered to reimburse SoftAware, Inc. for reasonable costs incurred in
reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has yet
to respond to this offer.
On September 12, 1998 the Company was served with a summons and
complaint by MTS, Incorporated filed in Sacramento County Superior Court of
California for damages arising out of the Company's as well as two other
merchants' sale of the video "Titanic" at below cost thereby purportedly
constituting violation of section 17043 and 17044 of California's Business and
Professions Code as well as the Unfair Business Practices Act (Bus. & Prof. Code
section 17200 ET. SEQ.). The complaint alleges damages in excess of $25,000.00,
that sum trebled should a statutory violation be established, and attorneys'
fees and costs. The Company has not had an opportunity to investigate the
allegations of the complaint. Accordingly, a reasonable assessment of the
Company's potential exposure cannot be made at this time. The action will,
however, require the engagement of defense counsel and it is estimated that
substantial attorney fees may be incurred should litigation proceed to trial.
The Company is involved in two other labor related disputes. Although it
is not possible to predict the outcome of these disputes, or any future claims
against the Company related hereto, the Company believes that such disputes will
not, either individually or in the aggregate, have a material adverse effect on
its financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
The following are all securities sold by Registrant within the past
three (3) years without registering the securities under the Securities Act1/:
DATE TITLE AMOUNT
(1) (a) March 1997-June 1997 Common Stock 1,282,500 Shares
(b) There were no underwriters used in connection with this offering.
1,150,000 shares of Common Stock were offered and sold to Robert J.
McNulty, CEO of the Registrant. Subsequently, Mr. McNulty gifted an
aggregate of 325,000 of such shares to various employees of the Company
for no consideration. In addition, the Company offered and sold shares
of Common Stock to idealab!, a company controlled by Bill Gross, a
former Director of Registrant (100,000 shares); Alvin S. Morrow, (2,500
shares); and 30,000 shares to an independent consultant who provided
the Registrant's web site address; all of whom were accredited
investors and residents of the State of California.
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(c) The securities were sold for two cents ($.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.
- --------
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
offering. The warrants to purchase 122,000 shares of the Company's
Common Stock issued to Waldron & Co., Inc. as the Underwriters'
Representative are not included because such warrants were registered
in connection with the Company's initial public offering. As of July
31, 1998, the Company had issued 1,188,000 options, largely to
employees, officers and directors. On September 15, 1998, the Company
issued a Promissory Note in the principal amount of $500,000 and
warrants to purchase common stock exercisable at $2.25 per share. See
"Other Information."
DATE TITLE AMOUNT
(2)(a) March 1997-April 1997 Series A Preferred Stock 750,000 Shares
Warrants for 375,000 Warrants
Common Stock
(b) There were no underwriters used in connection with this offering. The
securities were offered and sold only to two accredited investors,
Cyber Depot, Inc., a corporation controlled by Robert J. McNulty, then
President and CEO of the issuer, and idealab! a corporation controlled
by Bill Gross, a former Director of Registrant. One Warrant was issued
for each two shares.
(c) The securities were sold for forty cents ($.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.
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DATE TITLE AMOUNT
(3)(a) April 1997 Series B Preferred Stock 536,500 Shares
-September 1997 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.
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. In May
1998, 16,650 Warrants were exercised in a "cashless" exercise and
13,295 shares of the Company's Common Stock were issued.
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.
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(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.
(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.
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DATE TITLE AMOUNT
(8)(a) April 1998 Warrants for 2,936
Common Stock
(b) There were no underwriters in connection with this offering. The
warrants were issued to companies providing equipment leasing
facilities to the Company.
(c) The consideration was the provision of computer equipment leasing.
(d) The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated under the Act.
(e) 1,079 shares are exercisable at $22.25 until February 2, 2000. 1,857
shares are exercisable at $14.75 until December 18, 1999.
DATE TITLE AMOUNT
(9)(a) May 1998 Warrants for Common Stock 142,500 Shares
Promissory Notes $1,225,000
(b) Waldron & Co., Inc. acted as placement agent in connection with this
private placement and was paid 7% of the total amount raised plus an
expense allowance of 3%. In addition, Waldron was issues warrants to
purchase 20,000 shares of Common Stock exercisable at $14.00 per share
(c) The shares were offered pursuant to Subscription Agreements, Promissory
Notes and Warrant Agreements between the Company and individual
investors, each dated May 15, 1998. Pursuant to the Subscription
Agreements, each investor purchased units consisting of a promissory
Note in the principal amount of $25,000 bearing interest at an annual
rate of 10% interest and principal payable November 15, 1998 and
warrants to purchase 2,500 shares of the Company's Common Stock at an
exercise price of $14.00 per share. The units were sold to Ray Fisk
(two units), Mike Weikamp (four units), Jon Aubry (twenty units),
William Schweitzer (two units), Zahra Khiaban (three units), Carlos
Beharie (sixteen units), and Tony Nikolich (two units). A total
consideration of $1,225,000 was paid in this offering.
(d) The Company relied on Section 4(2) and Regulation D Rule 505
promulgated by the Securities and Exchange Commission as the exemption
from registration. The investors were all accredited investors.
DATE TITLE AMOUNT
(10)(a) June and July 1998 8% Convertible $2,500,000
Debentures Due
in 2 years
Warrants for 1 share for every
Common Stock 2 shares issued upon
conversion of the
Debenture
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(b) Trautman, Kramer & Company, Incorporated and Waldron & Co., Inc. acted
as placement agents in connection with this private placement,
receiving 9% and 1%, respectively, of the net proceeds. The Debentures
in the amount of $250,000 were sold to each of ten Investor listed in
"selling stockholders." Subject to certain restrictions on the ability
of the holders of the Debentures to convert, the Debentures are
convertible into shares of the Company's Common Stock at a conversion
price for each share of Common Stock equal to the lower of (i) the
lowest market price for any three trading days selected by the
Debenture holder from the thirty trading days prior to the conversion,
or (ii) $16.00.
(c) The total consideration was $2,500,000.
(d) The issuer relied on Section 4(2) and Regulation D Rule 506 promulgated
by the securities and Exchange Commission as the exemption from
registration. Each investor was an accredited investor.
DATE TITLE AMOUNT
(11)(a) June 1998 Warrants for 300,000 Shares
Common Stock
(b) There were no underwriters used in connection with this offering. The
warrants were issued to Ladenberg Thalmann & Co., Inc. pursuant to the
Company's retainer of Ladenberg as its investment banker and financial
advisor. The warrants are exercisable after December 15, 1998 until
June 15, 2003 at $21.92 per share.
(c) The warrants were issued to Ladenberg Thalmann & Co., Inc. pursuant to
the Company's retainer of Ladenberg as its investment banker and
financial advisor.
(d) The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated under the Act.
(e) The warrants are exercisable after December 15, 1998 until June 15,
2003 at $21.92 per share.
DATE TITLE AMOUNT
(12)(a) June 1998 Warrants for 33,000 Shares
Common Stock
(b) There were no underwriters in connection with this offering. The
placement agent for the private placement of the 8% Convertible
Debentures and its affiliates were issued the warrants.
(c) The warrants were issued as consideration for the placement agent's
services.
(d) The Company relied on Section 4(2) of the Securities Act of 1993, as
amended, and Regulation D promulgated under the Act.
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(e) The warrants are exercisable at $24.00 per share until June 30, 2003.
DATE TITLE AMOUNT
(13)(a) June 1998 Warrants for
Common Stock 10,000 Shares
Promissory Notes $100,000
(b) Waldron & Co., Inc. acted as placement agent in connection with this
private placement and was paid 7% of the total amount raised plus an
expense allowance of 3%.
(c) The shares were offered pursuant to a Subscription Agreement,
Promissory Note and Warrant Agreement between the Company and Daniel
Kern, each dated June 8,1998. Pursuant to the Subscription Agreements,
the investor purchased units consisting of a Promissory Note in the
principal amount of $100,000 bearing interest at an annual rate of 10%,
interest and principal payable six months from the date of the
Promissory Note and warrants to purchase 10,000 shares of the Company's
Common Stock at an exercise price of $14.00 per share.
(d) The Company relied on Section 4(2) and Regulation D Rule 505
promulgated by the Securities and Exchange Commission as the exemption
from registration. The investors were all accredited investors.
DATE TITLE AMOUNT
(14)(a) August 1998 Common Stock 7,500 Shares
Warrants for 20,000 Shares
Common Stock
(b) There were no underwriters in connection with this offering. The
placement agent for the private placement of the 8% Convertible
Debentures and its affiliates were issued the warrants.
(c) The Common Stock and warrants were issued as consideration for the
placement agent's services.
(d) The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated under the Act.
(e) The warrants are exercisable at $16.00 per share until July 31, 2003.
DATE TITLE AMOUNT
(15)(a) August 1998 Warrants for 60,000 shares
Common Stock
Convertible
Promissory Note $500,000
Page 48 of 114
<PAGE>
(b) Waldron & Co., Inc. acted as placement agent in connection with this
private placement and received 10% of the total amount raised, $50,000,
and warrants to purchase 10,000 shares of Common Stock. The securities
were sold to an accredited investor.
(c) The shares were offered pursuant to a Subscription Agreement and
Convertible Promissory Note dated August 25, 1998 and Warrant Agreement
dated as of August 20, 1998. Pursuant to the Subscription Agreement,
the investor purchased 20 units consisting of a promissory note in the
principal amount of $25,000 and warrants to purchase 2,500 shares of
the Company's Common Stock at an exercise price of $10.00 per share.
The Convertible Promissory Note bears interest at an annual rate of 8%
and the principal amount, plus any accrued interest, is payable six
months from the date of the note. The promissory note may be converted
at the option of the investor into a number of shares of Common Stock
equal to the quotient of the principal amount divided by the Conversion
Price. The initial Conversion Price is $10.00 per share.
(d) The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, as the exemption from registration.
(e) The warrants issued to Waldron & Co., Inc. are exercisable for $10.00
per share and have all the rights and privileges received by the
investor. The all warrants issued in the offering expire August 20,
2001.
DATE TITLE AMOUNT
(16)(a) August 1998 Common Stock 66,667 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 August 12, 1998.
(c) PRN agreed to purchase the shares in consideration of radio advertising
valued at $1,000,000.
(d) The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated under the Securities Act of 1933,
as amended.
(e) In the event that the average closing price of the Company's Common
Stock for the ten days prior to August 12, 1999 is less than $15.00 per
share, the Company will issue to PRN up to 133,333 additional shares.
Item 3. Defaults Upon Senior Securities
None.
Page 49 of 114
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of stockholders during
the Company's Annual Meeting of Stockholders held July 15, 1998:
Description of Matter
1.
BROKER
VOTES CAST NON-VOTES
------------------------------------- ---------
For Against Withheld
- --------------------------------------------------------------------------------
Amendment of bylaws 2,230,826 5,735 2,500 747,234
to provide for a range
in the size of the
Board of Directors
from five to nine
members with the
exact number set at
five members.
2.
ELECTION OF DIRECTORS: VOTES CAST FOR WITHHELD
- ---------------------- -------------- --------
Frank Denny 2,886,764 2,685
John H. Markley 2,886,764 2,685
Douglas Hay 2,886,764 2,685
Paul J. Hill 2,886,764 2,685
Edward F. Bradley 2,886,764 2,685
3.
BROKER
VOTES CAST NON-VOTES
------------------------------------- ---------
For Against Withheld
- --------------------------------------------------------------------------------
Approval and 2,228,956 5,685 3,420 748,234
adoption of the
Stock Option Plan of
1997.
Page 50 of 114
<PAGE>
4.
BROKER
VOTES CAST NON-VOTES
------------------------------------- ---------
For Against Withheld
- --------------------------------------------------------------------------------
Amendment of 2,225,426 11,135 2,500 747,234
Articles of
Incorporation to
authorize preferred
stock as determined
by the Board of
Directors.
5.
BROKER
VOTES CAST NON-VOTES
------------------------------------- ---------
For Against Withheld
- --------------------------------------------------------------------------------
Ratification of 2,899,662 50 0 N/A
appointment of
independent public
accountant.
Item 5. Other Information
On September 15, 1998, the Company issued a Promissory Note and Warrant
For The Purchase of Shares Of Common Stock (the "Warrant") to USFI, Inc., a
Delaware corporation (the "Holder"), in connection with the loan of $500,000.
The Promissory Note in the principal amount of $500,000 bears interest at an
annual rate of 10% and is payable upon the earlier of October 14, 1998 or the
occurrence of certain events. The Warrant provides for the purchase of 30,000
shares of the Company's Common Stock at an exercise price of $2.25 per share.
The Warrant provides for anti-dilution protections and "cashless" exercise. In
addition, the Warrant grants the Holder demand and "piggy-back" registration
rights.
Item 6. Exhibits an, Reports on Form 8-K
(a) Exhibits:
4.1 Subscription Agreement dated August 25, 1998 between the
Company and Carlos and Joan Beharie.
4.2 Convertible Promissory Note dated August 25, 1998 made by
the Company payable to Carlos Beharie.
Page 51 of 114
<PAGE>
4.3 Warrant Agreement dated August 25, 1998 between the
Company and Carlos and Joan Beharie.
4.4 Subscription Agreement dated June 8, 1998 between the Company
and Daniel Kern.
4.5 Unsecured Promissory Note dated June 8, 1998 made by the
Company payable to Daniel Kern.
4.6 Warrant Agreement dated June 8, 1998 between the Company and
Daniel Kern.
4.7 Subscription Agreement dated August 12, 1998 between the
Company and Premiere Radio Networks, Inc.
9.1 Irrevocable Proxy dated June 1, 1998 from Cyber Depot,
Inc. to Frank W. Denny incorporated herein by reference
from Exhibit 7.1 to Registrant's Current Report on Form
8-K dated June 1, 1998. (Filed with the SEC on June 9,
1998, File No. 000-29518.)
9.2 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Douglas Hay incorporated herein by reference
from Exhibit 7.2 to Registrant's Current Report on Form
8-K dated June 1, 1998. (Filed with the SEC on June 9,
1998, File No. 000-29518.)
9.3 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Paul J. Hill incorporated herein by reference
from Exhibit 7.3 to Registrant's Current Report on Form
8-K dated June 1, 1998. (Filed with the SEC on June 9,
1998, File No. 000-29518.)
9.4 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Edward F. Bradley incorporated herein by
reference from Exhibit 7.4 to Registrant's Current Report
on Form 8-K dated June 1, 1998. (Filed with the SEC on
June 9, 1998, File No. 000-29518.)
9.5 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to John Markley incorporated herein by reference
from Exhibit 7.5 to Registrant's Current Report on Form
8-K dated June 1, 1998. (Filed with the SEC on June 9,
1998, File No. 000-29518.)
10.1 Employment Agreement between the Company and John H.
Markley dated June 1, 1998 incorporated herein by
reference from Exhibit 10.20 to Registrant's Current
Report on Form 8-K dated June 1, 1998. (Filed with the SEC
on June 9, 1998, File No. 000-29518.)
Page 52 of 114
<PAGE>
10.2 Termination and Buy-Out Agreement between the Company and
Robert J. McNulty dated June 1, 1998 incorporated herein
by reference from Exhibit 10.21 to Registrant's Current
Report on Form 8-K dated June 1, 1998. (Filed with the SEC
on June 9, 1998, File No. 000-29518.)
10.3 Consulting Agreement between the Company and Cyber Depot,
Inc. dated June 1, 1998 incorporated herein by reference
from Exhibit 10.22 to Registrant's Current Report on Form
8-K dated June 1, 1998. (Filed with the SEC on June 9,
1998, File No. 000-29518.)
10.4 Agreement between the Company and Stilden Co., Inc. dated
April 1, 1998 incorporated herein by reference from
Exhibit 10.4 to Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended April 30, 1998.
(Filed with the SEC on June 22, 1998, File No. 000-29518.)
10.5 Agreement between the Company and Howard S. Schwartz dated
August 1, 1998 incorporated herein by reference from
Exhibit 10.1 to Registration Statement on Form S-1. (Filed
with the SEC on August 18, 1998, File No. 333-62777.)
27.1 Financial Data Schedule 2/
(b) Reports on Form 8-K
On June 9, 1998, the Company filed with the SEC a current Report on Form
8-K dated June 1, 1998 to report the resignation of Robert J. McNulty from his
positions as President and Chief Executive Officer and as a member of the
Company's Board of Directors and the appointment of John Markley as President
and Chief Executive Officer and as a member of the Board of Directors.
- --------
2/ This exhibit is being filed electronically in the electronic format
specified by EDGAR.
Page 53 of 114
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHOPPING.COM
/s/ Frank W. Denny
September 21, 1998 ---------------------------
Frank W. Denny,
Chairman of the Board
/s/ John H. Markley
September 21, 1998 ---------------------------
John H. Markley,
Chief Executive Officer,
President and Director
/s/ Kristine E. Webster
---------------------------
September 21, 1998 Kristine E. Webster,
Senior Vice President,
Chief Financial Officer and
Secretary
/s/ Paul J. Hill
September 21, 1998 ---------------------------
Paul J. Hill,
Director
___________________________
September ___, 1998 Edward F. Bradley,
Director
/s/ Howard S. Schwartz
September 20, 1998 --------------------------
Howard S. Schwartz,
Executive Vice President
Page 54 of 114
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- --------------------------------------------------------------------------------
4.1 Subscription Agreement dated August 25, 1998 between the
Company and Carlos and Joan Beharie. 57
4.2 Convertible Promissory Note dated August 25, 1998 made by
the Company payable to Carlos Beharie. 61
4.3 Warrant Agreement dated August 25, 1998 between the Company
and Carlos and Joan Beharie. 69
4.4 Subscription Agreement dated June 8, 1998 between the
Company and Daniel Kern. 80
4.5 Unsecured Promissory Note dated June 8, 1998 made by the
Company payable to Daniel Kern. 85
4.6 Warrant Agreement dated June 8, 1998 between the
Company and Daniel Kern. 91
4.7 Subscription Agreement dated August 12, 1998 between the
Company and Premiere Radio Networks, Inc. 100
9.1 Irrevocable Proxy dated June 1, 1998 from Cyber Depot, Inc.
to Frank W. Denny incorporated herein by reference from
Exhibit 7.1 to Registrant's Current Report on Form 8-K dated
June 1, 1998. (Filed with the SEC on June 9, 1998, File No.
000-29518.)
9.2 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Douglas Hay incorporated herein by reference
from Exhibit 7.2 to Registrant's Current Report on Form 8-K
dated June 1, 1998. (Filed with the SEC on June 9, 1998,
File No. 000-29518.)
9.3 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Paul J. Hill incorporated herein by reference
from Exhibit 7.3 to Registrant's Current Report on Form 8-K
dated June 1, 1998. (Filed with the SEC on June 9, 1998,
File No. 000-29518.)
9.4 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to Edward F. Bradley incorporated herein by
reference from Exhibit 7.4 to Registrant's Current Report on
Form 8-K dated June 1, 1998. (Filed with the SEC on June
9, 1998, File No. 000-29518.)
Page 55 of 114
<PAGE>
9.5 Irrevocable Proxy dated June 1, 1998 from Robert J.
McNulty to John Markley incorporated herein by reference
from Exhibit 7.5 to Registrant's Current Report on Form 8-K
dated June 1, 1998. (Filed with the SEC on June 9, 1998,
File No. 000-29518.)
10.1 Employment Agreement between the Company and John H.
Markley dated June 1, 1998 incorporated herein by reference
from Exhibit 10.20 to Registrant's Current Report on Form 8-
K dated June 1, 1998. (Filed with the SEC on June 9, 1998,
File No. 000-29518.)
10.2 Termination and Buy-Out Agreement between the Company
and Robert J. McNulty dated June 1, 1998 incorporated
herein by reference from Exhibit 10.21 to Registrant's
Current Report on Form 8-K dated June 1, 1998. (Filed with
the SEC on June 9, 1998, File No. 000-29518.)
10.3 Consulting Agreement between the Company and Cyber
Depot, Inc. dated June 1, 1998 incorporated herein by
reference from Exhibit 10.22 to Registrant's Current Report
on Form 8-K dated June 1, 1998. (Filed with the SEC on
June 9, 1998, File No. 000-29518.)
10.4 Agreement between the Company and Stilden Co., Inc. dated
April 1, 1998 incorporated by reference from Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 1998. (Filed with the SEC
on June 22, 1998, File No. 000-29518.)
10.5 Agreement between the Company and Howard S. Schwartz
dated August 1, 1998 incorporated by reference from Exhibit
10.1 to Registration Statement on Form S-1. (Filed with SEC
on August 18, 1998, File No. 333-6277.)
27.1 Financial Data Schedule 1/ 114
- --------
1/ This exhibit is being filed electronically in the electronic format
specified by EDGAR.
Page 56 of 114
<PAGE>
EXHIBIT 4.1
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES REFERRED TO HEREIN.
SUBSCRIPTION AGREEMENT
Attn: John Markley
Shopping.com
2101 East Coast Highway
Garden level
Corona Del Mar, CA 92625
Re: Prospective Purchase of Notes and Warrants
Shopping.com, a California corporation
Gentlemen:
The undersigned, by signing the Signature Page attached hereto, hereby
irrevocably tenders this subscription and applies to purchase 20 units (the
"Units") of Shopping.com., a California corporation (the "Company"), at a
purchase price of $25,000 per Unit. Each Unit consists of a Promissory Note in
the principal amount of $25,000 and warrants to purchase 2,500 shares of the
Company's Common Stock, no par value (the "Common Stock"), at an exercise price
of $10.00 per share.
Enclosed, in cash or good funds (in the case of a check, the check
should be payable to the order of "Shopping.com") as tender of the purchase
price for the Units, is the aggregate amount of $500,000.00 ($25,000 minimum).
The undersigned hereby acknowledges receipt of a copy of the Company's
Annual Report on form 10-KSB for the period ending January 31, 1998 (the
"Report"), relating to and describing the terms and conditions of the offer and
sale of the Units.
The undersigned hereby represents and warrants to, and covenants with,
the Company as follows, recognizing that the Company will rely to a material
degree upon such representations, warranties and covenants, each of which shall
survive any acceptance of this subscription in whole or in part by the Company
and the issuance and sale of any Units to the undersigned:
1. All statements made in the Prospective Investor Questionnaire which
has been or is concurrently being furnished to the Company by the undersigned
continue to be and are true, accurate and complete as of the date hereof.
2. The undersigned has been informed and is aware that an investment in
the Units involves a degree of risk and speculation, and has carefully read and
considered the Report in its entirety.
3. The undersigned confirms that he has been advised that he should
rely on, and that he has consulted and relied upon, his own accounting, legal
and financial advisors with respect to this investment in the Units. The
undersigned and his professional advisor(s) (as defined in Section 260.102.12(g)
of the Rules of the California Corporations Commissioner), if any, have been
afforded an opportunity to meet with the officers and directors of the Company
and to ask and receive answers to any questions about this offering and the
proposed business and affairs of the Company, and to obtain any additional
-1-
Page 57 of 114
<PAGE>
information which the Company possesses or can acquire without unreasonable
effort or expense that is necessary to verify the accuracy of information
provided in the Report, and have therefore obtained, in the judgement of the
undersigned and/or his or her professional advisor(s), sufficient information to
evaluate the merits and risks of investment in the Units. The undersigned
acknowledges and agrees that he/she has had an opportunity to meet and speak
with officers or representatives and to ask questions and get answers with
respect to the Company and this offering.
4. The undersigned understands and acknowledges that no federal or
state agency has made any finding or determination as to the fairness or
suitability for investment in, nor any recommendation or endorsement of, the
Company or the Units.
5. On the basis of the review of the materials and information
described above, and relying solely thereon and upon the knowledge and
experience of the undersigned and/or his or her professional advisor(s), if any,
in business and financial matters, the undersigned has evaluated the merits and
risks of investment in the Units and has determined that he or she is both
willing and able to undertake the economic risk of this investment.
6. The Units are being acquired by the undersigned for the personal
account of the undersigned for investment and not with a view to, or for resale
in connection with, any distribution thereof or of any interest therein, and no
one else has any beneficial ownership or interest in the Units being acquired by
the undersigned, nor are they to be subject to any lien or pledge. The
undersigned has no present obligation, indebtedness or commitment pending, nor
is any circumstance in existence which will compel the undersigned to secure
funds by the sale, transfer or other distribution of any of the Units or any
interest therein or any Stock that may be distributed in respect thereof.
7. The undersigned understands and agrees that the Units cannot be
transferred or assigned that there is and will be no public market therefor,
and, accordingly, that it may not be possible for the undersigned readily, if at
all, to liquidate this investment in the Units in case of an emergency or
otherwise. The undersigned has the net worth, past income and estimated future
income set forth in the Prospective Investor Questionnaire, can afford to bear
the risks of an investment in the Units, including the risk of losing the entire
investment, for an indefinite period of time, and has adequate means of
providing for his or her current needs and personal contingencies and has no
need for liquidity in this investment.
8. The undersigned understands and acknowledges that the Units are
being offered and sold pursuant to one or more exemptions from the registration
and qualification requirements of the Securities Act of 1933 and the California
Corporate Securities Act of 1968, the availability of which depend upon the
truth and completeness of the information provided to the Company in the
Prospective Investor Questionnaire and the bona fide nature of the foregoing
representations and warranties. With such realization, the undersigned hereby
authorizes the Company to act as it may see fit in reliance on such information,
representations and warranties, including the placement of the following legend
on the stock certificate(s) issued to the undersigned in addition to any other
legends that may be imposed thereon which, in the reasonable opinion of
Company's counsel, may be required by applicable securities laws:
"THE UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSIONS UNDER THE SECURITIES ACT OF 1933 OR
-2-
Page 58 of 114
<PAGE>
WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE
SECURITIES LAW OF 1968, AS AMENDED. THE UNITS MAY NOT BE PLEDGED, SOLD
OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACTS COVERING THE UNITS OR AN OPINION OF
QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED."
9. The undersigned hereby indemnifies and holds harmless the Company,
and its respective officers, directors, shareholders, employees and agents, as
the case may be, from and against any and all damages suffered and liabilities
incurred by any of them (including costs of investigation and defense and
attorneys' fees) arising out of any inaccuracy in the agreements,
representations, covenants and warranties made by the undersigned herein.
10. If the undersigned is purchasing the Units subscribed for hereby in
a fiduciary capacity, the above representations and warranties shall be deemed
to have been made on behalf of the person or persons for whom the undersigned is
so purchasing.
11. The undersigned hereby acknowledges and agrees that the undersigned
is not entitled to cancel, terminate or revoke this subscription or any
agreements of the undersigned hereunder and that such subscription and
agreements shall survive the death or disability of the undersigned.
12. The undersigned understands and acknowledges that this subscription
may be accepted or rejected by the Company in its sole discretion, together with
a completed and executed Prospective Investor Questionnaire and all information
required by the provisions hereof and payment of the full amount of the
subscription price for the Units subscribed for. Any amounts tendered in excess
of the total payable as the purchase price for Units as to which this
subscription has been accepted will thereafter be delivered to the undersigned
as soon as is practicable, all as described in the Confidential Private
Placement Memorandu. The Company shall signify its rejection by returning to the
undersigned this Subscription Agreement and all funds (without interest or
deduction) submitted by the undersigned.
NEITHER THE COMPANY, NOR ANY OFFICER, DIRECTOR, SHAREHOLDER, EMPLOYEE
OR AGENT OF ANY OF THEM SHALL BE LIABLE TO ANY PERSON FOR THE REJECTION, IN
WHOLE OR IN PART, OF ANY OFFER TO SUBSCRIBE TO PURCHASE UNITS, NOTWITHSTANDING
THAT THE UNDERSIGNED MAY OTHERWISE BE QUALIFIED AS A PROSPECTIVE INVESTOR.
13. If, prior to the sale of any Units to the undersigned, there is a
material change in the undersigned's investment intention as expressed herein,
or if there occurs any change which would make either the representations or
warranties made by the undersigned herein or the information provided by the
undersigned in the Prospective Investor Questionnaire materially untrue or
misleading, the undersigned agrees to immediately so notify the Company, and any
prior acceptance of the subscription of the undersigned shall be voidable at the
option of the Company.
IN WITNESS WHEREOF, the undersigned executes and agrees to be bound by
this Subscription Agreement by executing the Signature Page attached hereto on
the date therein indicated.
**********************
-3-
Page 59 of 114
<PAGE>
SIGNATURE PAGE
(All information must be completed)
Date: August 20, 1998
/s/ Carlos Beharie $500,000 50,000 $500,000
- -------------------------- ------------ --------------- ---------
Signature of Purchaser Purchase Price # of Warrants Total
8/25/98
/s/ Joan Beharie Carlos and Joan Beharie
- ------------------------ -----------------------------
Signature of Joint Owner Name(s) of Purchaser (Print)
(if any)
If Joint Ownership, 583 Cherry Hill Road
--------------------
check one: Residence Address
X Joint Tenants, with Princeton, New Jersey 08540-7612
----- Right of Survivorship ---------------------------------------------
City State Zip
_____ Tenants in Common
_____ Community Property
###-##-####
----------------------------------------
Social Security No. or Taxpayer I.D. No.
ACCEPTED AND AGREED:
Shopping.com
By: /s/ John H. Marley
------------------------------------------
John H. Markley, Chief Executive Officer
Date: August 24, 1998
-4-
Page 60 of 114
<PAGE>
EXHIBIT 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE
THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION.
SHOPPING.COM
CONVERTIBLE PROMISSORY NOTE
$500,000.00
Corona Del Mar, California
August 25, 1998
1. Principal.
---------
FOR VALUE RECEIVED, the undersigned, SHOPPING.COM ("Maker"), promises to
pay to Dr. Carlos Beharie ("Payee"), or order, at 2101 East Coast Highway,
Corona Del Mar, CA 92625 or such other place as the holder of this Note shall
specify, in lawful money of the United States of America, the principal amount
of Five Hundred Thousand Dollars ($500,000.00), together with interest at the
rate of eight percent (8%) per annum, payable as hereinafter provided.
2. Payment of Interest.
-------------------
Except as otherwise specifically provided below, interest will
accrue at the rate of eight percent (8%) per annum, simple interest, on the
unpaid principal amount of this Note. The Company agrees to pay all interest
accrued on the principal hereof six months from the date of this Note. Any
accrued but unpaid interest shall be payable on the earliest of (i) maturity and
(ii) conversion of this Note into shares of Common Stock as provided in
paragraph 5 below if Payee does not elect to also convert the interest into
Common Stock. Unless prohibited by law, any accrued interest which is not paid
on the date when is due and payable shall bear interest at the same rate at
which interest is then accruing on the principal amount of this Note.
3. Payment of Principal of Note.
----------------------------
The Company agrees to pay the principal amount hereof, plus any
accrued and unpaid interest, to the holder of this Note six months from the date
-1-
Page 61 of 114
<PAGE>
of this Note. Any payment pursuant hereto shall first be applied to interest due
and owing at the date of such payment, and whatever remains after the amount of
such interest is deducted from such payment shall be applied to the principal
balance due hereunder, and the interest upon the portion of principal so
credited shall thereupon cease. Subject to the provisions of the following
paragraph, the Company shall have the right, without penalty, to prepay the
indebtedness represented hereby in part or in full at any time or times during
the term hereof. Any prepayment pursuant hereto shall first be applied to
interest due and owing at the date of such payment, and whatever remains after
the amount of such interest is deducted from such prepayment shall be applied to
the principal balance due hereunder, and the interest upon the portion of
principal so credited shall thereupon cease.
In the event the Company elects to prepay the principal of and
interest accrued on this Note, the Company shall notify the Payee in writing
fifteen (15) days in advance of its intention to repay any amount hereof,
stating the proposed payment date (the "Payment Date") and the amount to be
repaid. At any time prior to the Payment Date, the Lender may, but shall not be
obligated to, elect to convert all or any portion of the principal and interest
to be repaid on the Payment Date into shares of Common Stock at the Conversion
Price then in effect, by delivering to the Company, to the attention of the
President, written notice of its election to convert.
4. Registration Rights.
-------------------
The Company and Lender shall enter into that certain Registration
Rights Agreement of even date herewith pursuant to which Lender will be
entitled, upon conversion of this Note into Common Stock, to cause the Company
to register such shares of Common Stock pursuant to Section 5 of the Securities
Act of 1933, as amended, at the cost and expenses of the Company, in the event
that the Company is registering shares of Common Stock for sale, except in
connection with employee benefit plans or an acquisition transaction.
5. Conversion.
----------
(a) Conversion Procedure. In lieu of accepting any repayment of
the principal amount of, and accrued interest on, this Note, the Lender may
convert all or any portion of any principal or interest repayment into a number
of shares of the Company's Common Stock, no par value (the "Common Stock"),
determined by dividing the principal amount designated for conversion by the
"Conversion Price" (as defined below). Lender, in his sole discretion, may elect
to convert the principal and accrued interest into Common Stock (i) at any time,
(ii) upon notification by the Company that it intends to repay this Note or any
portion thereof or (iii) upon maturity of this Note. Lender shall notify the
-2-
Page 62 of 114
<PAGE>
Company of its intention to convert into Common Stock in writing delivered to
the Company at its principal executive offices, attention John Markley, Chief
Executive Officer.
(b) Deliveries by the Company. On the Payment Date, the Company will
pay to the Lender any principal amount proposed to be repaid on such date which
the Lender has not elected to convert into shares of Common Stock and all
interest accrued to date on the principal amount of this Note. As soon as
reasonably possible after a conversion has been effected, the Company will
deliver to the Lender:
(i) a certificate representing the number of shares of
Common Stock (excluding fractional shares) issuable by reason of the
conversion, which shares shall be validly issued, fully paid and
nonassessable; and
(ii) payment for any fractional shares of Common Stock that
would otherwise have been issued upon conversion of the principal amount
so converted.
(c) Conversion Price.
(i) The initial Conversion Price shall be three dollars and
thirty cents ($3.30) per share. In order to prevent dilution of the
conversion rights granted under this Note, the Conversion Price will be
subject to adjustment from time to time pursuant to this paragraph 5(c).
(ii) If any capital reorganization, reclassification, consoli-
dation or merger or any sale of substantially all of the Company's assets
(collectively, the "Corporate Transactions") is effected in such a way that
the holders of Common Stock become entitled to receive stock, securities or
assets with respect to or in exchange for Common Stock, then, as a
condition to such Corporate Transaction, lawful and adequate provision will
be made whereby the Lender will thereafter have the right to acquire and
receive in lieu of shares of Common Stock, such shares, securities or
assets as would have been issuable to the Lender if it had converted the
principal amount of, and accrued interest on, this Note immediately prior
to such Corporate Transaction.
6. Waiver.
------
Maker and all endorsers, guarantors and all persons liable, or to
become liable on this Note (each hereinafter referred to in this Section as the
"Applicable Party"), jointly and severally, waive presentment, protest and
demand, notice of protest, demand, dishonor and nonpayment of this Note, notice
of acceleration, notice of intent to accelerate, and any and all other notices
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<PAGE>
or matters of a like nature, and consent to any and all renewals and extensions
of the time of payment hereof. Each Applicable Party agrees that at any time and
from time to time, without notice, (i) the terms of payment herein, or (ii) the
terms of any guaranty of this Note, or (iii) the security described in any
documents at any time securing this Note, may be modified, increased, changed or
exchanged, in whole or in part, without in any way affecting the liability of
any Applicable Party.
7. Late Charge.
-----------
If any payment of interest and/or principal hereunder is not
received by Payee within ten (10) days after the due date thereof, Maker agrees
to pay Payee a late charge equal to five percent (5%) of the unpaid amount.
Maker acknowledges that it would be extremely difficult to fix Payee's actual
damages for the failure of Maker to timely pay any amount due under this Note.
Accordingly, such late charge shall be deemed to be Payee's damages for any such
late payment, provided that such late charge shall not limit Payee's right to
compel prompt performance by Maker or to exercise other remedies available to
Payee.
8. Default By Maker.
----------------
Any one or more of the following shall constitute an "Event of
Default" by Maker under the terms of this Note:
A. If Maker fails to pay any payment, whether at maturity or
otherwise, of principal and/or interest upon the due date thereof.
B. If Maker defaults in the performance or observance of any of
the covenants, conditions or agreements set forth in this Note.
C. If Maker institutes proceedings to be adjudicated a voluntary
bankrupt; consents to the filing of a bankruptcy proceeding against Maker; files
or consents to filing of a petition or answer or consent seeking reorganization
under the federal bankruptcy laws or any other similar applicable federal or
state law; consents to the appointment or a receiver of liquidator or trustee or
assignee in bankruptcy or insolvency of the Maker or a substantial part of
Maker's property; an assignment for the benefit of creditors is made by the
Maker; or Maker admits in writing of Maker's inability to pay Maker's debts
generally as they become due.
9. Remedies Upon Default.
---------------------
If an Event of Default occurs, at the option of Payee, and upon
written demand, the Payee may accelerate the due date of this Note and declare
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<PAGE>
the entire outstanding principal balance hereof, including all fees and costs
(if any), and accrued but unpaid interest, immediately due and payable in full.
Each of the options, rights and remedies provided herein or
available at law or in equity which may be exercised by Payee may be exercised
separately or concurrently with any one or more other options, rights or
remedies available to Payee. Failure to exercise any option, right or remedy
shall not constitute a waiver of the right of the Payee to exercise such option,
right or remedy in the event of or with respect to any prior, subsequent or
concurrent transaction or occurrence of the same or a different kind or
character.
10. Attorneys' Fees.
---------------
Maker agrees to pay all costs of collection or enforcement of this
Note when incurred, including, but not limited to, reasonable attorneys' fees.
If any suit or action is instituted to enforce this Note, Maker promises to pay,
in addition to the costs and disbursements allowed by law, such sum as the court
may adjudge as reasonable attorneys' fees in such suit or action. Maker shall
also pay all reasonable attorneys' fees and costs incurred by Payee in
connection with any modification, amendment or consent related to any
renegotiation or modification of this Note.
11. Severability.
------------
Every provision of this Note is intended to be severable. If any
term or provision hereof is declared by a court of competent jurisdiction to be
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
12. Governing Law.
-------------
This Note shall be governed by and construed in accordance with the
laws of the State of California.
13. Notices.
-------
All notices, statements or demands shall be in writing and shall be
served in person, by telegraph, by express mail, by certified mail or by private
overnight delivery. Service shall be deemed conclusively made (i) at the time of
service, if personally served, (ii) at the time (as confirmed in writing by the
telegraphic agency) of delivery thereof to the addressee, if served
telegraphically, (iii) twenty-four (24) hours (exclusive of weekends and
national holidays) after deposit in the United States mail, properly addressed
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<PAGE>
and postage prepaid, if served by express mail, (iv) five (5) calendar days
after deposit in the United States mail, properly addressed and postage prepaid,
return receipt requested, if served by certified mail, (v) twenty-four (24)
hours after delivery by the party giving the notice, statement or demand to the
private overnight deliverer, if served by private overnight delivery and (vi) at
the time of electronic transmission, if a copy of such notice is mailed within
twenty-four (24) hours after the transmission.
Any notice or demand to Maker shall be given to:
John Markley, CEO
Shopping.com
2101 E. Coast Hwy., Garden Level
Corona del Mar, CA 92625
Any notice or demand to Payee shall be given to:
Any party hereto may change its address for the purpose of receiving
notices, demands or other communications as herein provided by a written notice
given in the manner aforesaid to the other party or parties hereto.
14. Successors and Assigns.
----------------------
All the terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
15. Assignability.
-------------
Maker's obligation hereunder are nontransferable and nonassignable
without the prior written consent of Payee.
16. Amendment.
---------
Neither this Note nor any term or provision hereof may be modified,
amended or altered except by a written instrument approved by Payee and signed
by Maker.
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<PAGE>
17. Headings.
--------
Headings at the beginning of each numbered Paragraph of this Note
are intended solely for convenience and are not to be deemed or construed to be
a part of this Note.
18. Purpose of Loan.
----------------
The proceeds of this Note are to be used by Maker exclusively for
business purposes, and not for personal, family or household purposes.
19. Time of the Essence.
-------------------
TIME IS EXPRESSLY DECLARED TO BE THE ESSENCE of each
obligation of the Maker hereunder and in all matters concerning this Note,
including all acts or things to be done or performed in connection herewith, and
specifically of every provision of this Note in which time is an element.
20. Compliance With Usury Laws.
--------------------------
Maker and Payee intent to comply with all applicable usury laws. In
fulfilling this intention, all agreement between Maker and Payee are expressly
limited so that the amount of interest paid or agreed to be paid to Payee for
the use, forbearance, or detention of money under this Note shall not exceed the
maximum amount permissible under applicable law.
If for any reason payment of any amount required under this Note
shall be prohibited by law, then the obligation shall be reduced to the maximum
allowable bylaw. If for any reason Payee receives as interest an amount that
would exceed the highest lawful rate, then the amount which would constitute
excessive interest shall be applied to the reduction of the principal of this
Note and not to the payment of interest. If any conflict arises between this
provision and any provision of any other agreement between Maker and Payee, then
this provision shall control.
21. Legal Representation.
--------------------
Maker agrees and represents that such party has been represented by
such party's own legal counsel with regard to all aspects of this Note, or if
such party is acting without legal counsel, that such party has had adequate
opportunity and has been encouraged to seek the advice of such party's own legal
counsel prior to the execution of this Agreement.
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<PAGE>
22. Jurisdiction.
------------
Any action whatsoever brought upon or relating to this Note shall be
instituted and prosecuted in the state courts of California, County of Orange,
or the federal district court therefore, and each party waives the right to
change the venue. The parties hereto further consent to accept service of
process in any such action or proceeding by certified mail, return receipt
requested,
"MAKER" "PAYEE"
SHOPPING.COM
By: /s/ By: /s/
--------------------------- ---------------------------
John Markley, President and
Chief Executive Officer
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<PAGE>
EXHIBIT 4.3
SHOPPING.COM
WARRANT AGREEMENT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE.
This Warrant Agreement (this "Agreement") is entered into as of 25th day
of August, 1998 by and between, SHOPPING.COM, a California corporation (the
"Company"), and Carlos and Joan Beharie (the "Holder").
RECITALS
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
40,000 shares of Company Common Stock in exchange and in consideration for good
and valuable goods and services.
NOW, THEREFORE, BE IT RESOLVED, the parties agree hereto as follows:
1. DESCRIPTION; EXECUTION.
(a) The Company agrees to issue to the Holder and the Holder agrees
to accept the Warrant Certificate evidencing the right to purchase shares of the
Company common stock at an initial purchase price of Three Dollars and Thirty
Cents ($3.30) per Share as to which the Warrant is exercisable. The Warrant
Certificate shall be substantially in the form annexed hereto as Exhibit A.
(b) This Agreement shall be executed on behalf of the Company by
its President. Upon delivery of this Warrant to the Holder, this Agreement shall
be binding upon the Company, and the Holder shall be entitled to all the
benefits set forth herein.
2. TERM OF WARRANT.
The Warrant shall become exercisable at any time after the date hereof,
and remain exercisable, subject to the conditions set forth in Section 3 until
the close of business on May 15, 2001 (the "Expiration Date").
3. EXERCISE OF WARRANT.
(a) Subject to (b) below, at any time until the Expiration Date,
the Holder shall have the right to purchase from the Company (and the Company
shall promptly issue to the Holder) one fully-paid and nonassessable share of
Common Stock at the Exercise Price (as defined below) for each Warrant, by
surrendering the appropriate Warrant Certificate and the Subscription Form
attached hereto to the Company at its executive offices and paying the
aggregate Exercise Price for the shares to be purchased, in cash, by check or by
cancellation of indebtedness.
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(b) The Warrant may be exercised in whole and in part but not
in increments of less than 100 shares. In case of a partial exercise, the
Warrant Certificate shall be surrendered and a new Warrant Certificate of the
same tenor and for the purchase of the number of shares not purchased upon such
partial exercise shall be issued by the Company to the Holder hereof. The
Warrants shall be deemed to have been exercised immediately prior to the close
of business on the date of their surrender for exercise as provided above, and
the person or entity entitled to receive the shares of Common Stock issuable
upon the exercise shall be treated for all purposes as the holder of such
shares of record as of the close of business on such date. Prior to any such
exercise, neither the Holder nor any person entitled to receive shares issuable
upon exercise shall be or have any of the rights of a shareholder of the
Company. No adjustment shall be made for dividends or other stockholder rights
for which the record date is prior to the date of exercise. As soon as
practicable on or after such date, the Company shall issue in the name of, and
deliver to the person or persons entitled to receive, a certificate or
certificates for the full number of shares of Common Stock issuable upon such
exercise.
4. EXERCISE PRICE. The initial Exercise Price for each share of Common
Stock issuable pursuant to the Warrant shall be Three Dollars and Thirty Cents
($3.30) per Share, adjusted as provided below. The Exercise Price may be paid,
in cash, cashier's check or by cancellation of indebtedness from the Company to
the Holder.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON STOCK.
The number and kind of securities purchasable upon the exercise of the
Warrants and the Exercise Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
5.1 ADJUSTMENTS. The Exercise Price of the Warrant shall be
subject to adjustment as follows:
(a) In case the Company shall issue rights, options, warrants
or convertible securities to all or substantially all holders of its Common
Stock, without any charge to such holders, entitling the holder thereof to
subscribe for or purchase Stock at a price per share which is lower at the date
of issuance of such rights, options, warrants or securities than the then
Current Fair Market Value (as defined in Section 7 hereof), the price of shares
of Stock thereafter purchasable upon the exercise of the Warrant shall be
reduced to a price equal to an amount which would entitle the Holder to receive
the same number of shares of Common Stock and other securities that he would
have received had he exercised the Warrants immediately prior to such issuance.
(b) For the purpose of this Section 5, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
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5.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 5.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of a
Warrant.
5.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall be made
pursuant to Section 5 hereof in connection with the grant or exercise of
presently authorized or outstanding options to purchase Common Stock under the
Company's existing stock option plan or the exercise of presently outstanding
warrants to purchase Common Stock.
5.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Holder an
agreement that the Holder shall have the right thereafter, upon payment of the
Exercise Price in effect immediately prior to such action, to purchase, upon
exercise of each Warrant, the kind and amount of shares and other securities
and property which it would have owned or have been entitled to receive after
the occurrence of such consolidation, merger, sale or conveyance had each
Warrant been exercised immediately prior to such action. In the event of a
merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986,
as amended, in which the Company is the surviving corporation, the right to
purchase shares of Common Stock under the Warrant shall terminate on the date
of such merger and thereupon the Warrant shall become null and void, but only
if the controlling corporation shall agree to substitute for the Warrant its
warrant which entitle the holders thereof to purchase upon their exercise the
kind and amount of shares and other securities and property which they would
have owned or been entitled to receive had the Warrant been exercised
immediately prior to such merger. Any such agreements referred to in this
Subsection 5.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 5
hereof. The provisions of this Subsection 5.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
6. REGISTRATION RIGHTS.
6.1 DEFINITIONS.
(a) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act of 1933, as amended (the "Securities Act").
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<PAGE>
(b) "Registrable Securities" shall mean (x) shares of Common
Stock issuable upon exercise of the Warrants and (y) any Common Stock issued as
a dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (x) above, provided, however, that
Registrable Securities shall not include any shares of Common Stock which have
previously been registered or which have been sold to the public.
(c) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness
of such registration statement.
(d) "Registration Expenses" shall mean all expenses incurred
in effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include selling expenses and fees and
disbursements of counsel for the Holder.
(e) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(f) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
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6.2 "PIGGYBACK" REGISTRATION. If the Company shall determine to
register any of its shares of Common Stock in a firm commitment public offering
for its own account, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a Rule 145 transaction on
Form S-4, or a registration on any registration form that does not permit
secondary sales, the Company will:
(a) promptly give to Holder written notice thereof;
(b) use its best efforts to include in such registration (and
any related qualification under the blue sky laws or other compliance), except
as set forth in Section 6.3 below, and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests,
made by Holder within Twenty (20) days after the written notice from the
Company described in clause 6.2(a) above is given. Such written request may
specify all or a part of Holder's Registrable Securities; and
(c) pay all Registration Expenses, other than the selling
expenses of Holder's Registrable Securities.
6.3 UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice. In such
event, the right of the Holder to registration pursuant to this Section 6 shall
be conditioned upon Holder's participation in such underwriting and the
inclusion of the Holder's Registrable Securities in the underwriting to the
extent provided herein. The Holder shall (together with the Company) enter into
an underwriting agreement in customary form with the representative of the
underwriter of underwriters selected by the Company.
6.4 EXCLUSION OF REGISTRABLE SECURITIES. Notwithstanding any other
provisions of this Section 6, if the representative of the underwriters advises
the Company that marketing factors require a limitation on the number of
shares to be underwritten, the representative may (subject to the limitations
set forth below) exclude all Registrable Securities from, or limit the number
of Registrable Securities to be included in, the registration and underwriting.
The Company shall so advise the Holder, and the number of shares of securities
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<PAGE>
that are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account
and thereafter to the Holder, pro rata with any other holders of Common Stock
having registration rights. If the Holder does not agree to the terms of any
such underwriting, he shall be excluded therefrom by written notice from the
Company or the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion pro rata
amongst those persons requesting inclusion.
6.5 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to Section 6, the Company will keep Holder
advised in writing as to the initiation of each registration and as to the
completion thereof, at its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one
hundred twenty (120) days or until the Holder has completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (x) such 120-days period shall be extended for
a period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (y) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 145, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post- effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be
included in (I) and (II) above to be contained in periodic reports filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 in the
registration statement.
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<PAGE>
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus,
as the Holder from time to time may reasonably request;
(d) Notify the Holder at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of Holder, prepare and furnish
to the Holder a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and
(g) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act.
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7. FRACTIONAL SHARES; ISSUANCE OF SHARES; LEGENDS.
7.1 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of Company Common Stock on the exercise of a Warrant. If any
fraction of a share of Stock would, except for the provisions of this Section 6,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company shall in lieu thereof pay an amount in cash equal to the then Current
Fair Market Value, multiplied by such fraction. For purposes of this Agreement,
the term "Current Fair Market Value" shall mean (i) if the Common Stock is
traded in the over-the-counter market and not in the NASDAQ Small Cap Market or
the National Market nor on any national securities exchange, the average of the
per share closing bid prices of the Common Stock on the 10 consecutive trading
days immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ Small Cap Market or the National Market or on a national
securities exchange, the average for the 10 consecutive trading days immediately
preceding the date in question of the daily per share closing prices of the
Common Stock in the NASDAQ Small Cap Market or the National Market or on the
principal stock exchange on which it is listed, as the case may be. or (iii) if
the class of Stock is not publicly traded or quoted, the fair market value as
determined by the Board of Directors of the Company based on (with appropriate
adjustments) the most recent purchases of the Company's Stock and/or other
relevant factors including the Company's income and assets or evaluation
reports received by the Company.
7.2 ISSUANCE OF SHARES. All shares of Stock issued upon exercise
of a Warrant will be duly authorized, validly issued, fully paid and
nonassessable.
7.3 LEGENDS. If the Stock to be issued upon exercise of this
Warrant has not been registered under the Securities Act of 1933, as amended,
then the stock certificates representing such shares of Common Stock shall bear
a legend substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"ACT") OR APPLICABLE STATE SECURITIES LAWS AND ARE
RESTRICTED SECURITIES. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE ACT AND STATE SECURITIES
LAWS.
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<PAGE>
8. TRANSFERABILITY.
The Warrant or the Shares of Company Common Stock underlying the
Warrant shall not be transferred, and the Company shall not be required to
register any transfer on the books of the Company, unless the Company shall have
been provided with an opinion of counsel satisfactory to it prior to such
transfer that registration under the Securities Act and applicable state
securities laws is not required in connection with the transaction resulting
in such transfer. Each new Warrant or Company Common Stock certificate issued
upon any transfer as above provided shall bear an appropriate investment
legend, except that such Warrant or Company Common Stock certificate shall not
bear such restrictive legend if the opinion of counsel referred to above is to
further effect that such legend is not required in order to establish
compliance with the provisions of the Securities Act or if such transfer is
made in accordance with the provisions of Rule 144(k) promulgated under the
Securities Act. The Warrant may also be transferred by will or devise and by
the laws of descent.
Any attempt to transfer, sell or otherwise dispose of this Warrant
(except as provided above) shall be void and shall not convey any rights or
privileges to the transferee.
9. MISCELLANEOUS.
9.1 NOTICES.
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
to the following addresses:
If to the Company: SHOPPING.COM
2101 E. Coast Hwy., Garden Level
Corona del Mar, California 92625
Attention: Mr. John Markley
With a copy to: Jeffers, Wilson, Shaff & Falk, LLP
18881 Von Karman Avenue,
Suite 1400
Irvine, California 92612
Attention: Barry D. Falk, Esq.
If to the Holder: Carlos Beharie and Joan
583 Cherry Hill Road
Princeton, New Jersey 08540-7612
Any party may change the address to which such communications are to be
directed to it by giving written notice to the other party. Except as otherwise
provided in this Warrant, all notices shall be deemed to be given when delivered
in person, or if placed in the mail as aforesaid, then two (2) days thereafter.
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9.2 MODIFICATIONS.
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant in any manner agreed by them in writing at
any time.
9.3 ENTIRE AGREEMENT.
This Agreement, and any documents, instruments or agreements
specifically referred to herein, set forth the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior agreements, arrangements and understandings
relating to the subject matter hereof.
9.4 HEADINGS.
The section and paragraph headings contained in this Agreement are
for convenient reference only, and shall not in any way affect the meaning or
interpretation hereof.
9.5 GOVERNING LAW; ARBITRATION.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without any regard to the choice of law
provisions thereof. Any dispute arising under this Agreement shall be resolved
by binding arbitration under the rules of commercial arbitration of the American
Arbitration Association in Orange County, California.
9.6 SEVERABILITY.
If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, it shall be deemed severable from the remaining
provisions of this Agreement which shall remain in full force and effect.
9.7 WAIVER.
No waiver of any provision of this Agreement or any breach thereof
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) or any other breach hereunder nor shall such waiver
constitute a continuing waiver. Either party may waive performance of any
provision of this Agreement, the non-performance of which would otherwise
constitute a breach of this Agreement, including but not limited to the
non-performance of any condition precedent to such party's performance,
without affecting the enforceability of this Agreement or the provisions
contained herein.
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9.8 HEIRS; SUCCESSORS AND ASSIGNS.
The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective heirs, successors and assigns of
the parties hereto. Holders may transfer and assign the Warrants only as
provided in Section 7 and any assignment in violation of the foregoing shall be
void.
9.9 ATTORNEYS' FEES.
If any legal action is instituted to enforce or interpret the terms
of this Agreement, the prevailing party in such action shall be entitled to
actual attorneys' fees in addition to any other relief to which the party is
entitled.
IN WITNESS WHEREOF, the parties have executed this instrument as of
the date first written above.
SHOPPING.COM,
A CALIFORNIA CORPORATION
By: ________________________________
John Markley, President
"HOLDER"
____________________________________
Carlos Beharie
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EXHIBIT 4.4
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES REFERRED TO HEREIN.
SUBSCRIPTION AGREEMENT
Shopping.com
2101 East Coast Highway
Garden level
Corona Del Mar, CA 92625
Attn: Robert McNulty
Re: Prospective Purchase of Notes and Warrants
Shopping.com, a California corporation
Gentlemen:
The undersigned, by signing the Signature Page attached hereto, hereby
irrevocably tenders this subscription and applies to purchase 4 units (the
"Units") of Shopping.com, a California corporation (the "Company"), at a
purchase price of $25,000 per Unit. Each Unit consists of a Promissory Note in
the principal amount of $25,000 and warrants to purchase 2,500 shares of the
Company's Common Stock, no par value (the "Common Stock"), at an exercise price
of $14.00 per share.
Enclosed, in cash or good funds (in the case of a check, the check
should be payable to the order of "Shopping.com") as tender of the purchase
price for the Units, is the aggregate amount of $100,000.00 ($25,000 minimum).
The undersigned hereby acknowledges receipt of a copy of the Company's
Annual Report on form 10-KSB for the period ending January 31, 1998 (the
"Report"), relating to and describing the terms and conditions of the offer and
sale of the Units.
The undersigned hereby represents and warrants to, and covenants with,
the Company as follows, recognizing that the Company will rely to a material
degree upon such representations, warranties and covenants, each of which shall
survive any acceptance of this subscription in whole or in part by the Company
and the issuance and sale of any Units to the undersigned:
1. All statements made in the Prospective Investor Questionnaire which
has been or is concurrently being furnished to the Company by the undersigned
continue to be and are true, accurate and complete as of the date hereof.
2. The undersigned has been informed and is aware that an investment in
the Units involves a degree of risk and speculation, and has carefully read and
considered the Report in its entirety.
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3. The undersigned confirms that he has been advised that he should rely
on, and that he has consulted and relied upon, his own accounting, legal and
financial advisors with respect to this investment in the Units. The undersigned
and his professional advisor(s) (as defined in Section 260.102.12(g) of the
Rules of the California Corporations Commissioner), if any, have been afforded
an opportunity to meet with the officers and directors of the Company and to ask
and receive answers to any questions about this offering and the proposed
business and affairs of the Company, and to obtain any additional information
which the Company possesses or can acquire without unreasonable effort or
expense that is necessary to verify the accuracy of information provided in the
Report, and have therefore obtained, in the judgement of the undersigned and/or
his or her professional advisor(s), sufficient information to evaluate the
merits and risks of investment in the Units. The undersigned acknowledges and
agrees that he/she has had an opportunity to meet and speak with officers or
representatives and to ask questions and get answers with respect to the Company
and this offering.
4. The undersigned understands and acknowledges that no federal or state
agency has made any finding or determination as to the fairness or suitability
for investment in, nor any recommendation or endorsement of, the Company or the
Units.
5. On the basis of the review of the materials and information described
above, and relying solely thereon and upon the knowledge and experience of the
undersigned and/or his or her professional advisor(s), if any, in business and
financial matters, the undersigned has evaluated the merits and risks of
investment in the Units and has determined that he or she is both willing and
able to undertake the economic risk of this investment.
6. The Units are being acquired by the undersigned for the personal
account of the undersigned for investment and not with a view to, or for resale
in connection with, any distribution thereof or of any interest therein, and no
one else has any beneficial ownership or interest in the Units being acquired by
the undersigned, nor are they to be subject to any lien or pledge. The
undersigned has no present obligation, indebtedness or commitment pending, nor
is any circumstance in existence which will compel the undersigned to secure
funds by the sale, transfer or other distribution of any of the Units or any
interest therein or any Stock that may be distributed in respect thereof.
7. The undersigned understands and agrees that the Units cannot be
transferred or assigned that there is and will be no public market therefor,
and, accordingly, that it may not be possible for the undersigned readily, if at
all, to liquidate this investment in the Units in case of an emergency or
otherwise. The undersigned has the net worth, past income and estimated future
income set forth in the Prospective Investor Questionnaire, can afford to bear
the risks of an investment in the Units, including the risk of losing the entire
investment, for an indefinite period of time, and has adequate means of
providing for his or her current needs and personal contingencies and has no
need for liquidity in this investment.
8. The undersigned understands and acknowledges that the Units are being
offered and sold pursuant to one or more exemptions from the registration and
qualification requirements of the Securities Act of 1933 and the California
Corporate Securities Act of 1968, the availability of which depend upon the
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truth and completeness of the information provided to the Company in the
Prospective Investor Questionnaire and the bona fide nature of the foregoing
representations and warranties. With such realization, the undersigned hereby
authorizes the Company to act as it may see fit in reliance on such information,
representations and warranties, including the placement of the following legend
on the stock certificate(s) issued to the undersigned in addition to any other
legends that may be imposed thereon which, in the reasonable opinion of
Company's counsel, may be required by applicable securities laws:
"THE UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSIONS UNDER THE SECURITIES ACT OF 1933 OR
WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE
SECURITIES LAW OF 1968, AS AMENDED. THE UNITS MAY NOT BE PLEDGED, SOLD
OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACTS COVERING THE UNITS OR AN OPINION OR QUALIFIED COUNSEL OR
OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
9. The undersigned hereby indemnifies and holds harmless the Company,
and its respective officers, directors, shareholders, employees and agents, as
the case may be, from and against any and all damages suffered and liabilities
incurred by any of them (including costs of investigation and defense and
attorneys' fees) arising out of any inaccuracy in the agreements,
representations, covenants and warranties made by the undersigned herein.
10. If the undersigned is purchasing the Units subscribed for hereby in
a fiduciary capacity, the above representations and warranties shall be deemed
to have been made on behalf of the person or persons for whom the undersigned is
so purchasing.
11. The undersigned hereby acknowledges and agrees that the undersigned
is not entitled to cancel, terminate or revoke this subscription or any
agreements of the undersigned hereunder and that such subscription and
agreements shall survive the death or disability of the undersigned.
12. The undersigned understands and acknowledges that this subscription
may be accepted or rejected by the Company in its sole discretion, together with
a completed and executed Prospective Investor Questionnaire and all information
required by the provisions hereof and payment of the full amount of the
subscription price for the Units subscribed for. Any amounts tendered in excess
of the total payable as the purchase price for Units as to which this
subscription has been accepted will thereafter be delivered to the undersigned
as soon as is practicable, all as described in the Confidential Private
Placement Memorandu. The Company shall signify its rejection by returning to the
undersigned this Subscription Agreement and all funds (without interest or
deduction) submitted by the undersigned.
NEITHER THE COMPANY, NOR ANY OFFICER, DIRECTOR, SHAREHOLDER,
EMPLOYEE OR AGENT OF ANY OF THEM SHALL BE LIABLE TO ANY PIERSON FOR
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THE REJECTION, IN WHOLE OR IN PART, OF ANY OFFER TO SUBSCRME TO PURCHASE UNITS,
NOTWITHSTANDING THAT THE UNDERSIGNED MAY OTHERWISE BE QUALEFIED AS A PROSPECTIVE
INVESTOR.
13. If, prior to the sale of any Units to the undersigned, there is a
material change in die undersigned's investment intention as expressed herein,
or if there occurs any change which would make either the representations or
warranties made by the undersigned herein or the information provided by the
undersigned in the Prospective Investor Questionnaire materially untrue or
misleading, the undersigned agrees to immediately so notify the Company, and any
prior acceptance of the subscription of the undersigned shall be voidable at the
option of the Company.
IN WITNESS WHEREOF, the undersigned executes and agrees to be bound by
this Subscription Agreement by executing the Signature Page attached hereto on
the date therein indicated.
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<PAGE>
SIGNATURE PAGE
(All information must be completed)
Date: June 8, 1998
/s/ Daniel E. Kern $100,000 10,000 $100,000
- ----------------------- ------------- ---------------- --------------
Signature of Purchaser Purchase Price # of Warrants Total $ Investment
_________________________________ Daniel Kern
Signature of Joint Owner (if any) ----------------------------
Name(s) of Purchaser (Print)
If Joint Ownership, check one:
_____ Joint Tenants, with Residence Address:
Right of Survivorship 1656 E. Salt Sage Drive
Phoenix, Arizona 85048
_____ Tenants in Common
_____ Community Property ###-##-####
---------------------------------------
Social Security No. or Taxpayer I.D. No.
ACCEPTED AND AGREED:
SHOPPING.COM
By /s/ John H. Markley
--------------------------------
John Markley, President and CEO
Date: June 30, 1998
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EXHIBIT 4.5
UNSECURED PROMISSORY NOTE
$100,000.00 CORONA DEL MAR, CALIFORNIA JUNE 8, 1998
1. PRINCIPAL.
FOR VALUE RECEIVED, the undersigned, SHOPPING.COM ("Maker"),
promises to pay Daniel Kern ("Payee"), or order, at 2101 East Coast Highway,
Corona Del Mar, CA 92625 or such other place as the holder of this Note shall
specify, in lawful money of the United States of America, the principal amount
of ONE HUNDRED THOUSAND DOLLARS ($100,000.00), together with interest at the
rate of ten percent (10%) per annum, payable as hereinafter provided.
2. PAYMENT OF PRINCIPAL AND INTEREST.
All principal of and interest accruing on this Note shall be due and
payable six months from the date of this Note.
Interest shall be calculated on the unpaid principal balance of this
Note on the basis of a year of 360 days and the actual number of days elapsed
until payment, unless such calculation would result in a usurious rate, in which
case interest shall be calculated on the basis of a year of 365 or 366 days, as
the case may be. Interest shall accrue and be payable under this Note whether or
not Maker, or Maker's successors or assigns, should avail themselves of the
protection of the United States bankruptcy laws. From and after the occurrence
of an "event of default" as set forth in Section 7 hereof, interest shall
continue to accrue on the unpaid principal balance of this Note at the same
interest rate as set forth in Section 1 of this Note.
3. PREPAYMENT.
A. This Note may be prepaid at any time or from time to time, in
whole or in part, without penalty.
B. Each such prepayment shall include all interest then accrued but
unpaid on this Note.
C. Any partial prepayment of the outstanding principal balance shall
in no way release, discharge or affect the obligation of the Maker to continue
to make any other payments of principal or interest provided for herein until
this Note is paid in full.
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4. APPLICATION OF PAYMENTS.
Each payment on this Note (whether made when due or otherwise) shall
be credited first, to late charges, fees and other charges due, including
collection costs and attorneys' fees, second against interest then due, and the
remainder of such payment shall be credited against the unpaid principal.
5. WAIVER.
Maker and all endorsers, guarantors and all persons liable, or to
become liable on this Note (each hereinafter referred to in this Section as the
"Applicable Party"), jointly and severally, waive presentment, protest and
demand, notice of protest, demand, dishonor and nonpayment of this Note, notice
of acceleration, notice of intent to accelerate, and any and all other notices
or matters of a like nature, and consent to any and all renewals and extensions
of the fine of payment hereof. Each Applicable Party agrees that at any time and
from time to time, without notice, (i) the terms of payment herein, or (ii) the
terms of any guaranty of this Note, or (iii) the security described in any
documents at any time securing this Note, may be modified, increased, changed or
exchanged, in whole or in part, without in any way affecting the liability of
any Applicable Party.
6. LATE CHARGE.
If any payment of interest and/or principal hereunder is not
received by Payee within ten (10) days after the due date thereof, Maker agrees
to pay Payee a late charge equal to five percent (5%) of the unpaid amount.
Maker acknowledges that it would be extremely difficult to fix Payee's actual
damages for the failure of Maker to timely pay any amount due under this Note.
Accordingly, such late charge shall be deemed to be Payee's damages for any such
late payment, provided that such late charge shall not limit Payee's right to
compel prompt performance by Maker or to exercise other remedies available to
Payee.
7. DEFAULT BY MAKER.
Any one or more of the following shall constitute an "Event of
Default" by Maker under the terms of this Note:
A. If Maker fails to pay any payment, whether at maturity or
otherwise, of principal and/or interest upon the due date thereof.
B. If Maker defaults in the performance or observance of any of the
covenants, conditions or agreements set forth in this Note.
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C. If Maker institutes proceedings to be adjudicated a voluntary
bankrupt; consents to the filing of a bankruptcy proceeding against Maker; files
or consents to filing of a petition or answer or consent seeking reorganization
under the federal bankruptcy laws or any other similar applicable federal or
state law; consents to the appointment or a receiver of liquidator or trustee or
assignee in bankruptcy or insolvency of the Maker or a substantial part of
Maker's property; an assignment for the benefit of creditors is made by the
Maker; or Maker admits in writing of Maker's inability to pay Maker's debts
generally as they become due.
8. REMEDIES UPON DEFAULT.
If an Event of Default occurs, at the option of Payee, and upon
written demand, the Payee may accelerate the due date of this Note and declare
the entire outstanding principal balance hereof, including all fees and costs
(if any), and accrued but unpaid interest, immediately due and payable in full.
Each of the options, rights and remedies provided herein or
available at law or in equity which may be exercised by Payee may be exercised
separately or concurrently with any one or more other options, rights or
remedies available to Payee. Failure to exercise any option, right or remedy
shall not constitute a waiver of the right of the Payee to exercise such option,
right or remedy in the event of or with respect to any prior, subsequent or
concurrent transaction or occurrence of the same or a different kind or
character.
9. ATTORNEYS' FEES.
Maker agrees to pay all costs of collection or enforcement of this
Note when incurred, including, but not limited to, reasonable attorneys' fees.
If any suit or action is instituted to enforce this Note, Maker promises to pay,
in addition to the costs and disbursements allowed by law, such sum as the court
may adjudge as reasonable attorneys' fees in such suit or action. Maker shall
also pay all reasonable attorneys' fees and costs incurred by Payee in
connection with any modification, amendment or consent related to any
renegotiation or modification of this Note.
10. SEVERABILITY.
Every provision of this Note is intended to be severable. If any
term or provision hereof is declared by a court of competent jurisdiction to be
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
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11. GOVERNING LAW.
This Note shall be governed by and construed in accordance with the
laws of the State of California.
12. NOTICES.
All notices, statements or demands shall be in writing and shall be
served in person, by telegraph, by express mail, by certified mail or by private
overnight delivery. Service shall be deemed conclusively made (i) at the time of
service, if personally served, (ii) at the time (as confirmed in writing by the
telegraphic agency) of delivery thereof to the addressee, if served
telegraphically, (iii) twenty-four (24) hours (exclusive of weekends and
national holidays) after deposit in the United States mail, properly addressed
and postage prepaid, if served by express mail, (iv) five (5) calendar days
after deposit in the United States mail, properly addressed and postage prepaid,
return receipt requested, if served by certified mail, (v) twenty-four (24)
hours after delivery by the party giving the notice, statement or demand to the
private overnight deliverer, if served by private overnight delivery and (vi) at
the time of electronic transmission, if a copy of such notice is mailed within
twenty-four (24) hours after the transmission.
Any notice or demand to Maker shall be given to:
John Markley
Shopping.com
2101 E. Coast Hwy., Garden Level
Corona del Mar, California 92625
Any notice or demand to Payee shall be given to:
Daniel Kern
1656 E. Salt Sage Drive
Phoenix, Arizona 85048
and with a copy to:
Barry D. Falk, Esq.
JEFFERS, WILSON, SHAFF & FALK, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
FAX No.: (949) 660-7799
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Any party hereto may change its address for the purpose of receiving
notices, demands or other communications as herein provided by a written notice
given in the manner aforesaid to the other party or parties hereto.
13. SUCCESSOR AND ASSIGNS.
All the terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
14. ASSIGNABILITY.
Maker's obligation hereunder are nontransferable and nonassignable
without the prior written consent of Payee.
15. AMENDMENT.
Neither this Note nor any term or provision hereof may be modified,
amended or altered except by a written instrument approved by Payee and signed
by Maker.
16. HEADINGS.
Headings at the beginning of each numbered Paragraph of this Note
are intended solely for convenience and are not to be deemed or construed to be
a part of this Note.
17. PURPOSE OF LOAN.
The proceeds of this Note are to be used by Maker exclusively for
business purposes, and not for personal, family or household purposes.
18. TIME OF THE ESSENCE.
TIME IS EXPRESSLY DECLARED TO BE THE ESSENCE of each
obligation of the Maker hereunder and in all matters concerning this Note,
including all acts or things to be done or performed in connection herewith, and
specifically of every provision of this Note in which time is an element.
19. COMPLIANCE WITH USURY LAWS.
Maker and Payee intent to comply with all applicable usury laws. In
fulfilling this intention, all agreement between Maker and Payee are expressly
limited so that the amount of interest paid or agreed to be paid to Payee for
the use,
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forbearance, or detention of money under this Note shall not exceed the maximum
amount permissible under applicable law.
If for any reason payment of any amount required under this Note
shall be prohibited by law, then the obligation shall be reduced to the maximum
allowable bylaw. If for any reason Payee receives as interest an amount that
would exceed the highest lawful rate, then the amount which would constitute
excessive interest shall be applied to the reduction of the principal of this
Note and not to the payment of interest. If any conflict arises between this
provision and any provision of any other agreement between Maker and Payee, then
this provision shall control.
20. LEGAL REPRESENTATION.
Maker agrees and represents that such party has been represented by
such party's own legal counsel with regard to all aspects of this Note, or if
such party is acting without legal counsel, that such party has had adequate
opportunity and has been encouraged to seek the advice of such party's own legal
counsel prior to the execution of this Agreement.
21. JURISDICTION.
Any action whatsoever brought upon or relating to this Note shall be
instituted and prosecuted in the state courts of California, County of Orange,
or the federal district court therefore, and each party waives the right to
change the venue. The parties hereto further consent to accept service of
process in any such action or proceeding by certified mail, return receipt
requested.
"MAKER" "PAYEE"
SHOPPING.COM DANIEL KERN
By /s/ John H. Markley By /s/ Daniel Kern
---------------------------------- ----------------------------------
John Markley Daniel Kern
Title: President and Chief Executive
Officer
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EXHIBIT 4.6
SHOPPING.COM
WARRANT AGREEMENT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR UNLESS AN EXEMPTION THEREFROM IS AVAILABLE.
This Warrant Agreement (this "Agreement") is entered into as of 8th day of
June, 1998 by and between, SHOPPING.COM, a California corporation (the
"Company"), and Daniel Kern (the "Holder").
RECITALS
WHEREAS, the Company has agreed to grant to Holder warrants to purchase
10,000 shares of Company Common Stock in exchange and in consideration for good
and valuable goods and services.
NOW, THEREFORE, BE IT RESOLVED, the parties agree hereto as follows:
1. Description, Execution.
(a) The Company agrees to issue to the Holder and the Holder agrees
to accept the Warrant Certificate evidencing the right to purchase shares of the
Company common stock at an initial purchase price of Fourteen Dollars ($14.00)
per Share as to which the Warrant is exercisable. The Warrant Certificate shall
be substantially in the form annexed hereto as Exhibit A.
(b) This Agreement shall be executed on behalf of the Company by its
President Upon delivery of this Warrant to the Holder, this Agreement shall be
binding upon the Company, and the Holder shall be entitled to all the benefits
set forth herein.
2. Term of Warrant. The Warrant shall become exercisable at any time after
the date hereof, and remain exercisable, subject to the conditions set forth in
Section 3 until the close of business on June 8, 2001 (the "Expiration Date").
3. Exercise of Warrant.
(a) Subject to (b) below, at any time until the Expiration Date, the
Holder shall have the right to purchase from the Company (and the Company shall
promptly issue to the Holder) one fully-paid and nonassessable share of Common
Stock at the Exercise Price (as defined below) for each Warrant, by surrendering
the appropriate Warrant Certificate and the Subscription Form attached hereto to
the Company at its executive offices and paying the aggregate Exercise Price for
the sham to be purchased, in cash, by check or by cancellation of indebtedness.
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(b) The Warrant may be exercised in whole and in part but not in
increments of less than 100 shares. In case of a partial exercise, the Warrant
Certificate shall be surrendered and a new Warrant Certificate of the same tenor
and for the purchase of the number of sham not purchased upon such partial
exercise shall be issued by the Company to the Holder hereof. The Warrants shall
be deemed to have been exercised immediately prior to the close of business on
the date of their surrender for exercise as provided above, and the person or
entity entitled to receive the shares of Common Stock issuable upon the exercise
shall be treated for all purposes as the holder of such shares of record as of
the close of business on such date. Prior to any such exercise, neither the
Holder nor any person entitled to receive shares issuable upon exercise shall be
or have any of the rights of a shareholder of the Company. No adjustment shall
be made for dividends or other stockholder rights for which the record date is
prior to the date of exercise. As soon as practicable on or after such date, the
Company shall issue in the name of, and deliver to the person or persons
entitled to receive, a certificate or certificates for the full number of shares
of Common Stock issuable upon such exercise.
4. Exercise Price. The initial Exercise Price for each share of Common
Stock issuable pursuant to the Warrant shall be Fourteen Dollars ($14.00) per
Share, adjusted as provided below. The Exercise Price may be paid, in cash,
cashier's check or by cancellation of indebtedness from the Company to the
Holder.
5. Adjustment of Warrant Price and Number of Shares of Common Stock. The
number and kind of securities purchasable upon the exercise of the Warrants and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
5.1 Adjustments. The Exercise Price of the Warrant shall be subject
to adjustment as follows:
(a) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, entitling the holder thereof to subscribe
for or purchase Stock at a price per share which is lower at the date of
issuance of such rights, options, warrants or securities than the then Current
Fair Market Value (as defined in Section 7 hereof), the price of shares of Stock
thereafter purchasable upon the exercise of the Warrant shall be reduced to a
price equal to an amount which would entitle the Holder to receive the same
number of shares of Common Stock and other securities that he would have
received had he exercised the Warrants immediately prior to such issuance.
(b) For the purpose of this Section 5, the term "Common Stock" shall
mean (i) the class of stock designated as the Common Stock of the Company at the
date of this Agreement, or (ii) any other claw of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
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5.2 No Adjustment for Dividends. Except as provided in Section 5.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of a
Warrant.
5.3 No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section 5 hereof in connection with the grant or exercise of
presently authorized or outstanding options to purchase Common Stock under the
Company's existing stock option plan or the exercise of presently outstanding
warrants to purchase Common Stock.
5.4 Preservation of Purchase Price upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Holder an
agreement that the Holder shall have the right thereafter, upon payment of the
Exercise Price in effect immediately prior to such action, to purchase, upon
exercise of each Warrant, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
occurrence of such consolidation, merger, sale or conveyance had each Warrant
been exercised immediately prior to such action. In the event of a merger
described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended, in which the Company is the surviving corporation, the right to
purchase sham of Common Stock under the Warrant shall terminate on the date of
such merger and thereupon the Warrant shall become null and void, but only if
the controlling corporation shall agree to substitute for the Warrant its
warrant which entitle the holders thereof to purchase upon their exercise the
kind and amount of shares and other securities and property which they would
have owned or been entitled to receive had the Warrant been exercised
immediately prior to such merger. Any such agreements referred to in this
Subsection 5.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 5
hereof. The provisions of this Subsection 5.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
6. Registration Rights.
6.1 Definitions.
(a) "Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act of
1933, as amended (the "Securities Act").
(b) "Registrable Securities" shall mean (x) shares of Common Stock
issuable upon exercise of the Warrants and (y) any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (x) above, provided, however, that
Registrable Securities shall not include any shares of Common Stock which have
previously been registered or which have been sold to the public.
(c) The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
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statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
(d) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fem fees and disbursements of counsel for the Company, blue sky fees and
expenses of any regular or special audits incident to or required by any such
registration, but shall not include selling expenses and fees and disbursements
of counsel for the Holder.
(e) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(f) "Rule 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
6.2 "Piggyback" Registration. If the Company shall determine to
register any of its shares of Common Stock in a firm commitment public offering
for its own account, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a Rule 145 transaction on
Form S-4, or a registration on any registration form that does not permit
secondary sales, the Company will:
(a) promptly give to Holder written notice thereof,
(b) use its best efforts to include in such registration (and any
related qualification under the blue sky laws or other compliance), except as
set forth in Section 6.3 below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made by
Holder within Twenty (20) days after the written, notice from the Company
described in clause 6.2(a) above is given. Such written request may specify all
or a part of Holder's Registrable Securities; and
(c) pay all Registration Expenses, other than the selling expenses
of Holder's Registrable Securities.
6.3 Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shaft so advise the Holder as a part of the written notice. In such
event, the right of the Holder to registration pursuant to this Section 6 shall
be conditioned upon Holder's participation in such underwriting and the
inclusion of the Holder's Registrable Securities in the underwriting to the
extent provided herein. The Holder shall (together with the Company) enter into
an underwriting agreement in customary form with the representative of the
underwriter of underwriters selected by the Company.
6.4 Exclusion of Registrable Securities. Notwithstanding any
other provisions of this Section 6, if the representative of the underwriters
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advises the Company that marketing factors require a limitation on the number of
shares to be underwritten, the representative may (subject to the limitations
set forth below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting. The
Company shall so advise the Holder, and the number of shares of securities that
are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account and
thereafter to the Holder, pro rata with any other holders of Common Stock having
registration rights. If the Holder does not agree to the terms of any such
underwriting, he shall be excluded therefrom by written notice from the Company
or the underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of sham so withdrawn, with such sham to
be allocated among the persons requesting additional inclusion pro rata amongst
those persons requesting inclusion.
6.5 Registration Procedures. In the case of each registration
effected by the Company pursuant to Section 6, the Company will keep Holder
advised in writing as to the initiation of each registration and as to the
completion thereof, at its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holder has completed the distribution described
in the registration statement relating thereto, whichever first occurs;
provided, however, that (x) such 120-days period shall be extended for a period
of time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common Stock
(or other securities) of the Company; and (y) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended, if
necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 145, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (I) and (II) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 in the registration
statement.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
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(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as the
Holder from time to time may reasonably request;
(d) Notify the Holder at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement; as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of Holder, prepare and furnish
to the Holder a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or incomplete
in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered, pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration; and
(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
7. Fractional Shares; Issuance of Shares; Legends.
7.1 Fractional Shares. The Company shall not be required to issue
fractional shares of Company Common Stock an the exercise of a Warrant if any
fraction of a share of Stock would, except for the provisions of this Section 6,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company shall in lieu thereof pay an amount in cash equal to the then Current
Fair Market Value, multiplied by such fraction. For purposes of this Agreement,
the term "Current Fair Market Value" shall mean (i) if the Common Stock is
traded in the over-the-counter market and not in the NASDAQ Small Cap Market or
the National Market nor on any national securities exchange, the average of the
per share closing bid prices of the Common Stock on the 10 consecutive trading
days immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ Small Cap Market or the National Market or on a national
securities exchange, the average for the 10 consecutive trading days immediately
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preceding the date in question of the daily per share closing prices of the
Common Stock in the NASDAQ Small Cap Market or the National Market or on the
principal stock exchange an on which it is listed, as the case may be or (iii)
if the class of Stock is not publicly traded or quoted, the fair market value as
determined by the Board of Directors of the Company based on (with appropriate
adjustments) the most recent purchases of the Company's Stock and/or other
relevant factors including the Company's income and assets or evaluation reports
received by the Company.
7.2 Issuance of Shares. All shares of Stock issued upon exercise of
a Warrant will be duly authorized, validly issued, fully paid and nonassessable.
7.3 Legends. If the Stock to be issued upon exercise of this Warrant
has not been registered under the Securities Act of 1933, as amended, then the
stock certificates representing such shares of Common Stock shall bear a legend
substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE
STATE SECURITIES LAWS AND ARE RESTRICTED SECURITIES. SUCH SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE ACT AND STATE SECURITIES LAWS.
8. Transferability. The Warrant or the Shares of Company Common Stock
underlying the Warrant shall not be transferred, and the Company shall not be
required to register any transfer on the books of the Company, unless the
Company shall have been provided with an opinion of counsel satisfactory to it
prior to such transfer that registration under the Securities Act and applicable
state securities laws is not required in connection with the transaction
resulting in such transfer. Each new Warranty or Company Common Stock
certificate issued upon any transfer as above provided shall bear an appropriate
investment legend, except that such Warrant or Company Common Stock certificate
shall not bear such restrictive legend if the opinion of counsel referred to
above is to further effect that such legend is not required in order to
establish compliance with the provisions of the Securities Act or if such
transfer is made in accordance with the provisions of Rule 144(k) promulgated
under the Securities Act. The Warrant may also be transferred by will or devise
and by the laws of descent.
Any attempt to transfer, sell or otherwise dispose of this Warrant (except
as provided above) shall be void and shall not convey any rights or privileges
to the transferee.
9. Miscellaneous.
9.1 Notices.
All notices, requests, demand and other communications required Or
Permitted to be given hereunder shall be deemed to have been duly given if in
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writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
to the following addresses:
If to the Company: SHOPPING.COM
2101 E. Coast Hwy., Garden Level
Corona del Mar, California 92625
Attention: Mr. Robert J. McNulty
With a copy to: Jeffers, Wilson, Shaff & Falk, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Attention: Barry D. Falk, Esq.
If to the Holder: Daniel Kern
1656 E. Salt Sage Drive
Phoenix, Arizona 85048
Any party may change the address to which such communications are to
be directed to ft by giving written notice to the other patty. Except as
otherwise provided in this Warrant, all notices shall be deemed to be given when
delivered in person, or if placed in the mail as aforesaid, then two (2) days
thereafter.
9.2 Modifications. The parties may, by mutual consent, amend,
modify, supplement and waive any right under this Warrant in any manner agreed
by them in writing at any time.
9.3 Entire Agreement. This Agreement, and any documents, instruments
or agreements specifically referred to herein, set forth the entire agreement
and understanding of the parties with respect to the transactions contemplated
hereby and supersede all Prior agreements, arrangements and understandings
relating to the subject matter hereof.
9.4 Headings. The section and paragraph headings contained in this
Agreement am for convenient reference only, and shall not in any way affect the
meaning or interpretation hereof.
9.5 Governing Law; Arbitration. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
any regard to the choice of law provisions thereof. Any dispute arising under
this Agreement shall be resolved by binding arbitration under the rules of
commercial arbitration of the American Arbitration Association in Orange County,
California.
9.6 Severability. If any provision of this Agreement shall be hold
to be invalid, illegal or unenforceable, it shall be deemed severable from the
remaining provisions of this Agreement which shall remain in full force and
effect.
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9.7 Waiver. No waiver of any provision of this Agreement or any
breach thereof shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar) or any other breach hereunder nor
shall such waiver constitute a continuing waiver. Either party may waive
performance of any provision of this Agreement, the nonperformance of which
would otherwise constitute a breach of this Agreement including but not limited
to the nonperformance of any condition precedent to such party's performance,
without affecting the enforceability of this Agreement or the provisions
contained herein.
9.8 Heirs; Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
heirs, successors and assigns of the parties hereto. Holders may transfer and
assign the Warrants only as provided in Section 7 and any assignment in
violation of the foregoing shall be void.
9.9 Attorneys' Fees. If any legal action is instituted to enforce or
interpret the terms of this Agreement, the prevailing party in such action shall
be entitled to actual attorneys' fees in addition to any other relief to which
the party is entitled.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first written above.
SHOPPING.COM, A CALIFORNIA CORPORATION
By: /s/ John H. Markley
---------------------------------
John Markley, President & CEO
"HOLDER"
/s/ Daniel Kern
--------------------------------------
Daniel Kern
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EXHIBIT 4.7
SUBSCRIPTION AGREEMENT
This Subscription Agreement, dated as of August 12, 1998, is by and among,
SHOPPING.COM, INC., a California corporation (the "COMPANY"), and PREMIERE RADIO
NETWORKS, Inc., a Delaware corporation (the "SHAREHOLDER").
ARTICLE I
1.1 SUBSCRIPTION. Subject to the terms and conditions set forth
herein, the Shareholder hereby subscribes for and agrees to purchase 66,667
shares of Common Stock of the Company (the "SHARES") at the purchase price per
share of $15.00 (the "SUBSCRIPTION PRICE") in consideration for radio
advertising services, valued at $1,000,000, acquired by the Company from the
Shareholder on August 12, 1999. Exhibit A hereto sets forth $1,000,000 of
advertising time to be provided. The Subscription Price shall be payable on a
date mutually acceptable to the parties that is within five days of the date of
execution of this agreement (the "CLOSING DATE"). Upon receipt of the
Subscription Price for the Shares, the Company shall cause its transfer agent to
issue to the Shareholder, within five days of the Closing Date, a certificate
representing the Shares. The Company represents and warrants to the Shareholder
that, upon payment and issuance and delivery of the Shares in accordance with
this Agreement, the Shares will be duly authorized, validly issued, fully paid
and nonassessable.
1.2 ADDITIONAL SHARES. If on August 12, 1999, the average closing
price of the Company's Common Stock for the previous ten trading days (the
"AVERAGE CLOSING PRICE") is less than $15.00 per share (as adjusted for any
stock splits or recapitalizations), then the Company shall issue additional
shares of Common Stock to the Shareholder (the "ADDITIONAL SHARES") in an amount
equal to (1) $1,000,000 divided by the Average Closing Price minus (ii) 66,667,
provided, however that the Company shall not be obligated in any case to issue
more than 133,333 Additional Shares; provided further that if the Shareholder
shall have sold any of the Shares prior to August 12, 1999, then the number of
Additional Shares to be issued shall be reduced by a number of shares equal to
the product of (x) the proceeds received by Seller on account of such sale,
divided by (y) the Average Closing Price.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants as of the date hereof that:
2.1 ORGANIZATION; GOOD STANDING; QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own and operate its properties and assets and to carry on its business as now
conducted, to execute and deliver this Agreement, to issue and sell the Shares
at the Closing, and the Additional Shares when due and to carry out the
provisions of this Agreement. The Company is duly qualified to transact business
and is in good standing in each jurisdiction in. which the failure to so qualify
would have a material adverse effect on its business. properties, prospects or
financial conditions.
2.2 CAPITALIZATION; SUBSIDIARIES. The Company has the authority to
issue 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock.
The Company has at least 200,000 authorized and unissued shares of Common Stock.
The Company will reserve 133,333 shares of its authorized and unissued Common
Stock at all times for issuance pursuant to Section 1.2 hereof.
2.3 AUTHORIZATION. All Corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder at the Closing and the authorization, issuance, sale and
delivery of the Shares and the Additional Shares (together, the "Purchased
Shares") being sold hereunder has been taken or will be taken prior to the
Closing, and this Agreement constitutes a valid and legally binding obligation
of the Company, enforceable in accordance with its terms except (i) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws
of general application affecting enforcement of creditors' rights generally, and
(ii) as limited by or relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
2.4 VALID ISSUANCE OF SHARES. The Purchased Shares, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
non-assessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
federal securities laws.
2.5 NO CONFLICT. The execution, delivery and performance by the
Company under this Agreement and the issuance and delivery of the Purchased
Shares do not and will not (a) violate the articles of incorporation or bylaws
of the Company or any order, 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
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any governmental or regulatory body, department or agency, applicable to the
Company of which the Company is aware, (c) violate, conflict with, result in a
material breach or constitute a default under any contract or other agreement
to which the Company is a party or (d) require the approval of any person under
any material indenture, mortgage, instrument, contract or other agreement to
which the Company is a party.
2.6 GOVERNMENTAL CONSENTS. No consent. approval, qualification,
order or authorization of, or filing with, any local, state or federal
government authority is required on the part of the Company in connection with
the Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of Purchased Shares by the Company, except such filings
which will be made prior to the Closing, except that any notices of sale
required to be filed with the Securities Exchange Commission (the"SEC') under
the Securities Act of 1933, as amended (the "Securities Act"), or such
post-closing filings as may be required under applicable state securities laws,
which will be timely filed within the applicable periods therefor.
2.7 LITIGATION. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company that questions
the validity of this Agreement, or the consummation of the transactions
contemplated hereby.
2.8 DISCLOSURE; REPORTS AND FINANCIAL STATEMENTS. The Company has
provided Shareholder with all the information reasonably available to it without
undue expense that Shareholder has requested for deciding whether to purchase
the Common Stock. The Company has previously furnished Shareholder with true and
complete copies of its most recent reports on Form 10-KSB for the year ended
January 31, 1998, on Forms 8-K filed subsequently thereto and on Form 10-QSB for
the interim period ended April 30,1998 and the proxy statement for the Company's
1998 Annual Meeting of Shareholders (the "SEC Reports"). The Company's SEC
Reports have been filed with the SEC and as of such date and to the best of the
Company's knowledge, the SEC Reports complied in all material respects with the
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "1934 Act"), as the case may be, and the rules and regulations of
the SEC thereunder applicable to such the Company SEC Reports. As of their
respective dates and to the best of the Company's knowledge, the SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein. The financial statements contained in the
SEC Reports have been prepared in accordance with generally accepted accounting
principles, except for the absence of footnotes from interim period statements
and customary year-end adjustments, and present fairly the financial position
and results of operations of the Company as of the applicable dates thereto.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER
The Shareholder hereby represents, warrants, acknowledges and agrees as
follows:
3.1 INVESTMENT INTENT. The Shareholder is the sole and true party in
interest and is acquiring the Purchased Shares for its own account, for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of the Purchased Shares. No other person has any
direct or indirect beneficial ownership interest in the Purchased Shares.
3.2 NO REGISTRATION UNDER FEDERAL OR STATE SECURITIES LAWS. The
Shareholder acknowledges that the Shares have not and the Additional Shares when
issued will not be registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state by reason of a specific
exemption or exemptions from registration under the Securities Act and
applicable state securities laws, and that the Company's reliance on such
exemptions is predicated on the accuracy and completeness of the Shareholder's
representations, warranties, acknowledgments and agreements herein. Accordingly,
the Purchased Shares may not be offered, sold, transferred, pledged or otherwise
disposed of by the Shareholder without an effective registration statement under
the Securities Act and any applicable state securities laws or an opinion of
counsel to the Company that the proposed transaction will be exempt from
registration.
3.3 RESTRICTIONS ON RESALE. The Shareholder acknowledges that since
the Shares are not and the Additional Shares will not be registered under the
Securities Act and applicable 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 August 12, 1998, a copy of
which is on file at the principal office of the Corporation. The sale,
transfer or other disposition of such shares is subject to the terms of
said agreement and such shares are transferable only upon proof of
compliance therewith."
The Shareholder further acknowledges that the Company reserves the right to
place a stop order against the certificate representing the Purchased Shares and
to refuse to effect any transfers 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 so that the
Shareholder is capable of evaluating the merits and risks of its investment in
the Company and of protecting its own interests in connection therewith. The
Shareholder acknowledges and represents to the Company that it is an "Accredited
Investor," under Rule 501(a)(3) under the Securities Act, by reason of the fact
that the Shareholder is a corporation with total assets in excess of $5,000,000.
3.6 ACCESS TO INFORMATION. The Shareholder has had the opportunity
to review all documents and information which the Shareholder has requested
concerning its investment in the Company. The Shareholder has had the
opportunity to ask questions of the Company's management, which questions were
answered to its satisfaction. The Shareholder has relied only on the SEC Reports
and the foregoing information in determining to make its investment in the
Company.
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3.7 INVESTMENT RISKS. The Shareholder acknowledges that an
investment in the Company involves substantial risks. The Shareholder is able to
bear the economic risk of its investment for an indefinite period of time.
3.8 COMMISSIONS AND ADVERTISING. The Shareholder has not received
any public media advertisements and has not been solicited by any form of mass
mailing solicitation, including any leaflet, public promotional meeting,
television or radio advertisement or other form of general advertising.
ARTICLE IV
REGISTRATION RIGHTS
The Company covenants and agrees as follows:
4.1 DEFINITIONS. For 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 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 a registration relating
solely to the sale of securities to participants in a Company stock plan, a
registration on any form which does not include substantially the same
information as would be required to be
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included in a registration statement covering the sale of the Registrable
Securities or a registration in which the only Common Stock being registered is
Common Stock issued upon conversion of debt securities which are also being
registered), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within 20 days after mailing of such notice by the Company, the Company shall,
subject to the provisions of Section 4.5, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered, unless (1) the proposed registration is being made following demand
by shareholders other than the Shareholder pursuant to a contract with the
Company and (ii) the Company is restricted from registering some or all of such
Registrable Securities pursuant to such contract.
4.3 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 4 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
4.4 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 4.2 for each Holder (which right may be assigned as provided
in Section 4.10), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel for the selling Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
4.5 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 4.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
Registrable Securities requested by shareholders to be included in such offering
exceeds the amount of securities that the underwriters determine in their sole
discretion is compatible with the 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
-7-
Page 106 of 114
<PAGE>
securities of the selling Holders included in the offering of the Company's
securities be less than 25 percent of the number of shares originally requested
to be included. For purposes of the preceding parenthetical concerning
apportionment, for any selling stockholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling stockholder," and
any pro-rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling stockholder," as defined in
this sentence.
4.6 DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 4.
4.7 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 4:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Act) for
such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the 1934 Act, against any
losses, claims, damages, or liabilities (joint or several) to which they
may become subject under the Act, or the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Act, the 1934 Act,
any state securities law or any rule or regulation promulgated under the
Act, or the 1934 Act or any state securities law; and the Company will pay
to each such Holder, underwriter or controlling person, as incurred, any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, 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
-8-
Page 107 of 114
<PAGE>
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 43(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 4.7(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 4.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section
4.7, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party (together with all other
indemnified parties that may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the
fees and expenses to be paid by the indemnifying party, 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
-9-
Page 108 of 114
<PAGE>
deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than
under this Section 4.7.
(d) If the indemnification provided for in this Section 4.7 is
held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand
and of the indemnified party on the other in connection with the
statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified party
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the indemnifying
party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent
such statement or omission.
(e) Notwithstanding the foregoing, to the went 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 Holders under this
Section 4.7 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and
otherwise.
4.8 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(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
-10-
Page 109 of 114
<PAGE>
registrant whose securities may be resold pursuant to Form S-3 (at any
time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so
filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of
the SEC which permits the selling of any such securities without
registration or pursuant to such form.
4.9 FORM S-3 REGISTRATION. In case the Company shall receive from
any Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of
such Holder's or Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities
of any other Holder or Holders joining in such request as are specified in
a written request given within 15 days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance,
pursuant to this Section 4.9. (1) if Form S-3 is not available for such
offering by the Holders; (2) if the Holders, together with the holders of
any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $25,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company
and its shareholders for such Form S-3 Registration to be effected at such
time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than 60
days after receipt of the request of the 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 require an additional audit of
the financial statements of the Company; or (6) in any particular
jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
-11-
Page 110 of 114
<PAGE>
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders. All expenses incurred
in connection with a registration requested pursuant to Section 4.9,
including (without limitation) all registration, filing, qualification,
printer's and accounting fees and the reasonable fees and disbursements of
counsel for the selling Holder or Holders and counsel for the Company,
shall be borne pro rata by the Holder or Holders participating in the Form
S-3 Registration.
4.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 4. 10 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities, provided: (a) the Company is, within a reasonable
time after such transfer, furnished with written notice of the name and address
of such transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 4.11 below;
(c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act; and (d) the Company consents to such
transfer, which consent shall not be unreasonably withheld.
4.11 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that,
during the period of duration specified by the Company and an underwriter of
Common Stock or other securities of the Company, following the date of the first
sale to the public pursuant to a registration statement of the Company filed
under the Act pursuant to this Agreement, it shall not, to the extent requested
by the Company and such underwriter, directly or indirectly sell, offer to sell
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donces who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
(a) all officers and directors of the Company enter into
similar agreements; and
(b) such market stand-off time period shall not exceed 180
days. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of
each Investor (and the shares or securities of every other person subject
to the foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this Section
4.12 shall not apply to a registration relating solely to employee benefit plans
on Form S-1
-12-
Page 111 of 114
<PAGE>
or Form S-9 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.
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 party to which notice is given, to the address
set forth above (in the case of the Corporation) and at the address set forth on
the signature pages to this Agreement in the case of the Shareholder or to such
changed address as such party
-13-
Page 112 of 114
<PAGE>
may have fixed by notice; provided, however, that any notice of change of
address shall be effective only upon receipt.
5.8 ARBITRATION. The parties waive their right to seek remedies in
court, including any ht 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 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 prearbitraiton
discovery shall be limited to the greatest extent provided by the rules of AAA,
that the arbitration award shall not include factual findings or conclusions of
law, and that no punitive damages shall be awarded. The parties understand that
any party's right to appeal or to seek modification of rulings in an arbitration
is severely limited. Any award rendered by the arbitrators shall be final and
binding and judgment may be entered upon it in any court of competent
jurisdiction at the time such award is rendered.
IN WITNESS WHEREOF, the shareholder has executed this Subscription
Agreement as of this date first written above.
SHAREHOLDER: PREMIERE RADIO NETWORKS, INC.
By: /s/ Illegible
-------------------------------
Title: President/CEO
Address:
15620 Ventura Boulevard, 5th Floor
Sherman Oaks, CA 91403
Attention: President
The Company hereby accepts the foregoing subscription and acknowledges
receipt of the Subscription Price as of the date set forth thereon.
SHOPPING.COM, INC.
By: /s/ Harold S. Schwartz
---------------------------------
Title: Executive Vice President
Address:
2101 East Coast Highway
Corona Del Mar, CA 92625
Attention: President
-14-
Page 113 of 114
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