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RULE 424(A)
REGISTRATION NO. 333-74795
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
DATED APRIL 20, 1999
1,750,000 UNITS
[LOGO]
We are offering units consisting of a share of common stock and a warrant to
purchase an additional share of common stock. The common stock and warrants will
trade as separate securities immediately after this offering. Each warrant will
entitle its owner to purchase one share of common stock for $ per share.
You may exercise your warrants at any time for five years after the date of this
prospectus unless we have redeemed the outstanding warrants. We may redeem some
or all of the outstanding warrants by giving 30 days' prior written notice and
paying $0.25 per unexercised warrant. We may not redeem any warrants for at
least 180 days from the date of this prospectus and thereafter unless the
closing bid price of the common stock has been at least 200% of the initial
public offering price of the units for ten consecutive trading days before the
date we give notice of redemption.
Our common stock is listed on the NASD OTC Bulletin Board under the symbol
"PGRX". On April 16, 1999, the closing bid price of the common stock was $15.625
per share. We have applied to list our common stock and warrants under the
symbols "DDDS" and "DDDSW", respectively, on the Nasdaq National Market after
this offering.
INVESTING IN THE UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
PER UNIT TOTAL
--------------- -----
<S> <C> <C>
Initial public offering price....................................................................
Underwriting discounts and commissions...........................................................
Proceeds to 3Dshopping.com.......................................................................
</TABLE>
We expect total cash expenses to be approximately $825,000, which will
include a nonaccountable expense allowance of 2% of the gross proceeds of this
offering that will be paid to Paulson Investment Company, Inc., the managing
underwriter of this offering. We have granted to the underwriters a 45-day
option to purchase up to 262,500 additional units to cover over-allotments and
will grant to the underwriters a five-year warrant to purchase up to 175,000
additional units.
Delivery of the units will be made on or about , 1999 against payment
in immediately available funds.
PAULSON INVESTMENT COMPANY, INC.
, 1999
<PAGE>
[ART]
Our home page (top) provides information about our company and is the starting
point for the 3Dshopping experience. Visitors to our Web site can choose between
a fast and slow Internet connection depending on the speed of modem they use
(bottom left). Shoppers can navigate to our customers' Web sites by clicking on
a product category that interests them (bottom right).
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................................................................................ 3
Risk Factors.............................................................................................. 7
Use of Proceeds........................................................................................... 14
Price Range of the Common Stock........................................................................... 15
Dividend Policy........................................................................................... 15
Capitalization............................................................................................ 16
Dilution.................................................................................................. 17
Selected Financial Data................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 20
Business.................................................................................................. 23
Management................................................................................................ 29
Principal Shareholders.................................................................................... 32
Description of Securities................................................................................. 33
Shares Eligible for Future Sale........................................................................... 36
Underwriting.............................................................................................. 38
Legal Matters............................................................................................. 40
Experts................................................................................................... 40
Additional Information.................................................................................... 40
Index to Financial Statements............................................................................. F-1
</TABLE>
Information contained at any of the Web sites maintained by 3Dshopping.com
does not constitute a part of this prospectus.
3Dshopping.com is a trademark we have applied to register with the United
States Patent and Trademark Office. This prospectus also contains trademarks and
tradenames of other companies.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY AND THE MORE DETAILED INFORMATION
ABOUT US AND THE UNITS AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHERE WE HAVE SPECIFICALLY INCLUDED OTHER
INFORMATION, THE INFORMATION IN THIS PROSPECTUS ABOUT SHARES OF COMMON STOCK
OUTSTANDING, NET OFFERING PROCEEDS AND CAPITAL RESOURCES ASSUMES THAT NONE OF
THE WARRANTS OR OPTIONS DESCRIBED IN THIS PROSPECTUS HAS BEEN EXERCISED.
3DSHOPPING.COM
OUR COMPANY
We have developed and are beginning to implement and market to e-commerce
retailers a Web-based marketing and display system that incorporates
sophisticated graphics and other visual features. We believe that this system is
attractive to retailers of products that require a compelling visual
presentation to be effectively sold on the Internet. A limited range of products
is currently being successfully sold via e-commerce. These include items such as
books, CD's and DVD's, where the customer usually knows what he or she is
looking for before searching for it on a vendor's Web site, or items such as
computers or automobiles, where the customer can make a final decision by
choosing from a list of objectively definable options. E-commerce sales of
products that require a more subjective decision process, such as clothing, have
so far presented a challenge to retailers and have achieved percentages of total
e-commerce sales that are substantially less than their percentages of sales
through more traditional channels, such as in-store sales and mail order
catalogs.
We believe that e-commerce sales of products where the decision process has
a substantial subjective and/or emotional content cannot be effectively
supported by the kind of Web sites used to sell more objectively definable
products. We have therefore developed the technological and other resources that
support our system with a view to presenting the e-commerce shopper with an
experience closer to what he or she would experience by visiting a store.
Instead of presenting a text-based presentation that might include still
pictures of an article of clothing, we are able to provide an animated,
graphical presentation in which a model is seen from a series of positions
throughout a full 360 degree spectrum. We also provide viewer interactivity that
permits the viewer to stop the motion at any view. A viewer can also select from
a menu of available colors and change the image to reflect the selected color,
or zoom in on selected features. We have acquired and are developing additional
presentation materials that will allow us to incorporate a "cyber-salesperson",
an animated character preselected by the retailer or selected by the viewer from
a menu of choices, that will make an audiovisual presentation of the key
features of the selected garment. For viewers with access to the Internet
through high-volume data delivery services, we are developing the technology to
support a complete virtual shopping experience, including audiovisual features
that will permit the viewer to enter a store in which the various items for sale
will be presented. This "virtual store" will not be limited to the shelves,
racks and walls found in traditional retail outlets, but instead will permit the
retailer to display these items in their most favorable marketing context. For
example, beachwear could be presented by models posing on a beach. The shopper
will be able to view the various items offered, make inquiries of virtual sales
persons and select and purchase merchandise all at a level of virtual reality
equivalent to that used in sophisticated computer games and other animated
presentations. We believe that these features will enable the viewer to make a
more informed choice and therefore will attract shoppers for products
traditionally sold only through stores or mail order catalogs.
3
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OUR SYSTEM
We offer our system to clothing and other retailers who want to engage in
e-commerce through a Web site that we design and maintain. We offer a complete
package of services in support of this activity, including
- Web site design;
- model selection and photography;
- preparation and maintenance of specific customer offerings on their or our
Web sites;
- data services with respect to Web site activity; and
- electronic order processing.
While we maintain all of the Web sites we design, these sites are accessible
either directly through our "home" page at www.3Dshopping.com, from electronic
"shopping malls" that we and others maintain to attract shoppers to our
customer-specific Web sites or from other Web sites maintained by the customer.
We charge fees for designing, setting up and maintaining our customers' Web
sites and for the number of visitors to those Web sites if our customers choose
not to use our order processing services. We also receive a percentage of the
total value of product orders we process for our customers.
We provide an Internet-based marketing and display system to retailers who
wish to engage in e-commerce and who believe that they require sophisticated
presentation technology to do so. We do not intend to sell retail products for
our own account, nor do we currently intend to offer "banner" advertising or
other promotional space to advertisers, other than our retailer customers, on
any of our Web sites.
OUR MARKETS AND CUSTOMERS
We believe that our principal market consists of branded and non-branded
retailers of apparel and accessories. Our clients include Nordstrom, K-Swiss,
Cobra, and Perfetto. In addition, we design and operate Intranets used by
companies like Boeing and Shell to allow their employees to select products
under award programs. We also have customers in other markets, including
flowers, antiques and jewelry and expect to examine other market areas as
opportunities arise.
OUR STRATEGY
Our goal is to be the leading provider of Web-based marketing and display
services to e-commerce retailers that require a high level of technical
sophistication and presentation quality to attract and serve the needs of their
customers. We believe that e-commerce is becoming more widely accepted as a
retail channel by both sellers and consumers. As the volume and range of
products sold in e-commerce increases, the channel will require ever increasing
levels of sophistication to support consumer demand over a variety of product
categories. We believe that we are well positioned, from both a technological
and a marketing point of view, to offer state-of-the-art Web site design and
maintenance services to customers across a broad spectrum of product categories.
We believe that, for the foreseeable future, our core market will be in the area
of apparel and accessories, where we believe the market potential is great
enough to support substantial growth.
In order to compete as a relatively small participant in the emerging and
highly competitive market enabled by the Internet, we have positioned ourselves
as a service provider to larger and more recognized entities in their respective
market areas. We intend to enable our customers to capitalize on their own
market presence and brand recognition in a new sales channel or to support
intracompany communication at a high level of sophistication. While we believe
that we may ultimately become a
4
<PAGE>
recognized name in e-commerce, we expect for the immediate future to depend on
the name recognition of our customers to attract viewers to our Web sites.
In order to more fully integrate the range of services we offer, we have
agreed in principle to acquire the assets of Design Base Los Angeles, Inc., a
designer and producer of print advertising, direct mail catalogs, brochures and
advertising collateral materials. We expect to complete the acquisition before
the completion of this offering.
We were incorporated in California under the name Pi Graphix, Inc. and
commenced business in August 1996. The mailing address and telephone number of
our principal executive offices are 517 Boccaccio Avenue, Venice, California
90291 and (310) 301-6733.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 1,750,000 units. Each unit consists of one share of
common stock and one warrant to purchase one additional
share of common stock. The common stock and warrants
will trade separately immediately after the offering.
For more information, see "Description of Securities"
beginning on page 33.
Warrants.......................... The warrants will be exercisable at an exercise price of
$ at any time until they expire on the fifth
anniversary of the date of this prospectus. We may not
redeem the warrants for at least 180 days after the date
of this prospectus. After that date, if the closing bid
price of our common stock on each of the 10 consecutive
trading days preceding our notice of redemption is
greater than or equal to $ , we may redeem some or all
of the outstanding warrants if we provide the holders
with 30 days' prior written notice. The redemption price
will be $0.25 per warrant. Please refer to "Description
of Securities--Warrants" beginning on page 33 for more
information.
Common Stock Outstanding.......... 3,645,746 shares of common stock were outstanding on
February 24, 1999. After the offering, there will be
5,395,746 shares outstanding. Both of these numbers
exclude up to 562,333 shares of common stock issuable on
exercise of outstanding options and warrants.
Risk Factors...................... An investment in the units involves a high degree of
risk. You should not consider this offer if you cannot
afford to lose your entire investment. Please refer to
"Risk Factors" beginning on page 7 for factors you
should consider.
Use of Proceeds................... The net proceeds from the offering, estimated to be
approximately $23,521,875, will be used to repay debt,
fund expansion of sales and marketing activities,
continue research and development efforts, acquire
capital equipment and Internet infrastructure and
acquire content and technology and for working capital
and general corporate purposes. For more information,
please refer to "Use of Proceeds" beginning on page 14.
</TABLE>
5
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SUMMARY FINANCIAL INFORMATION
Amounts for the eleven months ended June 30, 1997 reflect eleven months of
operations from August 13, 1996 (inception) to June 30, 1997.
The line item "Weighted average shares used in computing net loss per share"
is based on the weighted average shares of common stock outstanding for the
eleven months ended June 30, 1997, the year ended June 30, 1998 and the six
months ended December 31, 1998. It excludes 0, 32,609 and 32,609 shares,
respectively, of common stock issuable upon exercise of outstanding options,
warrants and convertible debt. Note 1 of Notes to Financial Statements includes
an explanation of the determination of the number of shares used in computing
net loss per share.
The amounts in the "As Adjusted" column of the Balance Sheet Data have been
adjusted to give effect to the sale of the 1,750,000 units offered by this
prospectus, assuming an initial public offering price of $15.00, after deducting
the underwriting discount and estimated offering expenses, and the receipt of
the net proceeds from the offering.
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30, DECEMBER 31,
-------------- ------------ ------------------------
1997 1998 1997 1998
-------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ -- $ 18,404 $ 521 $ 27,539
Operating expenses:
Sales and marketing................................... 973,283 473,665 148,092 822,338
Research and development.............................. 294,360 170,259 107,748 281,675
General and administrative............................ 647,868 457,345 178,091 1,650,310
-------------- ------------ ---------- ------------
Total costs and expenses.............................. 1,915,511 1,101,269 433,931 2,754,323
Loss from operations.................................... 1,915,511 1,082,865 433,410 2,726,784
Interest expense........................................ 3,089 10,373 2,450 17,163
Other income............................................ 10,000 13,500 13,500 --
-------------- ------------ ---------- ------------
Net loss................................................ $ 1,908,600 $ 1,079,738 $ 422,360 $ 2,743,947
-------------- ------------ ---------- ------------
Net loss per share...................................... $ .59 $ .28 $ .11 $ .68
Weighted average shares used in computing net loss per
share................................................. 3,210,651 3,823,228 3,686,644 4,015,416
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 112,062 $ 23,633,887
Working capital (deficit)........................................................... (236,790) 23,285,035
Total assets........................................................................ 251,985 23,773,810
Accumulated deficit................................................................. (5,732,285) (5,732,285)
Shareholders equity (deficit)....................................................... (143,252) 23,378,573
</TABLE>
6
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RISK FACTORS
AN INVESTMENT IN THE UNITS INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER THE FOLLOWING DISCUSSION OF RISKS IN ADDITION TO THE OTHER INFORMATION
IN THIS PROSPECTUS BEFORE PURCHASING ANY OF THE UNITS. IN ADDITION TO HISTORICAL
INFORMATION, THE INFORMATION IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING"
STATEMENTS ABOUT OUR FUTURE BUSINESS AND PERFORMANCE. OUR ACTUAL OPERATING
RESULTS AND FINANCIAL PERFORMANCE MAY BE VERY DIFFERENT FROM WHAT WE EXPECT AS
OF THE DATE OF THIS PROSPECTUS. THE RISKS BELOW ADDRESS SOME OF THE FACTORS THAT
MAY AFFECT OUR FUTURE OPERATING RESULTS AND FINANCIAL PERFORMANCE.
OUR SYSTEM DEPENDS ON RAPID DATA TRANSMISSION TO ACHIEVE ITS FULL POTENTIAL;
RAPID DATA TRANSMISSION IS NOT WIDELY AVAILABLE AND MAY NEVER BECOME WIDELY
AVAILABLE
Our system has the ability to display products in a moving format, to
incorporate audio tracks and to support substantial interactivity between the
shopper and the display. While we believe that these features distinguish us
from traditional creators of static Web site displays, the volume of electronic
data required to support this process is substantially greater than for a
traditional static display. Shoppers accessing our Web sites using a
conventional modem hooked up to a conventional telephone line will be limited to
viewing options that do not make full use of our display potential or will be
required to accept long download times. Even customers using a high-speed data
delivery system, such as ISDN, cable or DSL systems may be subject to delays
generated within the Internet itself. In order to make full use of our
technology without experiencing frustrating download times, shoppers will have
to access our Web sites through high speed connections, such as cable modems and
we will be required to feed data directly from broadband communications
providers, such as MediaOne Express, rather than through conventional Internet
channels. Cable modems, although increasingly available, are currently in use by
only a small percentage of Internet users. Direct feeds from broadband
communications providers are currently under development but are not in current
commercial use. We believe high volume data delivery systems will be
increasingly available both to business and individual Internet users but we
cannot predict with confidence the speed with which such systems will become
widely available nor can we guarantee that these systems will be widely used by
consumers.
MANY OF OUR POTENTIAL CUSTOMERS AND SHOPPERS ARE UNFAMILIAR WITH THE INTERNET
AND E-COMMERCE
Most potential retail customers have only limited experience with e-commerce
and have not spent a significant amount of their time or income purchasing
products offered through e-commerce. Similarly, most sellers of consumer
products do not, or have only recently begun to, sell their products through
e-commerce. We cannot guarantee that consumers will use e-commerce for a
significant portion of their shopping needs or that retailers will use this
method widely to reach consumers. Our ability to generate revenue will depend on
the following variables, among others:
- the continued development of the Internet as an e-commerce medium;
- our continuing ability to provide our customers with the highest quality
of service and support;
- the availability of comparable e-commerce products and services on other
Web sites;
- sales volume on Web sites that we maintain;
- our ability to achieve and demonstrate user demographic characteristics
that are attractive to our customers; and
- the establishment and maintenance of desirable relationships with our
customers.
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WE HAVE A NEW AND UNPROVEN BUSINESS MODEL
The manner in which we conduct our business and charge for our services is
new and unproven. The model depends on our ability to generate revenue from
multiple sources through our Web sites. These sources include:
- fees paid for designing and building Web sites showcasing apparel and
accessories;
- fees paid for maintenance of the Web sites;
- revenue sharing with retail customers who use the Web sites to sell
apparel and accessories through e-commerce;
- fees paid by retailers based on the number of shoppers who visit the Web
site when a customer does not use its site to directly sell product; and
- fees for updating the Web site, including product offerings.
For us to be successful, we must convince a large number of retailers to use
our system. Furthermore, we and our customers must convince shoppers to visit
our Web sites regularly. We must persuade retailers and their customers that the
shopping experience provided by our Web sites is compelling, innovative,
informative and easy to use. To date, apparel sales on the Internet have been
minimal compared to sales of other kinds of products such as books and CDs.
Accordingly, we cannot guarantee that we will be able to change the buying
habits of consumers or the perception of retailers as to the usefulness of our
system to them either for advertising or for sale distribution.
OUR BUSINESS IS INTENSELY COMPETITIVE
We will face intense competition in every aspect of our business, including:
- competition for retailers that choose to sell or market products by using
our Internet system; and
- competition for shoppers interested in products featured by our customers.
We compete specifically with Web site designers and generally with suppliers
of other advertising media for business from retailers. Moreover, retailers may
employ people to design and maintain their own Web sites. Additionally, we
believe marketing companies could adopt our system, or one very similar to it,
as another means to promote the products and brands of their clients. Many of
these organizations have greater financial resources than we have. As the
Internet and e-commerce continue to expand, the number of people and companies
providing Web-based services will continue to increase and competition will
increase as well.
In addition to the competitors discussed above, we compete with other
companies for shoppers who visit our Web sites. E-commerce is experiencing
explosive growth fueled by extremely rapid technological development, rapid
changes in consumer habits and preferences, massive infusions of capital and a
large number of new and established companies with aspirations to control
virtually every aspect of e-commerce. A relatively small number of these
companies, including Microsoft, Netscape, America Online and Yahoo!, currently
control primary or secondary access of a significant percentage of all Internet
users. As a result, these companies and the companies they sponsor or assist
have a competitive advantage in marketing to Internet shoppers. Other large and
established companies, such as local and long distance telephone companies,
cable companies, satellite programming providers and others have established
relationships with large customer bases and are rapidly expanding into the
provision of Internet services. Almost all of these companies have financial,
technological, promotional and other resources that are much greater than those
available to us. Many of these companies could use or adapt their current
technology, or could purchase technology, to provide a service directly
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competitive with ours. We cannot guarantee that we will be able to compete
effectively in our chosen markets.
WE HAVE A SHORT OPERATING HISTORY
We began to do business in August 1996. For most of our history, we were
developing and testing our system. We first made our Web sites available to our
customers on a test basis in November 1997 and achieved revenue only in the last
three months of calendar 1998. Many of our customers have not yet had an
opportunity to fully evaluate the benefit of using our Web sites. Our ability to
retain our current customers and to attract others will depend on the
performance of our customers using our Web sites, especially over the next few
months.
WE HAVE NOT YET ACHIEVED PROFITABLE OPERATIONS AND EXPECT LOSSES TO INCREASE
We have operated at a loss since the start of our business and expect to
continue to operate at a loss for at least the next twelve months. As of
December 31, 1998, we had a cumulative loss from inception and an accumulated
deficit of $5,732,285. We cannot guarantee that we will ever achieve profitable
operations. We expect to increase substantially our levels of expense in almost
all categories of our operations following this offering. As a result of these
increases, we expect our rate of loss will initially increase. In the long run,
these losses will be offset by increasing revenues only if we are successful in
achieving our sales goals by attracting an increasing number of customers and
shoppers to our Web sites.
OUR FUTURE OPERATING RESULTS MAY BE DIFFICULT TO PREDICT
Because of our very limited operating history and early stage of
development, we do not have historical financial data on which we, you or market
analysts can plan or base forecasts of revenues, earnings or capital
requirements with any accuracy. Because e-commerce is new, both we and others
will find it difficult to make predictions about our financial performance based
on the performance of other companies. One result of this unpredictability may
be that we will experience unanticipated capital requirements at a time when the
required capital is not available to us or is only available on terms that will
dilute your investment. Another possible result is that our stock price may
experience rapid and significant fluctuations as our financial performance
exceeds or falls short of market expectations.
OUR BUSINESS WILL DEPEND ON THE PERFORMANCE OF OUR CUSTOMERS AND OTHERS
Our ability to earn revenues from our customers will depend on the success
of these customers in increasing their business through the use of our service,
either by making e-commerce sales or by using our Web sites as an effective
advertising medium supporting sales in other channels. This in turn will depend
on our ability, and the ability of our customers, to present merchandise using
our system in a manner that is substantively informative, visually attractive,
responsive to consumer demand and user-friendly. Our ability to achieve these
goals depends in part on the availability of technology that we and our
customers do not own or control. In particular, we expect to depend on the
speed, quality and demographic coverage of data delivery systems offered by
various Internet service providers. Our success will also depend on the ability
of our customers to select and offer merchandise that is attractive to their
target markets. We cannot guarantee that we or our customers will succeed in
establishing a profitable, e-commerce-based sales channel.
WE WILL REQUIRE SIGNIFICANT ADDITIONS TO OUR MANAGEMENT TEAM
Since we began our business, we have been a small company engaged in
developing a basic marketing concept for e-commerce. As a result, we have not
had to deal with many of the challenges
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facing a more mature business, such as the management of a sophisticated sales
organization, performing under a substantial volume of service obligations to
customers or the management of significant financial resources. We expect to
face all of these management challenges in the near future. To do so, we expect
to be required to add additional members to our management team, particularly in
the area of operations and finance. If we acquire Design Base Los Angeles, Inc.,
as described elsewhere in this prospectus, we expect that Brian Smith, Design
Base's president, will become our president and chief operating officer. We also
expect to retain a chief financial officer and may seek management level
additions in other areas. Competition for qualified management level personnel
is intense and we cannot guarantee that we will be successful in hiring
qualified personnel or in integrating them into our company. We also intend to
elect additional independent directors to our board of directors but have not
identified any particular candidates at this time.
WE MAY BE UNABLE TO MANAGE OUR GROWTH
Our business plan requires significant expansion of our operations to
address potential market opportunities. We expect we will need to increase
personnel, including key management personnel, and other resources significantly
in the near future. We expect this growth to place a significant strain on our
managerial, operational and financial resources and systems. To manage our
growth, we must implement, improve and effectively use our operational,
management, marketing and financial systems and train and manage our new and
existing employees. We cannot guarantee we will be able to manage effectively
the expansion of our operations or that our personnel, systems, procedures and
controls will be adequate to meet our anticipated future operations.
WE FACE A RISK OF FAILURE, DELAYS AND OVERLOADS ON OUR WEB SITES
The performance, reliability and availability of our Web sites and network
infrastructure are critical to our reputation and ability to attract and retain
retailers or shoppers. Our network and computer infrastructure is located at a
facility in Marina Del Rey, California. Our systems and operations are
vulnerable to damage or interruption from a variety of causes. We will not have
redundant facilities until May 1999 at the earliest and may be reliant on a
single facility for an indefinite period after that date. We carry only limited
business interruption insurance. Our computer systems are complex and under
rapid development. Undetected errors in new or existing programs or equipment
could cause a range of problems from temporary unavailability of data, to
slowdowns and overloads to complete system failures. A sudden and significant
increase in traffic on one of our Web sites could also strain the capacity of
our software, hardware and telecommunications systems, which could lead to
slower response times or system failures. Any system error or failure that
causes interruption in the availability of content or an increase in response
time could result in a loss of business for our customers and reduce the
popularity of our Web sites with shoppers. Since our ability to earn revenue
depends directly on our ability to attract customers and shoppers, any such
error or failure could have a material temporary or permanent effect on our
revenues.
WE, OUR CUSTOMERS AND SHOPPERS USING OUR WEB SITES FACE SECURITY RISKS
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other problems. A person
who is able to circumvent security measures could misappropriate proprietary
information or cause interruptions in our operations. Various Web sites and
Internet service providers have experienced, and our Web sites may experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. We may be required to
spend significant amounts to protect against the threat of security breaches or
to alleviate problems caused by such breaches. Although we intend to implement
industry-standard security measures, these measures may be circumvented.
Eliminating computer
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viruses and alleviating other security problems may require service
interruptions or unanticipated expense.
THE FUTURE OF THE INTERNET AS A COMMERCIAL MEDIUM IS UNCERTAIN
Rapid growth in use of and interest in the Internet is a recent phenomenon.
Neither we nor others can predict with confidence whether acceptance and use of
the Internet will continue to develop or whether a sufficient base of users will
emerge to support our business. The Internet may not be accepted as a viable
commercial medium for any of a number of reasons, including:
- inadequate development of the necessary infrastructure;
- inadequate development of enabling technologies; and
- inadequate consumer support for e-commerce generally or in our targeted
market areas.
If the Internet continues to experience an increase in users, an increase in
frequency of use or an increase in the bandwidth requirements of users, the
Internet infrastructure may be unable to support the demands placed upon it,
specifically the demands of delivering the high volume of data necessary for the
optimum performance of our Web sites. The Internet could lose its viability as a
commercial medium due to delays in the development or adoption of new standards
and protocols required to handle increased levels of Internet activity, or due
to increased government regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in
unacceptable response times and could adversely affect use of the Internet
generally and of our Web sites in particular.
WE MAY NEED, AND MAY BE UNABLE TO OBTAIN, ADDITIONAL FINANCING
We may require additional capital to take full advantage of future growth
opportunities, fund our ongoing research and development efforts and continue to
upgrade our technology and network systems. The amount and timing of our future
capital requirements will depend on many factors, including, among others:
- consumer acceptance of and demand for our Web sites;
- the acceptance by customers and potential customers of our business
concept;
- the need to establish and continually upgrade our technology and computer
systems; and
- the need to establish and maintain an effective sales and marketing
program.
We have not arranged for any funding beyond the proceeds from this offering.
We believe these proceeds will satisfy our capital requirements for at least the
12 months following this offering and for the foreseeable future after that but
we cannot guarantee that additional financing will not be required earlier than
we expect. We also cannot guarantee that additional financing, if required, will
be available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, your investment may be substantially diluted. If we
raise capital by borrowing, the interest charge may substantially increase
operating expense.
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS
Our success depends, to a significant extent, upon the continued involvement
of Mr. Weisdorn, our President. The loss of his services, or the services of
other key employees, could have a material adverse effect on our business and
prospects. We do not currently maintain "key person" life insurance on the lives
of any of our officers or employees, nor do we have employment agreements with
our key personnel. Our future success also depends on our continuing ability to
attract and retain highly qualified technical personnel and management.
Competition for such personnel is intense and we
11
<PAGE>
cannot guarantee that we will be able to retain our key management and technical
employees or that we will be able to attract or retain additional qualified
technical personnel and management in the future.
WE HAVE ONLY LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND TO AVOID
INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS
We consider our proprietary technology, trademarks, trade secrets, domain
names and other intellectual property to be critical to our success. We rely on
a combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
our employees and with third parties to establish and protect our proprietary
rights. We cannot guarantee the procedures that we employ or may employ in the
future to protect our intellectual property will provide us with adequate
protection. The defense of intellectual property rights can be expensive and the
outcome of any defense may be uncertain. We use a variety of proprietary
technologies that we have developed ourselves or licensed from others. We cannot
guarantee that any particular aspect of our technology will not be found to
infringe the rights of other companies. Other companies may acquire proprietary
rights to technology useful or necessary to our business or may establish
trademarks, tradenames or domain names that limit our ability to market our
services or our customers' products. We cannot predict how any such intellectual
property, or the need to obtain rights to use it, will affect our business.
OTHERS MAY DEVELOP OR PURCHASE COMPARABLE OR SUPERIOR TECHNOLOGY
We believe our technology reflects the current state of the art for online
merchandise display. However, others could develop, and may have developed,
comparable or superior technology. We cannot guarantee that future innovations
in Internet or computer technology, generally, or in online merchandising
technology, will not eliminate any technological advantage we may currently
enjoy or render our technology obsolete. We expect we will be required to
maintain a continuous program of technological innovation in order to take
advantage of general technological advances and to remain competitive.
GOVERNMENT REGULATION OF THE INTERNET IS NEW AND ITS FUTURE IS UNCERTAIN
Although there are currently few laws and regulations directly applicable to
the Internet, new laws and regulations likely will be adopted in the United
States and elsewhere covering issues such as privacy, pricing, sales taxes and
characteristics and quality of Internet services. The adoption of restrictive
laws or regulations could slow Internet growth or expose us to significant
liabilities associated with the products available on our Web sites. The
application of existing laws and regulations governing Internet issues such as
property ownership, libel and personal privacy is also subject to substantial
uncertainty. We cannot guarantee that the application of new or existing laws
and regulations will not expose us to significant liabilities, significantly
slow Internet growth or otherwise have an adverse effect on our business.
The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, we cannot
guarantee similar laws will not be proposed and adopted. Although we do not
currently distribute the types of materials that the CDA would have prohibited,
similar legislation in the future could limit our ability to market some
products.
12
<PAGE>
OUR STOCK HAS BEEN THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY
Before this offering, our stock has been traded on the NASD OTC Bulletin
Board. We achieved a trading market for our stock through a series of small,
unregistered offerings and have not been required to file reports with the SEC
as do most companies whose securities are publicly traded. Historical market
prices for our stock may not be a reliable indication of our value for several
reasons, including the following:
- we have not regularly made available the kind of public information that
supports the markets for securities of more established companies;
- our company has not been covered by regular reports from financial
analysts of established standing;
- the limited amount and distribution of our stock has exacerbated the
effect of relatively small imbalances in supply and demand; and
- the number of stock brokerage firms through whom our stock could be traded
has been limited.
We cannot guarantee that the market for our securities after this offering
will fairly reflect our value or that it will be active enough to provide
liquidity to you. The trading price of our securities could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations or new products by us or our competitors or other factors. In
addition, the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices for many technology and small
capitalization companies. These broad market fluctuations may affect the market
price of our securities. Market valuations for companies offering Internet
services have recently experienced substantial increases and extreme volatility.
Any significant decrease in the market valuation of such companies generally
could cause a substantial decrease in the price of our securities unrelated to
our operating results.
YOUR WARRANTS CAN BE REDEEMED ON SHORT NOTICE
At any time after 180 days following the date of this prospectus, we could
redeem your warrants for $0.25 per warrant on 30 days' written notice, provided
that the closing price of our common stock has been at least $ for the ten
consecutive trading days immediately preceding the date of notice of redemption.
If we give notice of redemption, a holder would be forced to sell or exercise
the warrants or accept the redemption price.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO ALLOCATE OFFERING PROCEEDS
We expect to use approximately $573,500 of the net proceeds of this offering
to repay debt and approximately $5,650,000 for the other purposes described
under "Use of Proceeds" later in this prospectus. The remaining net proceeds,
estimated to be approximately $17,298,375, will be used for working capital and
applied to general corporate purposes. Our management will have broad discretion
to allocate the proceeds of this offering, including proceeds currently
specifically allocated as described in this prospectus, and any other cash
resources to such uses as they determine to be in the best interest of
3Dshopping.com. The amounts actually allocated to each expense category, and the
source of the cash so allocated, may vary significantly, depending on a number
of factors, including the amount of future revenue growth, the amount of cash
generated or used by our operations and the progress of our marketing efforts.
13
<PAGE>
USE OF PROCEEDS
The net proceeds that we will receive from the sale of the 1,750,000 units
are estimated to be approximately $23,521,875, assuming an initial public
offering price of $15.00 per unit, after deducting underwriting discounts and
commissions and estimated offering expenses, and assuming no exercise of the
warrants or the underwriters' over-allotment option.
Immediately following this offering, we expect to use approximately $58,500
of the net proceeds to repay indebtedness we owe to our President, Lawrence
Weisdorn, and his father. The principal is payable on demand and bears interest
at a rate of 7% per annum. We also intend to use approximately $515,000 to pay
the outstanding principal and interest on a promissory note issued to an
institutional investor in March 1999. We intend to use the remaining net
proceeds, along with any other financing sources that may become available to
us, to support our anticipated growth over the next two to three years. We
expect to experience negative cash flow from operations for at least the next 12
months. We expect that our cash requirements will exist principally in the
following areas:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT BUDGETED
FOR USE IN THE 12 MONTHS
USE OF CAPITAL FOLLOWING THE OFFERING
- ------------------------------------------------------------------------------------ ----------------------------
<S> <C>
Developing and rapidly expanding sales, marketing and advertising activities,
including the hiring of additional employees and consultants...................... $ 3,000,000
Continuing and expanding our internal research and development program.............. 500,000
Purchasing capital equipment, including computer, video, photographic and other
equipment required to support expanded operations................................. 500,000
Funding an anticipated growth in levels of receivables.............................. 750,000
Expansion of our management team.................................................... 400,000
Other uses not now expressly contemplated, such as the purchase of complementary
technology or businesses, the purchase or lease of real and personal property and
equipment; funding unanticipated negative cash flow from operations; or
repurchases of stock or redemption of warrants.................................... 500,000
</TABLE>
The amount and timing of any of the above expenses will depend on various
factors, including rates of business growth, specific technology, capital
equipment and other requirements imposed by our customers and opportunities
presented to us. While we have prepared internal forecasts to assist management
in planning, we believe that these forecasts, as they apply to periods extending
beyond the next few months, are inherently unreliable and that our actual cash
requirements will differ materially from those we presently forecast.
Our current business plan has identified total capital requirements that are
substantially less than the anticipated offering proceeds. However, we expect
that unanticipated needs and opportunities may cause our capital requirements to
exceed our current estimates. We believe the net proceeds of this offering will
be sufficient to fund our operations for at least the next twelve months and for
the foreseeable future after that.
Pending the use of the proceeds of this offering for operational purposes,
we intend to invest the net proceeds of this offering not used for the immediate
repayment of debt in short-term, investment grade, interest-bearing securities.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
Since June 25, 1997, 3Dshopping.com's common stock has been traded on the
NASD OTC Bulletin Board under the symbol "PGRX". The following table sets forth
the high and low bid prices for the common stock for the quarters indicated.
Prices reflect bids posted by market makers and may not necessarily reflect
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED JUNE 30, 1998
First Quarter............................................................................. $ 1.8750 $ 1.1875
Second Quarter............................................................................ 2.2500 1.3750
Third Quarter............................................................................. 1.7656 0.9219
Fourth Quarter............................................................................ 1.8750 0.9531
YEAR ENDING JUNE 30, 1999
First Quarter............................................................................. 5.5000 1.6250
Second Quarter............................................................................ 19.7500 4.0625
Third Quarter............................................................................. 19.2500 13.0000
Fourth Quarter (to April 16, 1999)........................................................ 16.8125 14.5000
</TABLE>
On April 16, 1999, the closing bid price of the common stock on the NASD OTC
Bulletin Board was $15.625 per share. As of February 24, 1999, there were 60
holders of record of our common stock. This number does not reflect the number
of beneficial holders of the common stock, which we believe to be between 600
and 800 holders.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. Payment
of any cash dividends will depend on the results of our operations, our
financial condition and our capital expenditure plans, as well as other factors
our board of directors may consider relevant. We presently intend to retain any
earnings for use in our business and, therefore, do not anticipate paying any
cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1998 on an
actual basis and as adjusted to give effect to the sale of the 1,750,000 units
at an assumed initial public offering price of $15.00 per unit and the receipt
of the net proceeds. This table should be read in conjunction with the Financial
Statements and related Notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Short term debt..................................................................... $ 295,064 $ 295,064
Long term debt...................................................................... 12,052 12,052
Shareholders' equity (deficit):
Common stock, no par value: 10,000,000 shares authorized; 3,305,746 shares issued
and outstanding; 5,055,746 shares issued and outstanding, as adjusted........... 3,306 5,056
Additional paid-in capital........................................................ 5,534,477 29,054,602
Stock subscriptions in advance--net............................................... 51,250 51,250
Accumulated deficit............................................................... (5,732,285) (5,732,285)
------------- -------------
Total shareholders' equity (deficit)................................................ (143,252) 23,378,623
------------- -------------
Total capitalization................................................................ $ 163,864 $ 23,685,739
------------- -------------
------------- -------------
</TABLE>
16
<PAGE>
DILUTION
The difference between the initial public offering price per share of common
stock and the pro forma net tangible book value per share of common stock after
this offering constitutes the dilution to you. Net tangible book value per share
is determined by dividing our net tangible book value (total tangible assets
minus total liabilities) by the number of shares of common stock outstanding.
At December 31, 1998, our net tangible book deficit was $(151,524), or
$(.05) per share of common stock. After giving effect to the sale of the
1,750,000 units, and the receipt of the estimated net proceeds, assuming an
initial public offering price of $15.00 (after deducting the underwriting
discount and the estimated offering expenses and attributing no portion of the
value of the unit to the warrant), our pro forma net tangible book value as of
December 31, 1998 would have been $23,370,351 or $4.62 per share of common
stock. This represents an immediate increase in the net tangible book value of
$4.67 per share to existing shareholders and an immediate dilution in net
tangible book value of $10.38 per share to the purchasers of the units in the
offering.
The following table illustrates the per share dilution to you:
<TABLE>
<S> <C>
Assumed initial public offering price............................................... $ 15.00
Net tangible book deficit per share............................................... (.05)
Increase attributable to new investors............................................ 4.67
---------
Adjusted net tangible book value after offering..................................... 4.62
---------
Dilution per share to new investors................................................. $ 10.38
---------
---------
Dilution as a percentage of offering price.......................................... 69.2%
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1998,
the number of shares of common stock purchased from 3Dshopping.com, the total
consideration paid to 3Dshopping.com and the average price per share (1) paid by
the existing shareholders and (2) paid by the purchasers of the units in this
offering, assuming the sale of 1,750,000 units at an assumed public offering
price of $15.00 per unit, before deduction of underwriting discounts and other
estimated offering expenses payable by us and ascribing no portion of the value
of a unit to the warrant.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- --------------------------
NUMBER PERCENT AMOUNT PERCENT AVERAGE PRICE PER SHARE
---------- ----------- ------------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders...................... 3,305,746 65% $ 1,608,093 6% $ 0.49
New Investors.............................. 1,750,000 35 26,250,000 94 15.00
---------- --- ------------- ---
Total...................................... 5,055,746 100% $ 27,858,093 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option, outstanding options or warrants, the warrants we are offering through
this prospectus or the representative's warrants. At December 31, 1998, options
and warrants were outstanding to purchase up to a total of 706,333 shares of
common stock at exercise prices ranging from $1.25 to $3.00. To the extent that
these options and warrants are exercised, there will be further dilution to new
investors.
17
<PAGE>
SELECTED FINANCIAL DATA
We derived the following selected statement of operations data for the
eleven months ended June 30, 1997 and the year ended June 30, 1998 and the
selected balance sheet data at June 30, 1998 from financial statements included
elsewhere in this prospectus, which have been audited by Friedman, Minsk, Cole &
Fastovsky, independent auditors. We derived the selected statements of
operations data for the six month periods ended December 31, 1997 and 1998 and
the selected balance sheet data at December 31, 1998 from our unaudited
financial statements included elsewhere in this prospectus. The financial
statements included elsewhere in this prospectus contain all material financial
information about us and we urge you to read them carefully. In the opinion of
our management, the unaudited financial statements have been prepared on a basis
consistent with the audited financial information and include all normal
recurring adjustments necessary for a fair presentation of the results for these
periods and as of such dates. The selected financial data provided below for the
six months ended December 31, 1998 are not necessarily indicative of our future
results of operations or financial performance. The data shown below should be
read in conjunction with the financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information appearing elsewhere in this
prospectus.
Amounts for the eleven months ended June 30, 1997 reflect eleven months of
operations from August 13, 1996 (inception) to June 30, 1997.
The line item "Weighted average shares used in computing net loss per share"
is based on the weighted average shares of common stock outstanding for the
eleven months ended June 30, 1997, the year ended June 30, 1998 and the six
months ended December 31, 1998. It excludes 0, 32,609 and 32,609 shares,
respectively, of common stock issuable upon exercise of outstanding options,
warrants and convertible debt. Additional information about these options is
provided under "Shares Eligible for Future Sale." Note 1 of Notes to Financial
Statements includes an explanation of the determination of the number of shares
used in computing net loss per share.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
-------------------------- --------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues............................................. $ -- $ 18,404 $ 521 $ 27,539
Operating expenses:
Sales and marketing.................................... 973,283 473,665 148,092 822,338
Research and development............................... 294,360 170,259 107,748 281,675
General and administrative............................. 647,868 457,345 178,091 1,650,310
Total costs and expenses............................... 1,915,511 1,101,269 433,931 2,754,323
Loss from operations..................................... 1,915,511 1,082,865 433,410 2,726,784
Interest expense......................................... 3,089 10,373 2,450 17,163
Other income............................................. 10,000 13,500 13,500 --
Net loss................................................. $ 1,908,600 $ 1,079,738 $ 422,360 $ 2,743,947
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share....................................... $ .59 $ .28 $ .11 $ .68
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares used in computing net loss per
share.................................................. 3,210,651 3,823,228 3,686,644 4,015,416
</TABLE>
18
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Cash and cash equivalents....................................................... $ 144,564 $ 112,062
Working capital (deficit)....................................................... (165,096) (236,790)
Total assets.................................................................... 229,529 251,985
Accumulated deficit............................................................. 2,988,338 5,732,285
Shareholders deficit............................................................ 98,626 143,252
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION THAT WE BELIEVE
IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE ELEVEN MONTHS ENDED JUNE 30, 1997, THE FISCAL YEAR
ENDED JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1998.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Since beginning operations in August 1996, we have devoted substantially all
of our resources to designing, implementing and introducing our marketing and
display system. From inception through December 31, 1998 we raised total equity
capital of $1,608,093 and had an accumulated deficit of $5,732,285. We began to
receive revenues from sales of services in April 1998 and are continuing to
operate at a deficit. We expect the operating deficit to continue and to
increase over at least the next twelve months as we incur increasing levels of
expense to support growth.
We believe that our historical operating results are not indicative of
future performance for the following reasons, among others:
- The receipt of the proceeds of this offering and their use to fund our
anticipated growth will materially change expense levels in all major
categories and are expected to support substantial increases in revenues
from operations;
- The acquisition of Design Base, if it occurs, will change substantially
the character and scope of our existing business (see "Business--Proposed
Acquisition of Design Base"); and
- We have recently emerged from the development stage and anticipate
substantial increases in the number and size of customer orders and
revenues from operations.
Although we expect substantial growth in both revenues and expenses, we
anticipate that increases in expenses will occur more rapidly than corresponding
increases in revenues. Also, while we are committed, at least in the short term,
to substantial increases in expenses, we cannot guarantee that revenues will
increase correspondingly. Like many companies attempting to build an
Internet-based business, we expect over at least the next year and for an
indeterminate period of time thereafter to follow a strategy of establishing
market share by making expenditures for marketing and infrastructure development
that exceed current revenues.
3DSHOPPING.COM
RESULTS OF OPERATIONS. For the eleven months ended June 30, 1997, we had no
revenues and incurred total expenses of $1,918,600. Expenses consisted of
$294,360 of research and development expense, $973,283 of sales and marketing
expense and $647,868 of general and administrative expenses. $1,363,180 of the
total expense amount resulted from expense attributable to the issuance to
employees and independent service providers of stock options exercisable at
below fair market value. Other income of $10,000, consisting principally of
payments under an Internet co-marketing agreement, resulted in a net loss for
the period of $1,908,600, or $0.59 per share of common stock.
For the year ended June 30, 1998, expenses declined to $1,111,642 and
consisted of $170,259 of research and development expense, $473,665 of sales and
marketing expense and $457,345 of general and administrative expense. The
decline in expenses was due primarily to decreases in purchases of equipment and
reductions in research and development and the effects in 1997 of a charge for
stock issued at below fair market value. Revenues of $18,404 and other income of
$13,500 resulted in a net loss for the year of $1,079,738, or $0.28 per share of
common stock.
20
<PAGE>
For the six months ended December 31, 1998, expenses increased substantially
from $436,381 for the six months ended December 31, 1997 to $2,771,486 and
consisted of $281,675 of research and development expense, $822,338 of sales and
marketing expense and $1,650,310 of general and administrative expense. The
increase in expenses was due primarily to increases in payroll and compensation
expenses and fees paid to consultants. $2,290,646 of the total expense resulted
from expense attributable to the issuance to employees and independent service
providers of stock and stock options at below fair market value and does not
represent cash or recurring expense. Revenues of $27,539 resulted in a net loss
for the six month period ended December 31, 1998 of $2,743,947 or $0.68 per
share of common stock. Revenues and other income in the six month period ended
December 31, 1997 were $521 and $13,500 resulting in a net loss for the period
of $422,360 or $0.11 per share of common stock.
At December 31, 1998, we had net operating loss carryforwards of
approximately $1,376,000 and research and development tax credits of $34,000 for
federal income tax purposes. State net operating loss carryforwards of
$1,396,000 and research and development tax credits of $13,200 will expire
beginning in 2002 and federal net loss carry forwards will expire beginning in
2012 if not used. As a result of changes in ownership, including changes
resulting from this offering, as defined in Section 282 of the Internal Revenue
Code of 1986, as amended, the annual deductibility of net operating loss
carryforwards is limited. A valuation allowance has been recorded against total
deferred tax assets of $484,250 because realization is primarily dependent on
generating sufficient taxable income prior to expiration of the net operating
loss carryforwards. The research and development tax credits expire beginning in
2012.
LIQUIDITY AND CAPITAL RESOURCES. We have funded our operations primarily
through the sale of common stock and to a lesser extent, by issuing notes and
other borrowings. From inception through December 31, 1998, we raised net
proceeds of approximately $1,562,788 from sales of common stock for cash. In
some cases, we have issued common stock in return for goods or services. As of
December 31, 1998, we had a total of $295,064 of outstanding notes and other
obligations for money borrowed, cash and cash equivalents of $112,062 and a
working deficit of $236,790. We have described the effect of this offering on
our capital resources and our anticipated uses of those resources under "Use of
Proceeds" on page 14.
On March 18, 1999, we borrowed $500,000 from an institutional lender to fund
expenses associated with this offering and to cover interim operating expenses
pending receipt of the offering proceeds. We issued an unsecured promissory
note, payable in a single payment on or before August 31, 1999 and bearing
interest at the rate of 9% per annum. If the note is not fully paid when due, it
is automatically exchanged for a new note that is convertible and is not
prepayable, provided that, as long as this offering is being actively pursued,
the new note shall remain prepayable and non-convertible until October 31, 1999.
The new note would become due and payable June 30, 2001 unless called earlier by
the lender on 10 days notice at any time after March 31, 2000. We also issued to
the lender common stock purchase warrants exercisable during a three-year period
beginning on the later of the first anniversary of the effective date of this
offering and March 31, 2000. The warrants are exercisable to purchase common
stock having a market value of $2,000,000 at the time of exercise for an
aggregate exercise price of $1,500,000 and are redeemable by us at any time
after July 1, 1999. The redemption price increases between July 1, 1999 and July
1, 2000 from 80% to 100% of the difference between the exercise price and the
market value of the underlying common stock. The notes and the warrants are
restricted from transfer other than transfers to members of a group under common
control or distributions to fund investors, pursuant to a bona fide pledge or
hypothecation or by will or pursuant to the laws of descent and distribution.
The common stock issuable on exercise of the warrants or conversion of the new
note will be "restricted securities" under federal securities laws.
21
<PAGE>
YEAR 2000 COMPLIANCE
There are issues associated with the programming code in existing computer
systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. We have evaluated our current systems, purchased necessary upgrades and
believe that our current hardware and software is Year 2000 compliant.
Similarly, we believe that the products and services we offer to our customers
are not affected by the Year 2000 problem. We have evaluated the potential
impact on us of a Year 2000 problem on the part of our important third party
vendors and have found none. We plan to continue to evaluate our systems and
those of our important vendors in an effort to minimize the effects of a Year
2000 problem. We do not anticipate that the Year 2000 problem will have a
material impact on our business or operations.
22
<PAGE>
BUSINESS
MARKET OPPORTUNITY
The Internet and other media facilitating electronic commerce have offered a
unique opportunity to market and sell products of varying kinds directly to the
ultimate consumer. From a single, central source, a vendor can offer product on
a worldwide basis, providing the consumer the opportunity to acquire information
about the product on his or her home or office computer and, ultimately, to
purchase the product entirely by keystroke entry while sitting at the computer.
Traditional retailing methods require distribution of inventory to a large
number of retail outlets that are expensive to build, maintain, stock and staff.
Mail order sales require expensive and widespread distribution of catalogs that
rapidly become obsolete and that are not necessarily available at the time the
buyer wants or needs to make a purchase. In contrast, e-commerce can offer the
consumer the information required to make a purchase decision and the ability to
make the actual purchase through a medium that can be kept constantly current,
that is available to the customer when needed and that does not require the
retailer to maintain expensive and widely distributed sales outlets, each of
which must be separately stocked with inventory.
Despite these obvious advantages, e-commerce has so far achieved significant
growth in only a relatively limited number of areas, including books, CDs, DVDs
and computers, securities, and travel. This is in part a result of consumer lack
of familiarity with the Internet and e-commerce generally but also, in part, a
result of limitations inherent in traditional e-commerce technology to provide
the customer with an experience that the customer perceives as similar to
in-store selection of merchandise or even to high-quality catalog sales. The
areas in which e-commerce has been successful have the common characteristic
that the customer either knew what he or she wanted before visiting the Web
site, as is often the case with book sales, or needed only to make a selection
from a limited number of objectively definable options, as with computers.
Merchandise, such as clothing, whose selection is more dependent on subjective
factors, has not, so far, achieved a high level of penetration into e-commerce.
Online apparel sales for 1997 were $89 million compared with $169.2 billion in
the retail market. Total online shopping revenue for 1997 was $1.14 billion with
online apparel sales representing less than 8% of that amount. Mail order sales
of $169.5 billion in 1997 indicate that consumers do not need actually to touch
the product. They do need, however, to visually comprehend it in a way that does
not apply to the kind of products for which e-commerce has initially been the
most successful.
Many clothing and accessory retailers are eager to expand their sales and
marketing efforts to include e-commerce but believe the electronic sale of
clothing and similar items will require a second generation of e-commerce
technology that is capable of providing the consumer with an experience closer
to the in-store experience. An e-commerce program that is successful in
providing this information can function both as an advertising medium, providing
information to shoppers that will lead them to visit the seller's store or to
call the seller's 800 number to order a product, or as a complete sales outlet
in which the entire decision and purchase occurs electronically.
THE 3DSHOPPING EXPERIENCE
We have developed technology and support Web sites that are capable of
delivering a complete visual package over the Internet or otherwise via
e-commerce. In contrast to traditional static Web sites and retail catalogs, our
Web sites support full motion digital imaging and audio presentations for
viewers able to access the Web sites using a broadband connection or willing to
download data at a slower rate. This allows the shopper to view a model or
product through 360 degrees of rotation. It also allows a detailed examination
of the garment or accessory from several different angles. The technology is
also interactive, allowing the viewer to select a desired angle and freeze the
frame, to zoom in on selected details, such as buttons, stitching or other key
features or to select and change colors from a menu that includes all of the
colors in which the garment is offered. We have also
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acquired and are developing the technology to create a "cyber-salesperson", a
"talking head" that may in the future be used as a salesperson, explaining the
key features of the garment being viewed. This new technology will support a
menu of alternatives, allowing the shopper to choose from a list of computer
generated likenesses of customized and/or well-known product spokespersons.
Our typical Web site opens with a selection of 30 to 40 products displayed
on models that move slowly across the screen. It is possible to include up to 80
images on this Web page. The viewer can click on any model to go to a page that
features the displayed garment. This second page provides access to the various
visual features selected by the retailer and also provides data in traditional
format, such as price, size and other objective information about the garment.
At the retailer's option, the page may allow the shopper to add the item to a
"shopping cart" for later purchase. Once the shopper has completed his or her
selections, the Web site supports electronic product purchases by credit card,
can refer the shopper to a toll-free number from which the shopper can order the
product, or can provide the location of the nearest store.
OUR SYSTEM
We offer the following services to our customers as part of our marketing
and display system:
WEB SITE DESIGN AND SETUP. For a one-time fee, ranging from $3,000 to
$50,000 or more, depending on the size and complexity of the project, we will
design and build a complete Web site for our customer. The site can be accessed
through the customer's home page and/or directly through our home page. The
customer provides direction as to the size, features and other characteristics
of the desired site and furnishes the items of apparel that will be featured and
a detailed description of those items. We then create an inventory database,
provide the models, studio facilities and other requirements to create the
visual images and, using our proprietary technology, incorporate these images
into a Web presentation containing the visual features selected by the customer.
Additional fees are charged as changes are made in the customer's Web site, for
example, to add new items or to change presentation features.
WEB SITE MAINTENANCE. We charge a periodic fee for maintaining the
customer's Web site. In addition to making minor changes in Web site content, we
conduct general site maintenance functions, review the principal Internet search
engines to determine whether our Web sites are appropriately listed in response
to typical inquiries and perform other functions designed to make maximum use of
the Web sites' potential. Fees for this service currently range up to $300 per
month and we expect these fees to increase as Web site volume and traffic
increases.
WEB SITE TRAFFIC CREATION. As an additional service at no extra fee, we
maintain online "shopping malls" at 3Dshopping.com and other Web sites. From
these malls, shoppers have access to most of our customers' Web sites. The
purpose of the malls is to create shopping communities having shared interests.
We believe such online communities will draw more shoppers than individual Web
sites. Our malls have achieved steady growth, attracting 223,713 visitors in
March 1999. We plan to include brand name manufacturers, traditional brand
retailers and Web-only retailers with brand potential in our malls. We believe
shoppers eventually will be able to purchase apparel, jewelry, flowers,
housewares, gifts, antiques, ancient art, children's wear and toys at our malls.
In addition to our malls, we have agreements with malls operated by other
companies under which those malls include links to our Web sites. Links to our
sites are also included on search engines such as Lycos, Excite and HotBot.
ORDER PROCESSING. We offer our customers a complete range of electronic
order processing services. Many order processing service providers simply take
order and credit card information and transmit this data to the retailer by fax
or telephone. These systems have high error rates with respect to the credit
card and other data transmitted, requiring the retailer to sort out the errors
by attempting to contact the shopper. We have developed a fully computerized
order processing service that
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automatically processes and verifies credit card data with the issuing bank and
runs a fraud detection scan while the shopper is still online. If the data is
not entered correctly or if there is some other problem, we can ask the shopper
to re-enter data. Orders and credit data are transmitted directly to the
customer's fulfillment system, resulting in minimal loss of time and reduced
processing errors. Orders can be forwarded to our customers by fax or e-mail or
through a direct link to the customer's computer system, depending on the
customer's preferences and system capabilities. When the orders are filled, our
processing software automatically instructs the credit card company to release
the purchase money into the merchant's account. For customers electing this
service, a fee is charged based on a percentage of the total value of orders
processed. Some customers prefer to manage order processing themselves by
referring their customer to a Web site managed by them or a toll-free number.
For these customers, we charge a fee based on the number of site visits.
In contrast to many Internet companies, we do not currently offer space for
"banner" advertising. We believe such advertisements detract from the overall
appearance of our Web sites, are distracting to shoppers and are therefore
inconsistent with our primary goal of providing an enhanced electronic
experience to support our customers' product presentation needs.
OUR CUSTOMERS
We market our Web-based marketing and display system to customers with
established brand names and to non-brand name customers. Our customers include
Nordstrom, K-Swiss, Cobra, Perfetto, Max Muscle, Friends and GoGo Apparel. Our
customer base consists primarily of apparel retailers and manufacturers, but
also includes sellers of antiques, flowers and nutritional supplements. Our
customers generally sell a substantial percentage of their products through mail
order catalogs and have shipping capability in place. Based on past work with
our customers, which has allowed us to test our Web-based marketing and display
system, we expect to attract additional customers with more recognizable brand
names. We believe customers such as Nordstrom, with national name recognition,
will attract additional attention to our 3D shopping system, benefiting our
large and small customers.
Our customers have the option to use our Web sites for a variety of
purposes. Substantially all of our customers use our system as a fully
functional sales channel, offering products directly to shoppers over the
Internet. Some customers may use our Web sites as a marketing medium designed to
attract shoppers to other retail channels that they maintain. For example,
Nordstrom has chosen to use our system to display clothing offered in its stores
but does not provide electronic shopping cart e-commerce capability. Instead,
Nordstrom uses its Web site, which incorporates our 3D display technology, to
provide information on products with a toll-free number that customers can call
to order products directly from Nordstrom. The toll-free number is serviced and
maintained by Nordstrom.
We also provide Intranet design, implementation and maintenance services to
companies that participate in the Leavens Awards Program, a supplier and
administrator of employee awards programs. For example we have provided our
technology and services to Shell Oil Company and The Boeing Company for their
internal employee benefits programs. We believe our 3D technology is well suited
for displaying product awards under these programs such as jewelry, pens and
clothing.
We expect that, for the foreseeable future, our core customer base will
consist of clothing and accessory retailers. We believe that this market segment
has sufficient potential to support significant growth in our business and that,
by concentrating in this area, we can position ourselves as the leading provider
of Web-based marketing and display systems to our target customers. We also
serve customers in other areas and expect to continue to do so as the
opportunity arises.
MARKETING AND SALES
We have engaged a nationally-recognized marketing firm to help us enhance
our name recognition both with potential clients and with consumers who visit
our Web sites. We also enter into cross-
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marketing relationships with other Web sites, including MediaOne. This is
primarily implemented through putting click-through banners on each other's Web
sites so that traffic generated on one Web site has the ability to move easily
to the cross-marketing partner's Web site by simply clicking on the banner.
Finally, we are gaining recognition within the industry by participating in
various tradeshows.
Our in-house sales force identifies and develops potential clients through
cold calling and other direct marketing techniques. On April 15, 1999, we
employed three people to carry out our sales and marketing activities.
TECHNOLOGY
Wherever possible, our products are based on commercially available software
products. Because there are a number of alternative software programs that we
can use to create our 3D technology, we are not reliant on a single source of
software. For example, the rotation of our 3D images is created using Java. The
3D image itself is created using a proprietary digital photography system.
Compression for low speed Internet connections is produced through industry
standard programs. While we have adapted industry standard technology to fit our
own applications, and expect to continue to do so, we do not anticipate that the
service we provide will require the development of substantial, independently
developed computer programs or other technology.
We believe that our use of Java provides an advantage over sites that
require multimedia plug-ins. Plug-ins are awkward and often difficult to
download and use. These difficulties may deter some users from visiting the site
or purchasing any merchandise once there. Java requires no plug-ins and does not
result in the excess waiting time that can occur when a shopper downloads a
file.
RELATIONSHIP WITH MEDIAONE
To view conveniently all of the features we offer and plan to offer,
including full motion digital imaging and virtual reality, a shopper must have
access to the Internet via a broadband connection. Broadband connections include
cable, satellite and a variety of digital subscriber lines, also known as DSL.
Broadband connections are much faster than typical modem connections over a
standard telephone line. For example, a 3.5 megabyte file takes approximately 16
minutes to download using a standard modem operating at 14.4 kbps. The same file
will download in a few seconds over a high-speed cable modem. Although we have
designed our Web sites to accommodate differing connection speeds, we believe
the success of 3D-style e-commerce in the future will be dependent on the
availability of high-speed Internet access.
While download speed depends primarily on the speed of the connection
between the user and the Internet, the practical rate at which data can be
received by a user also depends on a variety of factors within the Internet
itself, including capacity and usage of the host site and the capacity of the
various links in the Internet through which the data passes from the host site
to the user. To deal with the dramatic increase in the volume of data being
transmitted over the Internet, various companies are working on the process of
speeding up data delivery by developing "backbones" or proprietary communication
channels that ensure the rapid processing of data within the Internet itself.
Web sites that have direct access to these backbones will transmit data at very
high volumes, permitting the effective use of the high-speed downloading
capabilities offered by broadband connections.
To take full advantage of high-speed cable Internet access, we have entered
into a co-branding agreement with MediaOne Express, a cable company with a
presence in 22 metropolitan markets nationwide. MediaOne has agreed to feature
the 3Dshopping.com Web site prominently in the shopping section of its home
page. The arrangement with MediaOne Express is non-exclusive and we expect to
pursue similar relationships with other Internet service providers in other
markets.
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PROPOSED ACQUISITION OF DESIGN BASE
In order to more fully integrate the range of services we offer, we have
agreed in principle to acquire the assets of Design Base Los Angeles, Inc.
Design Base designs and produces print advertising, direct mail catalogs,
brochures and advertising collateral materials. It operates from a studio on
leased premises located in North Hollywood, California and has a staff of two
management and five other full time employees. Additional staff is used from
time to time for specific purposes like preparing for a photo shoot. Design Base
has traditionally served customers who we view as our potential customers,
designing and producing mail order catalogs for these customers and others.
Since January 1999, we have been producing digital images that support our Web
sites using models selected by Design Base and Design Base's studio facilities.
The acquisition of Design Base will give us direct access to studio facilities
and trained studio staff for which we believe our requirements will increase
substantially over the next year to three years.
In addition to continuing to operate Design Base's traditional hard copy
advertising production business, we believe that we can increase our customer
base by offering to Design Base's traditional customers the opportunity to
produce the digital images necessary to support a Web site at little additional
cost. Substantially all of the time, and therefore the cost, of producing an
apparel catalog is taken up by dressing, making up and otherwise preparing the
models for each picture. In a typical 8-hour day, a model can display between 12
and 15 different items of clothing. Once the model is ready for a static photo
session, it takes only a few more minutes to capture the digital imaging content
using our proprietary digital imaging technology. Because the additional time
involved is relatively minor, the incremental cost of producing the additional
images is substantially lower than if the images are produced on a stand-alone
basis. We plan to offer the opportunity to Design Base's customers to order the
additional images so that they will be prepared, either immediately or in the
future, to sell clothing through e-commerce through one of our Web sites. In
this way, we intend to position ourselves as a "one-stop" source for fashion
product marketing using the latest technology to create compelling and visually
unique Web sites, mail order and electronic catalogs and other advertising
materials for the fashion industry.
If our acquisition of Design Base is completed, we expect to appoint Brian
Smith, Design Base's president and chief executive officer, as President and
Chief Operating Officer of 3Dshopping.com.
COMPETITION
We compete with a broad range of marketing alternatives available to our
customers. We also compete with a broad range of other shopping alternatives to
attract consumers to our Web sites.
Although many of our retail customers use our Web sites as their primary
sales channel, we believe we are seen by larger, name-brand customers and
potential customers primarily as a marketing solution, competing for a share of
the customer's marketing and advertising budget. In that capacity, we compete
against all of the traditional marketing resources, including print and other
media advertising, mail order catalogs, in-store displays, coupon and other
incentive programs and phone-in or computer-based services maintained by the
customer. In a narrower sense, we compete against a large number of providers of
Web site design and related Internet services.
At the consumer level, we and our customers compete for the attention and
budget of consumers for the products that our customers sell. This competition
includes traditional retail stores, mail order catalogs and a growing number of
Internet-based alternatives. While we believe that our system offers significant
marketing advantages over other existing Internet-based systems, many factors
affect competition for Internet consumers, including affiliations with companies
that control or direct access to the Internet or to individual Web sites.
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Design Base competes with many other producers of mail order catalogs for
retail customers. Some of these producers are much larger and have greater
financial resources than Design Base. Participants in this industry
differentiate themselves largely based on creative content and customer service.
We cannot guarantee that Design Base will be able maintain its creative
distinctiveness and desirability to customers.
EMPLOYEES
As of March 8, 1999, we had 18 full-time employees, 10 of whom were involved
in Web site design and development, four in sales and marketing and four in
finance, administration and operations. Our future success depends, in part, on
our continuing ability to attract, train and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense, and
we do not assure you that we will be able to recruit and retain sufficient
numbers of qualified personnel. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider our relations
with employees to be good.
Design Base had seven full time employees on March 1, 1999. None of these
employees is represented by a labor union.
FACILITIES
We lease approximately 2,000 square feet of office space in two office
buildings located in Venice, California. One of our leases will expire on May
31, 1999, but we anticipate that it will be renewed. We believe our current
facilities will be adequate through calendar year 1999. We are in the process of
locating additional space to meet our expected requirements beyond 1999. Design
Base leases approximately 10,000 square feet of office and photography studio
space from a limited liability company whose members are also the shareholders
of Design Base. We believe these facilities will be adequate through calendar
year 1999.
LITIGATION
We are not engaged in any litigation that, singly or in the aggregate, will
have a material adverse effect on our business, financial condition or results
of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table contains information as of March 1, 1999 with respect to
each person who is an executive officer or director of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Lawrence Weisdorn.......................... 41 President and Director
Robert J. Grant............................ 49 Treasurer and Secretary and Director
Donald R. Westland......................... 40 Vice President of Technical Operations
Donald L. Hejmanowski...................... 39 Director
</TABLE>
LAWRENCE WEISDORN has been President and a director of the company since its
inception in August 1996. From January 1995 to August 1996, Mr. Weisdorn served
as President and Chief Executive Officer of Samuel Hamann Graphix, Inc., a
company he founded that provides legacy software migration solutions and
services. During the eight years before he joined Samuel Hamann Graphix, Mr.
Weisdorn worked as an independent marketing and sales consultant.
In December 1988, Mr. Weisdorn entered into an Agreement and Undertaking
with the British Columbia Securities Commission relating to various matters
concerning Mr. Weisdorn's management of two mining companies. Mr. Weisdorn and
one other member of management obtained salary advances and other benefits from
these companies without obtaining the prior approval of the disinterested
directors or of the Vancouver Stock Exchange. In obtaining the advances and
benefits, Mr. Weisdorn acted on advice of legal counsel which stated that such
advances and benefits were permitted but failed to add that the above-mentioned
approvals were required. The advances were made in the aftermath of the market
crash of October 1987, as a result of which Mr. Weisdorn incurred substantial
debts from losses in his margin accounts with four broker-dealers. Mr. Weisdorn
has fully complied with the Agreement and has fully repaid the companies in
question and his margin debts.
ROBERT J. GRANT has been Treasurer and Secretary and a director of the
company since August 1996. During this period of time, Mr. Grant has also served
as our acting Chief Financial Officer. From April 1996 to August 1996, Mr. Grant
served as Office Manager of Samuel Hamann Graphix, Inc. From March 1995 to April
1996, he was a salesperson for two car dealerships. From January 1994 to March
1995, Mr. Grant was a principal of Grant & Associates, an industrial real estate
company. From January 1993 to January 1994, he worked in corporate sales at
Investors Title, a title insurance company. Mr. Grant was Vice President of
Business Development at Continental Lawyers Land Title, a real estate title
company, from 1982 to 1992. Mr. Grant declared personal bankruptcy under Chapter
7 of the federal Bankruptcy Code in 1995.
DONALD R. WESTLAND has been Vice President of Technical Operations of the
company since August 1997. From August 1996 to August 1997, Mr. Westland served
as a consultant to the company. During the seven years before joining the
company, Mr. Westland was a Senior Project Engineer for Rubbermaid Inc. Mr.
Westland declared personal bankruptcy under Chapter 7 of the federal Bankruptcy
Code in 1997.
DONALD L. HEJMANOWSKI has been a director of the company since August 1996.
Mr. Hejmanowski is President and a director of Genesis Oil & Gas. He has held
that position since April 1998. From 1990 to April 1998, Mr. Hejmanowski worked
as an independent corporate finance consultant, assisting companies with
financing, corporate strategy and financial public relations. From August 1996
to February 1997, Mr. Hejmanowski was employed by the company as investor
relations manager.
We are engaged in a search for a permanent Chief Financial Officer and
expect to retain a qualified person at the time of or shortly after the
offering.
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BRIAN A. SMITH is the principal shareholder of Design Base Los Angeles, Inc.
Following our anticipated acquisition of Design Base, we expect that Mr. Smith
will become our President and Chief Operating Officer and Mr. Weisdorn will be
named Chief Executive Officer. Mr. Smith has been President and Chief Executive
Officer of Design Base since August 1993. He has managed the company as an
independent business since January 1995.
All members of the board of directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation, or removal. Officers serve at the discretion of the
board of directors. There are no family relationships among any of our directors
and executive officers. We are engaged in a search for additional independent
directors and expect to add at least one and possibly two independent directors
following this offering.
BOARD COMMITTEES
Currently, the Board of Directors has not created any committees. We will
create an audit committee and a compensation committee upon completion of this
offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In the last fiscal year, our Board of Directors did not have a compensation
committee. Compensation decisions with respect to executive officers were made
by Lawrence Weisdorn.
EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Directors are reimbursed for the expenses they actually incur in attending
board meetings. We expect to implement an option program for non-employee
directors. Directors are not paid a fee for their service or attendance at board
meetings.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information regarding compensation
paid during our fiscal years ended June 30, 1997 and 1998 to our President. No
executive officer received salary and bonus in excess of $100,000 in those
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- ------------------------------------------------------------------------------------ --------- --------- -------------
<S> <C> <C> <C>
Lawrence Weisdorn, President........................................................ 1998 $ 48,000 $ 0
1997 $ 41,000 $ 0
</TABLE>
STOCK OPTION GRANTS AND EXERCISES
We have adopted a 1999 Stock Option Plan, authorizing the grant of options
to purchase up to 1,000,000 shares of common stock. The plan was adopted to
promote and advance the interests of 3Dshopping.com and its shareholders by:
- enabling us to attract, retain and reward managerial and other key
employees, non-employees and directors; and
- strengthening the mutuality of interests between participants in the plan
and the shareholders in our long-term growth, profitability and financial
success by offering stock options.
We have not granted options to Mr. Weisdorn.
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CERTAIN TRANSACTIONS
We sublease approximately 425 square feet of office space from Donald
Westland, one of our executive officers. The rent on this sublease is $700 per
month. We believe this is a competitive lease rate for similar real estate in
the area where the office is located. Mr. Westland also maintains a Web site at
which he includes a link to our Web sites. We pay him a fee of $800 per month
for that link.
Our company was founded by Lawrence Weisdorn in August 1996. At the time of
our inception, Mr. Weisdorn was the principal shareholder of Samuel Hamann
Graphix, Inc., a development stage company that had been in existence for about
one year at that time. We acquired property, equipment and other prepaid assets
from Samuel Hamann Graphix. In return for these assets, we assumed some payroll
and other liabilities of Samuel Hamann Graphix and liabilities of Mr. Weisdorn
in the amount of $18,500. The purchase price was allocated to the tangible
assets at their original cost. The balance of $5,306 was attributed to research
and development.
From August 1996 to June 30, 1998, Mr. Weisdorn and his father advanced a
total of $178,683 to our company. These advances were made in the form of loans
on which we pay annual interest of 7%. In fiscal 1998, the Weisdorns advanced
$108,860. We have repaid $118,095 of this indebtedness from inception to June
30, 1998 and on that date, we owed the Weisdorns a total of $60,588. We expect
to repay all remaining sums owing to Mr. Weisdorn and his father with the
proceeds of this offering.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of March 1, 1999, and as of
that date as adjusted to reflect the sale of the 1,750,000 units offered hereby,
with respect to the beneficial ownership of the common stock by (1) each
shareholder known by us to be the beneficial owner of more than 5% of our
outstanding common stock; (2) each of our directors; (3) the executive officer
named in the Summary Compensation Table; and (4) all current executive officers
and directors as a group. The address of each person listed below is: c/o
3Dshopping.com, 517 Boccaccio Avenue, Venice, California 90291. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock issuable on exercise of currently
exercisable or convertible securities or securities exercisable or convertible
within 60 days of March 1, 1999 are deemed beneficially owned and outstanding
for computing the percentage owned by the person holding such securities, but
are not considered outstanding for computing the percentage of any other person.
Except as modified by applicable community property laws, each shareholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite that shareholder's name.
<TABLE>
<CAPTION>
SHARES PERCENT OF SHARES OUTSTANDING
BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Lawrence Weisdorn.............................................. 700,000 19.2% 13.0%
Donald L. Hejmanowski.......................................... 250,000 6.9 4.6
Robert J. Grant................................................ 117,000 3.2 2.1
All Executive Officers and Directors as a Group (4 persons).... 1,164,000 31.3% 21.3%
</TABLE>
The shares beneficially owned by each of Mr. Grant and another executive
officer include 37,000 shares subject to immediately exercisable options as of
March 1, 1999.
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DESCRIPTION OF SECURITIES
As of the date of this prospectus, our authorized capital stock consists of
10,000,000 shares of common stock and 5,000,000 shares of preferred stock.
UNITS
Each unit consists of one share of common stock and one warrant. The common
stock and warrants will become immediately separately transferable following
this offering.
COMMON STOCK
As of March 1, 1999, there were 3,645,746 shares of common stock outstanding
held of record by approximately 60 shareholders. There will be 5,395,746 shares
of common stock outstanding after giving effect to the sale of the 1,750,000
units we are offering.
Holders of shares of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Upon giving proper notice,
shareholders have rights to cumulate their votes in the election of directors
under the California General Corporation Law.
Subject to preferences that may be applicable to the holders of outstanding
shares of preferred stock, the holders of common stock are entitled to receive
such lawful dividends as the board of directors may declare from time to time.
In the event we liquidate, dissolve or wind up, and subject to the rights of the
holders of outstanding shares of preferred stock, the holders of shares of
common stock will be entitled to receive PRO RATA all of our remaining assets
available for distribution to our shareholders. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and shares of common stock to
be issued pursuant to this offering will be, upon issuance, fully paid and
nonassessable.
WARRANTS
Each warrant will entitle the holder to purchase one share of common stock
at an exercise price of $ per share (150% of the initial public
offering price of the units). The warrants will generally be exercisable at any
time for five years after the date of this prospectus, unless earlier redeemed.
The warrants are redeemable by us, at a price of $0.25 per warrant, upon 30
days' prior written notice, no earlier than 180 days from the date of this
prospectus and then only if the closing bid price defined in the Warrant
Agreement, which we describe below, per share of the common stock for the 10
consecutive trading days immediately preceding the date of notice of redemption
equals or exceeds $ (200% of the initial public offering price of the
units). If we give notice of our intention to redeem, a holder will have the
choice either to sell or exercise his or her warrants before the date specified
in the redemption notice or to accept the redemption price.
The warrants will be issued in registered form under a warrant agreement
between us and Interwest Transfer Company, as warrant agent. The shares of
common stock underlying the warrants, when issued upon exercise of a warrant,
will be fully paid and nonassessable, and we will pay any transfer tax incurred
as a result of the issuance of common stock to the holder upon its exercise.
The warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price. These adjustments will occur in the event,
among others, of a merger, stock split or reverse stock split, stock dividend or
recapitalization. We are not required to issue fractional shares upon the
exercise of a warrant. The holder of a warrant will not possess any rights as
our shareholder until he or she exercises the warrant.
A warrant may be exercised upon surrender of the warrant certificate on or
before the expiration or redemption date of the warrant at the offices of the
warrant agent, with the form of "Election to
33
<PAGE>
Purchase" on the reverse side of the warrant certificate completed and executed
as indicated, accompanied by payment of the exercise price (by certified or bank
check payable to the order of 3Dshopping.com) for the number of shares with
respect to which the warrant is being exercised.
For a holder to exercise the warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of common stock or other securities underlying the warrants. We have agreed to
use all commercially reasonable efforts to cause a registration statement with
respect to such securities under the Securities Act to be filed and to become
and remain effective in anticipation of and before the exercise of the warrants
and to take such other actions under the laws of various states as may be
required to cause the sale of common stock or other securities upon exercise of
warrants to be lawful. Under certain circumstances, we may redeem the warrant by
paying to the holder cash equal to the difference between the market price of
the common stock on the exercise date and the exercise price of the warrant. We
will not be required to honor the exercise of warrants if, in the opinion of our
board of directors with the advice of counsel, the sale of securities upon
exercise would be unlawful.
The foregoing discussion of material terms and provisions of the warrants is
qualified in its entirety by reference to the detailed provisions of the warrant
agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this prospectus is a part.
For the life of the warrants, the holders have the opportunity to profit
from a rise in the market price of the common stock without assuming the risk of
ownership of the shares of common stock underlying the warrants. The warrant
holders may be expected to exercise their warrants at a time when we would, in
all likelihood, be able to obtain any needed capital by an offering of common
stock on terms more favorable than those provided for by the warrants.
Furthermore, the terms on which we could obtain additional capital during the
life of the warrants may be adversely affected.
PREFERRED STOCK
No shares of preferred stock are outstanding. As of the date of this
prospectus, our board of directors has the authority, without further action by
the shareholders, to issue shares of preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions of the preferred
stock, including
- voting rights,
- terms of redemption,
- redemption prices,
- liquidation preferences,
- dividend preferences,
- conversion rights,
- number of shares constituting any series or
- the designation of such series.
Although it presently has no intention to do so, our board of directors, without
shareholder approval, could issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of common
stock. This provision may be deemed to have a potential anti-takeover effect and
the issuance of the preferred stock in accordance with such provision may delay
or prevent a change of control of 3Dshopping.com.
34
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussions set forth certain federal income tax consequences,
under current law, relating to the purchase and ownership of the units and the
underlying common stock and warrants. The discussion is a summary and does not
purport to deal with all aspects of federal taxation that may be applicable to
an investor, nor does it consider specific facts and circumstances that may be
relevant to a particular investor's tax position. Some holders, such as dealers
in securities, insurance companies, tax exempt organizations, foreign persons
and those holding common stock or warrants as part of a straddle or hedge
transaction, may be subject to special rules that are not addressed in this
discussion. This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date hereof, all of which are subject to change. YOU
SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU
OF THIS OFFERING, INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL AND
FOREIGN TAX LAWS.
ALLOCATION OF PURCHASE PRICE
Each unit as a whole will have a tax basis equal to the cost of the unit.
The measure of income or loss from some of the transactions described below
depends on the tax basis in each of the warrant and the common stock comprising
the unit. The tax basis for each of the warrant and the common stock will be
determined by allocating the cost of the unit between the securities that
comprise the unit in proportion to the relative fair market values of these
elements at the time of acquisition.
EXERCISE AND SALE OF WARRANTS
No gain or loss will be recognized by a holder of a warrant on the purchase
of shares of common stock for cash on an exercise of a warrant, except that gain
will be recognized to the extent cash is received in lieu of fractional shares.
The tax basis of common stock received upon exercise of a warrant will equal the
sum of the holder's tax basis for the exercised warrant and the exercise price.
The holding period of the common stock acquired will begin on the date the
warrant is exercised and the common stock is purchased. It does not include the
period during which the warrant was held.
Gain or loss from the sale or other disposition of a warrant, or loss in the
event the warrant expires unexercised, other than on a redemption by us, will be
capital gain or loss to its holder if the common stock to which the warrant
relates would have been a capital asset in the hands of such holder. This
capital gain or loss will be long-term capital gain or loss if the holder has
held the warrant for more than one year at the time of the sale, disposition or
lapse. On the redemption of a warrant by us, the holder generally will realize
capital gain or loss.
SALE OF COMMON STOCK
The sale of common stock should generally result in the recognition of gain
or loss to the holder in an amount equal to the difference between the amount
realized and such holder's tax basis in the common stock. If the common stock
constitutes a capital asset in the hands of the holder, gain or loss upon the
sale of the common stock will be characterized as long-term or short-term
capital gain or loss, depending on whether the common stock has been held for
more than one year.
EXPIRATION OF WARRANTS WITHOUT EXERCISE
If a holder of a warrant allows it to expire without exercise, the
expiration will be treated as a sale or exchange of the warrant on the
expiration date. The holder will have a loss equal to the amount of such
holder's tax basis in the lapsed warrant. If the warrant constitutes a capital
asset in the hands of the holder, the loss will be characterized as long-term or
short-term capital loss, depending on whether the warrant was held for more than
one year.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
Interwest Transfer Company will serve as the Transfer Agent and Registrar
for the common stock and warrant agent for the warrants.
35
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, our common stock was thinly traded on the NASD OTC
Bulletin Board under the symbol "PGRX". Future sales of substantial amounts of
common stock in the public market or the prospect of such sales could adversely
effect prevailing market prices.
Upon completion of this offering, 5,395,746 shares of common stock will be
outstanding. Of these shares, the 1,750,000 shares issued as part of the units
will be freely tradable without restriction under the Securities Act, unless
purchased by an "affiliate" of the company, as that term is defined in Rule 144
under the Securities Act. In addition, 2,297,746 shares that were previously
issued under Rule 504 under the Securities Act will be freely tradable without
restriction. The remaining 1,348,000 shares outstanding after completion of this
offering are "restricted securities" or held by "affiliates" as defined in Rule
144. Restricted shares may be sold in the public market only if registered under
the Securities Act or if they qualify for an exemption from registration,
including an exemption under Rule 144.
Our company, our directors, officers and shareholders who beneficially own
more than five percent of our outstanding common stock all of whom held an
aggregate of 1,067,000 shares of common stock on March 1, 1999, have agreed
that, for one year following the date of this prospectus, they will not offer,
sell, contract to sell or otherwise dispose of any shares of common stock
without the consent of Paulson Investment Company, Inc. Officers and directors
may make intra-family transfers or transfers to trusts for estate planning
purposes. Upon expiration of these agreements, all of these shares will be
eligible for immediate resale in the public market subject to the limitations of
Rule 144.
In general under Rule 144, a person, including an "affiliate" of the
company, who has beneficially owned restricted shares for at least one year is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of common stock
(approximately 53,957 shares immediately following this offering) or the average
weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are subject to manner of sale
restrictions, notice requirements and the availability of current public
information about us. Rule 144(k) provides that a person who is not an
"affiliate" of the issuer at any time during the three months preceding a sale
and who has beneficially owned shares for at least two years is entitled to sell
those shares at any time without compliance with the public information, volume
limitation, manner of sale and notice provisions of Rule 144.
As of February 28, 1999, immediately exercisable options to purchase 323,000
shares of common stock were outstanding. These options were granted before we
adopted our 1999 Stock Option Plan and under written compensation agreements
with some of our employees and consultants under the exemption provided by Rule
701. To the extent these options are exercised, the underlying common stock will
become freely tradable 90 days after the date of this prospectus subject to the
manner of sale requirements of Rule 144.
We have reserved 1,000,000 shares for issuance upon the exercise of options
under our 1999 Stock Option Plan. We intend to file as soon as practicable
following completion of this offering a registration statement on Form S-8 under
the Securities Act covering these shares of common stock. See "Management--Stock
Option Plan." The registration statement will become effective immediately upon
filing, whereupon, subject to the satisfaction of applicable exercisability
periods, Rule 144 volume limitations applicable to affiliates and, in some
cases, the agreements with the representative of the underwriters referred to
above, shares of common stock to be issued upon exercise of outstanding options
granted pursuant to the Stock Option Plan will be available for immediate resale
in the open market. No options have been granted under the 1999 Stock Option
Plan as of the date of this prospectus.
36
<PAGE>
As of February 28, 1999, immediately exercisable warrants to purchase
239,333 shares of common stock were outstanding. These warrants were issued
under written compensation agreements with consultants under the exemption
provided by Rule 701. To the extent these warrants are exercised, the underlying
common stock will become freely tradable 90 days after the date of this
prospectus subject to the manner of sale requirements of Rule 144.
An additional 2,187,500 shares of common stock may become available for
resale upon exercise of the underwriters' over-allotment option, the warrants
and the representative's warrant.
Some holders of our common stock and warrants to purchase our common stock
have registration rights. These people hold 346,000 restricted shares of common
stock and immediately exercisable warrants to purchase 239,333 shares of
restricted common stock. Under some conditions, these people may request that we
register these shares with the Securities and Exchange Commission. Once these
shares are registered, they will be freely tradable.
37
<PAGE>
UNDERWRITING
The underwriters named below for whom Paulson Investment Company, Inc. is
acting as representative, have severally agreed, under the terms and conditions
of an underwriting agreement with us and the underwriters, to purchase from us,
and we have agreed to sell to them, the number of units set forth in the table
below at the price set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Paulson Investment Company, Inc......................................................................
----------
Total............................................................................................ 1,750,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase the units are subject to conditions. If any units are purchased, the
underwriters are committed to purchase all of the 1,750,000 units offered by
this prospectus, but not the 262,500 units subject to their over-allotment
option.
The representative has advised us that the underwriters propose to offer the
units to the public at the initial public offering price set forth on the cover
page of this prospectus and to selected dealers at that price minus a concession
within the discretion of the representative, and that the underwriters and the
selected dealers may reallow a concession to other dealers, including the
underwriters, within the discretion of the representative. After the initial
public offering of the units, the public offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by the
representative.
We have granted the underwriters an option, expiring at the close of
business 45 days after the date of this prospectus, to purchase up to 262,500
additional units from us on the same terms as apply to the sale of the units set
forth above. The underwriters may exercise the option only to cover
over-allotments incurred in the sale of the units.
The representative has informed us that it does not expect the underwriters
to confirm sales of units on a discretionary basis.
Until the distribution of the units is completed, rules of the Securities
and Exchange Commission may limit the ability of the underwriters and some
selling group members to bid for and purchase the securities. As an exception to
these rules, the underwriters are permitted to engage in transactions that
stabilize the price of the common stock and/or warrants. These transactions
include bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock and/or warrants. If the underwriters create a short
position in the units in connection with this offering, I.E., if they sell more
units than are set forth on the cover page of this prospectus, the
representative may reduce that short position by purchasing common stock and
warrants in the open market. The representative may also elect to reduce any
short position by exercising all or part of the over-allotment option.
38
<PAGE>
The representative may also impose a penalty bid on underwriters and selling
group members. This means that if the representative purchases units in the open
market to reduce the underwriters' short position or to stabilize the price of
the common stock and/or warrants, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
securities as part of this offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither we nor the underwriters make any
representation or predictions as to the direction or magnitude of any effect the
transactions described above may have on the price of the common stock and/or
warrants. In addition, neither we nor the underwriters make any representation
that the underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The underwriting agreement provides for indemnification between us and the
underwriters against some liabilities, including liabilities under the
Securities Act of 1933 and for contribution by us and the underwriters to
payments that may be required to be made in respect of those liabilities.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors, officers and controlling persons under the agreement
between us and the underwriters, or otherwise, we have been advised that in the
opinion of the SEC this indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
We have agreed to pay the representative a nonaccountable expense allowance
equal to two percent of the gross proceeds from the sale of units.
We have agreed to issue to the representative warrants that entitle the
holder to purchase up to 175,000 units at an exercise price of $ per unit.
The representative's warrants are not transferable for one year from the date of
issuance, except to individuals who are either a partner or an officer of an
underwriter, by will or by the laws of descent and distribution. The
representative's warrants are not redeemable by us. We have agreed to maintain
an effective registration statement with respect to the issuance of the
securities underlying the representative's warrants, if necessary, to allow
their public resale without restriction, at all times during the period in which
the representative's warrants are exercisable, beginning one year after the date
of this prospectus. Such securities are being registered on the registration
statement of which this prospectus is a part.
We have agreed that, for a period of one year following the completion of
this offering, we generally will not offer, sell, contract to sell, grant any
option for the sale or otherwise dispose of any of our common stock without the
consent of the representative. Our officers, directors and the holders of 5% or
more of our outstanding common stock (aggregating 1,067,000 shares) have agreed
that for a period of one year following this offering, they will not offer,
sell, contract to sell, grant any option for the sale or otherwise dispose of
any of our common stock, other than intra-family transfers or transfers to
trusts for estate planning purposes, without the consent of the representative,
which will not be unreasonably withheld. After the one year period, these
persons will give the representative prior notice of sales under Rule 144 for
five years from the date of this prospectus.
39
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Stoel Rives LLP, Portland, Oregon. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Grover T. Wickersham, P.C.,
Palo Alto, California.
EXPERTS
The balance sheet as of June 30, 1998, and the statements of operations,
stockholders' deficit, and cash flows for the eleven months ended June 30, 1997
and the year ended June 30, 1998, have been audited by Friedman, Minsk, Cole &
Fastovsky, independent certified public accountants, as set forth in their
report appearing elsewhere in this prospectus and in the registration statement,
and are included in reliance upon that report given upon the authority of that
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are not a reporting company under the Securities Exchange Act of 1934. We
have filed with the Securities and Exchange Commission a registration statement
on Form S-1 under the Securities Act of 1933 with respect to the units, common
stock and warrants. This prospectus omits some information contained in the
registration statement and its exhibits, as permitted by the rules and
regulations of the SEC. For further information with respect to us and our
securities, you should review the registration statement and its exhibits, which
may be inspected, without charge, at the Public Reference Section of the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the SEC located at 7 World Trade Center, Suite 1300,
New York, NY 10048, and the Kluczynski Federal Building, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies of all or any portion of the
Registration Statement may be obtained from the Public Reference Section of the
SEC, upon payment of prescribed fees. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
about registrants that file electronically with the SEC, including the
registration statement. The address of the SEC's World Wide Web site is
HTTP://WWW.SEC.GOV.
Statements contained in this prospectus as to the contents of any contract
or other document referred to in this prospectus are not necessarily complete
and, in each instance, reference is made to the copy of that contract or other
document filed as an exhibit to the registration statement, each statement being
qualified in all respects by that reference.
40
<PAGE>
3DSHOPPING.COM
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants....................................................... F-2
Financial Statements:
Balance Sheets as of June 30, 1998 and December 31, 1998 (Unaudited)..................................... F-3
Statements of Operations for the period August 1, 1996 (Inception) through June 30, 1997, for the year
ended June 30, 1998, for the period August 1, 1996 (Inception) through June 30, 1998 and for the six
months ended December 31, 1997 and 1998 (unaudited).................................................... F-4
Statement of Shareholders' Deficit for the period August 1, 1996 (Inception) through December 31, 1998... F-5
Statements of Cash Flows for the period August 1, 1996 (Inception) through June 30, 1997, for the year
ended June 30, 1998, for the period August 1, 1996 (Inception) through June 30, 1998 and for the six
months ended December 31, 1997 and 1998 (unaudited).................................................... F-6
Notes to Financial Statements--June 30, 1997 and 1998.................................................... F-7-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
3DSHOPPING.COM
We have audited the accompanying Balance Sheet of 3Dshopping.com (a
development stage enterprise) as of June 30, 1998 and the related Statements of
Operations, Shareholders' Deficit, and Cash Flows for the period from August 1,
1996 (Inception) to June 30, 1997, the year ended June 30, 1998 and for the
period from August 1, 1996 (Inception) to June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 3Dshopping.com (a
development stage enterprise) as of June 30, 1998 and the results of its
operations and its cash flows for the period from August 1, 1996 (Inception) to
June 30, 1997, the year ended June 30, 1998 and from August 1, 1996 (Inception)
to June 30, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations that
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ FRIEDMAN, MINSK, COLE & FASTOVSKY
- --------------------------------------------------
Friedman, Minsk, Cole & Fastovsky
Los Angeles, California
January 15, 1999, except for Note 9 as to which the date is March 9, 1999
and Note 12 as to which the date is April 19, 1999
F-2
<PAGE>
3DSHOPPING.COM
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER
1998 31, 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 144,564 $ 112,062
Accounts receivable.............................................. 4,999 15,264
Contracts in progress............................................ -- 10,797
Prepaid expenses................................................. 13,496 8,272
---------- ----------
Total current assets........................................... 163,059 146,395
Property and equipment-net....................................... 66,470 105,590
---------- ----------
Total assets................................................... $ 229,529 $ 251,985
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligation................... $ -- $ 5,293
Notes payable--current........................................... 260,588 295,064
Accounts payable................................................. 64,567 68,023
Accrued expenses and other current liabilities................... 3,000 14,805
---------- ----------
Total current liabilities...................................... 328,155 383,185
Capital lease obligation......................................... -- 12,052
Shareholders' deficit:
Common Stock, no par value: 10,000,000 shares authorized:
3,191,400 (June) and 3,305,746 (December) shares issued and
outstanding.................................................... 3,191 3,306
Additional paid-in capital....................................... 2,993,921 5,534,477
Stock subscriptions received in advance.......................... -- 53,750
Stock subscriptions receivable................................... (107,400) (2,500)
Accumulated deficit.............................................. (2,988,338) (5,732,285)
---------- ----------
Total shareholders' deficit.................................... (98,626) (143,252)
---------- ----------
Total liabilities and shareholders' deficit.................... $ 229,529 $ 251,985
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
3DSHOPPING.COM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
AUGUST 1, AUGUST 1,
1996 1996 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED (INCEPTION) DECEMBER 31,
TO JUNE 30, JUNE 30, TO ------------------------
1997 1998 JUNE 30, 1998 1997 1998
------------- ------------ ------------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ -- $ 18,404 $ 18,404 $ 521 $ 27,539
------------- ------------ ------------- ---------- ------------
Costs and expenses:
Sales and marketing.................... 973,283 473,665 1,446,948 148,092 822,338
Research and development............... 294,360 170,259 464,619 107,748 281,675
General and administrative............. 647,868 457,345 1,105,213 178,091 1,650,310
------------- ------------ ------------- ---------- ------------
Total costs and expenses............. 1,915,511 1,101,269 3,016,780 433,931 2,754,323
------------- ------------ ------------- ---------- ------------
Loss from operations................... 1,915,511 1,082,865 2,998,376 433,410 2,726,784
Interest expense....................... 3,089 10,373 13,462 2,450 17,163
Other income........................... 10,000 13,500 23,500 13,500 --
------------- ------------ ------------- ---------- ------------
Net loss............................. $ 1,908,600 $ 1,079,738 $ 2,988,338 $ 422,360 $ 2,743,947
------------- ------------ ------------- ---------- ------------
------------- ------------ ------------- ---------- ------------
Net loss per share....................... $ 0.59 $ 0.28 $ 0.85 $ 0.11 $ 0.68
------------- ------------ ------------- ---------- ------------
------------- ------------ ------------- ---------- ------------
Weighted average number of shares used in
computing net loss per share........... 3,210,651 3,823,228 3,530,256 3,686,644 4,015,416
------------- ------------ ------------- ---------- ------------
------------- ------------ ------------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
3DSHOPPING.COM
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK STOCK
---------------------- PAID-IN SUBSCRIPTIONS SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE IN ADVANCE DEFICIT TOTAL
--------- ----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of Common Stock................ 707,333 $ 707 $ 591,043 $ (83,375) $ 508,375
Issuance of Common Stock for
services........................... 1,820,000 1,820 1,363,180 1,365,000
Costs of stock offering.............. (15,931) (15,931)
Stock subscriptions received in
advance............................ $ 39,500 39,500
Net loss............................. -- -- -- -- -- $(1,908,600) (1,908,600)
--------- ----------- ----------- ------------ ------------ ------------ -----------
Balance at June 30, 1997............. 2,527,333 2,527 1,938,292 (83,375) 39,500 (1,908,600) (11,656)
Prior stock subscriptions received... 83,375 83,375
Issuance of Common Stock for
services........................... 35,700 36 59,293 59,329
Sales of Common Stock................ 289,933 290 419,960 (181,775) (39,500) 198,975
Net loss............................. -- -- -- -- -- (422,360) (422,360)
--------- ----------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1997
(unaudited)........................ 2,852,966 2,853 2,417,545 (181,775) -- (2,330,960) (92,337)
Issuance of Common Stock for
services........................... 33,000 33 43,851 43,884
Sales of Common Stock................ 305,434 305 343,444 74,375 418,124
Costs of stock offering.............. (29,374) (29,374)
Fair market value of stock options... 218,455 218,455
Net loss............................. -- -- -- -- -- (657,378) (657,378)
--------- ----------- ----------- ------------ ------------ ------------ -----------
Balance at June 30, 1998............. 3,191,400 3,191 2,993,921 (107,400) (2,988,338) (98,626)
Stock subscriptions received......... 107,400 53,750 161,150
Stock options exercised.............. 59,000 59 249,941 (2,500) 247,500
Issuance of Common Stock for
services........................... 25,000 25 306,225 306,250
Exercise of cashless warrants........ 30,346 31 (31) --
Employee stock options............... 1,629,921 1,629,921
Non-employee stock options........... 354,500 354,500
Net loss............................. -- -- -- -- -- (2,743,947) (2,743,947)
--------- ----------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1998
(unaudited)........................ 3,305,746 $ 3,306 $ 5,534,477 $ (2,500) $ 53,750 $(5,732,285) $ (143,252)
--------- ----------- ----------- ------------ ------------ ------------ -----------
--------- ----------- ----------- ------------ ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
3DSHOPPING.COM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 1,
1996 SIX MONTHS ENDED DECEMBER
(INCEPTION) AUGUST 1, 1996 31,
TO JUNE 30, YEAR ENDED (INCEPTION) TO --------------------------
1997 JUNE 30, 1998 JUNE 30, 1998 1997 1998
------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss........................................ $(1,908,600) $ (1,079,738) $ (2,988,338) $ (422,360) $ (2,743,947)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 20,822 40,333 61,155 20,418 23,207
Gain on sale of assets........................ -- (1,049) (1,049) --
Common Stock issued for services.............. 1,365,808 103,213 1,469,021 59,329
Options and warrants issued for services and
compensation................................ -- 218,455 218,455 -- 2,290,646
Changes in assets and liabilities:
Accounts receivable........................... (719) (4,280) (4,999) (1,221) (10,265)
Prepaid expenses.............................. (6,066) (7,430) (13,496) (2,200) 5,224
Contracts in progress......................... -- -- -- -- (10,797)
Accounts payable and other liabilities........ 88,162 (20,595) 67,567 (50,768) 15,261
Organization costs............................ (1,570) -- (1,570) -- --
------------- ------------- --------------- ----------- -------------
Net cash used in operating activities....... (442,163) (751,091) (1,193,254) (396,802) (430,671)
------------- ------------- --------------- ----------- -------------
Cash flows from investing activities:
Acquisition of property and equipment......... (114,270) (13,250) (127,520) (9,827) (62,327)
Proceeds from sale of property................ -- 2,514 2,514 -- --
------------- ------------- --------------- ----------- -------------
Net cash used in investing activities....... (114,270) (10,736) (125,006) (9,827) (62,327)
------------- ------------- --------------- ----------- -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock........ 547,067 700,474 1,247,541 282,100 408,675
Costs of issuance of Common Stock............. (15,931) (29,374) (45,305) --
Proceeds from issuance of debt................ 22,728 237,860 260,588 124,824 34,476
Capital lease................................. -- -- -- -- 17,345
------------- ------------- --------------- ----------- -------------
Net cash provided by financing activities... 553,864 908,960 1,462,824 406,924 460,496
------------- ------------- --------------- ----------- -------------
Net change in cash and cash equivalents..... (2,569) 147,133 144,564 295 (32,502)
Cash and equivalents at beginning of period..... -- (2,569) -- (2,569) 144,564
------------- ------------- --------------- ----------- -------------
Cash and cash equivalents at end of period...... $ (2,569) $ 144,564 $ 144,564 $ (2,274) $ 112,062
------------- ------------- --------------- ----------- -------------
Cash paid during period for:
Interest...................................... $ 2,980 $ 3,001 $ 5,981 $ 2,381 $ 2,674
Income taxes.................................. -- 1,600 1,600 800 800
Stock and options issued as compensation and for
services...................................... 1,365,808 321,668 1,687,476 59,329 2,290,646
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
3Dshopping.com, formerly Pi Graphix, Inc., (the "Company") commenced
operations effective August 1, 1996. The Company was formed to design and
develop high end internet applications using 3D modeling software and
interactive databases. The company has developed and is beginning to implement
and market to e-commerce retailers a Web-based marketing and merchandising
system that incorporates sophisticated graphics and other audio-visual features.
The Company was in the development stage through June 30, 1998 and its
efforts through that time were principally devoted to organizational activities,
raising capital and research and development efforts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company depreciates its
property and equipment using the straight-line method. The principal useful
lives in computing depreciation are as follows:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
- ------------------------------------------------------------------------------ --------------
<S> <C>
Machinery and equipment....................................................... 3-5 Years
Furniture and fixtures........................................................ 5-10 Years
Software...................................................................... 1-3 Years
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and tax basis of
assets and liabilities and operating losses available to offset future taxable
income, using enacted tax rates in effect in the years in which the differences
are expected to reverse.
DEVELOPMENT COSTS
Expenditures during the research and development stage are expensed as
incurred. Development costs, including direct labor, incurred subsequent to
establishing technological feasibility are capitalized. Development costs for
each product are carried on the balance sheet at the lower of unamortized cost
or net realizable value.
ORGANIZATION COSTS
In accordance with the provisions of Statement of Position 98-5, the Company
expensed organization costs in the year ended June 30, 1998. For the year ended
June 30, 1997, the Company amortized organization costs by the straight-line
method over a five year period. The effect of the change in accounting is not
material.
F-7
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOSS PER SHARE OF COMMON STOCK
The loss per share of common stock is based on the weighted average number
of common shares outstanding during the period, in conformance with SFAS
Statement 128 issued by the Financial Accounting Standards Board and nominal
issuances of potential common shares as required by the Securities and Exchange
Commission. Loss per common share assuming dilution has not been presented as
the effect would be anti-dilutive.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Revenue for software products is recognized when an arrangement exists, the
fee is determinable, collectibility is probable, and delivery has occurred.
Revenue from maintenance services is recognized when the service has been
performed.
STOCK-BASED COMPENSATION
The Company has adopted SFAS Statement 123 for stock-based compensation
plans. This statement encourages companies to adopt a fair value approach to
valuing stock options that would require compensation cost to be recognized
based on the fair value of stock options granted.
This statement also establishes fair value as the measurement basis for
transactions in which an entity acquires goods or services from non-employees in
exchange for equity instruments.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of December 31, 1998 and for the six months
ended December 31, 1997 and 1998 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for fair presentation of the financial position at such dates and the
results of operations and cash flows for the periods then ended. Operating
results for the six months ended December 31, 1998 are not necessarily
indicative of results that may be expected for the entire year.
F-8
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 2 GOING CONCERN
The Company's continued existence is dependent upon its ability to obtain
additional debt financing and equity capital until the Company's operations
generate positive cash flow. Through June 30, 1998 the Company has incurred a
net loss of $2,988,338 and has used net cash of $1,193,254 in its operating
activities.
Management believes that the collection of stock subscriptions, additional
principal stockholder advances and deposits from customers will enable the
Company to meet its obligations until it generates sufficient cash flow from
sales.
NOTE 3 COMMON STOCK
The Company issued 1,820,000 shares of common stock at a price of $0.001 per
share on August 15, 1996 to its founders and certain key employees. The
difference between the price paid ($0.001) and the estimated value of this stock
($0.75) was reported as compensation expense.
The Company issued 462,333 shares of common stock at $0.75 per share between
August 30, 1996 and November 26, 1996, 245,000 shares of common stock at $1.00
per share between June 24, 1997 and June 27, 1997 for cash, and 36,000 shares at
$1.00 per share in exchange for financial and advisory business services. In
accordance with recommendation 96-18 of the FASB's Emerging Issues Task Force,
the shares issued were recorded over the period of the contract at the then
current fair value when the shares were earned.
The company issued 56,600 shares at $1.25 per share, 233,333 shares at $1.50
per share and 50,000 shares at $1.00 per share for cash, and 32,700 shares for
services at $1.19 to $1.88 per share in the year ended June 30, 1998.
The Company issued 255,434 shares for $1.15 per share from February through
June 30, 1998. These shareholders also received warrants to purchase 127,717
additional common shares at $1.50 per share. The warrants expire one year after
issue.
NOTE 4 STOCK OPTIONS
(a) EMPLOYEE OPTIONS
During the year ended June 30, 1998 the Company granted options to one
employee and recognized compensation expense of $15,378 as the options were
granted.
F-9
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 4 STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1998,
and changes during the year then ended is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding at Beginning of Year.................................. -- --
Granted........................................................... 36,000 $ 1.75
Exercised......................................................... -- --
Forfeited......................................................... -- --
--------- -----
Outstanding at End of Year........................................ 36,000 $ 1.75
--------- -----
Options exercisable at year-end................................... --
Weighted-average fair value of options granted during
the year........................................................ $ .43
</TABLE>
The following summarizes information about stock options at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------- --------------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ----------- ----------- ---------------- ----------------- --------------- ---------------------
<C> <C> <S> <C> <C> <C>
1$.75...... 36,000 18.5 months $ 1.75 -- --
</TABLE>
The fair value of the option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1998:
Risk-free interest rate of 5.32 to 5.83%: Dividend yield of 0%: Expected life of
2.0 years: and Volatility of 61.4%.
In July 1997 the directors authorized the adoption of an employee stock
option plan a for total of 230,000 shares. 90,000 shares are designated for six
named officers/directors/employees. The plan was revised in November 1998 and
225,000 options were granted to employees at that time.
(b) NON-EMPLOYEE OPTIONS
During the year ended June 30, 1998 the Company granted options and warrants
to certain non-employees and recognized $203,077 of expense as the options were
granted.
F-10
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 4 STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock options and warrants as of
June 30, 1998, and changes during the year then ended is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding at Beginning of Year................................. -- --
Granted.......................................................... 497,717 $ 1.85
Exercised........................................................ -- --
Forfeited........................................................ -- --
--------- -----
Outstanding at End of Year....................................... 497,717 $ 1.85
--------- -----
Options and warrants excisable at year year-end.................. 497,717
Weighted-average fair value of options granted during the year... $ .41
</TABLE>
The following summarizes information about non-employee stock options and
warrants at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------- ------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ----------- ----------- ---------------- ----------------- ----------- -----------------
<C> <C> <S> <C> <C> <C>
$ 1.25-3.00 497,717 23.4 months $ 1.85 370,000 $ 1.45
</TABLE>
The fair value of the option or warrant grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions for 1998: Risk-free interest rate of 5.32 to 5.45%: Dividend yield
of 0%: Expected life of .67 to 2.4 years: and Volatility of 61.4%.
Stock Options and Warrant activity during the six months ended December 31,
1998 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance at June 30, 1998...................................... 533,717 $ 1.84
Granted..................................................... 270,000 2.33
Exercised................................................... (97,384) 3.06
Balance at December 31, 1998.................................. 706,333 1.86
</TABLE>
F-11
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 5 INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Federal net operating loss..................................................... $ 306,250
State net operating loss....................................................... 123,500
R & D credit carryforward...................................................... 47,250
Property and equipment......................................................... 2,500
Stock Compensation............................................................. 4,500
Other.......................................................................... 250
-------------
484,250
Less valuation allowance....................................................... (484,250)
-------------
Net deferred tax asset......................................................... $ 0
-------------
-------------
</TABLE>
The valuation allowance increased by $185,500, 298,750 and $484,250 in the
period from August 1, 1996 to June 30, 1997,the year ended June 30, 1998, and
the period from August 1, 1996 to June 30, 1998, respectively.
At June 30, 1998 the Company has incurred loss carryforwards for income tax
purposes and earned research and development credits which expire as follows:
<TABLE>
<CAPTION>
FEDERAL STATE
---------- ----------
<S> <C> <C> <C>
NET OPERATING LOSSES
Expiring................................ 2002 $ 531,000
2003 865,000
2012 $ 518,000
2013 858,000
RESEARCH AND DEVELOPMENT CREDITS
2012 17,000 3,800
2013 17,000 9,400
</TABLE>
The principal difference between the loss for financial statement and tax
purposes is that approximately $182,000 and $1,363,000 compensation expense from
the issuance of shares in 1998 and 1997, respectively (see Note 3) is not
recognized as an expense for income tax purposes.
The Internal Revenue Code contains provisions which may limit the loss
carryforwards available if significant changes in stockholder ownership of the
Company occur.
F-12
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 6 NOTES PAYABLE
Notes payable at June 30, 1998 is comprised of:
<TABLE>
<S> <C>
Note dated June 8, 1998 due December 8, 1998 with interest at 10%
per annum. Convertible to common stock at $1.25 per share....... $ 100,000
Note dated November 27, 1997 due May 22, 1998 with interest at 10%
per annum. Convertible to common stock at $1.00 per share....... $ 100,000
---------
$ 200,000
---------
---------
</TABLE>
The notes were not paid when due and continue earning interest at 18% until
paid.
NOTE 7 RELATED PARTY TRANSACTIONS
The Company acquired the property and equipment and certain other prepaid
assets and assumed certain payroll and other liabilities of Samuel Hamann
Graphix, Inc. ("Hamann") from the Company's principal shareholder/president for
$18,500.
The purchase price was allocated to the tangible assets at their original
cost, with the balance ($5,306) attributed to research and development which has
been expensed.
Hamann, a Public Company, was a Development Stage Corporation which had been
in existence for approximately one year. A founder and principal shareholder of
the Company was the principal shareholder of Hamann.
The principal shareholder and a minor shareholder have advanced funds
(including the $18,500 above) to the Company, at 7% per annum interest, which
the Company has partially repaid. A director and minor shareholder has received
consulting fees from the Company.
<TABLE>
<CAPTION>
AUGUST 1, 1996
(INCEPTION) TO
JUNE 30,
YEAR ENDED ---------------------
JUNE 30, 1998 1997 1998
------------- --------- ----------
<S> <C> <C> <C>
Advances by Shareholders................................ $ 108,860 $ 69,823 $ 178,683
Repayment to Shareholders............................... 71,000 47,095 118,095
Interest on Advances.................................... 2,427 2,972 5,399
Consulting Fees Paid.................................... -- 60,540 60,540
</TABLE>
The balance due on the advances was $60,588 at June 30, 1998.
F-13
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 8 PROPERTY AND EQUIPMENT
Property and Equipment is comprised of:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Machinery and Equipment..................................... $ 69,779 $ 118,897
Furniture and Fixtures...................................... 17,057 28,112
Software.................................................... 38,173 40,327
------------- --------
125,009 187,336
Accumulated Depreciation.................................... 58,539 81,746
------------- --------
Net......................................................... $ 66,470 $ 105,590
------------- --------
------------- --------
</TABLE>
NOTE 9 COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company leases its office facilities under an operating lease, which
expires May 31, 1999. Future minimum annual lease payments, as of June 30, 1998,
were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- ---------------------------------------------------------------
<S> <C>
June 30, 1999.................................................. $ 31,845
---------
Total.......................................................... $ 31,845
---------
---------
</TABLE>
The monthly rent includes a standard charge for utilities. Rent expense for
the period from August 1, 1996 through June 30, 1997, the year ended June 30,
1998, and the period from August 1, 1998 through June 30, 1998 amounted to
$28,870, $35,325 and $64,195, respectively.
Rent expense for the six months ended December 31, 1997 and 1998 amounted to
$12,900 and $14,590, respectively.
INSURANCE
The Company did not have workers compensation insurance from April 9, 1998
to June 30, 1998 and was not covered for risks formerly covered by this policy.
The policy was renewed effective July 1, 1998.
F-14
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 10 LOSS PER SHARE
The loss per common share is determined by dividing the net loss for the
period by the weighted average number of common shares outstanding during the
period.
<TABLE>
<CAPTION>
AUGUST 1, AUGUST 1,
1996 1996
(INCEPTION) (INCEPTION)
TO YEAR ENDED TO
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Common Stock
Outstanding Beginning of Period(1).................................. 0 2,432,666 0
Issued during the period(1)....................................... 2,432,666 687,134 3,119,800
End of the Period (1)............................................. 2,432,666 3,119,800 3,119,800
Nominal Issuances................................................. 1,064,233 1,064,233 1,064,233
Weighted Average number of shares................................... 2,276,022 2,913,554 2,608,647
</TABLE>
- ------------------------
(1) net of stock subscriptions
The Securities and Exchange Commission requires nominal issuances of
potential common shares issued within one year prior to the Initial Public
Offering filing date to be included in earnings per share calculations as if
outstanding for all periods presented. These calculations include all such
shares.
Loss per common share assuming dilution has not been presented as the result
would have been anti-dilutive.
The following securities, which were not included because the result would
have been anti-dilutive, could potentially dilute earnings per share in the
future:
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Employee stock options............................................................. 36,000
Non-employee stock options and warrants issued for services........................ 370,000
Stock warrants..................................................................... 127,717
Convertible notes payable.......................................................... 180,000
</TABLE>
Subsequent to June 30, 1998 the following securities were issued which could
potentially dilute earnings per share in the future:
<TABLE>
<S> <C>
Stock issued at par................................................. 25,000
Stock options issued for services................................... 75,000
Employee stock options.............................................. 2,000
</TABLE>
F-15
<PAGE>
3DSHOPPING.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 AND 1998 (CONTINUED)
(INFORMATION RELATING TO DECEMBER 31, 1997 AND 1998 IS UNAUDITED)
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments for which a fair value can be
determined are as follows. Fair value approximates carrying amount because of
the short term maturity of these instruments:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Financial Assets
Cash.................................................................................... $ 144,564 $ 144,564
Other receivable........................................................................ 3,176 3,176
Accounts Receivable..................................................................... 1,823 1,823
Financial Liabilities
Accounts payable and accrued expenses................................................... 67,567 67,567
Shareholder loan........................................................................ 60,588 60,588
Notes payable........................................................................... 200,000 200,000
</TABLE>
NOTE 12 SUBSEQUENT EVENTS
Effective March 10, 1999 the Company amended its Articles of Incorporation
to change the Company's name to 3Dshopping.com, authorize 5,000,000 shares of a
class of Preferred Stock, and to eliminate the par value of its Common Stock.
In addition, effective February 21, 1999, the Company approved the adoption
of a Stock Option Plan and reserved 1,000,000 shares of Common Stock for
issuance under the plan.
In February 1999 the noteholders converted notes payable of $200,000 and
accrued interest of $17,200 into 196,000 shares of Common Stock at $1 and $1.15
per share.
In March 1999 the Company received a bridge loan in the form of $500,000 of
unsecured promissory notes due August 31, 1999 with interest at 9%. If not paid
the notes become new notes convertible into the Company's Common Stock. The
noteholders also received warrants to acquire $1,600,000 of the Company's Common
Stock for $1,200,000.
F-16
<PAGE>
[ART]
From our Web site, shoppers can access a directory of our customers, with direct
links to their Web sites.
<PAGE>
1,750,000 UNITS
[LOGO]
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT COMPANY, INC.
, 1999
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, UNITS ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR SECURITIES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE UNITS OR POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
