UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-15161
3Dshopping.com
(Exact name of registrant as specified in its charter)
California 95-4594029
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
308 Washington Boulevard
Marina del Rey, California 90292
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (310) 301-6733
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Warrants to Purchase Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of September 21, 2000, the aggregate market value of the registrant's
Common Stock held by non-affiliates of the registrant was $33,893,682. Solely
for purposes of this calculation, the registrant has treated its Board of
Directors and executive officers as affiliates.
As of September 21, 2000, the number of shares of the registrant's Common
Stock outstanding was 5,196,748.
DOCUMENTS INCORPORATED BY REFERENCE:
Items 11, 12 and 13 of registrant's Proxy Statement for the 2000 annual
meeting of shareholders are incorporated by reference into Part III of this
report.
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3DSHOPPING.COM
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No.
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Part I
<S> <C> <C>
Item 1. Business........................................................................................1
Item 2. Properties......................................................................................7
Item 3. Legal Proceedings...............................................................................7
Item 4. Submission Of Matters To A Vote Of Security Holders.............................................7
Part II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters...........................8
Item 6. Selected Financial Data........................................................................10
Item 7. Management's Discussion And Analysis Of Financial ...............................................
Condition And Results Of Operations............................................................11
Item 7(A). Quantitative And Qualitative Disclosures About
Market Risk....................................................................................15
Item 8. Financial Statements And Supplemental Data.....................................................15
Item 9. Changes In And Disagreements With Accountants On ................................................
Accounting And Financial Disclosure............................................................15
Part III
Item 10. Directors And Executive Officers Of The Registrant.............................................16
Item 11. Executive Compensation.........................................................................18
Item 12. Security Ownership Of Certain Beneficial Owners And .............................................
Management.....................................................................................18
Item 13. Certain Relationships And Related Transactions.................................................18
Part IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On
Form 8-K.......................................................................................19
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We currently provide online merchants with the ability to give their
customers interactive, three-dimensional (3D) online shopping experiences. Using
our proprietary technology, we are able to create web sites for our clients on
which high-quality 3D images of products they offer are displayed. Web site
users are able to view these 3D product images through a full 360-degree
rotation around the product image. Our technology also provides motion imagery
and zoom capabilities, allowing users to interactively examine products in
detail. Our technology ensures that images, including motion-based imagery, are
accessible from the simplest computers, without end users having to download
cumbersome plug-ins or software applications. We also are expanding our
offerings to provide our clients with content management solutions and other
products and services designed to help them use the Internet to market and sell
their products and services efficiently and cost effectively.
We believe that online merchants are seeking dynamic, interactive and
detailed ways to present their products in order to differentiate themselves and
increase customer interest. We believe that our products and services provide
online merchants with an attractive solution. By using our interactive
technologies, merchants can fuel impulse purchasing and consumer emotion,
thereby increasing sales.
Our company was formed under the laws of the State of California in 1996.
Our principal offices are located at 308 Washington Boulevard, Marina del Rey,
California 90292 and our phone number is (310) 301-6733. We conduct business
under the name "O2 Essential Marketing Technologies." We intend to seek
shareholder approval to change our corporate name from "3Dshopping.com" to "O2
Essential Marketing Technologies, Inc." at our 2000 annual meeting of
shareholders as part of our overall corporate identity and branding efforts.
INDUSTRY BACKGROUND
General
A growing percentage of consumers and businesses are accepting the Internet
as a viable means of commerce. Companies in a broad range of industries are
realizing that eBusiness initiatives are critical to the success of their
businesses. A large majority of these companies are developing or licensing
applications that enable them to market and sell their products and services to
consumers online. However, in order to effectively compete in an ever-crowding
market, businesses must present their products and services in ways that capture
buyers' interest and imagination.
Companies are seeking to differentiate their online presence through the
use of sophisticated Internet-based applications that are interactive and
content-rich. As a result, web sites have rapidly evolved from simple online
corporate brochures to complex online storefronts. International Data
Corporation estimates that spending on software applications and services for
eBusiness will grow from $7.8 billion in 1998 to $53.8 billion in 2002.
<PAGE>
3D Technology
In the past, 3D applications for the Internet were viewed as slow, clunky
and expensive. Many applications required the time-consuming downloading of
software by the end user and subsequent, repetitive downloading of
bandwidth-intensive content. These characteristics, coupled with the slow spread
of broadband telecommunications capacity, diminished merchants' willingness to
adopt 3D online applications for their marketing efforts. However, the evolution
of 3D technologies and the increasing availability of broadband capacity and
faster modems have increased the rate at which businesses are adopting the use
of 3D technologies for various commercial applications.
E-mail Technology
As one of the most popular Internet applications, e-mail has grown from a
simple personal text-messaging tool to a sophisticated strategic visual business
tool. In addition to simply building web sites and waiting for consumers to
come, companies utilize the Internet for direct marketing through targeted
e-mail campaigns. Forrester Research projects that business-related e-mail
applications will account for 66%, or $3.2 billion, of e-mail-related
expenditures in 2004, compared to 49% in 1999. A large part of this growth is
being fueled by use of e-mail for direct marketing to target buyers.
The advantages of using e-mail for direct marketing initiatives compared to
other direct marketing techniques include instantaneous delivery of highly
interactive content that can be customized and directed to specific and unique
recipients at relatively low cost. Customers can react and respond
instantaneously to e-mail campaigns, with 90% of responses occurring within two
or three days from when the e-mail was sent. The cost to develop and deliver a
traditional direct mail piece ranges from $0.50 to $5.00. A large portion of
that cost relates to printing and postage, which can be eliminated when
companies use e-mail. Total cost per e-mail ranges from as low as $0.01 to
approximately $0.15.
Content Management Systems
As more businesses have adopted the Internet in connection with their
operations, there has been a corresponding growth in the amount and types of
online content. International Data Corporation estimates that the number of web
pages will grow from 925 million in 1998 to 13.1 billion in 2003. This has
created a strong need for content management solutions. Every company with a web
presence has a need for content management software to help publish content and
conduct eBusiness on the web. Content management systems enable companies to
collect content from various sources, organize the content, manage it centrally,
and deliver it to the web efficiently.
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OPPORTUNITY AND STRATEGY
We believe that our proprietary 3D technology and related expertise provide
us with significant opportunities to capitalize on demand trends in the
eBusiness marketplace. Key elements of our strategy include:
Capitalizing on our 3D Technology. Our 3D technology allows us to address
merchants' apprehension with respect to the use of 3D technology in their
marketing initiatives. Our 3D technology does not require plug-ins and does not
slow down the loading of an Internet page. It is therefore a system that
merchants can embrace for the marketing of products on their web sites. Further,
our technology is easily embedded into e-mails, allowing merchants to
differentiate and enhance their online direct marketing efforts.
Establishing Strategic Alliances. We have established strategic alliances
with, among others, Yahoo!, Inc., ClickAction, Inc. and Goodspeed Communications
PLC. These companies integrate our 3D technology into their own web sites and
product offerings. We regularly seek additional alliances with companies that
can facilitate the introduction of our products and services to companies
operating online and whose own products and services are complimentary to our
own.
Acquisition of Content Management and Other Complementary Technologies. We
regularly seek to acquire technologies that are complementary to our own. These
acquisitions focus on products that will enable us to provide our customers with
a broader range of solutions for their online marketing and sales initiatives.
For example, we are currently in the process of acquiring and integrating
technologies relating to the management of online content. We believe there is a
significant opportunity to commercialize cost-effective content management
applications that are targeted to small and medium-sized companies that either
do not have large information technology staffs or cannot afford the large
up-front license and monthly maintenance fees associated with existing content
management products.
Creating and exploiting generic image libraries. We are creating expanding
libraries of 3D images of generic products that are sold by multiple online
vendors, such as electronics and computer hardware. Our libraries will
concentrate on commodity goods where the images can be produced once and stored
in an image bank and thereafter licensed to resellers of the product type. By
doing this, many of our clients will be able to pick their merchandise
presentations at minimum cost and effort. Our objective is to offer an image at
a price that is low enough that the client would prefer to offer the enhanced,
3D media presentation of the product rather than the typical two-dimensional,
static version. Ultimately, we intend to offer the 3D images below the current
market price of 2D images.
PRODUCTS AND SERVICES
Our 3D proprietary technology and digital photographic techniques are
capable of delivering a complete visual display over the Internet or comparable
private computer networks for purposes of eBusiness and advertising. Our
technology is used to design, install and maintain web sites that feature
products which require rich visual displays to capture buying interest. Our
technology is interactive, allowing the viewer to freeze the frame, select a
desired angle and then zoom in on selected details. We strive to bring shoppers
as close as possible to the experience of actually visiting a store.
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Our products include:
3D Image Store - We create "3D image store" using our 3Dshopping
System.(TM) 3D content is created using actual products or models through
digital photography and proprietary programming techniques that, together,
produce a fluid full-range rotational view (VR) of products to be displayed on
the Internet. The 3Dshopping SystemTM does not require end users to download
special software or plug-ins, making the online shopping experience hassle-free
and fast. The 3Dshopping SystemTM is a combination of marketing solutions and
technology that, we believe, bridges the gap between the traditional "see, touch
and feel" off-line shopping experience and the "static" online shopping
experience.
O2VM Movies - We also use our proprietary technology to create virtual,
full-motion (VM) imagery on web browsers that can be accessed by end users
without the need for any additional plug-in downloads. Our 3D movies are
exciting additions to e-commerce, educational, entertainment, and commercial web
sites.
O2ZOOM - Our O2Zoom system provides zoom magnification that is limited only
by the quality and size of the original artwork. Images can be zoomed and panned
in real time, providing the viewer the unique ability to select and view any
portion of the image. O2Zoom is configurable in three ways: as mouse driven
magnifying glass; a "click to zoom;" or a combination of the two. The technology
offers the viewer the ability to examine details of images without the use of
plug-ins and without pixel distortion.
O2 Accelerator - The O2Accelerator is a hardware/software system installed
in front of Internet servers that dramatically reduces consumers' "wait" time
during web page downloads by reducing image file size. This technology,
typically called "image compression," can reduce raw image files sizes of 40K
bytes down to 12K bytes without any degradation in image quality.
O2Magic Mail - The 3D Shopping System(TM) can be effectively imbedded
inside e-mails. This provides our clients with the ability to differentiate and
enhance their e-mail campaigns. Our E-mail services include:
* Designing customized e-mail based marketing campaigns;
* Integrating our VR and VM imagery into the e-mail element of the
campaign;
* Building and managing e-mail address databases;
* Maintaining and updating customer lists; and
* Tracking and analyzing responses.
Commercial Builder - Our Commercial Builder enables Internet sites to build
custom-designed commercials for end users on an automated basis. Using
identifiable end-user information, online advertising targeted toward the
demographic group to which the end-user belongs can be developed and delivered
to that end user during his or her visit to the site. This allows for instant
creation of revenue-generation opportunities for both the Internet site and the
site's advertisers.
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Traditional Catalogs - We also offer traditional hard-copy advertising
production services. By doing so, we believe we can increase our client base by
offering traditional clients the opportunity to produce the digital images
necessary to support a web site at little additional cost.
O2 WEB Strategy - In addition to our technology based products and
services, we leverage our Internet, marketing, financial, public relations and
entrepreneurial skills to provide strategic advice to businesses looking to
transition to the Internet or improve their Internet presence.
RECENT ACQUISITIONS
We have recently acquired or will acquire interests in the following
companies:
LookSonic, LLC - In September 2000, we entered into an agreement to acquire
50.1% interest in this entity, with the right to purchase the remaining 49.9% at
our discretion. LookSonic develops commercial builder technology that enables an
Internet business to build and implement Internet commercials on their web site
quickly and efficiently.
eCMS - In September 2000, we entered into an agreement to acquire
"electronic Content Management System" (eCMS) technology from ChannelSpace
Entertainment, Inc., a company that operates websites. eCMS is a technology
developed by ChannelSpace Entertainment to manage content for its affinity
channels. This content management technology works with virtually any content
source to automate manual processes such as web production (including audio,
video, image and text content), auditing, access control, site versioning and
accounting. We intend to utilize this technology to provide cost-effective
content management applications to small to medium-sized companies.
STRATEGIC ALLIANCES
We have established several strategic alliances with technology partners.
These alliances include:
Yahoo! - We have entered into an agreement with Yahoo! to introduce and
market our 3D technology to all of Yahoo! Shopping's merchants. Initially, we
are focusing our licensing efforts on computer and electronics merchants, and
intend to extend our licensing efforts to merchants in all relevant product
categories within Yahoo! Shopping. Yahoo! will receive a portion of revenues
generated by us through these efforts. Yahoo! also intends to utilize our
technology to provide 3D images to its own customers. Our technology is the
first Java-based visual enhancement technology allowed to reside inside of the
Yahoo! Shopping system. We believe our relationship with Yahoo provides us with
a valuable and immediate sales channel and a potentially large installed
customer base. Yahoo! currently has more than 13,000 merchants offering millions
of products.
ClickAction - ClickAction is an e-marketing services company. With
ClickAction, we offer an integrated solution that is marketed to ClickAction
clients as Click3D(TM). This solution allows marketers to integrate key
components of our 3D technology into their e-mail campaigns. ClickAction will
pay us commissions based upon revenues generated by customers referred by us to
ClickAction through the co-marketed service.
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Goodspeed Communications - Goodspeed is a London-based digital solution
marketing company. Goodspeed will market our proprietary VR and VM imagery as
well as our O2Zoom technology to its customer base. Goodspeed will be entitled
to a significant share of the revenues generated through the sale of these
products.
AGA - AGA is a catalog design and production company based in New York. Our
relationship with AGA gives us access to its base of large customers, including
American Express Travel, Avon, Nike and Dayton Hudson. As part of this
relationship, we are establishing a digital, 3D production studio in AGA's New
York City facility. A commission is paid based upon customer introductions that
directly results in the generation of revenue.
SALES AND MARKETING STRATEGY
We currently have a sales and marketing staff of 15 full-time employees. We
market and sell our products utilizing the following strategies:
3D Image Store - We market and sell our 3D image store solutions through
in-house personnel and strategic alliances. We also are producing and will
market mass-produced images on a complimentary basis for major manufacturers of
consumer products. These images will then be licensed to online retailers to be
used on their sites. The multiple licensing of the images will allow for greater
distribution and for relationships to be established with a multitude of
Internet sites.
O2 Magic Mail - We market and sell our e-mail solutions through
affiliations with online portals, advertising agencies, web development
companies, ISPs and catalogers seeking to provide rich-media email services to
their customers. We conduct these efforts through our internal sales personnel.
We also believe that we can cross-sell our e-mail services to our 3D image store
clients.
Commercial Builder - We will initially market and sell this product through
LookSonic's established sales channels. We will also offer this product to
affinity organizations for distribution to their members. We also will
cross-market this product to clients for our other services.
Content Management - We will utilize email, seminars, trade-shows and
targeted periodical advertising to make corporate "decision makers" in small and
medium-sized businesses aware of the dramatic cost savings this product offers
to web businesses.
COMPETITION
We compete with a broad range of marketing, web page design and eBusiness
alternatives available to our potential clients. Noted competitive formats are
Flash, Metacreations, QuickTime VR, and IBM's Hotmedia. We also compete with all
of the traditional marketing resources, including print and other media
advertising, mail order catalogs, and in-store displays. Competitors in our
industry differentiate themselves on the basis of creativity, quality of
service, technical innovation and price. A large majority of our competitors
have greater financial resources and brand name recognition than us. Competition
in our target markets is extremely intense.
6
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Most of the 3D technology utilized by our competitors is based on
renderings, not actual digital photography, and requires the end user to
download software in order to view the image. We believe that the strength of
our 3D technology lies in the clarity and interactivity of the imagery and the
speed at which the imagery downloads to the end-user's computer.
EMPLOYEES
As of September 21, 2000, we had 41 employees; 16 are involved in web site
design, research and development, 15 in sales and marketing, 6 in finance and
administration and 4 in catalog operations. We also supplement our permanent
staff with independent contractors and consultants who perform various skilled
and professional level tasks. 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.
ITEM 2. PROPERTIES
Our offices are located in a 25,000 square foot facility in Marina del Rey,
California, pursuant to a six-year lease expiring July 2005. We pay an annual
rental of $586,236 for these premises. This amount will increase annually to a
maximum of $658,733 for the year ended June 30, 2005. We believe this facility
is adequate for our current operations.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any legal proceedings that, singly or in the
aggregate, will have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From June 1997 until July 19, 1999, our common stock was traded on the
Nasdaq OTC Bulletin Board under our the name "Pi Graphix, Inc." and symbol
"PGRX." Our common stock and warrants have been traded on the American Stock
Exchange since July 20, 1999 under the symbols "THD" and "THDW," respectively.
The following table sets forth the high and low bid prices for the common stock
and warrants for the quarters indicated. Prices reflect bids posted by market
makers and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock High Low
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<S> <C> <C>
YEAR ENDED JUNE 30, 1999
First Quarter...................................................................... 5.5000 1.6250
Second Quarter..................................................................... 19.7500 4.0625
Third Quarter...................................................................... 19.2500 13.0000
Fourth Quarter..................................................................... 18.0000 8.5000
YEAR ENDED JUNE 30, 2000
First Quarter...................................................................... 15.8750 6.0000
Second Quarter..................................................................... 15.0000 5.8750
Third Quarter...................................................................... 15.8125 10.6250
Fourth Quarter..................................................................... 13.5000 5.7500
Warrants High Low
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YEAR ENDED JUNE 30, 2000
First Quarter...................................................................... 2.8750 1.1250
Second Quarter..................................................................... 3.1250 1.0000
Third Quarter...................................................................... 3.5000 1.8750
Fourth Quarter..................................................................... 2.6250 0.8125
</TABLE>
At September 21, 2000, there were 86 shareholders of record of our common
stock and 5,196,748 shares of our common stock were outstanding. Also, there
were 8 warrant holders of record and 1,100,000 warrants were outstanding. We
believe the number of beneficial owners is substantially greater than the number
of record holders because a large portion of our outstanding common stock and
warrants is held of record in broker "street names" for the benefit of
individual investors.
We never have 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.
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RECENT SALES OF UNREGISTERED SECURITIES
Since October 1999, we have issued and sold the following unregistered
securities on the dates and for the consideration indicated:
From October 1999 to June 2000, we issued an aggregate of 267,299 shares of
common stock to Don Westland, Shareholders Solutions, Inc., Vista Quest, Rick
Emery, and Silhouette Investments, Ltd. pursuant to the exercise of options at
exercise prices ranging from $1.25 to $1.75 per share. The options and
underlying shares of common stock were issued in reliance on an exemption from
registration provided by Section 4(2) under the Securities Act.
In April 2000, we issued 75,000 shares of common stock to Del Mar
Consulting at a price of $7.50 per share in exchange for services. These shares
of common stock were issued in reliance on an exemption from registration
provided by Section 4(2) under the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the eleven months
ended June 30, 1997 and the fiscal years ended June 30, 1998, 1999, and 2000 and
the selected balance sheet data is derived from the financial statements for
such periods and as of such dates examined by Friedman, Minsk, Cole & Fastovsky,
independent auditors. The financial statements as of June 30, 1999 and June 30,
2000 and for each of the three years ended June 30, 2000 are included elsewhere
in this report and contain all material financial information about us. We urge
you to read them carefully. The data shown below should be read in conjunction
with the financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information appearing elsewhere in this report.
Amounts for the eleven months ended June 30, 1997 reflect eleven months of
operations from the date of inception (August 13, 1996) to June 30, 1997.
The line item "Weighted average shares used in computing net loss per
share" is based on the weighted average number of shares of common stock
outstanding for the eleven months ended June 30, 1997 and the years ended June
30, 1998, 1999 and 2000. It excludes 0, 32,609, 32,609, and 2,497,532 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.
<TABLE>
<CAPTION>
Eleven Months
Ended June 30, Year Ended June 30,
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Statement of Operations Data: 1997 1998 1999 2000
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net revenues............................. $ --- $ 18,404 $ 191,191 $ 858,624
Operating expenses:
Sales and marketing................. 973,283 473,665 682,575 3,014,436
Production and development.......... 294,360 170,259 513,382 2,441,325
General and administrative 644,993 460,220 2,992,480 3,846,795
---------------- ---------------- --------------- ----------------
Total costs and expenses............ 1,912,636 1,104,144 4,188,437 9,302,556
---------------- ---------------- --------------- ----------------
Loss from operations..................... (1,912,636) (1,085,740) (3,997,246) (8,443,932)
Interest expense......................... (3,089) (10,373) (436,025) (112,758)
Other income............................. 10,000 13,500 4,756 --
Interest income.......................... -- -- -- 354,504
Rental income............................ -- -- -- 73,850
---------------- ---------------- --------------- ----------------
Net loss................................. $ (1,905,725) $ (1,082,613) $ (4,428,515) $ (8,128,336)
================ ================ =============== ================
Net loss per share....................... $ (.59) $ (.28) $ (1.09) $ (1.69)
================ ================ =============== ================
Weighted average shares used in
computing net loss per share........ 3,210,651 3,823,228 4,045,746 4,811,623
Balance Sheet Data: June 30, 1997 June 30, 1998 June 30, 1999 June 30, 2000
-------------------- --------------------- --------------------- --------------------
Cash and cash equivalents... $ (2,569) $ 144,564 $ 116,918 $ 3,927,953
Working capital (deficit)... (106,674) (165,096) (1,373,253) 3,995,618
Total assets.............. .. 104,678 229,529 1,314,186 5,840,417
Accumulated deficit......... (1,905,725) (2,988,338) (7,416,853) (15,545,189)
Shareholders' equity
(deficit)................... (8,781) (98,626) (355,438) 5,101,464
</TABLE>
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ITEM 7. 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 fiscal years ended June 30, 1998, 1999 and 2000. The
following discussion should be read in conjunction with the financial statements
and related notes appearing elsewhere in this report.
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, the 3Dshopping System(TM). From inception through June 30,
2000, we raised total equity capital in the form of cash of $14,161,240 and had
an accumulated deficit of $15,545,189, including $7,019,138 in non-cash charges
for common stock issued as compensation. While still developing our technology,
we began to receive revenues from sales of services in April 1998.
Notwithstanding these revenues, we operated at a loss from inception to date and
we are continuing to operate at a loss as our expenditures for marketing,
product development and general and administrative costs exceed our gross
revenues. We expect the operating losses to continue and to increase over at
least the next six months as we incur increasing levels of expense to market our
services, implement our new business plan, support growth and integrate our
acquisitions.
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 our public offering of units on
July 23, 1999 and their use to fund our anticipated growth has
materially changed expense levels in all major categories. They
are also expected to support substantial increases in revenues
from operations in the next fiscal year;
* The acquisition of DBLA in May 1999 has enhanced and diversified
the scope of our business to include the catalog production
business;
* We have recently emerged from the development stage and
anticipate substantial increases in the number and size of
customer orders and revenues from operations; and
* We intend to implement our new business model very rapidly and
leverage our strategic alliances with Yahoo!, ClickAction,
Goodspeed and AGA.
Although we expect substantial growth in both revenues and expenses, we
anticipate that, in the near term, 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. We expect to follow a strategy of
establishing market share by making expenditures for marketing and the
development of our infrastructure, exceeding estimated revenues for at least the
next six months, resulting in operating losses.
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The catalog business, which we acquired through the acquisition of DBLA
effective April 1, 1999, is more traditional than our core Internet business and
it had been fully operational for several years before we acquired it. As a
result, the catalog business recorded larger revenues than our Internet business
in 1998 and 1999 (approximately $108,000 for the quarter ended June 30, 1999 and
$414,000 for the year ended June 30, 2000). If our business development plans
are successful, we expect that revenues from our new business model will
increase more rapidly than catalog sales. Because our catalog clients may also
be good prospects for other services, we may also develop business involving all
aspects of our business for a single client. Future income from the catalog
business will contribute to earnings and profits at the corporate level.
In July 1999, we completed a public offering of 1,100,000 units, each
consisting of one share of common stock and one warrant to purchase one share of
common stock. As a result of the offering, we received net proceeds after
deducting underwriting discounts and offering expenses of $11,933,648. We used
$200,595 of this amount to repay principal and interest on outstanding
indebtedness.
In September 2000, we entered into an agreement to acquire a 50.1% interest
in LookSonic, LLC. In consideration of that equity position, we issued options
to purchase 150,000 shares of our common stock, with one-third of this option
vesting on the closing date and the remaining portion vesting when certain
revenue targets are achieved.
In September 2000, we entered into an agreement to acquire "electronic
content management system" technology (eCMS) from Channelspace Entertainment,
Inc. We will issue 833,333 shares of our common stock in consideration of this
purchase. We will pay additional consideration in shares on a quarterly basis
for six quarters, beginning four months after the closing, based upon gross
revenue generated through the eCMS technology, up to a maximum of $12.5 million.
RESULTS OF OPERATIONS
Fiscal year 1999 as compared to fiscal year 1998
Revenues for 1999 were $191,191, reflecting the inclusion of fourth quarter
catalog revenues ($108,000) and Internet revenues from web site development and
billings for maintenance and sales fees. Expenses for the year ended June 30,
1999 were $4,624,462, primarily consisting of $513,382 for production and
development expenses, $682,575 for sales and marketing expenses, $2,992,480 for
general and administrative expenses, and $436,025 for interest expenses. The
increase in expenses of $3,509,945 over the preceding year reflects greater
levels of activity as we refined and actively marketed our Internet service
offerings. Of that increase, $2,682,663 was due to the values ascribed to option
grants to employees and consultants under the Black-Scholes option-pricing model
recommended by the Financial Accounting Standards Board in its Statement of
Financial Accounting Standards 123, and $399,225 was due to the amortization of
warrants issued for interest on debt. The net loss for fiscal year 1999 was
$4,428,515, or $1.09 per share of common stock, compared to a net loss for
fiscal year 1998 of $1,082,613, or $0.28 per share.
12
<PAGE>
Fiscal year 2000 as compared to fiscal year 1999
Revenues for 2000 were $858,624, reflecting the inclusion of catalog
revenues ($414,316) and Internet revenues from web site development and billings
for maintenance and sales fees. Expenses for the year ended June 30, 2000 were
$9,415,314, primarily consisting of $2,441,325 for production and development
expenses, $3,014,436 for sales and marketing expenses, $3,846,795 for general
and administrative expenses, and $112,758 for interest expenses. The increase in
expenses of $4,790,852 over the preceding year reflects greater levels of
activity as we refined and actively marketed our Internet service offerings. Of
that increase, approximately $4,111,000 was due to incremental increases in
production, sales and administration required to support the growth of revenues
during 2000, and approximately $680,000 was due to an increase in rent as the
Company moved into larger facilities to support the growth of the Company. The
net loss for fiscal year 2000 was $8,128,336, or $1.69 per share of common
stock, compared to a net loss for fiscal year 1999 of $4,428,515, or $1.09 per
share.
As of June 30, 2000, we had net operating loss carryforwards of
approximately $10,503,000 and research and development tax credits of $39,000
for federal income tax purposes, which amount will expire over a four-year
period beginning 2012 if not used. For state income tax purposes, we had net
operating loss carryforwards of $7,546,000 and research and development tax
credits of $16,300, which will expire beginning in 2012. As a result of changes
in ownership, including changes resulting from our July 1999 public 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 $5,115,000
because realization is primarily dependent on generating sufficient taxable
income prior to expiration of the net operating loss carryforwards and other
deferred expenses.
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 June 30, 2000, we raised cash proceeds of $14,161,240 from sales of
common stock. In some cases, we issued common stock in return for goods or
services. As of June 30, 2000, we had cash and cash equivalents of $3,927,953
and working capital of $3,995,618. We did not have any credit arrangements with
any banks as of June 30, 2000. We did not have any outstanding notes or other
obligations for money borrowed as of June 30, 2000. As a result of the proceeds
from the unit offering on July 23, 1999, all liabilities for borrowed money as
of June 30, 1999 were repaid and a working capital surplus was achieved as of
June 30, 2000.
Our liquidity and capital needs relate primarily to working capital and
other general corporate requirements. Since inception, we have not received any
significant cash flow from operations or investing activities. Based on our
current plans, we believe the proceeds from our unit offering will provide us
with sufficient capital resources to fund our operations for at least the next
six months. Expectations about our long-term liquidity may prove inaccurate if
our plans change. As we increase sales, we expect increased cash flow from
operations.
In August 2000, we engaged H. C. Wainwright & Co. as investment banker,
financial advisor and exclusive agent to arrange a private placement of
preferred stock in the amount of $10,400,000. We anticipate the closing of this
private placement in October 2000. However, we cannot assure you that we will be
able to consummate this or any alternative financing. Our auditors have included
a going concern comment in their opinion. If we are unable to secure the
proceeds of the current financing or proceeds from an alternative financing, our
operations could be materially impaired.
13
<PAGE>
In March 1999, we borrowed $500,000 from an institutional lender to fund
expenditures associated with our unit offering and to cover interim operating
expenses pending receipt of the offering proceeds. We also issued to the lender
common stock purchase warrants that were exercisable during a three-year period
beginning on July 20, 2000. The warrants were exercisable to purchase 100,000
units and were redeemable by us between July 1, 1999 and July 1, 2000 for a
price increasing from $400,000 to $500,000 over the period. In September 1999,
we exercised our option to repurchase the warrants for $400,000.
We also borrowed $100,000 from the Paulson Investment Company, Inc. in June
1999, under an unsecured promissory note. The note was payable on or before
August 31, 1999, together with interest at the rate of 7% per annum. This note
plus interest was paid off in July 1999 from the proceeds of our public
offering.
Net cash used in operating activities was $751,091 in 1998, $1,285,631 in
1999 and $5,335,974 in 2000. The net cash used in operating activities in each
year was primarily attributable to our net loss, as adjusted for common stock,
options and warrants issued for services and compensation. Such losses, together
with the increases in prepaid offering costs, accounts receivable, and property
and equipment, and the decrease in accounts payable, were funded principally by
the net proceeds received from the sales of stock (1998 - $671,000; 1999 -
$934,000; 2000 - $11,090,000) and the balances through additional borrowings
under the shareholders loan and two loans from third parties.
Net cash used in investing activities was $10,736 in 1998, $96,468 in 1999
and $916,690 in 2000 primarily reflecting acquisitions of property and
equipment, as well as $442,000 in 2000 pledged as collateral on an outstanding
letter of credit related to the Company's current facility lease.
Net cash provided by financing activities was $908,960 in 1998, $1,354,453
in 1999 and $10,063,699 in 2000 representing the net proceeds from the issuance
of common stock and debt.
FORWARD-LOOKING STATEMENTS
Information in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this report and about our goals and
plans and future business operations constitutes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Factors that could adversely affect
these forward-looking statements include, but are not limited to, business
conditions in the market areas we target, competitive factors, customer demand
for our services, and our ability to execute our plans successfully. Any
forward-looking statements should be considered in light of these factors.
14
<PAGE>
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We do not have any financial instruments that are subject to market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required by this item are included in this report
commencing on page F-1. The following information represents selected quarterly
financial data for the years ended June 30, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
Year ended June 30, 1999
-----------------------------------------------------------------------------------
3 months 3 months 3 months 3 months
ended ended ended ended
09/30/98 12/31/98 03/31/99 06/30/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 15,591 $ 11,948 $ 22,772 $ 140,880
Income before extraordinary items (201,752) (2,542,195) (335,432) (1,349,136)
Net Income (201,752) (2,542,195) (335,432) (1,349,136)
Earnings Per Share $ (0.05) $ (0.63) $ (0.08) $ (0.33)
Year ended June 30, 2000
-----------------------------------------------------------------------------------
3 months 3 months 3 months 3 months
ended ended ended ended
09/30/99 12/31/99 03/31/00 06/30/00
-------- -------- -------- --------
Net Sales $ 35,666 $ 216,924 $ 174,940 $ 431,094
Income before extraordinary items (1,372,376) (1,678,672) (1,852,235) (3,225,053)
Net Income (1,372,376) (1,678,672) (1,852,235) (3,225,053)
Earnings Per Share $ (0.31) $ (0.35) $ (0.38) $ (0.65)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
current executive officers and directors.
Name Age Position
---- --- --------
Terry L. Gourley 38 Chairman of the Board and Chief Executive Officer
Joel P. Gayner 56 President, Chief Operating Officer and Director
Jacalyn A. Hughes 48 Executive Vice President of Operations and Chief
Howard A. Cohn 60 Senior Vice President of Administration and Chief
Brian A. Smith 54 Executive Vice President of Marketing
David C. Williams 43 Executive Vice President of Business Development
C. James Jensen 59 Director
Maryann O'Donnell 49 Director
TERRY L. GOURLEY became our Chairman of the Board in September 2000 and has
served as our Chief Executive Officer since May 2000.From November 1999 to May
2000, he served as our Director of Marketing Communications. From February 1998
until November 1999, Mr. Gourley served as President and Branch Manager of a
financial services business at NLSB Bank Financial Service Center. From March
1993 until February 1998, Mr. Gourley was an independent business owner and
Branch Manager for FLPL Financial Services. From 1991 to 1993, Mr. Gourley was
Personal Accounts Director for a branch office of Chase Manhattan Investment
Services. From 1985 to 1991, Mr. Gourley was an Associate Vice President and
Branch Manager at Dean Witter Reynolds. Mr. Gourley received his B.S. in
Business/Financial Management from Southwest Missouri State University.
JOEL P. GAYNER has served as our President and Chief Operating Officer since May
2000, and became a member of our Board of Directors in September 2000. From
February 2000 to May 2000, he served as our Senior Vice President of Sales and
Marketing. From 1990 until February 2000, Mr. Gayner was the President of Group
6 Associates, Inc., a marketing company. From 1989 to 1990, Mr. Gayner served as
Executive Vice President of Business Development for the 1928 Jewelry Co. From
1986 to 1989, Mr. Gayner was the Executive Vice President and founder of
Advanced Marketing Technology Corporation.
JACALYN A. HUGHES has served as our Executive Vice President of Operations and
Chief Technology Officer since May 2000. From February 2000 to May 2000, she
served as our Senior Vice President of Technology and Chief Technology Officer.
16
<PAGE>
From January 1998 to February 2000, Ms. Hughes was Vice President of Information
Technology and Chief Information Officer at Specialty Laboratories, Inc., a
reference laboratory serving hospitals and specialist physicians. From 1989 to
1998, Ms. Hughes served as Director of Management Information Systems at Candle
Corporation, a supplier of networked business applications. From 1985 to 1989,
Ms. Hughes was a Director with Source EDP, a national technical placement
agency. Ms. Hughes currently serves on boards for the Society for Information
Management, Southern California, and the Organization of Women Executives. She
received her B.S. in Math from the University of Minnesota.
HOWARD A. COHN has served as our Senior Vice President of Administration and
Chief Financial Officer since May 2000. From November 1999 to May 2000 he served
as our Controller and Treasurer. From 1995 to November 1999, Mr. Cohn was Vice
President of Strategic Planning and Corporate Development at West LA Music. From
1991 to 1995, Mr. Cohn owned and operated Monograms Plus. From 1990 to 1991, Mr.
Cohn served as Vice President/Operations of Silo California, Inc. From 1988 to
1990, Mr. Cohn served as Vice President and Chief Financial Officer of the
Federated Group/Atari. From 1986 to 1988, Mr. Cohn held the position of
Executive Vice President and Chief Financial Officer with Leo's Stereo, and from
1983 to 1986, he was Executive Vice President of Ken Crane's. Mr. Cohn is a
Certified Public Accountant and holds a Masters Degree in Business
Administration from Woodbury University. Mr. Cohn declared personal bankruptcy
under Chapter 7 of the federal Bankruptcy Code in 1996.
BRIAN A. SMITH has served as our Executive Vice President of Marketing since May
2000. From May 1999 to May 2000, Mr. Smith served as our President of Creative
Services. From 1993 to May 1999, Mr. Smith was President and Chief Executive
Officer of DBLA, our direct mail and catalog marketing division. He managed DBLA
as an independent business from January 1995 until the sale of its assets to us
in May 1999. From 1990 to 1993, Mr. Smith was Vice President of Nobart, Inc., a
catalog design and production company, where he was in charge of all West Coast
operations. From 1987 to 1990, Mr. Smith served as Vice President, General
Merchandise Manager and Creative Director of Life Force Technologies, a direct
mail catalog company. From 1983 to 1987, Mr. Smith served as Vice President of
Creative Services for Harrison Service, a catalog design and production company.
DAVID C. WILLIAMS became our Executive Vice President of Business Development in
June 2000. From 1997 to June 2000, Mr. Williams was a Director and Principal in
The Management Group, a management consulting firm specializing in e-commerce
strategy. From 1991 to 1997, he was Managing Director of Hudson Hill Consulting,
a business development and strategic planning consulting firm. From 1988 to
1991, Mr. Williams was Vice President of Sales & Marketing of the Los
Angeles-based gourmet coffee roaster, Cafe Au Lait. From 1986 to 1987, Mr.
Williams served as Regional Manager with Pepsi USA, and from 1983 to 1986, Mr.
Williams was part of the management team of Barton Beers, Ltd. Before joining
Barton, from 1981 to 1983, Mr. Williams was a District Manager with Pabst
Brewing Company. Mr. Williams graduated from The Ohio State University with a
degree in Marketing and Organizational Communications.
C. JAMES JENSEN became a member of our Board of Directors in June 2000. Since
1999 Mr. Jensen has been the President and co-founder of SWD Holdings, Inc., an
investment company. Prior to founding SWD Holdings in 1999, Mr. Jensen was
President of J.J. Consulting Corporation, a marketing company specializing in
planned residential communities. From 1980 to 1998, Mr. Jensen served as
Chairman and Chief Executive Officer of Thousand Trails, Inc., a national
network of private campground resorts, and from 1973 to 1979 he was President of
Grantree Furniture Rental Corporation.
MARYANN O'DONNELL became a member of our Board of Directors in June 2000. Ms.
O'Donnell is currently a partner and investor in O'Donnell & Ganns, LLC, a
venture capital investment and e-commerce incubation firm. From 1996 until
January 2000, Ms. O'Donnell served as the President of ETI, LLC, a television
production company. From 1994 until 1996, Ms. O'Donnell was a co-founder of
Earthlink Network, an Internet Service Provider. From 1981 to 1991, Ms.
O'Donnell served as Vice President of Sales for Government Technology Services,
Inc., a technology sales company serving federal, state and local government
agencies.
17
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated by
reference to the information to be included under "Executive Compensation" in
our 2000 proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is incorporated by reference to the information to be included
under "Security Ownership of Certain Beneficial Owners and Management" in our
2000 proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management is incorporated by reference to the information to be included
under "Certain Transactions" in our 2000 proxy statement.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) 1. Financial Statements Page in this Report.
--------------------
<S> <C>
Independent Auditors' Report F-2
Balance Sheets as of June 30, 1999 and June 30, 2000 F-3
Statements of Operations for the years ended
June 30, 1998, 1999 and 2000 F-4
Statements of Shareholders' Equity (Deficit) for the years
ended June 30, 1998, 1999 and 2000 F-5
Statements of Cash Flows for the years
ended June 30, 1998, 1999 and 2000 F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules
Not applicable
3. Exhibits
The exhibits listed below are filed as part of this report
</TABLE>
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Reorganization dated as of April 1, 1999 between
the Registrant, Design Base Los Angeles Inc., Brian Smith and Todd
Hosaka. Incorporated by reference to Exhibit 10.7 to our Registration
Statement on Form S-1 (File No. 333-74795).
3.1 Amended and Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to our Registration Statement
on Form S-1 (File No. 333-74795).
3.2 Amended and Restated Bylaws of the Registrant. Incorporated by
reference to Exhibit 3.2 to our Registration Statement on Form S-1
(File No. 333-74795).
4.1 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to our Registration Statement on Form S-1 (File No.
333-74795).
4.2 Warrant Agreement dated July 20, 1999 among the Registrant and
ChaseMellon Shareholder Services, LLC, as Warrant Agent, including the
form of Warrant.
19
<PAGE>
4.3 Form of Representative's Warrants. Incorporated by reference to
Exhibit 4.3 to our Registration Statement on Form S-1 (File No.
333-74795).
4.4 Purchase Warrant dated March 18, 1999 between the Registrant and
Generation Capital. Incorporated by reference to Exhibit 4.4 to our
Registration Statement on Form S-1 (File No. 333-74795).
4.5 Promissory Note dated March 18, 1999 from the Registrant in favor of
Generation Capital Associates. Incorporated by reference to Exhibit
4.5 to our Registration Statement on Form S-1 (File No. 333-74795).
4.6 Substitute Purchase Warrant dated March 18, 1999 between the
Registrant and Generation Capital Associates. Incorporated by
reference to Exhibit 4.6 to our Registration Statement on Form S-1
(File No. 333-74795).
4.7 Promissory Note in the amount of $25,000 dated May 2, 2000 granted by
the Registrant in favor of Joel Gayner.
4.8 Promissory Note in the amount of $25,000 dated March 21, 2000 granted
by the Registrant in favor of Terry Gourley.
4.9 Promissory Note in the amount of $60,000 dated May 10, 2000 granted by
the Registrant in favor of Terry Gourley.
4.10 Secured Promissory Note in the amount of $50,000 dated June 23, 2000
granted by the Registrant in favor of Gregory Hartwell.
10.1 Letter Agreement, dated September 12, 2000, between the Registrant and
ChannelSpace Entertainment, Inc.
10.2 Consulting Agreement between the Registrant and The Del Mar Consulting
Group, Inc., dated April 14, 2000.
10.3 Independent Contractor/Referral Agreement between the Registrant and
Alex Gayner, dated July 14, 2000.
10.4 Employment Offer Letter to Joel Gayner, dated February 7, 2000.
10.6 Amendment to Employment Offer Letter to Joel Gayner, dated May 18,
2000.
10.9 Amendment to Employment Offer Letter to Terry Gourley, dated May 18,
2000.
10.10 Consultant Employment/Engagement Agreement between the Registrant and
Communications Options, LLC f/s/o Gregory Hartwell, dated March 1,
2000.
10.11 Security/Pledge Agreement dated March 1, 2000 between Gregory Hartwell
and Communications Options, LLC, on the one hand, and the Registrant
as the Secured Party, on the other hand.
10.12 Amendment No. 1 to Consultant Employment/Engagement Agreement between
the Registrant and Communications Options, LLC f/s/o Gregory Hartwell,
dated June 5, 2000.
10.14 Mutual General Release dated as of May 25, 2000, between the
Registrant and Robert J. Vitamante.
10.15 Management Change Agreement between the Registrant and Lawrence
Weisdorn, dated May 30, 2000.
20
<PAGE>
10.16 Mutual General Release dated as of September 1, 2000, between the
Registrant and Lawrence Weisdorn.
10.17 1999 Employee Stock Purchase Plan. Incorporated by reference to our
Registration Statement on Form S-8 (File No. 333-40830). 10.181999
Stock Option Plan. Incorporated by reference to our Registration
Statement on Form S-8 (File No. 333-40828).
10.19 Letter Agreement, dated August 25, 2000, between the Registrant and
LookSonic, LLC.
11.1 Statement re computation of per share earnings
24.1 Power of Attorney (see signature page of this report)
27.1 Financial Data Schedule
----------------------
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the period covered
by this report.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Venice, California
on September 28, 2000.
3DSHOPPING.COM
By: TERRY GOURLEY
-------------
Terry Gourley
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Terry Gourley and Howard A. Cohn, and
each of them, his attorney-in-fact, with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on September 28, 2000 on
behalf of the Registrant and in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
TERRY GOURLEY Chairman, Chief Executive Officer and Director
------------------------------------------------- (Principal Executive Officer)
Terry Gourley
HOWARD A. COHN Senior Vice President, Administration
------------------------------------------------- And Chief Financial Officer
Howard A. Cohn (Principal Financial and Accounting Officer)
JOEL P. GAYNER President, Chief Operating Officer and Director
-------------------------------------------------
Joel P. Gayner
C. JAMES JENSEN Director
-------------------------------------------------
C. James Jensen
MARYANN O'DONNELL Director
-------------------------------------------------
Maryann O'Donnell
</TABLE>
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
3Dshopping.com
INDEPENDENT AUDITORS' REPORT F-2
Balance Sheets as of June 30, 1999 and June 30, 2000 F-3
Statements of Operations
For the years ended June 30, 1998, 1999 and 2000 F-4
Statements of Shareholders' Equity (Deficit)
For the years ended June 30, 1998, 1999 and 2000 F-5
Statements of Cash Flows
For the years ended June 30, 1998, 1999 and 2000 F-6
NOTES TO FINANCIAL STATEMENTS F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
3Dshopping.com
We have audited the accompanying Balance Sheets of 3Dshopping.com as of June 30,
1999 and June 30, 2000 and the related Statements of Operations, Stockholders'
Equity (Deficit), and Cash Flows for the years ended June 30, 1998, 1999 and
2000. 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 as of June 30,
1999 and June 30, 2000 and the results of its operations and its cash flows for
the years ended June 30, 1998, 1999 and 2000 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.
-------------------------------------------
FRIEDMAN, MINSK, COLE & FASTOVSKY
Los Angeles, California
August 29, 2000, except Note 11 as to which
the date is September 12, 2000 and Note 19
as to which the date is September 21, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
3Dshopping.com
BALANCE SHEETS
June 30 June 30
1999 2000
-------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $116,918 $3,927,953
Accounts receivable, net of allowances of $2,991 and $20,500 113,669 189,222
Related party receivable 25,000 100,510
Other receivables 12,323 325,829
Contracts in progress - 101,596
Prepaid expenses 16,143 80,104
-------------- --------------
Total current assets 284,053 4,725,214
Restricted cash - 442,000
Property and equipment, net of accumulated
depreciation of $124,687 and $234,764 144,004 481,991
Patents, net of accumulated amortization
of $0 and $1,208 - 22,945
Prepaid offering costs 702,998 -
Goodwill, net 183,131 116,539
Deposits - 51,728
-------------- --------------
Total assets $1,314,186 $5,840,417
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $669,851 $100,816
Accrued payroll & taxes 104,629 191,530
Accrued Expenses 66,178 236,202
Notes payable 625,000 -
Note payable - related parties 70,723 -
Obligation under line of credit 54,000 -
Customer deposits 53,846 182,617
Current maturities of capitalized lease obligations 13,079 18,431
-------------- --------------
Total current liabilities 1,657,306 729,596
Noncurrent portion of capital lease obligations 12,318 9,357
Commitments and contingencies - -
Shareholders' equity (deficit)
Preferred Stock, no par value: 5,000,000 shares
authorized; no shares issued and outstanding.
Common stock, no par value: 10,000,000 shares
authorized; issued and outstanding: 3,685,747, and
5,129,448 respectively 7,063,915 20,646,653
Stock subscription receivable (2,500) -
Accumulated deficit (7,416,853) (15,545,189)
-------------- --------------
Total shareholders' equity (deficit) (355,438) 5,101,464
-------------- --------------
Total liabilities and shareholders' equity $1,314,186 $5,840,417
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
3Dshopping.com
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues, net $18,404 $191,191 $858,624
-------------- -------------- --------------
Costs and expenses:
Sales and marketing 473,665 682,575 3,014,436
Production and development 170,259 513,382 2,441,325
General and administrative 460,220 2,992,480 3,846,795
-------------- -------------- --------------
Total costs and expenses 1,104,144 4,188,437 9,302,556
-------------- -------------- --------------
Loss from operations (1,085,740) (3,997,246) (8,443,932)
Interest expense (10,373) (436,025) (112,758)
Other income 3,500 4,756 -
Interest income - - 354,504
Rental Income - - 73,850
-------------- -------------- --------------
Net loss ($1,082,613) ($4,428,515) ($8,128,336)
-------------- -------------- --------------
Net loss per share ($0.28) ($1.09) ($1.69)
============== ============== ==============
Weighted average number of
shares used in computing
net loss per share 3,823,228 4,045,746 4,811,623
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
3Dshopping.com
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock Stock
Common Stock Subscriptions Subscriptions Accumulated
------------
Shares Amount Receivable in Advance Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 2,527,333 1,940,819 (83,375) 39,500 (1,905,725) (8,781)
Fiscal Year 1998
Stock subscription payments received 83,375 83,375
Issuances of Common Stock
in exchange for services 68,700 195,602 195,602
Sales of Common Stock 595,367 763,997 (107,400) (39,500) 617,097
Costs of stock offering (29,374) (29,374)
Fair market value of
stock options granted 126,068 126,068
Net loss for year - - - - (1,082,613) (1,082,613)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 3,191,400 2,997,112 (107,400) - (2,988,338) (98,626)
Fiscal Year 1999
Stock subscriptions received 107,400 107,400
Stock options exercised 233,000 611,750 (2,500) 609,250
Issuance of Common Stock -
in exchange for services 25,000 306,250 306,250
Exercise of cashless warrants 30,347 - -
Employee stock options granted 2,021,938 2,021,938
Non-employee stock options granted 354,500 354,500
Conversion of notes payable 196,000 217,200 217,200
Amortizaton of Warrants
for interest on debt 399,225 399,225
Issuance of Common Stock on acquisition of
DBLA net assets 10,000 155,940 155,940
Net loss for year - - - - (4,428,515) (4,428,515)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 3,685,747 7,063,915 (2,500) - (7,416,853) (355,438)
Fiscal Year 2000
Sales of Common Stock - IPO 1,100,000 13,200,000 13,200,000
Underwriting Costs related to IPO (1,266,352) (1,266,352)
Offering Costs (758,055) (758,055)
Repurchase of Warrants (400,000) (400,000)
Amortizaton of Warrants
for interest on debt 100,774 100,774
Receipt of Subscription Receivable 2,500 2,500
Issuance of Common Stock
in exchange for services 75,000 562,500 562,500
Exercise of cashless warrants 230,299 -
Exercise of employee stock options 38,402 56,591 56,591
Employee stock options granted 1,345,627 1,345,627
Non-employee stock options granted 741,653 741,653
Net Loss for year - - - - (8,128,336) (8,128,336)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 $5,129,448 $20,646,653 $ - $ - $(15,545,189) $5,101,464
============ =========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
3Dshopping.com
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
June 30,
---------------------------------------------------
1998 1999 2000
---------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(1,082,613) $(4,428,515) (8,128,336)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 43,208 82,796 202,877
Gain on sale of assets (1,049) - -
Common Stock issued for services 103,213 - 562,500
Amortization of value of warrants issued for financing - 399,225 100,774
Options and warrants issued for services and compensation 218,455 2,682,663 2,087,280
Changes in assets and liabilities
Accounts receivable, net of allowances (4,280) (17,342) (75,553)
Related party receivables - - (75,510)
Other receivables - (12,323) (313,506)
Contracts in progress - 17,249 (101,596)
Prepaid expenses (7,430) 1,201 (62,835)
Prepaid offering costs - (702,998) 702,998
Deposits paid - - (51,728)
Accounts payable and other liabilities (20,595) 641,567 (312,110)
Customer deposits - 50,846 128,771
---------------------------------------------------
Net cash used in operating activities (751,091) (1,285,631) (5,335,974)
---------------------------------------------------
Cash flows from investing activities
Letter of Credit obtained (442,000)
Acquisition of property and equipment (13,250) (96,468) (450,537)
Acquisition of patents and trademarks - - (24,153)
Proceeds from sale of property 2,514 - -
---------------------------------------------------
Net cash used in investing activities (10,736) (96,468) (916,690)
---------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of Common Stock 700,474 322,125 13,200,000
Costs of issuance of Common Stock (29,374) - (2,024,407)
Proceeds from exercise of options 611,750 56,591
Proceeds from issuance of debt 237,860 425,135 100,000
Payment of loans from proceeds of stock offering (849,723)
Repurchase of warrants (400,000)
Stock Subscription Receivable 2,500
Payment of capitalized lease obligations - (4,557) (21,262)
---------------------------------------------------
Net cash provided by financing activities 908,960 1,354,453 10,063,699
---------------------------------------------------
Net change in cash and cash equivalents 147,133 (27,646) 3,811,035
Cash and cash equivalents at beginning of period (2,569) 144,564 116,918
---------------------------------------------------
Cash and cash equivalents at end of period $ 144,564 116,918 3,927,953
===================================================
Cash paid during period for:
Interest $ 3,001 $ 36,800 $ 11,984
Income taxes 1,600 800 800
Supplemental schedule of non-cash investing and financing activities:
The Company acquired the assets of Design Bas, Incorporated effective
April 1, 1999. In conjunction with the acquisition, assets and liabilities
were assumed as follows:
Fair value of assets acquired $ - $ 166,880
Liabilities assumed 210,720
Value of Common Stock issued in connection with acquisition 155,940
Stock and options issued as compensation and for services 321,668 2,682,663 2,649,780
Capital Leases 17,758 18,531
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
3Dshopping.com, (the "Company"), commenced operations effective
August 1, 1996. The Company was formed to design and develop
innovative marketing and display applications for the Internet
using 3D modeling software and interactive databases. The Company
has developed and is beginning to implement and market to
retailers and manufacturers, an interactive marketing technology
utilizing media rich content that incorporates sophisticated
graphics and other audio-visual features.
Commencing with the acquisition of Design Bas, Incorporated
("DBLA") on April 1, 1999, the Company also designs and produces
mail order catalogs, brochures and similar printed media for
department stores and apparel retailers. DBLA also fulfills the
digital photographic requirements of Web site development.
PROPERTY & EQUIPMENT
Property and equipment are stated at cost. The Company depreciates
its property and equipment using the straight-line method over the
following periods:
Asset Useful Life
------------------ -----------
Machinery and equipment 3 - 5 Years
Furniture and fixtures 5 Years
Software 1 - 3 Years
Leasehold Improvements 3 - 6 Years
PATENTS, TRADEMARKS & COPYRIGHTS
Patents and trademarks are stated at cost. The Company amortizes
patents and trademarks over 20 years.
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. The effect of this change of accounting was not material to
that year.
F-7
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that directly affect the reported
amounts of assets and liabilities, the disclosures 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 each period, in
conformity with SFAS Statement 128 issued by the Financial
Accounting Standards Board and nominal issuances of potential
common shares for the years ended June 30, 1998 and 1999 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
The Company's revenues from Internet Web site design and operation
services is recognized when an arrangement exists, the fee is
determinable, collectibility is probable, and delivery has
occurred. Revenues from Web site maintenance services are
recognized over the period services are performed. Revenues from
mail order catalog design and production are recognized upon
completion of the project. On certain projects, progress payments
are received from clients and such payments are reported as
customer deposits. Costs incurred on projects prior to completion
are reported as contracts in progress.
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 and requires that
compensation cost 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation. The effects of the changes are not
material.
Note 2 GOING CONCERN
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. As shown in financial statements during the years ended
June 30, 1998, 1999 and 2000, the Company incurred losses of
$1,082,613, $4,428,515 and $8,128,336, respectively. These factors
among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
F-8
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow, to meet its
obligations on a timely basis, to obtain additional financing as
may be required, and ultimately to attain profitability. The
Company is actively pursuing equity financing through a best
efforts agreement with H.C. Wainwright & Co. to place $10.4
million in preferred stock in a private placement. (Note 19)
Note 3 RESTRICTED CASH
In July 1999 $442,000 of cash was pledged as collateral on an
outstanding letter of credit related to the facility lease and was
classified as restricted cash on the balance sheet.
Note 4 CONCENTRATIONS OF RISK
Financial instruments, which potentially subject the Company to
credit risk, are trade accounts receivable. Management believes
that their credit risk from Web site sales is not concentrated in
any specific region, activity or economic characteristics of
specific industries because The Company performs services
throughout the country and for different industries. Receivables
arising from catalog production services have been concentrated in
the apparel industry.
Bank balances at any one institution are insured by the FDIC up to
$100,000. At June 30, 1999, and 2000, the Company's uninsured bank
balances total $19,479 and $873,474 respectively.
In addition, the Company has a money market mutual fund investment
in the amount of $1,000,000 at June 30, 2000 which is not insured.
Two customers represented 25% and 20% of revenues for the year
ended June 30, 1999. The customer representing 20% did not supply
any revenues in the year ended June 30, 2000. Two customers
represented 44% and 22% of revenues for the year ended June 30,
2000. The customer representing 22% will not supply any revenues
in future years, as the revenues generated were from a one-time
transaction. The loss of the customer representing 44% of revenues
in 2000 could have an adverse effect on the Company.
Note 5 PUBLIC OFFERING
On July 23, 1999, the Company completed a public offering in which
the Company sold 1,100,000 units, each consisting of one share of
common stock and one warrant for the purchase of one share of
common stock. The common stock and warrants underlying the units
trade separately on the American Stock Exchange. The warrants are
exercisable at a purchase price of $18 per share at any time until
they expire on July 20, 2004, and may be called by the Company
following any consecutive ten-day period in which the Company's
common stock trades over $24 per share. The following is a summary
of net proceeds of the offering:
Sales of Shares $13,200,000
Underwriting discount (990,000)
Fees (276,352)
Loan Principal
and interest (200,595)
------------
Net Proceeds $11,733,053
=+==========
F-9
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
Note 6 COMMON STOCK
During fiscal year 1998 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 in exchange for
services at $1.19 to $1.88 per share. The Company also issued
255,434 shares for $1.15 per share from February through June 30,
1998 to shareholders who also received warrants to purchase
127,717 additional common shares at $1.50 per share. These
warrants were exercised in July 2000.
During fiscal year 1999 the Company issued 233,000 shares of
common stock upon exercises of outstanding options at prices
ranging from $1.25 to $9.00 per share between November 18, 1998
and January 21, 1999. The Company also issued 25,000 shares at
$.001 per share in exchange for financial and advisory business
services on December 21, 1998, 30,347 shares upon exercises of
cashless warrants on December 7, 1998, 196,000 shares at prices
ranging from $1.00 to $1.15 per share upon conversion of notes
payable on February 12, 1999, and 10,000 shares for the net assets
of DBLA valued at $15.594 per share.
During fiscal year 2000 the Company issued 1,100,000 shares of
common stock to the public upon the completion of its Initial
Public Offering (Note 5). The Company also issued 38,402 shares of
common stock upon exercises of outstanding options at prices
ranging from $1.25 to $9.19 per share between October 27, 1999 and
May 15, 2000, and issued 230,299 shares upon exercises of cashless
warrants between December 3, 1999 and May 10, 2000. The Company
also issued 75,000 shares at $7.50 per share in exchange for
financial and advisory business services on April 14, 2000.
PREFERRED STOCK
The Company authorized 5,000,000 shares of Preferred Stock during
the year ended June 30, 1999. No shares have been issued.
Note 7 STOCK OPTIONS
(a) EMPLOYEE OPTIONS
During the years ended June 30, 1998, 1999, and 2000 the Company
granted options to employees and recognized compensation expense
of $15,378, $2,021,938, and $1,345,627 respectively, as the
options were granted.
A summary of the status of the Company's employee stock options as
of June 30, 1998, 1999 and 2000, and changes during the years is
as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999 June 30, 2000
------------- ------------- -------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year $ - $ - 36,000 $ 1.75 479,940 $ 7.97
Granted 36,000 1.75 503,940 7.61 872,500 9.43
Exercised - - (60,000) (1.25) (38,402) (1.47)
Forfeited - - - - (274,223) (9.95)
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at End of Year 36,000 $ 1.75 479,940 7.97 1,039,815 8.92
</TABLE>
F-10
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999 June 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Options exercisable at year-end - 196,000 325,324
Weighted average fair value of
options granted during the year
Exercise price at market price - $ 5.41 $ 9.66
Exercise price above market price - - 7.70
Exercise price below market price .43 7.24 -
The following summarizes information about employee stock options at June 30, 2000:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- ------------------------------------
Weighted-Average Weighted Average
Range of Number Remaining Weighted-Average Number Exercise
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
---------------- -------------- ------------------- -------------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
$ 1.25 128,000 3.39 years $ 1.25 128,000 $ 1.25
6.063-7.70 388,000 9.79 years 7.0918 10,000 6.063
9.1875-13.688 426,940 9.38 years 11.3175 164,355 11.0277
14.00-15.875 96,875 8.79 years 15.7782 22,969 15.8748
</TABLE>
The fair values of option grants were estimated on the dates 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%. Assumptions for 1999: Risk-free interest rate
of 4.43% to 6.01%; Dividend yield of 0%; Expected life of 1.0 to
4.0 years; and Volatility of 61.0% to 61.4%. Assumptions for 2000:
Risk-free interest rate of 5.73% to 6.78%; Dividend yield of 0%;
Expected life of 1.0 to 4.0 years; and Volatility of 65.0% to
67.0%.
On February 21, 1999 the directors authorized the adoption of an
employee stock option plan and reserved a total of 1,000,000
common shares. On September 21, 1999 the Board of Directors
adopted an amendment to the Plan, which was approved by
shareholders, to reserve an additional 1,000,000 shares for the
Plan, thereby increasing the total number of shares reserved under
the Plan to 2,000,000 common shares. A total of 278,940 and
872,500 options, respectively were issued to employees in the
years ended June 30, 1999 and 2000 under the Plan.
The Board of Directors has also adopted an Employee Stock Purchase
Plan (the "ESPP") for the benefit of the Company's employees and
others who provide services to the company, which was approved by
the shareholders. A total of 2,000,000 shares have been reserved
for issuance under the ESPP.
(b) NON-EMPLOYEE OPTIONS
During the years ended June 30, 1998, 1999, and 2000 the Company
granted options and warrants to certain non-employees and
recognized $203,077, $354,500 and $741,653 of expense,
respectively, as the options or warrants were granted.
F-11
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
A summary of the status of the Company's non-employee stock
options and warrants as of June 30, 1998, 1999 and 2000, and
changes during the years is as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999 June 30, 2000
------------- ------------- -------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year - $ - 497,717 $ 1.85 369,333 $ 2.06
Granted 497,717 1.85 45,000 7.75 266,500 13.16
Exercised - - (173,384) (2.94) (230,299) (1.53)
Forfeited - - - - (47,817) 1.64
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at End of Year 497,717 $ 1.85 369,333 $ 2.06 357,717 $ 10.16
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999 June 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Options exercisable at year-end 497,717 369,333 357,717
Weighted average fair value of
options granted during the year
Exercise price at market price - $ - $ 13.06
Exercise price above market price - - 15.37
Exercise price below market price .41 7.88 -
The following summarizes information about non-employee stock options and warrants at June 30, 2000:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- ------------------------------------
Weighted-Average Weighted Average
Range of Number Remaining Weighted-Average Number Exercise
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
---------------- -------------- ------------------- -------------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
$ 1.50 127,717 .44 years $ 1.50 127,717 $ 1.50
8.00-12.00 70,000 2.59 years 10.64 70.000 10.64
12.875-19.00 120,000 3.09 years 14.65 120,000 14.65
20.00-27.00 40,000 .42 years 23.50 40,000 23.50
</TABLE>
The fair values of the options or warrants granted were estimated
on the dates 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
.6667 to 2.4 years; and Volatility of 61.4%. Assumptions for
1999: Risk-free interest rate of 4.51%; Dividend yield of 0%;
Expected life of .1667 to .3333 years; and Volatility of 61.4%.
Assumptions for 2000: Risk-free interest rate of 6.15% to 6.18%;
Dividend yield of 0%; Expected life of 4.0 to 5.0 years; and
Volatility of 65.0% to 67.0%.
F-12
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
Note 8 INCOME TAXES
Deferred tax assets are comprised of the following:
June 30, 1999 June 30, 2000
------------- -------------
Federal net operating loss $1,013,000 $3,571,000
State net operating loss 404,000 667,000
R & D credit carryforward 51,000 55,000
Property and equipment (11,000) (4,000)
Stock Compensation 288,000 816,000
Bad Debt Reserve - 8,000
Other 155 2,000
------------- -------------
1,745,155 5,115,000
Less valuation allowance (1,745,155) (5,115,000)
------------- -------------
Net deferred tax asset $0 $0
The valuation allowance increased by $299,000, $1,261,000 and
$3,369,845 for the years ended June 30, 1998, 1999 and 2000,
respectively.
At June 30, 2000 the Company has incurred loss carryforwards for
income tax purposes and earned research and development credits,
which expire as follows:
<TABLE>
<CAPTION>
Federal State
------- -----
Net Operating Losses
<S> <C> <C>
Expiring.................................... 2002 $531,000
2003 865,000
2004 3,175,000
2005 2,975,000
2012 $518,000
2013 858,000
2014 3,176,000
2015 5,951,000
Research and Development Credits
Expiring.................................... 2012 17,000 4,000
2013 17,000 9,000
2014 2,000 1,000
2015 3,000 2,000
</TABLE>
F-13
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
The Company's provision for income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate
to losses as follows:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Tax benefit determined by applying the U.S.
statutory rate to loss before income taxes $(772,000) $(1,913,000) $(2,764,000)
Change in valuation allowances 299,000 1,261,000 3,369,845
Stock Compensation 167,000 73,000 348,000
Tax rate differences and State tax 306,000 555,000 (330,000)
Change in estimated effective tax rates - - (636,000)
Other - 24,000 12,155
------ ------ ------
Provision (credit) for income taxes $0 $0 $0
</TABLE>
The Internal Revenue Code contains provisions which may limit
the loss carryforwards available if significant changes in
stockholder ownership of the Company occur.
Note 9 SHORT-TERM BORROWINGS
Unsecured promissory notes payable at June 30, 1999 and 2000 are
comprised of:
<TABLE>
<CAPTION>
June 30
--------------------------
1999 2000
---- ----
Note due upon completion of
public offering with interest at 7%
per annum.
<S> <C> <C>
Paid July 1999 100,000 -
Note due on demand with interest at 12% per annum.
Paid August 2, 1999 25,000 -
Note due August 31, 1999 with
interest at 9% per annum(1)
Paid July 26, 1999 500,000 -
------- ------
$625,000 $ -
======= ======
</TABLE>
(1) The note holder also received warrants to acquire $2,000,000
of the Company's Common Stock for $1,500,000. The $500,000
difference between the value of the stock to be issued and
the consideration to be paid is accounted for as loan
origination costs and was amortized over the period of the
loan. Accordingly, $399,225 and $100,775, respectively, are
included in interest expense for the years ended June 30,
1999 and 2000.
On April 1, 1999 the Company assumed a $65,000 revolving bank line
of credit from DBLA which bears interest of 10.25% at June 30,
1999. Minimum monthly interest payments were calculated on the
average daily balance. The outstanding principal balance at June
30, 1999 was $54,000, which was repaid along with accrued interest
on August 9, 1999.
F-14
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
Note 10 RELATED PARTY TRANSACTIONS
The principal shareholder and a minor shareholder advanced funds
to the Company, at 7% per annum interest. Upon completion of the
public offering in July 1999, these notes were paid in full (Note
5).
Advances by shareholders to the Company were $60,135 and $0 at
June 30, 1999 and 2000, respectively, and repayments to
shareholders were $50,000 and $70,723 during the years ended June
30, 1999 and 2000, respectively.
Interest expense on these advances amounted to $2,427, $5,447 and
$0 for the years ended June 30, 1998, 1999, and 2000,
respectively. The balance due on the advances was $70,723 and $0
at June 30, 1999 and 2000 respectively.
In March and May 2000, the Company loaned $85,000 to the Chief
Executive Officer under promissory notes. The two promissory notes
for $25,000 and $60,000, respectively bear interest at 10% per
annum and, along with any accrued interest are repayable upon
demand by the Company. The CEO may make prepayments of the loan in
whole or in part without penalty.
In May 2000, the Company loaned $25,000 to the President & Chief
Operating Officer under a promissory note. The promissory note is
a non-interest bearing note that serves as an advance against
future sales commissions earned. If the President/COO remains with
the company for one year after the date of the offer letter, the
Company shall forgive the note or any balance therein, net of
previously applied commissions, in full. If the President/COO's
employment with the Company is terminated, the note shall be
forgiven at a rate of $7,500 per month over a period of 3.33
months. Through June 30, 2000, the Company has amortized $9,794,
which was charged to compensation expense.
Notes due to the Company from shareholders or officers were $0 and
$100,510 at June 30 1999 and 2000, respectively.
Note 11 OTHER RECEIVABLES
In July 1999, the Company loaned $225,000 to a key Company
employee under a secured promissory note with interest at 10% per
annum and secured by a deed of trust on a residential property.
The borrower is no longer an employee of the company. The note
plus accrued interest became due on September 1, 2000 and was not
repaid. Foreclosure proceedings began September 12, 2000.
Management believes that the value of the security exceeds the
outstanding indebtedness.
F-15
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
<TABLE>
<CAPTION>
Note 12 PROPERTIES AND EQUIPMENT
Property and Equipment is comprised of:
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Machinery and Equipment $ 125,576 $ 417,411
Furniture and Fixtures 54,964 78,057
Leasehold Improvements - 73,854
Software 58,197 93,825
Leased computers 29,954 53,608
------------- -------------
268,691 716,755
Accumulated Depreciation 124,687 234,764
------------- -------------
Net $ 144,004 $ 481,991
============= =============
</TABLE>
Depreciation expense for the years ended June 30, 1998, 1999 and
2000 amounted to $43,208, $66,148 and $135,077, respectively.
Note 13 CAPITAL LEASE OBLIGATION
Property held under capital leases, included with owned property
on the balance sheets at June 30, 1999 and 2000 consists of the
following:
June 30,
1999 2000
---- ----
Computer Equipment 29,954 53,608
Less: Accumulated Depreciation (4,222) (22,642)
------- --------
Net 25,732 30,966
Depreciation of these assets for the year ended June 30, 1998,
1999 and 2000 totaled $0, $4,222 and $18,420, respectively, and is
included in depreciation expense.
Capital lease obligation consists of the following:
June 30,
-------------------
1999 2000
---- ----
Non-cancelable equipment leases
expiring through January 2002 payable
in monthly installments aggregating $2,285
including interest at rates ranging from
12% to 32% secured by certain equipment 25,397 27,788
Less: Current portion of capital lease
obligation (13,079) (18,431)
-------- --------
Non-current portion of capital lease
obligation 12,318 9,357
F-16
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
The future annual lease payments under these leases at June 30,
2000 are as follows:
Years ending June 30, 2001 22,775
2002 10,065
-----------
Total lease payments 32,840
Less amount representing interest (5,052)
-----------
Total obligation under capital lease 27,788
Note 14 COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company executed a lease agreement on July 22, 1999 for
property in Marina Del Rey, California in order to consolidate its
sales and technology development offices and its studio production
facility. Occupancy commenced in September 1999. The term of the
lease is six years and terminates in July 2005. Monthly rent
expense is $48,853 from lease commencement to January 31, 2002;
$53,481 from February 1, 2002 to July 31, 2004, and $55,024 from
August 1, 2004 to July 3, 2005. There is an option to extend the
lease for an additional sixty months.
Future minimum lease payments for the next five years of the lease
and in the aggregate are:
June 30, 2001 586,236
2002 609,371
2003 641,760
2004 641,760
2005 658,733
-------------
$ 3,137,860
=============
The lease required the Company to provide the lessor an
unconditional irrevocable letter of credit in amounts that decline
from $442,000 to $277,166 during the initial lease term. Subject
to various terms and conditions, upon a material default by the
lessee, the lessor may draw on the letter of credit to satisfy the
lease terms.
The monthly rent includes a standard charge for utilities. Rent
expense for the years ended June 30, 1998, 1999 and 2000 amounted
to $35,325, $56,383 and $736,562 respectively.
During the year ended June 30, 2000, The Company terminated its
two previous facility leases.
LITIGATION
The Company is engaged in legal proceedings incidental to its
normal business activities. In the opinion of management, none of
these proceedings are material in relation to the Company's
financial position.
Note 15 LOSS PER SHARE
The loss per common share is determined by dividing the net loss
for each period by the weighted average number of common shares
outstanding during each period.
F-17
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------
1998 1999 2000
----- ------ -----
Common Stock Outstanding
Beginning of
<S> <C> <C> <C>
Period (1) 2,432,666 3,119,800 3,685,747
Issued during
the period (1) 687,134 565,947 1,443,701
End of the
Period (1) 3,119,800 3,685,747 5,129,448
Weighted
Average number
of shares 3,823,228 4,045,746 4,811,623
(1) Net of stock subscriptions
</TABLE>
The Securities and Exchange Commission requires nominal issuances
of potential common shares issued within one year prior to an
Initial Public Offering filing date to be included in earnings per
share calculations as if outstanding for all periods presented.
These calculations for 1998 and 1999 include all such shares.
Loss per common share assuming dilution has not been presented as
the result would have been anti-dilutive.
Note 16 FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, receivables, contracts in progress,
accounts payable and accrued expenses, notes payable, the
line-of-credit and customer deposits approximate fair value
because of the short maturity of these instruments.
Note 17 NON-CASH FINANCING AND INVESTING ACTIVITIES
Acquisition of DBLA
Effective April 1, 1999, the Company acquired $166,880 in assets
of DBLA in exchange for the assumption of its debt of $210,720 and
the issuance of 10,000 shares of the Company's common stock valued
at $155,940. The excess of the fair value of the net assets
acquired of $199,780 is being amortized over a three-year term.
Amortization for the years ended June 30, 1999 and 2000 amounted
to $16,648 and $66,572 respectively.
F-18
<PAGE>
3Dshopping.com
NOTES TO FINANCIAL STATEMENTS
-----------------------------------
Note 18 BRIDGE LOAN
In March 1999 the Company received an unsecured $500,000 bridge
loan in the form of promissory notes due August 31, 1999 with
interest at 9%. That note was paid upon the closing of the
Company's public offering in July 1999. The note holders have the
right to receive warrants to acquire $2,000,000 of the Company's
Common Stock for $1,500,000.
Note 19 SUBSEQUENT EVENTS
On September 1, 2000 Lawrence Weisdorn, Chairman of the Board
resigned his position. On that date, Weisdorn and 3Dshopping.com
executed a mutual general release whereby Weisdorn received two
years of severance pay in the gross amount of $300,000, payable
$150,000 upon signing and the remaining gross amount of $150,000
within three days following the receipt of proceeds from
3Dshopping.com's next round of financing.
On August 1, 2000, 3Dshopping.com engaged H. C. Wainwright & Co.
as investment banker, financial advisor and exclusive agent to
arrange a private placement of preferred stock in the amount of
$10,400,000. (Note 2)
On September 21, 2000 the company acquired a 50.1% interest in
Looksonic L.L.C. by issuance of options to purchase 150,000 shares
of 3Dshopping.com common stock with 50,000 shares vesting on the
transaction date and the remaining shares vesting based on
achievement of certain revenue targets.
On September 13, 2000, the company signed an agreement to acquire
" electronic content management system" technology (eCMS) from
Channelspace Entertainment, Inc. for an initial consideration of
833,333 shares of 3Dshopping.com common stock. Additional
consideration to be paid in shares on a quarterly basis for six
quarters, beginning four months after the closing, based upon
gross revenue to a maximum of $12.5 million.
F-19
