<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 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 No X
----- -----
As of December 8, 1998, there were 6,013,664 shares of the Registrant's no par
value common shares outstanding.
1
<PAGE>
Amendment No. 1 to Quarterly Report on FORM 10-QSB/A
For the Quarterly Period Ended October 31, 1998
The face page of the Shopping.com Quarterly Report on Form 10-QSB for the
quarterly period ended October 31, 1998 (the "Report") has been amended to
indicate that the issuer has not filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months because the
Report was delinquent. General Instruction A.1 to Form 10-QSB states that the
"issuer shall file a quarterly report on this form within 45 days after the end
of the first three quarters of each fiscal year." The Registrant's third quarter
ended October 31, 1998. Accordingly, the Registrant was required to file the
quarterly report for the quarterly period ended October 31, 1998 within the 45
day period ended December 15, 1998. The extension obtained by filing a Form
12b-25 pursuant to Rule 12b-25 promulgated under the Securities Exchange Act of
1934 was not available to Registrant because the Form 12b-25 received a file
date which was two business days after the due date for the Report. Accordingly,
the Report was delinquent.
In addition, Item I of Part I, Financial Statements, has been amended to
correct a typographical error in the Statements of Cash Flows. "Net cash used in
operating activities" for the nine months ended October 31, 1998 was $8,759,594.
2
<PAGE>
FORM 10-QSB
For the Quarterly Period Ended October, 1998
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (condensed) 4
Balance Sheet at October 31, 1998 4
Statements of Operations for the nine months
ended October 31, 1997 and 1998 5
Statements of Cash Flows for the nine months
ended October 31, 1997 and 1998 6
Notes to Financial Statements 7
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
SHOPPING.COM
BALANCE SHEET
As of October 31, 1998
(Unaudited)
-----------
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 336,319
Accounts/ advances receivable, net 74,904
Other receivables 19,778
Prepaid expenses 507,794
Inventories 46,163
Current portion of loan origination fees 1,150,246
-----------
Total current assets 2,135,204
Furniture and equipment, net 2,957,455
Deposits 504,041
Other assets 29,534
-----------
Total assets $ 5,626,234
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Current portion of capital lease obligation $ 224,527
Accounts payable 2,032,973
Subordinated notes payable 1,325,000
Notes payable 900,000
Secured promissory note 300,000
Convertible promissory note 500,000
Accrued legal fees and related costs 323,535
Accrued termination and severance 260,000
Other accrued liabilities 729,470
-----------
Total current liabilities 6,595,505
Capital lease obligation, net of current portion 151,682
8% convertible debentures 2,500,000
-----------
Total liabilities 9,247,187
-----------
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, 4,404,601 shares issued and outstanding 21,049,706
Accumulated deficit (24,670,659)
-----------
Total shareholders' equity (deficit) (3,620,953)
-----------
Total liabilities and shareholders' equity $ 5,626,234
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SHOPPING.COM
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------------- ------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 2,056,850 $ 321,281 $ 4,008,467 $ 376,822
Cost of sales 2,274,428 306,738 4,196,451 357,246
----------- ------------ ------------ -----------
Gross profit (deficit) (217,578) 14,543 (187,984) 19,576
Operating expenses:
Advertising and marketing 732,618 262,504 3,183,925 274,107
Product development 663,595 258,677 2,734,707 523,419
General and administrative 2,366,922 778,926 10,129,343 1,572,789
----------- ------------ ------------ -----------
Total operating expenses 3,763,135 1,300,107 16,047,975 2,370,315
----------- ------------ ------------ -----------
Loss from operations (3,980,713) (1,285,564) (16,235,959) 2,350,739
Other income (expense):
Loss on disposition of assets -- -- (89,913) --
Interest Income 6,141 -- 54,127 --
Interest Expense (1,681,414) ( 36,811) (2,675,188) (43,349)
----------- ------------ ------------ -----------
Total other income (expense) (1,675,273) ( 36,811) (2,710,974) (43,349)
----------- ------------ ------------ -----------
Net Loss $(5,655,986) $ (1,322,375) $(18,946,933) $(2,394,088)
=========== ============ ============ ===========
Basic Loss Per Share $ (1.32) $ (.98) $ (4.67) $ (1.83)
=========== ============ ============ ===========
Diluted Loss Per Share $ (1.32) $ (.98) $ (4.67) $ (1.83)
=========== ============ ============ ===========
Weighted Average Shares Outstanding 4,298,814 1,350,217 4,053,523 1,305,321
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SHOPPING.COM
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31,
<TABLE>
<CAPTION>
1998 1997
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss $(18,946,933) $(2,394,088)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation of furniture and equipment 477,151 71,622
Common stock issued for advertising 1,596,600 --
Amortization of loan origination fees 181,608 65,361
Amortization of deferred financing costs
related to beneficial conversion feature
of debentures 1,240,300 --
Amortization of deferred financing costs related
to beneficial conversion feature of convertible
debentures 262,500 --
Expense recognized from issuing below-market
stock options 2,812,626 --
Expense recognized from issuing warrants
below market value 1,017,318 --
Expense recognized from issuing common stock
below market value -- 6,000
Loss on disposition of assets 89,913
Other 86,233
Issuance of Common Stock to pay expenses -- 48,000
Decrease (Increase) in prepaid expenses 561,627 (263,672)
Decrease (Increase) in inventories (46,163) --
Decrease (Increase) in other assets (333,834) (101,858)
Decrease (Increase) in accounts/advances receivable 72,480 (174,747)
Decrease (Increase) in other receivables (2,221) --
Increase (Decrease) in accounts payable 1,183,259 973,191
Increase (Decrease) in other accrued liabilities 1,087,942 (20,577)
------------ -----------
Net cash used in operating activities (8,759,594) (1,790,768)
------------ -----------
Cash flows from investing activities
Purchase of furniture and equipment (799,757) (1,370,816)
------------ -----------
Net cash used in investing activities (799,757) (1,370,816)
------------ -----------
Cash flows from financing activities -- --
Payments on note payable - related party -- (50,000)
Proceeds from the issuance of notes payable 3,225,000 1,960,000
Payments on Notes Payable (200,000) --
Payments of loan origination fees (395,000) (234,000)
Payments on capital lease obligations (63,510) 5,842
Proceeds from the issuance of preferred stock,
Series A -- 200,000
Proceeds from the issuance of preferred stock,
Series B -- 1,489,781
Proceeds from the issuance of 8% convertible debentures 2,500,000 --
Payment of offering costs -- (57,226)
Proceeds from the issuance of common stock -- 25,000
------------ -----------
5,066,490
Net cash provided (used) by financing activities -- 3,327,713
------------ -----------
Net increase (decrease) in cash (4,492,861) 166,129
Cash, beginning of period 4,829,180 63
------------ -----------
Cash, end of period $ 336,319 $ 166,192
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SHOPPING.COM
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
- ------
The accompanying condensed financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
as contemplated by the SEC under Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. 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 nine months ended October 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:
<TABLE>
<CAPTION>
October 31, 1998
----------------
<S> <C>
Computer hardware $1,943,637
Computer software 1,297,882
Furniture & equipment 297,248
Leasehold improvements 102,708
----------
3,641,475
Less: Accumulated depreciation 684,020
----------
$2,957,455
==========
</TABLE>
In October 1998, the Company purchased computer equipment for $40,000 from
Waldron and Company, Inc., the underwriter for the Company's initial public
offering.
NOTE 3: ADVANCES - RELATED PARTIES
- ------
During the quarter ended October 31, 1998, an officer was advanced $367 from the
Company of which $367 was repaid during the quarter ended October 31, 1998.
Total advances to related parties as of October 31, 1998 were $19,240 which was
included in "Other receivables" in the balance sheet.
7
<PAGE>
NOTE 4: CONSULTING FEES - RELATED PARTY
- ------
For the three months ended October 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 October 31,
1998.
NOTE 5: SHAREHOLDERS' EQUITY
- ------
In September 1998, the Company executed an agreement whereby it issued 66,667
shares of common stock for $1,000,000 of radio advertising based on the average
fair market value of the common stock as of that date. The $596,600 of
advertisements were aired during the three months ending October 31, 1998,and
accordingly, $596,600 was expensed during the quarter ended October 31, 1998.
The remaining balance of $403,400 of advertisements will be aired in subsequent
quarters and will be expensed when aired. Up to 133,333 additional shares of
common stock may be issuable under the radio advertising agreement on the one-
year anniversary of the agreement, if on such date the average closing price of
the Company's common stock for the previous ten days is less than $15.00 per
share (as adjusted for any stock splits or recapitalizations).
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
8
<PAGE>
in additional interest charges of approximately $80,000 over the term of the
Promissory Notes of which $39,999 was expensed as interest during the quarter
ended October 31, 1998.
NOTE 7: CONVERTIBLE PROMISSORY NOTE
- -------
On August 25, 1998, the Company issued a $500,000 Convertible Promissory Note
which has a due date of six months from the date of issuance. The Convertible
Promissory Note carries an interest rate of 8% per annum and may be converted
for the principal and accrued interest into common stock at $10.00 per share. In
connection with the issuance of the Convertible Promissory Note, the Company
issued 50,000 warrants to purchase shares of common stock at an exercise price
of $10.00 per share when the Company's common stock was trading at $15.25 per
share. The warrants expire on August 20, 2001. Subsequently, on November 5,
1998, the Company agreed to revise the Convertible Promissory Note, Warrant
Agreement, and Subscription Agreement to reflect an exercise price of $3.30 per
share and a conversion price of $3.30 per share when the Company's common stock
was trading at $1.97 per share. The Company also issued warrants to purchase
10,000 shares of common stock to Waldron for acting as the placement agent. The
warrants issued to Waldron were issued under the same terms and conditions as
the warrants issued with the Convertible Promissory Note. The exercise prices of
these warrants was below market at the time of issuance and will therefore
result in additional interest charges of approximately $315,000 over the term of
the Convertible Promissory Note of which $131,250 was expensed as interest
during the quarter ending October 31, 1998. In addition, the conversion price
was below market at the time of the issuance and resulted in an additional
charge of $262,500 on August 25, 1998 as the Convertible Promissory Note was
available for conversion immediately upon the Company issuing the note.
NOTE 8: SECURED 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. On October 13,
1998, the Company repaid $200,000. On November 2, 1998, the Company renegotiated
the outstanding balance of $300,000 and entered into a new Note which is due at
the earlier of the Company receiving $300,000 in additional financing from
another source or December 2, 1998. Currently the Company is attempting to
renegotiate the terms of the Note as the amount remains unpaid as of December
21, 1998. In connection with the previous negotiations and issuance of the
$300,000 Promissory Note, the Company also issued 30,000 additional warrants to
purchase shares of the Company's common stock at an exercise price of $1.65 when
the Company's common stock was trading at $1.81 per share. These warrants expire
on November 2, 2003. The exercise price of these warrants was below market at
the time of issuance and will therefore result in additional interest charges of
$4,860. One of the Company's directors is also a member of the Board of
Directors of the corporation to which the Company issued the Promissory Note.
The Promissory Note carries an interest rate of 10% per annum and is secured by
a Non-Recourse Guaranty and Pledge Agreement by Mr. Robert J. McNulty, a
consultant of the Company. In connection with the issuance of the original
9
<PAGE>
$500,000 Promissory Note, the Company also issued 30,000 warrants to purchase
shares of common stock at an exercise price of $2.25 per share. The warrants
expire on September 15, 2003.
On October 1, 1998, the Company borrowed $900,000 from three accredited
investors. On November 10, 1998, this amount was repaid out of the proceeds
received from the issuance of 8% Convertible Debentures in the principal amount
of $2,500,000 that were received from the above transaction during November,
1998.
NOTE 9: 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 Company completed the second and final
tranche of Debenture financing of $2,500,000 for a total of $5,000,000 during
November 1998. The 8% Convertible Debentures (the "Debentures") are convertible
into shares of Common Stock at a conversion price (the "Conversion Rate") not to
exceed $16.00 per share (the "Base Rate"). The holders of the Debentures will
receive one warrant to purchase a share of Common Stock for each two shares of
Common Stock issued in connection with the corresponding conversion of the
Debentures (the "Warrants"). The Warrants attributable to each conversion shall
have an exercise price equal to the lesser of (a) 120% of the lowest market
price for any three trading days prior to conversion or (b) 125% of the Base
Rate. The Warrants expire on June 5, 2003. In connection with the issuance of
the 8% Convertible Debentures, the Company issued certain below-market warrants
and common stock to the placement agents and affiliates of the placement agents
and made certain payments to placement agents, which resulted in the Company
capitalizing such financing costs as loan origination fees on the balance sheet.
These loan origination fees will be amortized as additional interest expense
ratably over the term of the Debenture agreements, or until the Debentures are
converted to common stock, at which time a charge to interest expense for the
balance of any unamortized loan origination fees will be recorded as additional
interest expense. The subsequent issuance of warrants by the Company allows the
holders of the Debentures to convert at 90% of the Conversion Rate and to
require the Company to redeem the Debentures or any portion of them for cash.
The Company has the right to redeem all or any portion of the Debentures,
subject to certain "Redemption Premium" provisions of the agreement. The holder
of the Debentures may require the Company to redeem the outstanding portion of
this Debenture if certain breaches occur.
On November 16, 1998, the Company issued 300,000 warrants in connection with the
issuance of 8% Convertible Debentures to purchase shares of the Company's common
stock at an exercise price of $2.00 when the Company's common stock was trading
at $7.25 per share. The exercise price of these warrants was below market at
the time of issuance and will therefore result in additional interest charges of
approximately $1,575,000.
Subsequently in December 8% Convertible Debentures in the amount of $2,500,000
and the corresponding interest accrued thereon has been converted into shares of
Common Stock in the aggregate amount of 1,790,389 shares of Common Stock.
10
<PAGE>
NOTE 10: STOCK OPTIONS
- -------
As of October 31, 1998, the Company had outstanding options and warrants to
purchase an aggregate of 3,056,436 shares of Common Stock without giving
consideration to any warrants that may be issued upon conversion of the 8%
Convertible Debentures.
NOTE 11: WARRANTS
- -------
On September 24, 1998, the Company agreed to issue warrants to purchase 10,000
shares of the Company's common stock at an exercise price of $2.00 per share as
consideration to Typhoon Capital Consultants for its services related to
securing additional capital for the Company.
NOTE 12: COMMITMENTS AND CONTINGENCIES
- -------
CONSULTING AGREEMENTS
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. This agreement was subsequently terminated on
October 1, 1998.
EMPLOYMENT AND RESIGNATION 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
11
<PAGE>
exceeding the Company's annual business plan net profit. In addition, Mr.
Schwartz will receive an automobile allowance of $1,000 per month. On December
2, 1998 Mr. Schwartz resigned as the Company's Executive Vice President, Finance
and Administration.
On August 31, 1998, Mr. Michael Miramontes resigned his employment effective
June 12, 1998. Pursuant to a Resignation Agreement dated August 31, 1998
between the Company and Mr. Miramontes, Mr. Miramontes will receive one year's
salary in the total amount of $162,000 of which $160,000 was accrued on the
Company's Balance Sheet as of July 31, 1998 and the remaining $2,000 was
additionally accrued during the quarter ended October 31, 1998. The Company
will make equal installments of $13,067 beginning September 1, 1998 for a period
of ten months.
On September 30, 1998, Mr. Douglas Hay resigned as Executive Vice President and
as a director effective September 30, 1998. Pursuant to a Resignation Agreement
dated September 30, 1998 between the Company and Mr. Douglas Hay, Mr. Hay will
receive a total amount of $80,000 which was accrued on the Company's Balance
Sheet as of October 31, 1998. The Company agreed to make two equal payments of
$20,000 payable on October 1 and November 1 and the remaining $40,000 will be
paid equally on the first of each month December 1, 1998 through March 1, 1999.
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.
In March of 1998, the Company became aware that the Securities and Exchange
Commission (the "SEC") had initiated a private investigation to determine
whether the Company, Waldron & Co., Inc. ("Waldron"), then the principal market
maker in the Company's stock, or any of their officers, directors, employees,
affiliates or others had engaged in activities in connection with transactions
in the Company's stock in violation of the federal securities laws. The SEC
suspended trading in the Company's stock from 9:30 a.m. EST, March 24, 1998
through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the
Securities Exchange Act of 1934. On April 30, 1998, the National Association of
Securities Dealers ("NASD") permitted the Company's Common Stock to resume
trading on the electronic bulletin boards beginning on April 30, 1998. Because
the SEC has not alleged any violations, it is difficult to predict the outcome
of their investigation. The Company continues, however, to fully cooperate with
the SEC inquiry. Nevertheless, the investigation by the SEC and the attendant
adverse publicity may not only reduce significantly the liquidity of that stock
but also make it difficult for the Company to raise additional capital to
continue its development and expansion. The inability of the Company to raise
additional capital would have material adverse effect on the Company's business,
prospects, financial condition and results of operations and may prevent the
Company from carrying out its business plan.
12
<PAGE>
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. By order dated
December 4, 1998, the plaintiffs were granted leave to file a second amended
consolidated complaint on behalf of each of the federal court actions. The
amended complaint has since been filed.
On April 28, 1998, Abraham Garfinkel on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the United States District Court for the Central District of
California alleging violation of the federal securities laws by the Company,
Robert McNulty, Douglas Hay, Waldron and Cery Perle, an affiliate of Waldron.
The complaint alleges that defendants acted in concert with each other to
manipulate the price of the Company's stock by, inter alia, "work[ing] closely
with defendant McNulty on a weekly basis whereby defendant McNulty would pass
the supposedly confidential information of those who had 'hit' or contacted
Shopping's website." The complaint alleges that the defendants also manipulated
the market by engaging in conduct similar to that alleged in the Martucci and
Moore actions. The complaint also alleges that the Company's prospectus was
misleading by the failure to disclose sales to Waldron as discussed above. The
plaintiffs seek damages similar to that sought by Martucci and Moore. By order
dated December 4, 1998, the plaintiffs were granted leave to file a second
amended consolidated complaint on behalf of each of the federal court actions.
The amended complaint has since been filed.
13
<PAGE>
The second amended consolidated complaint filed in each of the federal court
actions expands the class period from the period beginning November 25, 1997 and
ending March 26, 1998 to the period beginning November 25, 1997 and ending
August 30, 1998. Further, the second amended complaint has added counts for
violation of sections 11 and 12(2) of the Securities Act of 1933, as amended, as
well as section 9 of the Securities Exchange Act of 1934.
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 April 16, 1998, Michael A. Martucci on behalf of all persons who purchased
shares of the Company's stock between November 25, 1997 and March 26, 1998,
filed suit in the California Superior Court for the County of Orange alleging
violations of the California securities laws by the Company, Robert McNulty,
Douglas Hay, Waldron and one other broker-dealer and two of those firm's
executives. The complaint charges that the defendants "participated in a scheme
and wrongful course of business to manipulate the price of [the Company's]
stock, which included: (i) defendant Waldron's refusal to execute sell orders;
(ii) the use of illegal stock parking; (iii) the use of illegal above-market
buy-ins to intimidate and dissuade potential short sellers from selling
[Company] stock short; (iv) the sale of [Company] shares to discretionary
accounts without regard to suitability; and (v) the dissemination of materially
false and misleading statements about [the Company's] operating performance and
its future prospects." The complaint further alleges that the Company "secretly
arranged to sell $250,000 of product to Waldron as part of defendants' effort to
have [the Company] post revenue growth prior to the [Company's] planned [initial
public offering]," that such sales constituted almost 25% of the Company's
revenues between its inception and March 26, 1998 and that the Company did not
disclose such sales or their significance in the Prospectus used in the
Company's initial public offering. The plaintiff seeks compensatory damages in
an unspecified amount, attorneys' fees and costs, injunctive relief,
disgorgement or restitution of the proceeds of the Company's IPO and the
defendants' profits from trading in the Company' s stock, and the imposition of
a constructive trust over the Company's revenues and profits. By order dated
December 4, 1998, the plaintiffs were granted leave to file a second amended
consolidated complaint on behalf of each of the federal court actions. The
amended complaint has since been filed.
14
<PAGE>
On May 13, 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 Orange County Superior Court alleging violation of the California 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 individual actions in Orange County superior Court have been consolidated as
well. The plaintiffs have filed a second amended complaint which increased the
class period to the period beginning November 25, 1997 and ending August 30,
1998. The amended pleading added causes of action for violation of California
Corporations Code sections 25401 and 25501 against all defendants as well as
sections 25504 and 25504.1 against defendants Robert J. McNulty and Douglas R.
Hay.
On or about March 27, Gladstone filed a complaint against the company as well as
its underwriters in the United States District Court for the Southern district
of New York contending that the Company's common stock was being manipulated in
violation of federal securities laws. The plaintiffs seeks equitable relief in
the form of a temporary restraining order and order to show cause regarding the
issuance of a preliminary injunction to enjoin certain trading of the Company's
stock. The plaintiffs also requested that they be given the right to conduct
expedited discovery. On March 30, 1998, the federal court, the Hon. Edelstein
presiding, denied the temporary restraining order, denied order to show cause,
denied the request for expedited discovery and ordered the case transferred to
the United States District Court for the Central District of California. The
plaintiffs have filed a first amended complaint against the Company and Mr.
McNulty in the United States District Court for the Central District of
California which alleges the same claims as the New York federal court action.
The Company has yet to respond to the amended pleading but will vigorously
defend the same.
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.
15
<PAGE>
On July 8, 1997, Brian Leneck, a former officer of the Company, resigned. By
letter dated July 10, 1997, Robert McNulty, the former Chief Executive Officer
of the Company, tendered payment to Leneck to buy back 140,000 shares of Common
Stock of the Company pursuant to a shareholder agreement. Leneck rejected the
tender, claiming that the amount was not the fair market value of the shares.
On March 17, 1998, Leneck filed a lawsuit in Orange County Superior Court of
California against the Company, Robert McNulty and three members of the Board of
Directors at the time, Bill Gross, Edward Bradley and Paul Hill. Leneck's
lawsuit seeks damages for breach of contract, conversion, and breach of
fiduciary duty with respect to 70,000 shares. The Company believes that it has
meritorious defenses, as well as affirmative claims, against Leneck and intends
to vigorously protect its rights in this matter. On March 27, 1998, the Company
filed a lawsuit in Orange County Superior Court against Leneck asserting, inter
-----
alia, breach of contract, breach of implied covenant of good faith and fair
- ----
dealing, fraud and deceit, declaratory relief and specific performance.
Subsequently, the charges against Bill Gross, Edward Bradley and Paul Hill were
dismissed with prejudice.
On November 23, 1998 Ray Fisk filed a complaint against the Company for breach
of contract arising out of that certain Unsecured Promissory Note dated May 15,
1998 in the principal sum of $50,000 due and payable on or about November 15,
1998. The Company does not dispute its obligation under the terms of the note.
In a similar circumstance, the Company received correspondence dated December
17, 1998 from counsel to Daniel Kern, a noteholder who demanded payment on the
principal sum of $100,000 together with accrued interest. The Company does not
dispute this obligation. The noteholder also claims that the quiet filing of the
Company's registration statement on Form S-1 is misleading because it fails to
disclose that the Company could not or would not make payment on the note. The
Company vigorously disputes this contention.
Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois &
Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice
of Client's Right to Arbitration" in connection with legal services performed on
behalf of the Company. The law firm claims legal fees and costs in the amount
of $328,818.97 are due. The Company disputes the amount of fees owed and is in
the process of exploring whether the matter can be informally resolved.
However, the Company has accrued the claimed amount as of January 31, 1998.
Though settlement negotiations have occurred, it is more probable than not that
the Company will proceed with its election to have the matter submitted to
arbitration before the Los Angeles County Bar Association.
By written contracts dated December 12, 1997, the Company retained SoftAware,
Inc. to provide facilities and services relative to the maintenance, location
and supply of T1 lines to the Company's servers. Subsequent to the execution of
the contracts, SoftAware, Inc. experienced a prolonged electrical outage which
resulted in the disruption of Internet access and communications. Based upon
this and other factors, the Company determined that SoftAware, Inc. was
incapable of performing under the agreements and declined to proceed. By letter
dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon the
Company for $120,000.00 which purportedly reflected the compensatory damages
SoftAware suffered as a direct and proximate result of the Company's refusal to
proceed with performance under the contract. The Company rejected this demand
and offered to reimburse SoftAware, Inc. for reasonable costs incurred in
reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has
rejected this offer and the parties are continuing settlement negotiations.
16
<PAGE>
On September 12, 1998 the Company was served with a summons and complaint by
MTS, Incorporated filed in Sacramento County Superior Court of California for
damages arising out of the Company's as well as two other merchants' sale of the
video "Titanic" at below cost thereby purportedly constituting violation of
section 17043 and 17044 of California's Business and Professions Code as well as
the California Unfair Business Practices Act (Cal. Bus. & Prof. Code section
17200 et. seq.). The complaint alleges damages in excess of $25,000.00, that
sum trebled should a statutory violation be established, and attorneys' fees and
costs. The Company has not had an opportunity to investigate the allegations of
the complaint. Accordingly, a reasonable assessment of the Company's potential
exposure cannot be made until such time as discovery is completed. The action
will, however, require the engagement of defense counsel; and it is estimated
that substantial attorney fees may be incurred should litigation proceed to
trial.
On December 4, 1998, the Company received correspondence from counsel for Yahoo!
Inc. alleging breach of contract arising out of two agreements. Despite
acknowledging receipt of $200,000 from the Company in connection with these
contracts, it is contended that the alleged breach of the agreements entitles
Yahoo! Inc. to recover damages in excess of $2 million. Though the Company has
not had the opportunity to fully investigate Yahoo!'s demands, the entitlement
and measure of damages are disputed. Nevertheless, a reasonable assessment of
the Company's potential liability cannot be made at this time.
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 October 31, 1998.
17
<PAGE>
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. During the three
month period ended October 31, 1998, $10,000 was paid in cash as of October 31,
1998 pursuant to Mr. McNulty's Termination and Buy-out Agreement thus leaving an
unpaid balance of $40,000.
On September 25, 1998, the Company approved the conversion of $350,000 of its
liability related to the Robert McNulty Termination and Buy Out Agreement, as
previously discussed in Note 4, for common stock at a market price of $1.37 (the
stock price on September 25, 1998), resulting in an issuance by the Company of
255,474 common shares. In addition the remaining $40,000 liability as of
October 31, 1998 was paid on December 7, 1998.
NOTE 13: SUBSEQUENT ISSUANCES OF SECURITIES
- -------
On October 1, 1998, the Company borrowed $900,000 from three accredited
investors. On November 10, 1998, this amount was repaid out of the proceeds
received from the issuance of 8% Convertible Debentures in the principal amount
of $1,000,000 that was received during November, 1998.
On November 16, 1998, the Company issued 300,000 warrants in connection with the
issuance of 8% Convertible Debentures to purchase shares of the Company's common
stock at an exercise price of $2.00 when the Company's common stock was trading
at $7.25 per share. The exercise price of these warrants was below market at
the time of issuance and will therefore result in additional interest charges of
approximately $1,575,000.
On December 8, 1998 Robert McNulty, the Company's former Chief Executive Officer
and founder was issued warrants to purchase 130,000 shares of the Company's
common Stock at an exercise price of $8.00 per share, the market price on the
date of issuance. The warrants were issued to Robert McNulty, the Company's
former CEO and founder who is a consultant to and affiliate of the Company, in
consideration for a pledge of Mr. McNulty's stock as security for the $2,500,000
Promissory Note described below.
On December 7, 1998 the Company entered into a Secured Promissory Note (the
Note") in the amount of $2,500,000 which has been received net of related fees
and commissions
18
<PAGE>
for which the proceeds are being used to fund ongoing operations. The Note is
secured by the intellectual property of the Company and certain shares of the
Company's Common Stock held by Robert McNulty, the Company's former Chief
Executive Officer and founder. The Note carries a 10% interest rate per annum
and is due and payable thirty (30) days from the date of the Note; provided
however, if within thirty (30) days from the date of this Note, certain
conditions are met the Payee would have the right at its option until January
10, 1999 to convert the principal amount of the Note together with all accrued
but unpaid interest into preferred stock. The Company issued warrants to
purchase 500,000 shares of Common Stock at an exercise price of $7.00 per share
in connection with the Secured Promissory Note. The warrants have a term of
three years.
In December 1998 the Company issued 1,790,389 shares of Common Stock pursuant to
terms of conversion related to the 8% Convertible Debentures in the principal
amount of $2.5 million and accrued interest thereon.
In addition, on December 10, 1998 the Company entered into an Agreement for A
Private Equity Line of Common Stock and Warrants Pursuant to Regulation D. The
commitment amount is $60 million, with an optional $40 million add-on, with
Swartz Private Equity, LLC.
On November 6, 1998 warrants to purchase 18,767 shares of the Company's Common
Stock were granted to Mark Asdourian, the Company's General Counsel. The
warrants have an exercise price of $1.781 per share which was the market price
on the date of grant. The warrants expire on November 6, 2003.
On November 6, 1998, Frank Denny, the Company's Chairman of the Board was
granted options to purchase 1,000,000 shares of the Company's Common Stock as
compensation for services to the Company. The options have an exercise price of
$1.781 per share which was the market price on the date of grant. One-third of
the options vest fully upon issuance, one-third vest on the first anniversary of
the date of grant and the remainder vest on the second anniversary of the date
of grant. The options expire five years from the date of grant.
On November 6, 1998 options to purchase 25,000 shares of the Company's Common
Stock were granted to each of Paul Hill, Ed Bradley and John Markley, each a
Director of the Company. The options have an exercise price of $1.781 per share
which was the market price on the date of grant. The options are fully vested
upon issuance and have a term of five years.
On November 6, 1998, options to purchase 347,000 shares of the Company's Common
Stock were granted to certain employees, including senior management, under the
Company's Stock Option Plan of 1997, as amended June 1998. The options have an
exercise price of $1.781 per share which was the market price on the date of
grant. Options to purchase 200,000 shares are fully vested upon issuance and the
remainder vest one-fourth on each anniversary of the date of grant for four
years.
As of December 14, 1998 (the "Date of Issuance"), the Company issued warrants to
purchase 490,385 shares of the Company's common stock at an exercise price of
$8.375 per share to Swartz Private Equity, LLC ("Swartz") in consideration for
Swartz entering into the Regulation D Common Stock Private Equity Line
Subscription Agreement (hereinafter referred to as "Private Equity Line of
Common Stock and Warrants Pursuant to Regulation D"). The warrants expire seven
years after the Date of Issuance.
19
<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
<TABLE>
<CAPTION>
<S> <C>
December 23, 1998 /s/ FRANK W. DENNY
---------------------------
Frank W. Denny,
Chairman of the Board
December ___, 1998
---------------------------
John H. Markley,
Chief Executive Officer, President and Director
December 23, 1998 /s/ KRISTINE E. WEBSTER
---------------------------
Kristine E. Webster,
Senior Vice President, Chief Financial Officer
and
Secretary
December ___, 1998
---------------------------
Paul J. Hill,
Director
December ___, 1998
---------------------------
Edward F. Bradley,
</TABLE> Director
20
