U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-28690
SHOPNET.COM, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 13-3871821
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
14 East 60th Street, Suite 402, New York, New York 10022
(Address of Principal Executive Offices)
(212) 688-9223
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
Title of Each Class and Name of Each Exchange on Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Registrant's revenues for its fiscal year ended December 31, 2000 were
$5,713,133.
The aggregate market value of the voting stock on March 31, 2001
(consisting of Common Stock, par value $0.001 per share) held by non-affiliates
was approximately $4,626,843, based upon the closing price for such Common Stock
on said date ($1.00), as reported by a market maker. On such date, there were
7,472,224 of Registrant's Common Stock outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The statements which are not historical facts contained in this Annual
Report are forward looking statements that involve risks and uncertainties,
including, but not limited to instability of revenues, future losses and
unpredictable operating results. The Company's actual results may differ
materially from the results discussed in any forward looking statement. Unless
otherwise indicated, all references to the number of our shares of common stock
give effect to the 1 for 3 reverse stock split effected in February 1998, 100%
Common Stock dividend effected in February 1999, 10% Common Stock dividend
effected in February 2000 and the 20% Common Stock dividend effected in June
2000.
History
ShopNet.com, Inc. (the "Company" or "Shopnet") was formed in December 1995
in the State of Delaware, as Hollywood Productions, Inc. ("HPI"). Its purpose
was to acquire screenplays and produce motion pictures. The Company changed its
name from "Hollywood Productions, Inc." to "Shopnet.Com, Inc." in May 1999.
In September 1996, the Company acquired Breaking Waves, Inc. ("Breaking
Waves"), a New York corporation which remains a wholly owned subsidiary of the
Company. This acquisition was contingent upon and was consummated simultaneously
with the Company's initial public offering ("IPO") and marked the Company's
entrance into the business of designing, manufacturing, and distributing
(throughout the United States) young girls' swimwear and coordinating beach
cover-ups and accessories.
In May 1999, Shopnet incorporated a new subsidiary, Hollywood Productions,
Inc. ("Hollywood"), to which Shopnet assigned its motion picture business. As a
result, Shopnet is now a holding company, owning 100% of Hollywood and Breaking
Waves. Except where otherwise indicated, Shopnet and its subsidiaries are
collectively referred to herein as the "Company."
Motion Picture Business
General
The Company, in general, has sought to acquire screenplays and produce
motion pictures budgeted from $1 million to $3 million. It also may invest in
the production of motion pictures, though it may not receive absolute ownership
of either the screenplay, the motion picture, or certain ancillary rights (i.e.,
stage performances or novel adaptations).
Production
Since its inception, the Company has actively solicited and reviewed
screenplays with a view toward acquiring the rights to those which it
anticipates either producing or co-producing. Typically, once a screenplay is
acquired (i) a budget is prepared, (ii) revisions to the screenplay are made,
(iii) the talent, production crews, and all ancillary items required for the
filming of the motion picture are hired and/or otherwise obtained, and (iv) a
film schedule is established. Once filming is complete, the film is edited,
sound and special effects are added, and a final print is produced. The Company
then arranges private showings of the film and attempts to secure foreign and
domestic distributors.
Production of a motion picture requires approximately five to eight weeks
of filming followed by approximately fourteen weeks of editing and adding sound
and special effects. An additional twelve to sixteen weeks generally is required
in order to secure a distributor for the film. If the Company cannot find a
distributor, it will attempt to distribute the film itself. Once this process is
complete, the film will be ready for release to theaters or other distribution
channels. See "--Distribution, Billing and Revenues."
Distribution, Billing and Revenues
Distribution of a film may be undertaken either by a motion picture studio,
an independent distributor, or by the Company itself through an agent. The
distributor or agent, in the event the Company self-distributes its films,
enters agreements with the theaters to provide same with films to show the
public. Most theaters have multiple screens and can show numerous movies at the
same time. There is a continuous demand for new films. In negotiating with a
distributor to sign onto a project, the Company and the distributor determine
who will incur what portion of the costs of marketing a film, at which time a
budget is prepared and the extent of the release of the film is determined. For
most high budget, top-name talent pictures, the film is widely released to
between 1,500 and 2,500 theaters nationwide. For films that the Company
anticipates producing, the release may be done in platforming stages where the
film may be released initially to theaters in one or two major markets where it
will be advertised and marketed. A screening is then held, and critics are
invited to review the film. If the film receives a favorable response from
either the critics and/or the audience, the film's distribution will expand
gradually into additional markets and theaters.
The Company expects that the films it produces will be distributed and
shown at movie theaters. Once a film is distributed throughout theaters in the
United States, it may be distributed in markets throughout the world. In
addition, the film may be distributed through public or cable television - via
pay-per-view, premium, and standard channels - and/or through the sale and/or
rental of videotapes. There are many avenues for the distribution of a film and
the exploitation of all ancillary rights thereto. The Company may enter into
agreements with different distributors for different markets or sell all the
rights to one distributor. Revenues generated are distributed to all parties
involved including the distributor, the producers, the owners, and the talent
pursuant to extensive formulas previously agreed upon.
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the United States and most foreign countries which provide
substantial civil and criminal sanctions for unauthorized duplication and
exhibition of motion pictures. The Company plans to take all appropriate and
reasonable measures to secure, protect, and maintain or obtain agreements from
licenses to secure, protect, and maintain copyright protection for all of the
motion pictures it distributes under the laws of all applicable jurisdictions.
The Company estimates that between 12 and 18 months will elapse between the
commencement of expenditures by the Company in the acquisition of a screenplay,
the production of a motion picture, and its release. The Company does not expect
to receive revenues from the exploitation of a film until approximately 24 to 36
weeks after its release. Billing in the industry typically occurs quarterly:
theaters pay distributors on a quarterly basis, and the Company is paid the
following quarter. In the event a distributor desires to distribute one of the
Company's films, however, such distributor may either (i) offer an initial
payment to the Company against, or in addition to, future royalties or (ii)
purchase the film outright.
Production of "Dirty Laundry"
In March 1995, the Company entered into a property acquisition agreement
(the "Purchase Agreement") and a co-production agreement (the "Production
Agreement") with Rogue Features, Inc. ("Rogue"), an unaffiliated entity, to
acquire the rights to and co-produce a motion picture of the screenplay entitled
"Dirty Laundry." In addition, the Company and Rogue entered into a right of
first refusal agreement with respect to the next two products of Rogue and/or
its principals.
In April 1996, the Company formed D.L. Productions, Inc. ("D.L.
Productions"), a New York corporation, as a wholly owned subsidiary, for the
purpose of holding title to and producing the Dirty Laundry film and receiving
revenues from the distribution thereof. The Purchase Agreement conveyed all
rights to the screenplay and the film itself to the Company. In return, Rogue
directed Dirty Laundry and has the right to 25% of its profits as described in
the Production Agreement. Rogue also retained the right to produce a live comedy
or musical upon the earlier of five years after Dirty Laundry's release or the
Company's approval. In addition, Michael Normand, a principal of Rogue, retained
the right to adapt the screenplay of Dirty Laundry into a novel on the Company's
approval of the compensation it is to receive therefrom. The Production
Agreement provided for the principals of Rogue to direct and retain creative
control of the production of the film while the Company retains final approval.
In November 1997, with production of the movie complete, the Company
effected the dissolution of D.L. Productions. Its assets were transferred to the
Company, and the Company took over the marketing of Dirty Laundry.
In June 1998, the Company entered into an agreement with Artistic License
Films, Inc. ("ALF") whereupon ALF agreed to use its best efforts to distribute
(i.e., release) the film in at least three New York theaters and two Los Angeles
theaters. In exchange for its efforts, ALF received a $20,000 retainer fee which
constitutes an advance against ALF's distributor's fee of 25% of the gross
receipts from the theatrical distribution of the film. To date, the film has not
generated any significant revenues for the Company.
The film was released to five New York and three Los Angeles theaters. It
had a limited run during the fall of 1998 and received marginal reviews.
Currently, the Company is reviewing plans to distribute the film through
numerous distribution channels, including video, syndicated, network and cable
television and pay-per-view.
Dirty Laundry is a romantic comedy shot in the New York tri-state area. It
stars Jay Thomas as Joey (a dry cleaner going through a mid-life crisis), and
Tess Harper as Beth (a sex advice columnist for a woman's magazine and Joey's
wife of 15 years). Joey's dry cleaning business is doing poorly, and he is
convinced that he is aging prematurely. Given their increasing lack of intimacy,
Beth encourages Joey to seek counseling, which he does unbeknownst to Beth, who
has become attracted to her chiropractor. Throughout the film, a variety of
bizarre mishaps occur which result in the couple's rekindling of their lost
romance. Mr. Thomas has co-starred in the motion picture "Mr. Holland's Opus"
and is known for his television work in "Love & War," "Cheers," "Murphy Brown,"
and "Mork & Mindy," and, most recently, is hosting WTJM "Jammin" 105.1 FM, a New
York radio station which hopes to air nationwide. Ms. Harper earned a Golden
Globe nomination for her performance in the film "Tender Mercies" and an Oscar
nomination for her role in the film "Crimes of the Heart."
Production of "Machiavelli Rises"
In April 1998, the Company entered into a co-production agreement with
North Folk Films, Inc. ("North Folk") for the production of a film entitled
"Machiavelli Rises." The Company and North Folk formed a limited liability
company, Battle Studies Productions, LLC ("Battle Studies"), to finance,
produce, and distribute the film which commenced production in April 1998.
Principal photography was completed in May 1998 at a total cost of $265,000.
Post-production work on the film was completed in November 1998. The film was
written, directed, and co-produced by Efraim Horowitz and can be characterized
as a contemporary ghost story about power, greed, love, and Leonardo Da Vinci's
lost notebook. Total production costs to date have aggregated approximately
$433,000, of which the Company has funded approximately $217,500. In accordance
with the terms of the co-production agreement, the proceeds of the film will be
distributed as follows: first, both parties shall be entitled to recoup their
initial investment in the film, at 135% thereof; then, after repayment to the
respective parties of additional costs incurred by same, any remaining proceeds
shall be distributed 50% to North Folk and 50% to the Company. The film was
shown in January 1999 in both New York and at the Brussels Film Festival.
In February 2000, "Machiavelli Rises" was one of thirty-eight films
showcased at the New York Independent Film Festival ("NYIFF") in New York City
where it was honored with the award for Best Screenplay. In addition, it was
chosen (along with only six other films) for presentment at the Los Angeles
distribution of the NYIFF in April, 2000. Recently, Battle Studies has entered
into agreements with Raven Pictures International and Koan, Inc. for the
distribution of "Machiavelli Rises" internationally and domestically,
respectively. See "Management's Discussion and Analysis or Plan of Operation -
Investment in Joint Ventures - Battle Studies Productions, LLC."
Production of "The Girl"
In July 1999, the Company entered into an agreement with ALF with respect
to the production of a film entitled "The Girl." Pursuant to such agreement, the
Company and ALF formed a limited liability company, The Girl, LLC ("Girl LLC"),
to finance, produce and distribute the film. As of December 31, 2000, the
Company invested $35,000 for a 22.533% interest in Girl LLC. "The Girl" is
completed, has been exhibited at several film festivals and Girl LLC is in the
process of attempting to secure distribution arrangements.
Regulations
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, assigns ratings for age-group
suitability for viewing of motion pictures. While the Company will follow the
practice of submitting most of its motion pictures for such ratings, the Company
may review this policy from time to time.
United States television stations and networks, as well as foreign
governments, impose regulations on the content of motion pictures which may
restrict, in whole or in part, exhibition on television or in a particular
territory. There can be no assurance that current and future restrictions on
motion pictures released by the Company will not limit or affect the Company's
ability to exhibit such motion pictures.
Competition in the Film Industry
The Company competes, and will continue to compete, with other institutions
which produce, distribute, exploit and finance films, some of which have
substantial financial and human resources considerably more extensive than the
Company's. These institutions include the major film studios - including Disney,
Universal, MGM, and Sony - as well as the television networks. Industry members
compete substantially for the hire or purchase of a limited number of producers,
directors, actors, and screenplays which are able to attract major distribution
in all media and all markets throughout the world.
The motion picture business is highly competitive and has an extremely high
profile in terms of name recognition, with relatively insignificant barriers to
entry, and numerous entities compete for the same directors, producers,
actors/actresses, distributors, theaters, etc. There is intense competition
within the film industry for exhibition times at theaters, as well as for
distribution in other media, and for the attention of the movie-going public and
other viewing audiences. Competition for distribution in other media is as
intense as the competition for theatrical distribution, and not all films are
licensed in other media. Each year, numerous production companies are formed,
and numerous motion pictures are produced, all of which motion pictures seek
full distribution and exploitation. Despite the increase in the number of films,
a small number of films, those which receive widespread consumer acceptance,
account for a large percentage of total box office receipts.
Swimwear Business
General
Breaking Waves is a designer, manufacturer, and distributor of girl's
swimwear which is sold throughout the United States. In addition to swimwear,
Breaking Waves also manufactures beach cover-ups and accessories to coordinate
with its swimwear. Swimwear is made in children's sizes from 2-16 and in
pre-teen sizes.
Breaking Waves markets swimwear under private brand labels including
"Breaking Waves," "All Waves," and "Making Waves." In July 2000, Breaking Waves
added a new line of girls' swimwear which is sold under the label, "Coral Cove."
Under a license agreement with Beach Patrol, Inc. ("Beach Patrol"), Breaking
Waves also markets and manufactures a line of children's swimwear under the name
"Daffy Waterwear" and has the exclusive right to use the "All Waves," "Breaking
Waves," "Making Waves," "Coral Cove" and other marks in connection with its
manufacture and sale of girls' swim and beach wear.
During June 2000, Breaking Waves entered into a license agreement with an
effective date of November 1, 2000 with Gottex Models Ltd., an Israeli
Corporation and Gottex Models (USA) Corp., a New York Corporation for the use of
the trademark "Gottex" in the United States for children's swimwear. See
"Agreement with Gottex Models Ltd."
Products, Design, Supplies and Inventory
Breaking Waves designs, manufactures, and sells both private label and name
brand girl's swimwear and accessories. It has an office in Homestead, Florida
where its designer designs all styles for its swimwear lines and accessory
items. Each season, roughly 20-25 prints and fabrics are developed for the
"Breaking Waves" line, 15-18 prints and fabrics are developed for the "All
Waves" line, and 12-16 prints are developed for the "Daffy Waterwear" line and
15 prints and fabrics are developed for "Karl Cove." For the year ended December
31, 2000, the "All Waves" line accounted for approximately one-third of Breaking
Waves' total volume, and the remaining three lines accounted for, in equal
parts, the remainder of Breaking Waves' volume.
In designing its children's swimwear, Breaking Waves adapts certain of the
prints and styles it is provided by Beach Patrol which management feels are
appropriate for children's wear. Of each fabric or print chosen, the Company
usually manufactures two swimsuits: a one-piece model and a two-piece model.
Once Breaking Waves has chosen the prints it desires to use for its
children's swimwear, it sends the fabric designs to its agent in Korea who
disseminates same to one or more clothing manufacturers for prototyping and the
knitting or weaving and printing of fabrics. The manufacturer returns the
fabrics to Breaking Waves, and upon Breaking Waves' approval thereof, the
fabrics are sent, with the desired design, to any one or more of several
Indonesian companies where the fabric is cut and sewn into a completed product.
Finished goods are shipped from the Indonesian company to a public warehouse in
the City of Industry, California. Breaking Waves has found that this process is
the most cost-effective means of operating its business. It expects to continue
its operations in this manner in the future, though it may use other
manufacturers and suppliers in different countries.
Breaking Waves' swimwear typically is produced in two blended fabrics: one
is a blend of nylon and lycra spandex ("NL"), and the other is a blend of
cotton, polyester, and lycra spandex ("CPL"). Each product line uses different
designs and emphasizes different fabric blends.
For the year ended December 31, 2000, half of Breaking Waves' finished
products were purchased from an Indonesian manufacturer and half were purchased
from a Samoan manufacturer, whereas for the year ended December 31, 1999, 50%,
40%, and 10% of Breaking Waves' finished products were purchased from two
Indonesian manufacturers and one Samoan manufacturer. Although management of
Breaking Waves believes that the fabrics and non-fabric sub-materials it uses
are readily available and that there are numerous manufacturers for such piece
goods who offer similar terms and prices, there can be no assurance that
management is correct in such belief. The unavailability of fabrics or the
absence of clothiers, or the availability of either at unreasonable cost, could
adversely affect the operations of Breaking Waves and, hence, the Company.
Since Breaking Waves purchases finished garments from overseas contractors,
it does not buy or maintain an inventory of sub-materials. It has not
experienced difficulty in satisfying finished garment requirements and considers
its sources of supply adequate. Breaking Waves' inventory of garments varies
depending upon its backlog of purchase orders and its financial position.
Marketing and Sales
The "Daffy Waterwear" label is sold to department and specialty stores. The
"Breaking Waves" label is also distributed through better department and
specialty stores. The "All Waves" label is sold to mass merchants and also as
promotional goods in department stores. Private label programs are supplied to
several major chains and department store groups.
Breaking Waves sells its swimwear and accessory items through its showroom
sales staff and through independent sales representatives. Over the past several
years, certain of its customers have included the Dillard and Federated
department store groups as well as Kids R Us, Sears, Wal-Mart, T.J. Maxx, Kohl's
Department Store, and Marshalls. For the year ended December 31, 2000, Breaking
Waves had three customers representing 22%, 14% and 10% of net sales,
respectively. Pursuant to a sales agreement entered into with Play Co. Toys &
Entertainment Corp. ("Play Co.") (a toy retailer and publicly traded company
whose board chairman is the President of both the Company and Breaking Waves and
a company in which Breaking Waves owns 1,270,000 Shares of Common Stock),
Breaking Waves also sells its swimwear in certain of Play Co.'s toy stores. (See
"--Acquisition of Minority Interest in Play Co. Toys & Entertainment Corp.")
Breaking Waves' merchandise is shipped pursuant to purchase orders sent by
its customers and is sent f.o.b. shipping point (freight on board) meaning
Breaking Waves is neither responsible for the goods during shipment nor for the
delivery charge. Payment is due 30 days after shipment. No goods are shipped on
consignment; therefore, except for non-conforming or damaged goods, all goods
shipped are considered sold.
In addition to its in-house sales and showroom personnel, approximately
twenty independent sales representatives throughout the United States sell
Breaking Waves merchandise. These representatives service department stores and
smaller specialty retailers. Separate independent representatives sell the
"Daffy Waterwear" line. None of these representatives is under contract with
Breaking Waves; nor does any receive a salary from same. Rather, each is paid a
commission based upon his sales. In addition to showroom sales and sales
representatives calling on customers, Breaking Waves exhibits its products at
major trade shows. End of season and discontinued merchandise is sold to
off-price stores.
Suspended Internet Activities
In March 1999, Breaking Waves launched an online wholesale children's
swimwear website at www.breakingwaves.com. The website was designed to
complement the company's wholesale distribution efforts by providing retailers
instant access to more than 200 styles of Breaking Waves swimwear. The Company
has determined, however, not to pursue this method of distribution, and its
website is now dormant.
Work in Progress
Breaking Waves manufactures its swimwear lines from June to December based
on its knowledge of the market and past sales. Customer orders generally start
arriving in June and July. Goods are reordered by customers on a continual basis
through the following June. The quantity of open purchase orders at any date may
be affected by, among other things, the timing and recording of orders. Breaking
Waves does not sell on consignment and accepts return of only such products as
are imperfect or shipped in error.
The major design work takes place from January to May. Goods are
manufactured, printed, and sewn overseas from June to December. Finished
garments are shipped from the factory to a public warehouse in Los Angeles for
shipments to retailers. The majority of shipments to retailers are made from
November to May, with January through March being the peak shipping time.
Trademarks and Licensing; New Product Line
Breaking Waves relies on common law trademarks for usage of its private
label swimwear lines. On October 16, 1995, Breaking Waves entered into a license
agreement with Beach Patrol, Inc. ("Beach") for the exclusive use of certain
trademarks in the United States. The agreement covered a term from January 1,
1996 to June 30, 1998 and contained a provision for an additional three year
extension, at the option of Breaking Waves, through and until June 30, 2001.
Breaking Waves has exercised this opinion, thereby extending the agreement. The
agreement calls for minimum annual royalties of $75,000 to $200,000 over the
life of the agreement with options based on sales levels from $1,000,000 for the
first year to $4,000,000 in the sixth year. Breaking Waves has negotiated an
additional two year extension thereby extending the agreement through and until
June 30, 2003, and it contains a provision for an additional two year extension,
at the option of Breaking Waves, through and until June 30, 2005. The new
agreement signed February 28, 2001 and effective July 1, 2001 calls for minimum
annual royalties of $50,000 to $87,500 over the life of the extension with
options based on sales levels from $1,000,000 for the seventh year to $1,750,000
in the tenth year. Breaking Waves recorded royalties under this agreement
totaling $163,009 and $162,501 during the years ended December 31, 2000 and
1999, respectively.
During June 2000, Breaking Waves entered into a license agreement with an
effective date of November 1, 2000 with Gottex Models Ltd., an Israeli
Corporation and Gottex Models (USA) Corp., a New York Corporation for the use of
the trademark "Gottex" in the United States for children's swimwear. The
agreement calls for a royalty fee of 7% of net sales (as defined in the license
agreement) with guaranteed minimum annual royalties of $70,000 to $140,000 over
the life of the agreement, subject to certain exceptions. The license agreement
also requires the Company to expend certain minimum amounts on advertising each
year. The license agreement is for a term of three years, subject to earlier
termination in accordance with its terms.
In addition to the foregoing, Breaking Waves has registered trademarks for
the "Breaking Waves" and "All Waves" labels. There can be no assurance that such
trademarks or the marks licensed by Breaking Waves adequately will be protected
against infringement. In addition, there can be no assurance that Breaking Waves
will not be found to be infringing on another company's trademark. In the event
Breaking Waves finds another party to be infringing upon one of its trademarks,
if registered, or is found by another company to be infringing upon such
company's trademark, there can be no assurance that Breaking Waves will have the
financial means to litigate such matters.
Competition
There is intense competition in the swimwear apparel industry. Breaking
Waves competes with many other manufacturers in these markets, many of which are
larger and have greater resources than it does. Major competitors in the
swimwear industry include "Ocean Pacific," "Ralph Lauren," and "Speedo." In
addition, department stores and retailers have their own private label programs
which are the major competition in the mass merchant business.
Breaking Waves' business is highly competitive with relatively
insignificant barriers to entry and with numerous firms competing for the same
customers. Breaking Waves is in direct competition with local, regional, and
national clothing manufacturers, many of which have greater resources and more
extensive distribution and marketing capabilities than it does. In addition,
many large retailers have recently commenced sales of "store brand" garments
which compete with those sold by Breaking Waves. Management believes that
Breaking Waves' market share is not significant in its product lines.
Many of the national clothing manufacturers have extensive advertising
campaigns which develop and reinforce brand recognition. In addition, many of
such manufacturers have agreements with department stores and national retail
clothing chains to jointly advertise and market their products. Since Breaking
Waves does little advertising and has no agreement with any department store or
national retail chain to advertise any of its products, it competes with
companies that have brand names that are well known to the public. All other
factors being equal, it can be expected that a retail shopper will buy a "brand
name" garment before he buys an "unknown" brand.
Seasonality
Breaking Waves' business is seasonal: a large portion of its revenues and
profits are derived between November and March. Each year from April through
October, Breaking Waves designs and manufactures the following season's swimwear
lines. There can be no assurance that revenues received from December to June
will support Breaking Waves' operations for the rest of the year.
Employees
During the year ended December 31, 2000, the Company had two executive
officers (and one administrative assistant) to oversee both its operations and
those of Breaking Waves. In January 2000, the Company's secretary (and
director), Robert DiMilia, resigned from these positions and was replaced in
February 2000 by Jeanne Falletta, who is also a Controller of Breaking Waves.
Most screenwriters, performers, directors, and technical personnel who are or
will be involved in the Company's films are members of guilds or unions which
bargain collectively with producers on an industry-wide basis from time to time.
Any work stoppages or other labor difficulties could delay the production of the
films resulting in increased production costs and delayed return of investments.
Breaking Waves has two full-time executive officers including a vice president
of design, marketing and sales and a controller, and a part-time employee--a
vice president of design, marketing and sales. Breaking Waves has approximately
twenty independent road sales people and accounting and clerical staff.
Business Risks
The Company anticipates that the motion pictures it produces will cost
between $1 million and $3 million, depending on the film. The likelihood of the
success of each film and the Company's ability to stay on budget and on schedule
for each film must be considered in light of the problems, expenses,
difficulties, complications, and delays frequently encountered in connection
with the production of a motion picture. Due to unforeseen problems and delays
including illness, weather, technical difficulty, and human error, by
completion, most films are considerably over budget. In addition, the lack of
experience of management in this industry, the limited operating history and
capital of the Company, and the competitive environment in which the Company
operates may cause increased expenses due to mistakes and delays in the
production of the films.
The success of a film in theatrical distribution, television, home video,
and other ancillary markets is dependent upon public taste which is
unpredictable and susceptible to change. The number and popularity of other
films being distributed may also significantly affect the theatrical success of
a film. Accordingly, it is impossible for anyone to predict accurately the
success of any film at the time it enters production. The production of a motion
picture requires the expenditure of funds based largely on a pre-production
evaluation of the commercial potential of the proposed project.
The apparel industry is a cyclical industry, with consumer purchases of
swimwear, accessory items, and related goods tending to decline during
recessionary periods when disposable income is low. Accordingly, a prolonged
recession would in all likelihood have an adverse effect on the operations of
Breaking Waves and, hence, the Company. Breaking Waves operates in only one
segment of the apparel industry, specifically swimwear, and is therefore
dependent on the demand for such goods. Decreases in the demand for swimwear
products would have a material adverse effect on the Company's business as a
whole.
Breaking Waves believes that its success in the swimwear industry depends
in substantial part on its ability to anticipate, gauge, and respond to changing
consumer demands and fashion trends in a timely manner. Breaking Waves attempts
to anticipate consumer preferences. There can be no assurance, however, that it
will be successful in this regard, and if it misjudges the market for any of its
products, it may be faced with unsold finished goods, inventory, and work in
process, which could have an adverse effect on the Company's operations as a
whole.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located at 14 East 60th Street, Suite
402, New York, New York 10022, (212) 688-9223, and comprise approximately 1,800
square feet. The Company leased its office space in November 1996 for a term of
five years, at an approximate base annual rental of $70,000. The Company has the
option to terminate this lease anytime after November 1999.
Breaking Waves maintains its executive offices and showroom at 112 West
34th Street, New York, New York 10120. Until January 1998, this space was
approximately 1,000 square feet and comprised only office space. In January
1998, Breaking Waves amended its lease and rented an additional 1,000 square
feet. The lease is for a term of seven years, expiring December 2004, and
carries an annual rental of $71,600. Breaking Waves also maintains a Florida
office, which it moved in January 1999 from Miami to 19865 Southwest 328th
Street, Homestead, Florida 33030. This office, comprising approximately 780
square feet, houses Breaking Waves' design operation and is rented month to
month for approximately $900.
ITEM 3. LEGAL PROCEEDINGS
On or about June of 2000, an action was brought in the Queens County
Supreme Court against the Company and several others claiming, among other
things, that the Company allegedly breached a contract and engaged in fraudulent
statements (including supposedly promising the plaintiff options and then not
allowing the plaintiff to exercise these options). The plaintiff seeks, among
other things, compensatory damages in the amount of $497,500, punitive damages
in the amount of $995,000, together with costs and attorney's fees. The Company
has responded to the complaint and denied the allegations. The Company intends
to contest this action vigorously and believes that such claims against it are
baseless and without merit.
The Company is not a party to any other material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business. Neither the Company's officers, directors, affiliates, nor owners
of record or beneficially of more than five percent of any class of the
Company's Common Stock is a party to any material proceeding adverse to the
Company or has a material interest in any such proceeding adverse to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is quoted on the SmallCap Market of the Nasdaq
Stock Market and the Third Segment of the Frankfurt Stock Exchange. The
following table sets forth representative high and low sale prices as reported
by a market maker for the Company's Common Stock and Warrants, during the period
from January 1, 1998 through December 31, 2000. Sales prices reflect prices
between dealers and do not include resale mark-ups, mark-downs, or other fees or
commissions.
Common Stock Warrants
Calendar Period Low High Low High
1999(1)(2)
01/01/99 - 03/31/99 .50 2.78 .03 .31
04/01/99 - 06/30/99 1.06 3.09 .06 .41
07/01/99 - 09/30/99 2.06 2.75 .13 .28
10/01/99 - 12/31/99 2.06 3.44 .13 .31
2000(2)
01/01/00 - 03/31/00 2.56 7.72 .13 .72
04/01/00 - 06/30/00 2.44 5.13 .13 .47
07/01/00 - 09/30/00 2.38 3.98 .25 .31
10/01/01 - 12/31/00 .25 3.00 .16 .28
2001(2)
01/01/01 - 03/31/01 .19 .89 .09 .22
04/01/01 - 04/12/01 1.00 1.45 .16 .16
---------------------------------------------
As of March 31, 2001, there were 54 holders of record of the Company's
Common Stock, although the Company believes that there are approximately 900
additional beneficial owners of shares of Common Stock held in street name. As
of March 31, 2001, the number of outstanding shares of the Company's Common
Stock was 7,472,224. (This number includes an aggregate of 2,420 shares of
Common Stock being held by the Company on behalf of certain shareholders pending
their submission for exchange of stock certificates outstanding on the date of
the Company's one-for-three reverse stock split, as adjusted for the reverse
stock split and subsequent stock dividends.)
Initially, each Warrant issued in the IPO entitled the holders thereof to
purchase one share of the Company's Common Stock at an exercise price of $6.50
per share, until September 9, 2001. On June 23, 1997, the Board of Directors
approved a reduction in the exercise price of the Warrants from $6.50 to $3.00.
On February 5, 1998, the Company effected a one for three reverse split of the
Company's Common Stock. Accordingly, the Company adjusted the terms of the
Warrants to reflect the reverse split such that exercise of three Warrants would
entitle the holder to purchase one share of Common Stock at an exercise price of
$9.00. Giving effect to the February 1999 100% Common Stock dividend, February
2000 10% Common Stock dividend and June 2000 20% Common Stock dividend, the
Warrants have been cumulatively adjusted such that the exercise of each Warrant
at an exercise price of $3.41 purchases .88 of a share of Common Stock.
On April 15, 1998, the Company's Board of Directors authorized the
distribution of Distribution Warrants to all holders of shares of the Company's
Common Stock as of the May 8, 1998 Warrant Record Date. Pursuant to the
distribution, each share held on the Warrant Record Date shall generate the
issuance of one Distribution Warrant to purchase one share of Common Stock at an
exercise price of $4.00 per share. The Distribution Warrants, which are
exercisable for a period of three years commencing one year after issuance,
shall be issued and distributed once the Company has filed a registration
statement for same and same has been declared effective by the SEC. The Company
to date has not filed the registration statement.
Common Stock Dividends
20% Common Stock Dividend
On May 8, 2000, the Company's Board of Directors authorized the issuance of
a 20% stock dividend to all holders of shares of the Company's Common Stock, par
value $0.001 per share (the "Common Stock") as of May 19, 2000 payable on June
19, 2000.
10% Common Stock Dividend
On January 7, 2000, the Company's Board of Directors authorized the
issuance of a 10% stock dividend to all holders of shares of the Company's
common stock, par value $0.001 per share (the "Common Stock"), as of January 20,
1999, payable February 1, 2000.
100% Common Stock Dividend
On January 14, 1999, the Company's Board of Directors authorized the
issuance of a stock dividend to all holders of shares of the Company's Common
Stock as of January 29, 1999, payable on February 5, 1999.
The Company has paid no cash dividends and has no present plan to pay any
cash dividends. Payment of future dividends will be determined from time to time
by its board of directors, based upon its future earnings, if any, financial
condition, capital requirements, and other factors. The Company is not presently
subject to any contractual or similar restriction on its present or future
ability to pay such dividends.
Recent Sales of Unregistered Securities
In February 1998, in private transactions, the Company sold an aggregate of
792,000 shares of Common Stock to three entities at a price of $0.295 per share
for an aggregate price of $195,000. These shares were purchased by the following
accredited investors: Full Moon Development, Inc., Volcano Trading, Inc., and
American Telecom Corp. (whose president, secretary, and a director is related to
the Company's President). The private offering was conducted in reliance upon
Rule 506 of the General Rules and Regulations under the Act. The proceeds from
these sales were used by the Company for general working capital and to fund the
Company's interest in Battle Studies. No underwriter was used in connection with
this offering.
In April 1998, in private transactions, the Company sold an aggregate of
924,000 shares of Common Stock to three entities at a price of $0.73 per share
for an aggregate price of $560,000. These shares were purchased by the following
accredited investors: Amir Overseas Capital, Ltd., HDS Capital Corp. (whose
secretary is related to the Company's President), and Galit Capital, Ltd. The
private offering was conducted in reliance upon Rule 506 of the General Rules
and Regulations under the Act. The proceeds from these sales were used by the
Company for general working capital and to fund the Company's interest in Battle
Studies. No underwriter was used in connection with this offering.
In February 2000, in a private transaction, the Company sold 120,000 shares
of Common Stock to Value Management & Research, AG for an aggregate price of
$300,000. The private offering was conducted in reliance upon Rule 506 of the
General Rules and Regulations under the Act. The proceeds from the sale were
used by the Company for general corporate purposes. No underwriter was used in
connection with this offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
General
Shopnet was incorporated in the State of Delaware on December 1, 1995 as
Hollywood Productions, Inc. On May 10, 1999, Shopnet filed an amendment to its
Articles of Incorporation effecting a change in its name to its current one. On
May 12, 1999, it incorporated a wholly-owned subsidiary, Hollywood, to which it
assigned its film production business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, Breaking Waves.
Shopnet was formed initially for the purpose of acquiring screenplays and
producing motion pictures. In September 1996, in connection with the completion
of its IPO it acquired all of the capital stock of Breaking Waves which designs,
manufactures, and distributes private and brand name label children's swimwear.
The consolidated financial statements at December 31, 2000 and 1999 include
the accounts of Shopnet and its wholly owned subsidiaries, Breaking Waves and
Hollywood (collectively referred to as the "Company" except where otherwise
indicated), after elimination of all significant intercompany transactions and
accounts.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related footnotes which provide
additional information concerning the Company's financial activities and
condition. Since Shopnet and its subsidiaries operate in different industries,
the discussion and analysis is presented by segment in order to be more
meaningful.
Year ended December 31, 2000 as compared to the year ended December 31, 1999
Breaking Waves
For the years ended December 31, 2000 and 1999, Breaking Waves generated
net sales of $5,713,133 and $4,756,497, respectively with a cost of sales
amounting to $3,764,258 and $3,214,704, respectively. The increase in sales
amounting to $956,636, or approximately 20%, from 1999 to 2000 was primarily
attributable to the introduction of the new "Coral Cove" product line. The gross
profit for the year ended December 31, 2000 amounted to $1,948,875, or 34%, as
compared to the year ended December 31, 1999 during which it amounted to
$1,541,793, or 32%.
Selling, general, and administrative expenses during the years ended
December 31, 2000 and 1999 amounted to $1,638,809 and $1,503,993, respectively.
The increase, amounting to $134,816, is primarily attributable to increased
factoring and warehousing costs.
The major components of the Breaking Waves' selling, general, and
administrative expenses are as follows for the years ended December 31:
2000 1999
--------------------- ------------------
Officers, office staff and
designer salaries and related benefits $ 535,137 $ 499,642
Commission expense 94,489 112,475
Warehousing costs 228,934 178,479
Royalty fees 171,869 173,700
Rent expense 87,690 96,404
Factor commissions 56,683 50,956
Miscellaneous general corporate
overhead expenses 464,007 392,337
In November 1998, Breaking Waves purchased 1,400,000 shares of Play Co.
Toys & Entertainment Corp. ("Play Co.") for a total of $504,000 comprised of
$300,000 in cash and by shipping $204,000 in merchandise. After the purchase,
Breaking Waves owned 25.4% of the outstanding common stock of Play Co.
For the year ended December 31, 1999, Breaking Waves recognized $994,305 of
equity loss (non-cash loss) in Play Co. in connection with the equity method of
accounting.
During the year ended December 31, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play Co's
common stock thereby diluting Breaking Waves ownership interest in Play Co. The
percentage ownership of Breaking Waves' investment was diluted to approximately
1.5% as of December 31, 2000. Breaking Waves accounted for its investment in
Play Co. pursuant to the equity method through the point it maintained at least
a 20% ownership interest. Once its investment fell below 20%, Breaking Waves
used the cost method of accounting. At the time that Breaking Waves shifted from
the equity to the cost method of accounting its basis in Play Co. was $0 since
its share of Play Co.'s loss for 1999 exceeded its cost basis. In accordance
with SFAS No. 115 "Accounting for certain investments in debt and equity
securities," since such securities are classified as available for sale, the
value of such investment was revalued and recorded at the fair market value
which was approximately $108,000 as of December 31, 2000. Accordingly, Breaking
Waves recorded an unrealized gain of approximately $108,000 for the year ended
December 31, 2000, which has been recorded as a component of comprehensive
income (loss) on the statements of operations.
Interest expense in connection with its factoring agreement amounted to
$305,309 and $228,772, for the years ended December 31, 2000 and 1999,
respectively.
Breaking Waves' generated a net income (loss) of $663 and ($1,025,449) for
the years ended December 31, 2000 and 1999, respectively. The net loss generated
for the year ended December 31, 1999 includes an equity loss (non - cash loss)
of $994,305 from Play Co.
Breaking Waves'comprehensive income was $108,615 for the year ended
December 31, 2000 versus a comprehensive loss of $1,025,449 for the year ended
December 31, 1999. The comparisons of the comprehensive net income (loss) for
the two years excluding the affect of the investment in Play Co. are $663 for
2000 and ($31,144) for 1999.
Hollywood
On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary, Hollywood,
to which it assigned its film production business. All film related operations
prior to May 12, 1999 were conducted by Shopnet under its former name.
For the years ended December 31, 2000 and 1999, Hollywood generated no
sales from its motion picture "Dirty Laundry." Although sales prior to the year
ended December 31, 1999 were minimal, the Company expects to effect increased
sales during 2001 and thereafter as a result of the implementation of a new
marketing strategy which, among other things, emphasizes the development of new
marketing and distribution arrangements for "Dirty Laundry." There can be no
assurance that the Company's new marketing and distribution strategies will be
successful in generating sales from "Dirty Laundry." Upon a review of the net
realizable value of the movie costs, management determined that a $308,564 and
$261,000 write down was necessary as of December 31, 2000 and 1999,
respectively. Accordingly, Hollywood generated a loss of approximately $314,000
and $265,000 for the years ended December 31, 2000 and 1999, respectively. In
addition to "Dirty Laundry," Hollywood has also invested in other movie ventures
which are in the distribution phase, which the Company believes will generate
revenue in the future. See "- Liquidity and Capital Resources."
Shopnet.com
For the years ended December 31, 2000 and 1999, Shopnet generated minimal
revenue comprised of interest from its money market and other ancillary revenue
from its corporate office.
Shopnet's selling, general, and administrative expense amounted to $554,434
and $630,014 for the years ended December 31, 2000 and 1999, respectively. This
represents a decrease of $75,580, or approximately 12%.
The major components of the Company's expenses are as follows for the years
ended December 31:
2000 1999
Salaries (officer and office staff) and stock
compensation and related benefits $ 192,135 $ 231,631
Rent 76,234 74,907
Legal and professional fees 99,610 61,634
Consulting fees 27,080 45,824
Other general corporate and administrative expenses 159,375 204,018
Shopnet generated a net loss of $594,576 and $685,476 after an income tax
(benefit) expense of ($8,140) and $53,369 for the years ended December 31, 2000
and 1999, respectively. The income tax expense in 1999 was primarily a result of
an increase in the valuation allowance associated with some of the Company's
federal net operating losses. The Company has a consolidated net operating loss
carry forward of approximately $2,148,000 for federal tax purposes which is
expected to be utilized in the future as a result of filing consolidated federal
income taxes with its subsidiaries, Breaking Waves and Hollywood.
Liquidity and Capital Resources
At December 31, 2000, the Company's consolidated working capital amounted
to $515,984. The Company anticipates that its current available cash will be
sufficient for the next twelve months and does not anticipate any cash
shortfalls. Breaking Waves' ownership interest in Play Co. amounted to
approximately 1.5% as of December 31, 2000 as evidenced by the 1,270,000 shares
of common stock it currently owns. As of December 31, 2000, Breaking Waves'
investment in Play Co. increased to $107,950 based on the fair market value of
its common stock holdings. On March 28, 2001, Play Co. and certain of its
subsidiaries all filed for protection under Title 11 of the United States Code
with the United States Bankruptcy Court for the Southern District of New York.
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Included in cash
are certificates of deposit of $900,690. Shopnet maintains cash deposits in
accounts which are in excess of Federal Deposit Insurance Corporation limits by
approximately $800,000. Shopnet believes that such risk is minimal. Shopnet
maintains a letter of credit with a financial institution as a condition of its
factoring agreement. The financial institution requires Shopnet to maintain
$1,150,000 on deposit as collateral for the letter of credit. The $900,690 of
certificates of deposit represents a portion of the $1,150,000. In addition,
during 1999, Breaking Waves was required to transfer a $200,000 cash deposit to
its factoring agent as additional collateral. Accordingly, both cash amounts are
designated as restricted.
For the years ended December 31, 2000 and 1999, the Company reported a
consolidated net loss of ($906,976) and $1,976,079 after an income tax (benefit
of) provision of ($6,004) and $12,273 and a comprehensive net loss of ($799,026)
and($1,976,079) respectively
Investment in Joint Ventures
Battle Studies Productions, LLC
In April 1998, the Company entered into a co-production agreement with
North Fork for "Machiavelli Rises." The Company and North Fork formed Battle
Studies to finance, produce and distribute the film. Battle Studies will be
treated as a joint venture in order to co-produce motion pictures and to finance
the costs of production and distribution of such motion pictures. The joint
venture retains all rights to the motion pictures, the screenplays, and all
ancillary rights attached thereto. Total production costs to date have
aggregated approximately $433,000 of which the Company has funded approximately
$217,500. In accordance with the terms of the co-production agreement, the
proceeds of the film will be distributed as follows: first, both parties shall
be entitled to recoup their initial investment in the film, at 135% thereof;
then, after repayment to the respective parties of additional costs incurred by
same, any remaining proceeds shall be distributed 50% to North Folk and 50% to
the Company. The film was shown in January 1999 in both New York and at the
Brussels Film Festival.
The Company accounts for the investment in Battle Studies on the equity
method. As of December 31, 2000, the Company has recorded its investment at
$213,210. This represents its initial investment of $217,500 less $4,290 of
equity loss for its proportionate share of Battle Studies.
On October 12, 2000, Battle Studies entered into a distribution agreement
with Raven Pictures International ("Raven Pictures") to distribute Battle
Studies motion picture ("Machiavelli Rises") to foreign countries. Battle
Studies has granted rights under the agreement for the theatrical, video,
non-theatrical and television markets. The term of the agreement is for
twenty-four months for all portions of territory outside of the United States
and English speaking Canada. Battle Studies expects to realize 75% (which is net
of a 25% fee to Raven Pictures) of the expected estimated gross revenue derived
from foreign countries less $20,000 for marketing and advertising expenses.
On January 17, 2001, Battle Studies entered into a distribution agreement
with KOAN to distribute and promote Battle Studies' motion pictures
("Machiavelli Rises") in the United States and Canada. Battle Studies has
granted rights under the agreement for Free TV, pay TV, cable, satellite, video
and DVD markets. The terms of the agreement is for twenty - four months and it
will be automatically renewed unless KOAN receives a letter of cancellation at
least thirty days prior to the date of termination or if sales have not exceeded
$250,000 over the twenty - four month period. Battle Studies expects to realize
70% (which is net of a 30% fee to KOAN) of the expected estimated gross revenues
derived from the United States and Canada less $5,000 per year for promotional
costs.
The Girl, LLC
Pursuant to an agreement dated July 1, 1999 with ALF for the production of
a film entitled "The Girl," Hollywood invested through December 31, 2000 $35,000
for a 22.533% interest in a new entity, The Girl, LLC, a limited liability
company ("Girl LLC"). In return for its participation in Girl LLC, Hollywood
shall be entitled to receive a non-contested, non-dilutable 22.533% ownership
interest in Girl LLC, a recoupment of its investment on no less favorable terms
than any other investor and 22.533% of 100% of any contingent compensation which
shall be actually received by Girl LLC. Girl LLC retains all rights to the
motion pictures, the screenplays, and all ancillary rights attached thereto.
"The Girl" is completed and has been exhibited at several film festivals. Girl
LLC is in the process of attempting to secure distribution rights for the film.
Hollywood accounts for the investment in The Girl under the equity method.
Accordingly, as of December 31, 2000 and 1999, the Company has only recorded its
initial $35,000 investment since no revenues have been derived from this film as
of December 31, 2000.
Factoring Arrangements
CIT Group
On August 20, 1997, Breaking Waves entered into a factoring and revolving
inventory loan and security agreement (as amended December 9, 1998) with CIT
Group (formerly, Heller Financial, Inc. "CIT") to sell their interest in all
present and future receivables without recourse. Breaking Waves paid CIT a
factoring commission of .85% of the first $5,000,000 of receivables sold and
.65% of receivables sold in excess of $5,000,000 for each year. Breaking Waves
took advances of up to 85% of the receivable, with interest at the rate of 1
3/4% over prime. In connection with the factoring agreement, the Company agreed
to maintain $1,150,000 of cash in a segregated account in order to collateralize
standby letters of credit. In addition, during 1999, the Company was required to
transfer an additional $200,000 of cash as collateral for the standby letter of
credit. Interest expense related to this agreement totaled $204,821 and $228,772
for the years ended December 31, 2000 and 1999, respectively. CIT had a
continuing interest in Breaking Wave's inventory as collateral for the advances.
As of December 31, 2000, the net due to Breaking Waves from CIT amounted to
$312. On or about September 12, 2000 the agreement with CIT was cancelled and a
new factoring agreement was entered into with Century Business Credit
Corporation ("Century").
Century Business Credit Corporation
On or about September 12, 2000, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement with Century to sell their
interest in all present and future receivables without recourse. Breaking Waves
submits all sales offers to Century for credit approval prior to shipment, and
pays a factoring commission of .75% of receivables sold. Century retains from
the amount payable to Breaking Waves a reserve for possible obligations such as
customer disputes and possible credit losses on unapproved receivables. Breaking
Waves may take advances of up to 85% of the receivables, with interest at the
rate of 1 3/4% over prime. In connection with the factoring agreement, the
Company agreed to maintain $1,150,000 of cash in a segregated account in order
to collateralize standby letters of credit for Breaking Waves. Additionally,
Breaking Waves was required to pledge as additional collateral $200,000 of its
own cash and its investment in Play Co. which is represented by 1,270,000 shares
of Play Co.'s common stock. Pursuant to the terms of a Reimbursement and
Compensation Agreement, a trust ("Trust"), the beneficiary of which is a
relative of the Company's President and Chief Executive Officer and a relative
of a majority stockholder, pledged assets as collateral for securing a $250,000
letter of credit to replace a portion of a letter of credit previously pledged
by the Company. Accordingly, on December 20, 2000 the original agreement with
the factor was amended to allow such replacement of collateral. Breaking Waves'
Loan and Security Agreement with Century dated December 20, 2000 requires the
provision of one or more letters of credit in the aggregate amount of $1,150,000
to partially secure the line of credit.
Breaking Waves agreed to reimburse the Trust for any and all losses, fees,
charges and expenses to the Trust in the event the letter of credit is called by
Century and/or the issuing bank demands reimbursement from the Trust. Breaking
Waves' obligations to the Trust are secured by a subordinate security interest
in Breaking Waves' assets. In addition, the Company has guaranteed Breaking
Waves' obligations to the Trust; such guaranty is secured by a security interest
in all of the Company's assets. Breaking Waves paid a fee of $42,500 to the
Trust and reimbursed the Trust for all related professional and other fees
incurred by the Trust in connection with such transaction. Interest expense
related to this agreement totaled $100,488 for the year ended December 31, 2000.
Century has a continuing interest in Breaking Wave's inventory as collateral for
the advances. As of December 31, 2000, the net advances to Breaking Waves from
Century amounted to $3,165,597.
Capital Lease Obligations
During 1998, the Company acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:
On August 13, 1998, the Company acquired various computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum, requiring 48 monthly payments of principal and
interest of $762. The lease is secured by the related computer equipment.
On September 13, 1998, the Company acquired proprietary software for
$32,923 by entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments of principal and
interest of $850. The lease is secured by the related software.
Lease Commitments
Shopnet and Breaking Waves have entered into lease agreements for
administrative offices. Shopnet leases its administrative office pursuant to a 5
year lease expiring November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leases its administrative
offices pursuant to a lease requiring annual payments of $71,600 expiring
December 2004. Lastly, Breaking Waves leases an offsite office for one of its
designers on a month to month basis with annual payments approximating $11,000.
Rent expense for the years ended December 31, 2000 and 1999 amounted to
approximately $163,924 and $172,709, respectively.
License Agreements
On October 16, 1995, Breaking Waves entered into a license agreement with
Beach Patrol, Inc. Pursuant to the licensing agreement, Breaking Waves was given
the right to use certain designs for its children's line under the "Daffy
Waterwear" label from January 1, 1996 to June 30, 1998. Thereafter, the
agreement provided for a three year extension, at the option of Breaking Waves,
through and until June 30, 2001. Breaking Waves has exercised this option,
thereby extending the agreement. The agreement calls for minimum annual
royalties of $75,000 to $200,000 over the life of the agreement with options
based on sales levels from $1,000,000 for the first year to $4,000,000 in the
sixth year. Breaking Waves has negotiated an additional two year extension
thereby extending the agreement through and until June 30, 2003, and it contains
a provision for an additional two year extension, at the option of Breaking
Waves, through and until June 30, 2005. The new agreement signed February 28,
2001 and effective July 1, 2001 calls for minimum annual royalties of $50,000 to
$87,500 over the life of the extension with options based on sales levels from
$1,000,000 for the seventh year to $1,750,000 in the tenth year. Breaking Waves
recorded royalties under this agreement totaling $163,009 and $162,501 during
the years ended December 31, 2000 and 1999, respectively.
On October 31, 1996, Breaking Waves entered into a license agreement with
North-South Books, Inc. for the exclusive use of certain art work and text in
the making of swimsuits and accessories in the United States and Canada. The
agreement expired on March 1, 1999. Breaking Waves recorded royalties totaling
$784 under this agreement during the year ended December 31, 1999.
On October 17, 1997, Breaking Waves entered into a license agreement with
Kawasaki Motors Corp., U.S.A. with an effective date of July 1, 1997 for the
exclusive use of certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is five percent (5%)
of net sales. The agreement expired May 31, 1999 and was not renewed. Breaking
Waves recorded royalties under this agreement totaling $10,415 during the year
ended December 31, 1999.
During June 2000, Breaking Waves entered into a license agreement with an
effective date of November 1, 2000 with Gottex Models Ltd., an Israeli
Corporation and Gottex Models (USA) Corp., a New York Corporation for the use of
the trademark "Gottex" in the United States of America for children's swimwear.
The agreement calls for a royalty fee of 7% of net sales with guaranteed minimum
annual royalties of $70,000 to $140,000 over the life of the agreement, subject
to certain exceptions. The license agreement also requires the Company to expend
certain minimum amounts on advertising each year. The License agreement is for a
term of three years, subject to earlier termination in accordance with its
terms. Breaking Waves recorded royalties under this agreement totaling $8,859
for the year ended December 31, 2000.
In connection with such licensing agreement, Breaking Waves entered into a
consulting agreement with Larry Nash, Inc. ("Consultant") a New York
corporation, whereby Mr. Nash, the Consultant's sole stockholder shall provide
sales and consulting services in connection with Breaking Waves' new Gottex
line. Mr. Nash has provided similar services for the past twelve years with
another company for which he represented the Gottex children's swimwear line.
This agreement is effective August 5, 2000 and shall continue to August 5, 2001
and from year to year thereafter unless cancelled by either party on thirty (30)
days' prior written notice.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Officers and Directors
The following table sets forth the names, ages, and titles of all directors
and officers of the Company:
Name Age Position
Harold Rashbaum 73 President, CEO, and Director
Jeanne Falletta 43 Secretary and Director
Alain Le Guillou, M.D. 43 Director
James B. Frakes 44 Director
Michael Friedland 63 Director
Debra Riggs 47 Director
The Directors of the Company are elected annually by the stockholders, and
the Officers of the Company are appointed annually by the Board of Directors.
Vacancies on the Board of Directors may be filled by the remaining Directors.
Each current Director and Officer will hold office until the next annual meeting
of stockholders or until his successor is elected and qualified. The outside
Directors do not receive a Director's fee for their participation as Directors.
The outside Directors are Alain Le Guillou, M.D. (Until recently Harold Rashbaum
was the father-in-law of Alain Le Guillou, M.D.), James B. Frakes and Debra
Riggs. The Corporation does not have key man insurance on the lives of any of
its Officers or Directors.
As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, shareholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
Harold Rashbaum, age 73, has been the President, Chief Executive Officer,
and a Director of the Company since January 1997. Since September 1996, he has
also been the President, Secretary, and sole Director of Breaking Waves, Inc.
("Breaking Waves"), a New York company which is a wholly-owned subsidiary of the
Company. From May 1996 to January 1997, Mr. Rashbaum served as Secretary and
Treasurer of the Company. Since September 1996, Mr. Rashbaum has been the
Chairman of the Board of Directors of Play Co. Toys & Entertainment Corp. ("Play
Co."), a public entity whose Common Stock, Series E Stock and Series E Warrants
are quoted on the over-the-counter market on the OTC Bulletin Board. Mr.
Rashbaum was a management consultant to Play Co. from July 1995 to September 10,
1996. In May 1998, he was elected as a Director of Toys International, Inc.
("Toys"), a majority-owned subsidiary of Play Co. whose Common stock is traded
on the SMAX segment of the Frankfurt Stock Exchange. On March 28, 2001, Play
Co., Toys and Play Co. Toys Canyon Country, Inc. ("Play Co. Toys Canyon") each
filed for protection under Title 11 of the United States Code with the United
States Bankruptcy Court for the Southern District of New York. Since February
1996, Mr. Rashbaum has also been the President and a Director of H.B.R.
Consultant Sales Corp. ("HBR"), of which his wife is the sole shareholder.
Jeanne Falletta, age 43, was elected a director of the Company in May 2000
and has been its Secretary since February 2000. Since October 1997, Ms. Falletta
has been the controller of Breaking Waves where she has been employed since
February 1997, initially having been hired as a bookkeeper. From January 1996 to
February 1997, Ms. Falletta consulted with various companies as a freelance
accountant.
Alain Le Guillou, M.D., age 44, has been a Director and a consultant of the
Company since 1996. Since July 1995, Dr. Le Guillou has been a doctor of
pediatrics at Montefiore Medical Group. Until recently, Dr. Le Guillou was the
son-in-law of Harold Rashbaum.
James Frakes, age 45, has been a Director of the Company since January 1998
and was appointed Chairman of the Company's Audit Committee in June 2000. Since
July 1997, Mr. Frakes has served as Chief Financial Officer and Secretary of
Play Co. In August 1997, he was elected as a Director of Play Co. In January
1998, Mr. Frakes was appointed Secretary and Chief Financial Officer of Toys. He
was elected as a Director of Toys in May 1998. On March 28, 2001, Play Co., Toys
and Play Co. Toys Canyon each filed for protection under Title 11 of the United
States Code with the United States Bankruptcy Court for the Southern District of
New York. From June 1990 to March 1997, Mr. Frakes was Chief Financial Officer
of Urethane Technologies, Inc. ("UTI") and two of its subsidiaries, Polymer
Development Laboratories, Inc. ("PDL") and BMC Acquisition, Inc. These were
specialty chemical companies, which focused on the polyurethane segment of the
plastics industry. Mr. Frakes was also Vice President and a Director of UTI
during this period. In March 1997, three unsecured creditors of PDL filed a
petition for the involuntary bankruptcy of PDL. From 1985 to 1990, Mr. Frakes
was a manager for Berkeley International Capital Corporation, an investment
banking firm specializing in later stage venture capital and leveraged buyout
transactions.
Michael Friedland, age 63, has been a Director of the Company since May
2000. Mr. Friedland has been the Vice President of Design, Marketing and Sales
of Breaking Waves since its inception in 1991. Mr. Friedland has over 40 years
experience in the children's swimwear industry. Prior to joining Breaking Waves,
Mr. Friedland co-founded Making Waves, Inc., a manufacturer of children's
swimwear.
Debra Riggs, age 46, has been a Director of the Company since June 2000
when she was also appointed to the Company's Audit Committee. Ms. Riggs has been
the Controller of Play Co. since February, 1999. On March 28, 2001, Play Co.,
Toys and Play Co. Toys Canyon each filed for protection under Title 11 of the
United States Code with the United States Bankruptcy Court for the Southern
District of New York. From June, 1998 through January, 1999, Ms. Riggs was
Controller of National Customer Engineering, a private company. Prior to NCE,
Ms. Riggs was Assistant Controller of Factory 2-U Inc., a public company with
over 200 retail stores in the business of selling discount clothing.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities to file
reports of securities ownership and changes in such ownership with the SEC.
Officers, directors, and greater than ten percent beneficial owners also are
required by rules promulgated by the Securities and Exchange Commission ("SEC")
to furnish the Company with copies of all Section 16(a) forms they file.
No person ("a Reporting Person") who during the fiscal year ended December
31, 2000 was a director, officer, or beneficial owner of more than ten percent
of the Company's Common Stock which is the only class of equity securities of
the Company registered under ss.12 of the Securities Exchange Act of 1934, as
amended, failed to file on a timely basis reports required by ss.16 of the Act
during the most recent fiscal year except that, to the Company's knowledge, each
of Mr. Michael Friedland and Ms. Falletta and Riggs, all directors of the
Company, filed their Forms 3 in March 2001. In addition, to the Company's
knowledge, Mr. Rashbaum and Mr. Di Milia (a former officer of the Company) did
not file Forms 4 or Forms 5, and EVC did not file a Form 5 for the year ended
December 31, 1999. The foregoing is based solely upon a review by the Company of
(i) Forms 3 and 4 during the most recent fiscal year as furnished to the Company
under Rule 16a-3(e) under the Act, (ii) Forms 5 and amendments thereto furnished
to the Company with respect to its most recent fiscal year, and (iii) any
representation received by the Company from any reporting person that no Form 5
is required, except as described herein.
ITEM 10. EXECUTIVE COMPENSATION
Summary Of Cash And Certain Other Compensation
The following table provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, or paid to the named executive officer during the periods ended
December 31, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
Harold Rashbaum
President, CEO,
And Director 2000 160,000 -- -- -- -- -- --
1999 162,000 -- -- -- 44,000(1) -- --
1998 156,000 -- -- -- -- -- --
========================= ======== =========== ========= ============ ============== =============== ============ ============
(1) Represents an aggregate of 44,000 shares of Common Stock underlying options
exercisable at $1.38 per share, granted in April 1999.
Stock Options
The following table contains information regarding options to purchase
Common Stock held at December 31, 2000 by the Company's executive officer named
in the Executive Compensation Table above.
===============================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
--------------------------------------------------------- --------------------------------- -----------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Options at Fiscal Year End
Year End
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------------- --------------- --------------- ---------------- ---------------- ---------------- ------------------
Harold Rashbaum (1) (1) 132,000(2) -- (3) --
========================= =============== =============== ================ ================ ================ ==================
(1) No options were exercised in the year ending December 31, 1999 or 2000.
(2) Represents an aggregate of 88,000 shares of Common Stock underlying options
granted in March 1997 under the Company's Senior Management Incentive Plan,
currently exercisable at $1.46 per share, and an aggregate of 44,000 shares
of Common Stock underlying options granted in April 1999, currently
exercisable at $1.38 per share.
(3) The options had no value on December 31, 2000 or January 19, 2001, since on
each of those dates, the aggregate exercise price of the options exceeded
the aggregate market value of the underlying shares (based on the closing
sales prices of the Company's Common Stock on those dates.)
Employment and Consulting Agreements
ShopNet.com, Inc.
Before he became an officer and director of the Company, Harold Rashbaum
provided consulting services to the Company through HBR, a company of which he
is an officer and director and of which his wife is the sole shareholder. HBR
entered into an oral consulting agreement with the Company whereby it will
receive 5% of the net profits received by the Company from the distribution of
"Dirty Laundry." To date, HBR has not received any fees as a result of the
distribution of "Dirty Laundry" not generating any net profits. See "Certain
Relationships and Related Transactions."
Breaking Waves, Inc.
In November 1996, Breaking Waves entered into employment agreements with
each of Malcolm Becker and Michael Friedland; these agreements expired in
November 1999. The agreements initially provided that Messrs. Becker and
Friedland each would be compensated at a salary of $110,000 per annum during the
term of his agreement and that each would be issued restricted shares of Common
Stock, subject to a vesting schedule, annually during the term of his agreement.
The number of shares of Common Stock issuable thereunder is based on the market
value (as hereinafter defined) of $25,000 on the date of issuance, subject to
the following vesting schedule: (i) 1/2 of the shares issued on November 27,
1996 vested 90 days from issuance, and the balance vested 270 days from the date
of issuance and (ii) for each subsequent annual issuance commencing November 27,
1997, 1/2 of the shares vested six months from issuance, and the balance vested
on the following anniversary. "Market Value" shall mean (i) $5.00 per share with
respect to the shares issued in November 1996 and (ii) the average of the
closing bid and asked prices for a share of Common Stock for a period of 30 days
ending five days prior to the date of issuance, as officially reported by the
principal securities exchange on which the Common Stock is quoted. The
agreements include non-disclosure and non-compete clauses.
In November 1996, 3,667 shares of the Company's Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.
In November 1997, 15,888 shares of the Company's Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.
In January 1998, Mr. Friedland's employment agreement was amended to
provide for an increase in salary to $130,000 per annum, and Mr. Becker's
employment agreement was amended to reflect a reduction in the amount of time
Mr. Becker would be required to devote to the business of Breaking Waves, a
concomitant reduction in salary to $60,000 per annum, and a reduction in the
number of shares of Common Stock to be issued (the number to equal a market
value of $13,636). In January 1999, Mr. Becker's employment agreement was
further amended to reflect an increase in the amount of time Mr. Becker would be
required to devote to the business of Breaking Waves and a concomitant increase
in salary to $70,000 per annum.
In November 1998, pursuant to their respective employment agreements,
Messrs. Becker and Friedland were entitled to their final share issuances, 1/2
of which would have vested in May 1999, and the other 1/2 of which would have
vested in November 1999. Messrs. Becker and Friedland agreed to postpone the
issuance, however, and in March 2000, they amended such portion of their
respective employment agreements as set forth herein: Mr. Becker agreed to
accept his aggregate 91,289 shares in two allotments, 45,644 shares of Common
Stock to be issued on May 27, 2000 and 45,645 shares of Common Stock to be
issued on November 27, 2000. Mr. Friedland also agreed to accept his aggregate
167,365 shares in two allotments, 83,683 shares of Common Stock to be issued on
May 27, 2000 and 83,683 shares of Common Stock to be issued on November 27,
2000. Such shares were issued. As part of the foregoing transaction, Messrs.
Becker and Friedland each granted an option to BBC Capital Corp. ("BBC"), a
company controlled by Ilan Arbel, to purchase an aggregate of 76,074 shares of
common stock in the case of Mr. Becker and 139,471 shares in the case of Mr.
Friedland, at an exercise price of $4.50 per share. Such options expire to the
extent of 1/2 of the underlying shares on May 27, 2001 and the balance on
November 21, 2001 for each such individual.
Effective August 5, 2000, Breaking Waves entered into a consulting
agreement with Larry Nash, Inc. ("Consultant") a New York corporation, pursuant
to which the Consultant shall provide sales and consulting services in
connection with, and be in charge of sales of Breaking Waves' Gottex and Coral
Cove lines. Consultant is to be paid a commission equal to a percentage of net
sales on specified orders, as further set forth in the consulting agreement.
This agreement continues annually, unless cancelled by either party on thirty
(30) days' prior written notice.
Senior Management Incentive Plan
General
In May 1996, the Board of Directors adopted the Senior Management Incentive
Plan (the "Management Plan") which was adopted by shareholder consent. The
Management Plan provides for the issuance of an aggregate of 750,000 shares of
Common Stock in connection with the issuance of stock options and other stock
purchase rights to executive officers, key employees, and consultants.
The Management Plan was adopted to provide the Board of Directors with
sufficient flexibility regarding the forms of incentive compensation which the
Company will have at its disposal for rewarding executive officers, employees,
and consultants (of either the Company or a subsidiary of same) who render
significant services to the Company or its subsidiary with equity in the Company
through the grant of stock options and other rights. The Management Plan was
adopted to enable the Company to attract and retain qualified personnel without
unnecessarily depleting the Company's cash reserves (by offering those persons
who provide significant services a personal interest in the Company's growth and
success) and to augment the Company's existing compensation programs.
The Management Plan is intended also to help the Company attract and retain
key executive management personnel whose performance is expected to have a
substantial impact on the Company's long-term profit and growth potential by
encouraging and assisting those persons to acquire equity in the Company. It is
contemplated that only persons who perform services of special importance to the
Company will be eligible to participate under the Management Plan. A total of
shares of Common Stock have been reserved for issuance under the Management
Plan. It is anticipated that awards made under the Management Plan will be
subject to three-year vesting periods, although the vesting periods are subject
to the discretion of the Administrator (as defined below).
The Management Plan is to be administered by the Board of Directors or a
committee of the Board if one is appointed for this purpose (the Board or such
committee, as the case may be, will be referred to in the following description
as the "Administrator"). Members of the Board of Directors who are eligible for
awards or have been granted awards may not vote on any matters affecting the
administration of the Management Plan or the grant of any award thereunder.
Subject to the specific provisions of the Management Plan, the Administrator
will have the discretion to determine the recipients of the awards, the nature
of the awards to be granted, the dates such awards will be granted, the terms
and conditions of awards, and the interpretation of the Management Plan, except
that any award granted to any employee of the Company who is also a director of
the Company will also be subject - in the event the Administrator of such plan
at the time such award is proposed to be granted does not satisfy the
requirements regarding the participation of "disinterested persons" set forth in
Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") - to the approval of an auxiliary committee
consisting of not less than three individuals (all of whom qualify as
"disinterested persons" as defined under Rule 16b-3. In the event the Board of
Directors deems the formation of an auxiliary committee impractical, the Board
is authorized to approve any award under the Management Plan. As of the date
hereof, the Company has not yet determined who will serve on such auxiliary
committee, if one is required. The Management Plan generally provides that
unless the Administrator determines otherwise, each option or right granted
under the plan will become exercisable in full upon certain "change of control"
events as described therein.
If any change is made in respect of the Common Stock subject to the
Management Plan or subject to any right or option granted under the Management
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, or dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Administrator will make appropriate adjustments to
the Management Plan and the number of shares and price per share of Common Stock
subject to outstanding rights or options. Generally, the Management Plan may be
amended by action of the Board of Directors except that any amendment which
would change the class of securities subject to the plan, increase the total
number of shares subject to such plan, extend the duration of such plan,
materially increase the benefits accruing to participants under such plan, or
change the category of persons who can be eligible for awards under such plan
must be approved by the affirmative vote of the owners of a majority of the
Common Stock entitled to vote. The Management Plan permits awards to be made
thereunder until November 2004.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for four types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights), and
restricted shares.
Incentive Stock Options ("ISOs" and "non-ISOs")
The Management Plan may be either incentive stock options which qualify as
such under the Internal Revenue Code ("ISOs") or options which do not qualify
under the Internal Revenue Code as ISOs ("non-ISOs"). ISOs may be granted at an
option price of not less than 100% of the fair market value of the Common Stock
on the date of grant except that an ISO granted to any person who owns Common
Stock representing more than 10% of the total combined voting power of all
classes of Common Stock of the Company ("10% Shareholder") must be granted at an
exercise price of at least 110% of the fair market value of the Common Stock on
the date of the grant. The exercise price of non-ISOs may not be less than 85%
of the fair market value of the Common Stock on the date of grant. The
Administrator will determine the exercise period of the options granted which
shall be no less than one year from the date of grant. Non-ISOs may be
exercisable for a period of up to 13 years from the date of grant. ISOs granted
to persons other than 10% Shareholders may be exercisable for a period of up to
10 years from the date of grant; ISOs granted to 10% Shareholders may be
exercisable for a period of up to five years from the date of grant. The
aggregate fair market value (determined at the time an ISO is granted) of shares
of Common Stock that are subject to ISOs held by a plan participant that may be
exercisable for the first time during each calendar year may not exceed
$100,000.
Payment for shares of Common Stock purchased pursuant to exercise of stock
options may be remitted in cash or by certified check or at the discretion of
the Administrator (i) by promissory note, (ii) promissory note combined with
cash, (iii) by shares of Common Stock having a fair market value equal to the
total exercise price, or (iv) by a combination of items (i)-(iii) above. The
provision that permits the delivery of already owned shares of stock as payment
for the exercise of an option may permit "pyramiding." In general, pyramiding
enables a holder to use shares of Common Stock owned in order to pay for the
exercise of the stock option. This is done by transferring such shares to the
Company as payment of the exercise price for the shares purchased pursuant to
the exercise of the Option. The value of such shares shall be determined by the
market value of the shares at the time of transfer. Thereafter, the shares
received upon the exercise of the option could then be used to do the same.
Thereby, the holder may start with as little as one share of Common Stock and
use the shares of Common Stock acquired in successive, simultaneous exercises of
the option to exercise the entire option, regardless of the number of shares
covered thereby, with no additional cash or investment other than the original
share of Common Stock used to exercise the option.
Upon termination of employment, an optionee will be entitled to exercise
the vested portion of an option for a period of up to three months after the
date of termination except that if the reason for termination was a discharge
for cause, the option shall expire immediately, and if the reason for
termination was death or permanent disability of the optionee, the vested
portion of the option shall remain exercisable for a period of 12 months
thereafter.
In March 1997, the Company granted to Mr. Rashbaum an option to purchase
88,000 shares of Common Stock at an exercise price of $1.46 per share, pursuant
to the Management Plan.
Incentive Stock Rights
Incentive stock rights consist of incentive stock units each of which is
equivalent to one share of Common Stock and may be awarded in consideration for
services performed for the Company or any subsidiary. Each incentive stock unit
shall entitle the holder thereof to receive, without payment of cash or property
to the Company, one share of Common Stock in consideration for services
performed for the Company or any subsidiary by the employee, subject to the
lapse of the incentive periods, at which time the Company will issue one share
of Common Stock for each unit awarded upon the completion of each specified
period. If the employment with the Company of the holder of the incentive stock
units terminates prior to the end of the incentive period relating to the units
awarded, the rights will thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, will be entitled to receive a pro rata portion of the shares represented
by the units, based upon that portion of the incentive period which has elapsed
prior to the death or disability.
Stock Appreciation Rights (SARs)
SARs may be granted to recipients of stock options under the Management
Plan. In the discretion of the Board of Directors, SARs may be granted
simultaneously with, or subsequent to, the grant of a related stock option and
may be exercised to the extent that the related option is exercisable, except
that no general SAR (as hereinafter defined) may be exercised within a period of
six months of the date of grant of such SAR, and no SAR granted with respect to
an ISO may be exercised unless the fair market value of the Common Stock on the
date of exercise exceeds the exercise price of the ISO. An option holder may be
granted general SARs ("general SARs"), limited SARs ("limited SARs"), or both.
General SARs permit the holder thereof to receive - without payment of cash or
property to the Company - cash, shares of Common Stock, or a combination of both
in an amount determined by dividing (i) that portion, elected by the option
holder, of the total number of shares which the holder is eligible to purchase
multiplied by the amount, if any, by which the fair market value of a share of
Common Stock (on the exercise date) exceeds the option exercise price of the
related option by (ii) the fair market value of a share of Common Stock on the
exercise date. Limited SARs are similar to general SARs except that, unless the
Administrator determines otherwise, limited SARs may be exercised only during a
prescribed period following the occurrence of one or more of the following
"change of control" transactions: (i) the approval of the Board of Directors and
shareholders of the Company of a consolidation or merger in which the Company is
not the surviving corporation, the sale of all or substantially all of the
assets of the Company, or the liquidation or dissolution of the Company, (ii)
the commencement of a tender or exchange offer for the Company's Common Stock
(or securities convertible into Common Stock) without the prior consent of the
Board, (iii) the acquisition of beneficial ownership by any person or other
entity (other than the Company or any employee benefit plan sponsored by the
Company) of securities of the Company representing 25% or more of the voting
power of the Company's outstanding securities, or (iv) in the event, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board cease to constitute a majority of the
Board, unless the election, or the nomination for election, of each new director
is approved by at least a majority of the directors then still in office.
An SAR holder may exercise his SAR rights by giving written notice of such
exercise to the Company, which specifies the number of shares of Common Stock
involved. The exercise of any portion of either the related stock option or the
tandem SARs will cause a corresponding reduction in the number of shares
remaining subject to the option or the tandem SARs, thus maintaining a balance
between outstanding options and SARs. SARs have the same termination provisions
as the underlying stock options (as described above) in the event an SAR holder
ceases to be an employee of the Company.
Restricted Stock Purchase Agreements
Restricted share agreements provide for the issuance of restricted shares
of Common Stock to eligible participants under the Management Plan. The Board of
Directors may determine the price to be paid by the participant for the shares
or that the shares may be issued for no monetary consideration. The shares
issued shall be subject to restrictions for a stated restricted period during
which the participant must remain in the Company's employ in order to retain the
shares. Payment may be made in cash, by promissory note, or via a combination of
both.
Restricted shares awarded under the Management Plan will be subject to a
period of time, designated by the Administrator as the "restricted period,"
during which the holder has limited rights with respect to such shares. The
Administrator may also impose other restrictions, terms, and conditions that
must be fulfilled before the restricted shares may vest. Upon the grant of
restricted shares, stock certificates registered in the name of the recipient
will be issued, and such shares will constitute issued and outstanding shares of
Common Stock for all corporate purposes. The holder will have the right to vote
the restricted shares and to receive all regular cash dividends (and such other
distributions as the Administrator may designate, other than distributions made
solely with respect to the restricted shares ("retained distributions"), if any,
which are paid or distributed on the restricted shares and, generally, to
exercise all other rights as a holder of Common Stock except that until the end
of the restricted period: (i) the holder will not be entitled to take possession
of the stock certificates representing the restricted shares or receive retained
distributions, and (ii) the holder will not be entitled to sell, transfer, or
otherwise dispose of the restricted shares. A breach of any restrictions, terms,
or conditions established by the Administrator with respect to any restricted
shares will cause a forfeiture of such restricted shares.
Upon expiration of the applicable restricted period(s) and the satisfaction
of any other applicable conditions, the restricted shares and any dividends or
other distributions not distributed to the holder (the "retained distributions")
thereon will become vested. Any restricted shares and any retained distributions
thereon which do not so vest will be forfeited to the Company. If prior to the
expiration of the restricted period a holder's employ is terminated without
cause or because of a total disability (in each case as defined in the
Management Plan) or the holder dies, unless otherwise provided in the restricted
share agreement providing for the award of restricted shares, the restricted
period applicable to each award of restricted shares will thereupon be deemed to
have expired. Unless the Administrator determines otherwise, if a holder's
employment terminates prior to the expiration of the applicable restricted
period for any reason other than as set forth above, all restricted shares and
any retained distributions thereon will be forfeited. Upon forfeiture of any
restricted shares, the Company will repay to the holder thereof any amount the
holder originally paid for such shares.
Acceleration of all awards under the Management Plan shall occur, pursuant
to the provisions of Section 13 the Management Plan, on the first day following
the occurrence of any of the following: (a) the approval by the shareholders of
the Company of an "Approved Transaction," (b) a "Control Purchase," or (c) a
"Board Change."
An "Approved Transaction" is defined as (i) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of Common Stock would be converted into cash,
securities, or other property other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger, (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (iii) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
A "Control Purchase" is defined as circumstances in which any person (as
such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation, or other entity (other than the Company or any employee benefit
plan sponsored by the Company) (i) shall purchase any Common Stock of the
Company (or securities convertible into the Company's Common Stock) for cash,
securities, or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board of Directors or (ii) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities).
A "Board Change" is defined as circumstances in which, during any period of
two consecutive years or less, individuals who at the beginning of such period
constitute the entire Board shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least a majority
of the directors then still in office.
Non-Executive Director Stock Option Plan
The Company terminated its Non-Executive Director Stock Option Plan on
December 31, 1998, in accordance with the terms thereof.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 12, 2001 with
respect to the beneficial ownership of shares of Common Stock by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director or director nominee of the Company (iii)
each executive officer of the Company for whom information is given in the
Summary Compensation Table in this proxy statement and (iv) all officers and
directors as a group. Except to the extent indicated in the footnotes to the
following table or otherwise as specified in this Proxy Statement, each of the
individuals/entities listed below possesses sole voting power with respect to
the shares of Common Stock listed opposite his/its name.
Name and Address Number of Shares Percent of Common Stock Beneficially
of Beneficial Owner (1) Beneficially Owned (1) Owned (1)(2)
----------------------- ---------------------- ------------
European Ventures Corp.
P.O. Box 47 Road Town 1,783,836(3)(7) 23.9%
Tortola, BVI
American Telecom Corp.
C/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town 594,000(4)(5)(6)(7) 8.0%
Tortola, BVI
HDS Capital Corp.
c/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town 330,000(6)(7) 4.4%
Tortola, BVI
Amir Capital Overseas Ltd.
P.O. Box 47 Road Town 303,600(8) 4.1%
Tortola, BVI
Volcano Trading Inc.
C/o Valor Invest
Via Cantalone 16 250,800 (8) 3.4%
6900 Lugano, Switzerland
Full Moon Development Corp.
C/o Valor Invest
Via Cantalone 16 277,200(8) 3.7%
6900 Lugano, Switzerland
Galit Capital, Ltd.
Via Vanoni #6 290,400(8) 3.9%
Lugano, Switzerland CH 6901
Harold Rashbaum 252,000(9) 3.4%
Jeanne Falletta -- --
Alain Le Guillou, M.D. -- --
James Frakes -- --
Michael Friedland 167,720(10) 2.3%
Debra Riggs -- --
All Officers and Directors as a Group 419,720(9) 5.5%
(six persons)
* Less than 1% of the outstanding common stock.
(1) Unless otherwise indicated, the address for each listed director or officer
is c/o ShopNet.Com, Inc., 14 East 60th Street, New York, New York 10022. As
used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. For the purposes of this table, a person is deemed to be the
beneficial owner of securities that can be acquired within 60 days from
February 1, 2001 through the exercise of any option or warrant. Shares of
Common Stock subject to options or warrants that are currently exercisable
or exercisable within 60 days are deemed outstanding for computing the
ownership percentage of the person holding such options or warrants, but
are not deemed outstanding for computing the ownership percentage of any
other person. The amounts and percentages are based upon 7,472,224 shares
of common stock outstanding as of April 12, 2001.
(2) Does not give effect to the issuance of (i) 3,379,200 shares of Common
Stock issuable upon exercise of the 3,840,000 outstanding Warrants (the
exercise of each warrant at an exercise price of $3.41 purchases .88 of a
share of Common Stock) or (ii) 128,333 shares of Common Stock reserved for
issuance under the Company's Senior Management Incentive Plan.
(3) Includes an aggregate of 2,112 shares of common stock underlying 2,400
warrants. Each warrant is exercisable at a purchase price of $3.41 for .88
of a share of Common Stock. European Ventures Corp. ("EVC") is formed under
the laws of the British Virgin Islands. Mr. Ilan Arbel, father-in-law of
Harold Rashbaum, President, Chief Executive Officer and a director of the
Company, is President of EVC and as such, has voting and dispositive
control of shares of the Company beneficially owned by EVC and therefore
may be deemed to beneficially own such shares.
(4) American Telecom Corp. ("ATC") is a corporation organized under the laws
of the British Virgin Islands which is wholly-owned by Europe American
Capital Foundation ("EACF"), a Liechtenstein Trust with an address at
Pradafont Street #7, Vaduz Liechtenstein, c/o Dr. Wohlwerd. Mr. Arbel
controls EACF and is President of ATC. By virtue of such positions, Mr.
Arbel has voting and dispositive control over shares of the Company
beneficially owned by ATC and therefore may be deemed to beneficially own
such shares.
(5) Includes 330,000 shares owned by HDS Capital Corp. ("HDS"), a Company
organized under the laws of the British Virgin Islands, which is wholly
owned by ATC.
(6) Mr. Arbel is President of HDS and by virtue of such position and his
control over ATC and EACF (see footnotes (3) and (4) above), Mr. Arbel has
voting and dispositive control over shares of the Company beneficially
owned by HDS and therefore may be deemed to beneficially own such shares.
(7) Shares of the Company beneficially owned by EVC, ATC and HDS are held of
record in the name of "Fiduciara Biaggini, as trustee" ("Fiduciara
Biaggini"), on behalf of such respective entities which have retained
beneficial ownership of such shares. Fiduciara Biaggini is a fiduciary
company with an address at via Vanoni #6, Lugano, Switzerland CH 6901.
(8) Shares of the Company beneficially owned by each of Amir Capital Overseas
Ltd. ("Amir"), Volcano Trading Inc. ("Volcano"), Full Moon Development
Corp. ("Full Moon") and Galit Capital Ltd ("Galit"), all companies
organized under the laws of the British Virgin Islands, are held of record
in the name of "Fiduciara Biaggini, as trustee," on behalf of such
respective entities. Fabio Rossi, a manager of Fiduciara Biaggini, is the
President and sole director of each such entity. Accordingly, Mr. Rossi by
virtue of such positions, may have voting and dispositive control over
shares of the Company owned by each of Amir, Volcano, Full Moon and Galit
and therefore may be deemed to be the beneficial owner of such shares,
representing in the aggregate 15.1% of the Company's outstanding Common
Stock.
(9) Includes an aggregate of 132,000 shares of Common Stock underlying options
granted to Mr. Rashbaum, the President and Chief Executive Officer and a
director of the Company. See "Executive Compensation."
(10) Includes 139,471 shares of Common Stock underlying an option granted to
BBC Corp. ("BBC), a company controlled by Mr. Arbel. BBC also has an option
to purchase an additional 76,074 shares of Common Stock from Malcolm Becker
("BBC Option"), an officer of Breaking Waves, Inc., a wholly-owned
subsidiary of the Company. Mr. Arbel controls BBC, and as such may be
deemed to be the beneficial owner of the shares of Common Stock underlying
the BBC Option.
By virtue of Mr. Arbel's voting and dispositive control of shares of the
Company owned by each of EVC, ATC, HDS (see footnotes 3, 4, 5 and 6 above) and
giving effect to the BBC Option (see footnote 10 above), Mr. Arbel may be deemed
to beneficially own 34.7% of the Company's outstanding Common Stock.
Each of Mr. Arbel and several defendants were named in a complaint filed in
May 1998 by the Securities and Exchange Commission ("Commission") alleging fraud
and other violations of the securities laws during 1993 regarding three public
companies: Viral Testing Systems, Inc., LS Capital Corporation and RMS Titanic,
Inc. Simultaneously with the filing of the complaint, the Commission filed a
judgment on consent against Mr. Arbel. Without admitting or denying the
allegations of the complaint, Mr. Arbel and one other named defendant consented
to (1) permanent injunctions against violating Sections 5(a) and 5(c) of the
Securities Act of 1933, as amended ("Securities Act"), and Sections 13(d) and
16(a) of the Securities Exchange Act ("Exchange Act") and Rules 13d-1, 16a-2,
and 16a-3 thereunder, and (2) a joint and several disgorgement obligation of
$218,118, plus prejudgment interest. Mr. Arbel also consented to pay a penalty
of $100,000 pursuant to Sections 20(d) of the Securities Act and 21(d)(3) of the
Exchange Act.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Breaking Waves' Loan and Security Agreement with Century Business Credit
Corporation ("Century") dated December 20, 2000 requires the provision of one or
more letters of credit in the aggregate amount of $1,150,000 to partially secure
the line of credit. Pursuant to the terms of a Reimbursement and Compensation
Agreement, a trust ("Trust"), the beneficiary of which is the granddaughter of
Harold Rashbaum, the Company's President and Chief Executive Officer, and the
daughter of Mr. Arbel, provided the security underlying a letter of credit in
the amount of $250,000 issued by a bank to replace a portion of a letter of
credit previously provided by the Company. Breaking Waves agreed to reimburse
the Trust for any and all losses, fees, charges and expenses to the Trust in the
event the letter of credit is called by Century and the issuing bank makes
payment and then demands reimbursement from the Trust. Breaking Waves'
obligations are guaranteed by the Company in addition to being secured by a
first security interest in all of the assets of the Company and a subordinate
security interest in all of the assets of Breaking Waves. Breaking Waves paid a
fee of $42,500 to the Trust and reimbursed the Trust for all related
professional and other fees incurred by the Trust in connection with such
transaction.
In August 2000, Breaking Waves received an $80,000 advance from Play Co.
against future orders of merchandise. No orders were received against this
advance and in December 2000 Breaking Waves repaid the full $80,000 to Play Co.
In November 1999, Breaking Waves borrowed $400,000 from Play Co. with such
loan bearing interest at 9% per annum. Breaking Waves repaid $100,000 of the
loan in January 2000 and the balance in April 2000.
In October 1999, the Company borrowed $50,000 from Play Co. and Breaking
Waves borrowed $200,000 from Play Co. The loans bore interest at 9% and were
repaid in March 2000.
In February 1999, the Company loaned $100,000 to Play Co. with such loan
bearing interest at 9% per annum. In each of April and May 1999, the Company
loaned an additional $100,000 to Play Co. at an interest rate of 9% per annum.
All such loans have been repaid.
In November 1998, pursuant to a sales agreement entered into between
Breaking Waves and Play Co., Breaking Waves purchased 1.4 million unregistered
shares of Play Co.'s common stock in a private transaction, which was
subsequently reduced to 1,270,000 shares. The shares purchased represented
approximately 25.4% of the outstanding common stock of Play Co. immediately
after the transaction. Such percentage has since been reduced to approximately
1.5% of Play Co.'s outstanding common stock. Pursuant to the agreement which
bore an initial term of one year and automatically extended for an additional
one year term since it was not terminated by either of the parties - Play Co.
agreed to purchase (on a wholesale basis) a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods. Breaking Waves had previously sold a limited number of pieces
of its swimwear to Play Co. As consideration for the stock, Breaking Waves
remitted $504,000, which represented an approximate price of $0.36 per share:
$300,000 of the consideration was remitted in cash, and the remaining $204,000
was provided in the form of merchandise, primarily girls' swimsuits.
In October 1996, pursuant to a promissory note, the Company loaned Harold
Rashbaum its President and Chief Executive Officer a total of $50,000 bearing
interest at 6 1/2% payable over three years. As of September 30, 2000, the
unpaid portion, which is due on demand, amounted to $37,000, which has been
classified as current. In 1998, the Company's President was also advanced
additional funds totaling $3,000 which are non-interest bearing and due on
demand and are classified as current.
Before he became an Officer and Director of the Company, Mr. Rashbaum
provided consulting services to the Company through HBR, a company of which he
is an officer and director and of which his wife is the sole shareholder. In
1996, HBR entered into an oral consulting agreement with the Company providing
for the payment to HBR of 5% of the net profits received by the Company from the
distribution of "Dirty Laundry." To date, HBR has not received any fees as a
result of the distribution of "Dirty Laundry" not generating any net profits.
Alain Le Guillou, a director of the Company, has been a consultant to the
Company since 1996, receiving $12,000 per annum for such services. Until
recently, Dr. Le Guillou was the son-in-law of Harold Rashbaum.
During the years ended December 31, 2000 and 1999 the Company paid $49,080
and $24,000 respectively, in financial consulting fees to DRA Consulting, Inc.,
a company whose president is the daughter of the Company's President and Chief
Executive Officer.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements of the Company are included as Part
II, Item 8:
Index to Financial Statements F
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Operations F-3
Statement of Stockholders' Equity F-4
Statements of Cash Flows F-5 to F-6
Notes to Financial Statements F-7 to F-26
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) The following exhibits which are designated by an asterisk (*) are
filed herewith. Exhibits not so designated previously were filed with
the Securities and Exchange Commission with either (i) the Registration
Statement on Form SB-2, file no. 333-5098-NY, (ii) the Registration
Statement on Form SB-2, file no. 333-5098-NY, Post-Effective Amendment
No. 1, (iii) the Registration Statement on Form SB-2, file no.
333-5098-NY, Post-Effective Amendment No. 2, or (iv) such other
documents as the Company has filed with the Securities and Exchange
Commission as designated below. Pursuant to 17 C.F.R. 230.411, each
exhibit filed by the Company is incorporated by reference herein.
3.1 Certificate of Incorporation of the Company
3.2 Amendment to Certificate of Incorporation of the Company, filed in June 7, 1996
3.4 By-Laws of the Company
3.6 Certificate of Incorporation of Breaking Waves, Inc.
3.7 By-Laws of Breaking Waves, Inc.
3.8 Certificate of Amendment to Certificate of Incorporation
4.1 Specimen Common Stock Certificate
4.2 Specimen Warrant Certificate
4.4 Form of Warrant Agreement between the Company, the Underwriter and Continental Stock
Transfer & Trust Company
4.5 Form of Restricted Stock Agreement
10.2 The Company's Senior Management Incentive Plan
10.4 Consulting Agreement between Breaking Waves, Inc. and Dan Stone
10.5 Lease for premises at 112 West 34th Street, New York, New York
10.6 Lease for premises at 8410 N.W. 53rd Terrace, Miami, Florida
10.6(a) Amendment to lease at 8410 N.W. 53rd Terrace, Miami, Florida
10.7 Stock Purchase Agreement between the Company, European Ventures Corp., Breaking Waves,
Inc., and the shareholders of Breaking Waves, Inc., dated May, 1996
10.9 Property Acquisition Agreement between the Company and Rogue Features, Inc., dated March,
1996
10.10 Co-production agreement between the Company and Rogue Features, Inc., dated March, 1996
and all amendments thereto
10.11 Right of First Refusal Agreement with principals of Rogue Features, Inc.
10.13 Shippers Agency Agreement between Hollywood Productions, Inc., and Third Party
Enterprises, Inc.
10.14 License Agreement between Breaking Waves, Inc. and Beach Patrol, Inc.
10.16 Employment Agreement with Michael Friedland (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.17 Employment Agreement with Malcolm Becker (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.18 Termination of Employment Agreement with Robert Melillo
(incorporated by reference to the indicated exhibit in
the Company's 10-KSB for the year ended December 31,
1996)
10.19 Trident Releasing, Inc. License Agreement (incorporated by reference to the indicated
exhibit in the Post-Effective Amendment No. 1)
10.20 Cyclone Option Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No. 1)
10.21 Cyclone Co-Writer Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No.)
10.22 Heller Financial Agreement (incorporated by reference to the indicated exhibit in the
Post-Effective Amendment No. 2)
10.23 Non-Executive Director Stock Option Plan (incorporated by reference to Appendix B in the
Proxy Statement for the Company's June 1997 Annual Meeting)
10.24 Kawasaki Motors Corp., USA "Jet Ski" License Agreement (incorporated by reference to the
indicated exhibit in the Company's 10-KSB for the year ended December 31, 1997)
10.25 Amendment to lease at 112 West 34th Street, New York,
New York (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1997)
10.26 Form of Subscription Agreement used in connection with the Company's February 1998 Private
Placement (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1997)
10.27 Form of Subscription Agreement used in connection with the Company's May 1998 Private
Placement (incorporated by reference to the indicated
exhibit in the Company's 10-KSB for the year ended
December 31, 1998)
10.28 Amendment to Employment Agreement with Michael Friedland dated January 1, 1998
(incorporated by reference to the indicated exhibit in the Company's 10-KSB for the year
ended December 31, 1998)
10.29 Amendment to Employment Agreement with Malcolm Becker dated January 1, 1998 (incorporated
by reference to the indicated exhibit in the Company's 10-KSB for the year ended December
31, 1998)
10.30 Second Amendment to Employment Agreement with Malcolm Becker dated January 1, 1999
(incorporated by reference to the indicated exhibit in the Company's 10-KSB for the year
ended December 31, 1998)
10.31 Lease for premises at 14 East 60th Street, Room 402, New York, New York (incorporated by
reference to the indicated exhibit in the Company's 10-QSB for the quarter ended June 30,
1999)
10.32 Option Agreement - Robb Peck McCooey Clearing
Corporation (incorporated by reference to the indicated
exhibit in the Company's 10-QSB for the quarter ended
September 30, 1999)
10.33* License Agreement with Gottex Models Ltd, dated November 1, 2000
10.34* Factoring Agreement with Century Business Credit Corp. dated September 12, 2000
10.35* Supplement to factoring or Security Agreement with Century Business Credit Corporation,
dated August 14, 2000
10.36* Corporate Guaranty unlimited between Century Business Credit Corporation and ShopNet,
dated August 14, 2000
10.37* Trademark Collateral Security Agreement between Century Business Credit Corporation and
Breaking Waves, dated August 14, 2000.
10.38* Consulting Agreement with Larry Nash, Inc., dated August 5, 2000
16.1 Letter from Scarano & Tomaro, P.C. regarding dismissal of Scarano & Tomaro, P.C. as the
Company's auditors (incorporated by reference to the indicated exhibit in the Company's
Form 8-K/A filed on November 24, 1998)
21.1 Subsidiaries of the Registrant
SHOPNET.COM, INC. AND SUBSIDIARIES
(FORMERLY HOLLYWOOD PRODUCTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
Undersigned hereunto duly authorized on the 16th day of April, 2001.
ShopNet.Com, Inc.
By: /s/ Harold Rashbaum
Harold Rashbaum
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Harold Rashbaum Chief Executive Officer, 04/16/01
Harold Rashbaum President, and Director Date
/s/ Jeanne Falletta Secretary and Director, 04/16/01
Jeanne Falletta Date
/s/ Alain Guillou, M.D. Director 04/16/01
Alain Le Guillou, M.D. Date
/s/ James B. Frakes Director 04/16/01
James B. Frakes Date
/s/ Michael Friedland Director 04/16/01
Michael Friedland Date
/s/ Debra Riggs Director 04/16/01
Debra Riggs Date
42
SHOPNET. COM, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
SHOPNET.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
number
---------------------------------------------------------------------------------------------------------
Independent auditors' report F-1
Consolidated balance sheet at December 31, 2000 F-2
Consolidated statements of operations for the years ended
December 31, 2000 and 1999 F-3
Consolidated statement of stockholders' equity for the years ended
December 31, 2000 and 1999 F-4
Consolidated statements of cash flows for the years ended
December 31, 2000 and 1999 F-5 - F-6
Notes to consolidated financial statements F-7 - F-25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shopnet.com, Inc.
We have audited the accompanying consolidated balance sheet of Shopnet.com,
Inc. and subsidiaries (the "Company"), as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 2000 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2000 and the consolidated
results of its operations and cash flows for the years ended December 31,
2000 and 1999 in conformity with accounting principles generally accepted
in the United States of America.
Massella, Tomaro & Co., LLP
Jericho, New York
March 22, 2001
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current assets:
Cash $ 107,734
Cash - restricted 1,114,572
Accounts receivable, net 47,966
Other receivables 27,922
Inventory 3,464,229
Prepaid expenses 107,632
Advances to officer 40,000
-----------------
Total current assets 4,910,055
=================
Furniture, computer equipment, and leasehold improvements, net 61,708
Film production and distribution costs, net 1,350,000
Costs in excess of net assets of business acquired 762,737
Investments in movie ventures 248,210
Deferred tax asset - non - current 202,500
Other assets 20,635
Marketable securities - affiliate (Note 6 and 16) 107,950
-----------------
Total assets $ 7,663,795
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor $ 3,165,909
Accounts payable 1,095,490
Accrued expenses 99,843
Capital lease obligations 17,074
Other taxes payable 11,051
Deferred tax liability 4,704
-----------------
Total current liabilities 4,394,071
-----------------
Capital lease obligations, net of current portion 12,960
-----------------
Total liabilities 4,407,031
-----------------
Commitments and contingencies (Note 12) -
-----------------
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
7,472,244 shares issued, outstanding and subscribed (Note 13) 7,472
Additional paid-in capital 6,638,852
Accumulated deficit (3,497,510)
Accumulated other comprehensive income 107,950
-----------------
Total stockholders' equity 3,256,764
-----------------
Total liabilities and stockholders' equity $ 7,663,795
=================
See accompanying notes to consolidated financial statements
F-2
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---------------------------------------------------------------------------------------------------------- --------------------
Net sales $ 5,713,133 $ 4,756,497
Cost of sales 3,764,258 3,214,704
------------------- --------------------
Gross profit 1,948,875 1,541,793
------------------- --------------------
Expenses:
Selling, general, and administrative expenses 2,208,724 2,137,895
Amortization of costs in excess of net assets of business
acquired 70,952 70,952
------------------- --------------------
Total expenses 2,279,676 2,208,847
------------------- --------------------
Loss before other income (expense)
and provision for income taxes (330,801) (667,054)
-------------------- ---------------------
Other income (expense):
Equity in earnings (loss) of affiliate (4,290) (994,305)
Write down of film costs (308,564) (261,153)
Gain on sale of equity investment in affiliate - 130,093
Rental and other income 22,271 15,549
Interest and finance expense (371,752) (243,148)
Interest income 80,156 56,212
------------------- --------------------
Total other income (expense) (582,179) (1,296,752)
-------------------- ---------------------
Loss before (benefit of) provision for
income taxes (912,980) (1,963,806)
(Benefit of) provision for income taxes (6,004) 12,273
-------------------- --------------------
Net loss (906,976) (1,976,079)
Other items of comprehensive income 107,950 -
------------------- --------------------
Comprehensive net loss $ (799,026) $ (1,976,079)
-------------------- ---------------------
Basic and diluted loss per share: $ (.13) $ (.33)
==================== =====================
Weighted average number of
common shares outstanding 7,021,917 5,983,188
=================== ====================
See accompanying notes to consolidated financial statements
F-3
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
Balances at December 31, 1998 ... 2,686,944 $ 2,687 $ 6,310,103 $ (614,455) $ -- $ 5,698,335
Issuance of common stock in
connection with January 1999
stock dividend ................. 2,686,944 2,687 (2,687) -- -- --
Stock issued for compensation in
accordance with employment
agreements ..................... 215,732 216 38,420 -- -- 38,636
Net loss for the year ended
December 31, 1999 .............. -- -- -- (1,976,079) -- (1,976,079)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 ... 5,589,620 5,590 6,345,836 (2,590,534) -- 3,760,892
Issuance of common stock in
connection with January 2000
stock dividend ................. 537,389 537 (537) -- -- --
Sale of common stock in February
2000, net of costs ............ 100,000 100 294,798 -- -- 294,898
Issuance of common stock in
connection with May 2000
stock dividend ................. 1,245,235 1,245 (1,245) -- -- --
Unrealized gain on mark to market
securities .................... -- -- -- -- 107,950 107,950
Net loss for the year ended
December 31, 2000 ............ -- -- -- (906,976) -- (906,976)
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 ... 7,472,244 $ 7,472 $ 6,638,852 $(3,497,510) $ 107,950 $ 3,256,764
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements (unaudited)
F-4
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
Cash flows from operating activities:
Net loss $ (906,976) $ (1,976,079)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Equity in earnings (loss) of affiliate 4,290 994,305
Amortization and depreciation 117,328 114,974
Deferred income tax (benefit) expense (10,336) (8,961)
Write down of film costs 308,564 261,153
Stock issued for services rendered - 38,636
Decrease (increase) in:
Accounts receivable (16,862) 22,124
Other receivables (27,922) -
Inventory (602,176) (199,050)
Prepaid expenses (36,973) (17,991)
Film production and distribution costs - (18,495)
Increase (decrease) in:
Due to factor 1,389,635 (287,280)
Accounts payable (33,340) 209,516
Accrued expenses 40,598 368,153
Other taxes payable 11,051 -
----------------- -----------------
Net cash provided by (used for) operating activities 236,881 (498,995)
----------------- ------------------
Cash flows from investing activities:
Proceeds from sale of equity investment in affiliate - 130,093
Acquisition of furniture, computer equipment, and
leasehold improvements (15,267) (7,964)
Acquisition costs - (17,035)
Investment in movie ventures (5,000) (47,500)
------------------ ------------------
Net cash (used for) provided by investing activities (20,267) 57,594
------------------ ------------------
Cash flows from financing activities:
Proceeds from sale of common stock 294,898 -
Proceeds from line of credit 250,000 -
Repayments of line of credit (250,000) -
Advances from related parties - 650,000
Repayments to related parties (650,000) (130,000)
Principal payments on capital lease obligations (15,445) (11,886)
------------------ ------------------
Net cash (used for) provided by financing activities (370,547) 508,114
------------------ -----------------
Net (decrease) increase in cash (153,933) 66,713
Cash, beginning of period 1,376,239 1,309,526
----------------- -----------------
Cash, end of period $ 1,222,306 $ 1,376,239
================= =================
See accompanying notes to consolidated financial statements.
F-5
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------------- -----------------
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 379,802 $ 235,098
================= =================
Income taxes $ 17,106 $ 16,255
================= =================
In connection with the issuance (cancellation) of
compensation, 215,732 and 18,335 shares of
common stock were issued (cancelled), respectively $ - $ 50,886
================= =================
See accompanying notes to consolidated financial statements.
F-6
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 1 - ORGANIZATION
Shopnet.com, Inc. ("Shopnet") was incorporated in the State of
Delaware on December 1, 1995 under the name of Hollywood
Productions, Inc. It was formed for the purpose of acquiring
screenplays and producing motion pictures. On May 10, 1999, it
filed an amendment to its Articles of Incorporation to change
its name to Shopnet.com, Inc. On May 12, 1999, Shopnet
incorporated a new wholly owned subsidiary, Hollywood
Productions, Inc. ("Hollywood"), to which the Company assigned
all of its film rights. Accordingly, Shopnet is considered a
holding company. During September 1996, simultaneously with the
completion of its Initial Public Offering ("IPO"), Shopnet
acquired all of the capital stock of Breaking Waves, Inc.
("Breaking Waves"). Breaking Waves designs, manufactures, and
distributes private and brand name labels of children's swimwear
nationally.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of Shopnet and its wholly owned subsidiaries, Breaking
Waves and Hollywood (the "Company"), after elimination of all
significant intercompany transactions and accounts. Affiliated
companies which are 20 to 50 percent owned are accounted for
under the equity method.
b) Cash and cash equivalents
-------------------------
The Company considers highly liquid investments with maturities
of three months or less at the time of purchase to be Cash and
cash equivalents. Included in these amounts are certificates of
deposit of approximately $900,000. The Company maintains
balances in accounts which are in excess of Federal Deposit
Insurance Corporation limits by approximately $800,000. The
Company believes that such risk is minimal based on the
reputation of the financial institution. The Company has
classified $1,114,000 as restricted cash which is comprised of
approximately $900,000 on deposit with a bank and $214,000 with
its factor as collateral pursuant to its factoring agreement.
c) Accounts receivables
--------------------
The Company utilizes the allowance method for recognizing the
collectibility of its accounts receivables. The allowance method
recognizes bad debt expense based on a review of the individual
accounts outstanding based on the surrounding facts. As of
December 31, 2000, no allowance was deemed necessary by
management.
d) Marketable securities
---------------------
Marketable securities are classified as available for sale and
recorded at current market value. Net unrealized gains and
losses on marketable securities available for sale are credited
or charged to other comprehensive income. All of the Company's
marketable securities were classified as non-current and
available for sale at December 31, 2000, as a result of being
pledged pursuant to the factoring agreement.
F-7
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
e) Inventory
---------
Inventory amounting to $3,464,229 at December 31, 2000 consists
of finished goods and is valued at the lower of cost (using the
first-in, first-out method) or market. All inventory is pledged
as collateral for factored receivables pursuant to a factoring
agreement with a financial institution.
f) Furniture, computer equipment, and leasehold improvements
---------------------------------------------------------
Furniture, computer equipment, and leasehold improvements are
recorded at cost less accumulated depreciation and amortization
which is provided on the straight line basis over the estimated
useful lives of the assets which range between five and seven
years. Expenditures for maintenance and repairs are expensed as
incurred.
g) Film production and distribution costs
--------------------------------------
The Company follows industry standards in capitalizing film
production and distribution costs. Film production and
distribution costs include all costs associated with the
writing, producing, and distribution of the film. Film costs
include the costs of production, prints, pre-release, and other
advertising expected to benefit future periods. These costs, as
well as participation and talent residuals, are charged against
earnings on an individual film basis in the ratio that the
current year's gross film revenues bear to management's estimate
of total remaining ultimate gross film revenues from all
sources.
Film costs are stated at the lower of cost or estimated net
realizable value on an individual film basis. Revenue and cost
forecasts are continually reviewed by management and revised
when warranted by changing conditions. Estimates of total gross
revenues can change significantly due to the level of market
acceptance of film products. Accordingly, revenue estimates are
reviewed periodically and amortization is adjusted. Such
adjustments could have a material effect on the results of
operations in future periods. When estimates of total revenue
and costs indicate that a feature film will result in an
ultimate loss, additional amortization is recognized to the
extent required to produce a zero gross margin over the
remaining life of the film.
For the years ended December 31, 2000 and 1999, the Company has
written down film production and distribution costs by $308,564
and $261,153, respectively, in order to reduce the balance to
its estimated net realizable value.
h) Equity method of accounting
---------------------------
Investments in significantly (20 to 50 percent) owned affiliates
are accounted for by the equity method of accounting, whereby
the investment is carried at cost of acquisition, plus the
Company's equity percentage in undistributed earnings or losses
since acquisition. Reserves are provided where management
determines that the investment or equity in earnings is not
realizable.
F-8
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
i) Income taxes
------------
The Company accounts for income taxes in accordance with the
"liability method" of accounting for income taxes. Accordingly,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Current income taxes are based on the respective periods'
taxable income for federal, state and city income tax reporting
purposes.
j) Revenue and cost recognition
----------------------------
The terms of Breaking Waves' sales are FOB shipping point
thereby revenue is recognized upon shipment from the warehouse.
Sales returns are recorded upon acceptance of the goods by the
warehouse. Duty costs, which are a component of cost of sales,
are recorded upon the clearance of such goods through customs.
Revenues from the theatrical distribution of motion pictures are
recognized when motion pictures are exhibited. Revenues from
video sales are recognized, together with related costs, on the
date that video units are made widely available for sale by
retailers. Revenues from the licensing of feature films,
together with related costs, are recorded when the material is
available for telecasting by the licensee and when certain other
conditions are met. Film production and distribution costs are
stated at the lower of unamortized cost or estimated net
realizable value. In accordance with SFAS 53, "Financial
Reporting by Producers and Distributors of Motion Pictures
Films," the individual film forecast method is used to amortize
film costs.
k) Earnings per share
------------------
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 replaced the previously
required reporting of primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively.
Unlike the previously reported primary earnings per share, basic
earnings per share excludes the dilutive effects of stock
options. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Earnings per share
amounts for all periods presented have been calculated in
accordance with the requirements of SFAS No. 128.
l) Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions which affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. The most
significant estimate with regard to these financial statements
is the estimate of projected income of motion pictures which is
the basis used in amortizing film production and distribution
costs. Actual results could differ from those estimates
F-9
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m) Fair value disclosure at December 31, 2000
-------------------------------------------
The carrying value of cash, accounts receivable, inventory,
marketable securities, accounts payable, accrued expenses, and
capital lease obligations are a reasonable estimate of their
fair value.
n) Reclassifications
-----------------
Certain prior period accounts have been reclassified to conform
to the current year presentation.
o) Costs in excess of net assets of business acquired
--------------------------------------------------
Costs in excess of net assets of business acquired in connection
with the acquisition of Breaking Waves are being amortized on a
straight line basis over the estimated useful life of the
related assets acquired for a period of fifteen years.
p) Accounting for stock-based compensation
---------------------------------------
The Company elected to continue to measure compensation cost
using Accounting Principles Board Opinion ("APB") No.
25,"Accounting for Stock Issued to Employees," as is permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the
options issued under the Incentive Plan as the exercise price
and market value at the date of grant were the same.
For companies that choose to continue applying APB No. 25, SFAS
No. 123 requires certain pro forma disclosures as if the fair
value method had been utilized. Had compensation cost for the
Company's stock- based compensation plan been determined based
on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's net
income (loss) and earnings per share would have been reduced to
the pro forma amounts indicated below utilizing the Black-Sholes
option pricing model:
2000 1999
---------------- ---------------
Net income (loss)-
as reported $ (906,976) $ (1,976,079)
================= ================
pro forma $ (906,976) $ (1,988,329)
================= ================
Basic EPS - as reported $ (.13) $ (.33)
================= ================
pro forma $ (.13) $ (.33)
================= ================
F-10
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
p) Accounting for stock-based compensation (cont'd)
------------------------------------------------
The fair market value of each option grant is estimated at the
date of grant using the Black - Scholes option pricing model
with the following weighted-average assumptions:
Dividend yield 0.00%
Expected volatility 30%
Risk-free interest rate 6%
Expected life 1-5 years
q) Effect of new accounting standards
----------------------------------
The Company does not believe that any recently issued accounting
standards, not yet adopted by the Company, will have a material
impact on its financial position and results of operations when
adopted.
NOTE 3 - FURNITURE, COMPUTER EQUIPMENT & LEASEHOLD IMPROVEMENTS
Furniture, computer equipment, and leasehold improvements are as
follows at December 31, 2000:
Furniture & fixtures $ 38,727
Computer equipment and software 79,645
Leasehold improvements 13,415
--------
131,787
Less: accumulated depreciation
and amortization 70,079
--------
$ 61,708
========
Computer equipment and software amounting to $61,506 is pledged
in connection with capital lease obligations.
Depreciation and amortization expense for the years ended
December 31, 2000 and 1999 amounted to $21,376 and $19,023,
respectively.
NOTE 4 - ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued 110,000
shares of common stock in exchange for all of the issued and
outstanding capital stock of Breaking Waves. The transaction was
accounted for using the purchase method of accounting. As a
result of the transaction, excess of cost over net assets
acquired totaling $1,064,283 was recorded and is being amortized
over the useful lives of the related assets which is fifteen
years. Amortization expense totaled $70,952 for each of the
years ended December 31, 2000 and 1999.
F-11
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 5 - INVESTMENTS IN MOVIE VENTURES
a) Battle Studies
--------------
Pursuant to a co-production agreement dated April 17, 1998 with
North Folk Films, Inc., the Company invested through December
31, 2000 $217,500 for a 50% interest in a new entity, Battle
Studies Productions, LLC ("Battle Studies") a limited liability
company. Battle Studies will be treated as a joint venture in
order to co-produce motion pictures and to finance the costs of
production and distribution of such motion pictures. The joint
venture retains all rights to the motion pictures, the
screenplays, and all ancillary rights attached thereto.
The Company accounts for the investment in Battle Studies under
the equity method. For the years ended December 31, 2000 and
1999, the Company recorded $4,290 and $-0- equity loss for its
proportionate share of Battle Studies.
On October 12, 2000, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures")
to distribute Battle Studies motion picture ("Machiavelli
Rises") to foreign countries. Battle Studies has granted rights
under the agreement for the theatrical, video, non-theatrical
and television markets. The term of the agreement is for twenty
- four months for all portions of territory outside of the
United States and English speaking Canada. Battle Studies
expects to realize 75% (which is net of a 25% fee to Raven
Pictures) of the expected estimated gross revenues derived from
foreign countries less $20,000 for marketing and advertising
expenses.
b) The Girl
--------
Pursuant to an agreement dated July 1, 1999 with Artistic
License Films Inc., Hollywood invested through December 31, 2000
$35,000 for a 22.533% interest in a new entity, The Girl, LLC a
limited liability company ("The Girl"). In return for its
participation in The Girl, Hollywood shall be entitled to
receive a non-contested, non-dilutable 22.533% ownership
interest in The Girl, a recoupment of its investment on no less
favorable terms than any other investor and 22.533% of 100% of
any contingent compensation which shall be actually received by
The Girl. The Girl retains all rights to the motion pictures,
the screenplays, and all ancillary rights attached thereto.
Hollywood accounts for the investment in The Girl under the
equity method. Accordingly, as of December 31, 2000 and 1999,
the Company has only recorded its initial $35,000 investment
since no revenues have been derived from this film as of
December 31, 2000.
F-12
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 6 - MARKETABLE SECURITIES - AFFILIATE
On November 24, 1998, pursuant to a sales agreement (the "Sales
Agreement") entered into during September 1998 by and between
Breaking Waves and Play Co. Toys & Entertainment Corp. ("Play
Co," a toy retailer and a publicly traded company whose Chairman
of the Board is also the President of Shopnet and the Company),
Breaking Waves purchased 1,400,000 unregistered shares of Play
Co.'s common stock for a total of $504,000 comprised of $300,000
in cash and by shipping $204,000 of merchandise to Play Co.
After the purchase, Breaking Waves owned 25.4% of the
outstanding common stock of Play Co.
Breaking Waves accounted for its investment under the equity
method. For the year ended December 31, 1999 Breaking Waves
recorded $994,305 of equity loss for its proportionate share of
Play Co.'s loss for that year.
As of December 31, 1999, the Company's investment in Play Co.
was reduced to $-0- since its share of Play Co.'s losses
exceeded its cost basis. In addition, as of December 31, 1999,
as a result of Play Co.'s issuance of additional common stock
and the Company's sale of 130,000 shares of Play Co.'s common
stock, the Company's percentage ownership was reduced to 22.88%.
During the year ended December 31, 2000, Play Co. converted a
portion of its series E preferred stock into common stock,
thereby reducing Breaking Waves' ownership percentage to
approximately 1.5%. Accordingly, upon this event the accounting
method for the investment in Play Co. was changed to the
requirements of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Under SFAS 115, the securities are considered available for sale
and therefore the carrying value is based on the fair market
value of the securities at December 31, 2000 which amounted to
$107,950. The change in unrealized gain or loss has been
recorded as a component of comprehensive income. The Company has
pledged such shares as collateral for a standby letter of credit
in connection with Breaking Waves entering into a new factoring
agreement with Century Business Credit Corporation ("Century")
and are therefore considering non-current (See Note 8 (b)). In
addition, see Note 16 for subsequent event.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2000:
Commissions $ 33,610
Professional fees 17,500
Other corporate overhead 48,733
---------------
$ 99,843
F-13
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 8 - DUE TO FACTOR
a) CIT Group
---------
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended
December 9, 1998) with CIT Group (formerly, Heller Financial,
Inc. "CIT") to sell their interest in all present and future
receivables without recourse. Breaking Waves paid CIT a
factoring commission of .85% of the first $5,000,000 of
receivables sold and .65% of receivables sold in excess of
$5,000,000 for each year.
Breaking Waves took advances of up to 85% of the receivable,
with interest at the rate of 1 3/4% over prime. In connection
with the factoring agreement, the Company agreed to maintain
$1,150,000 of cash in a segregated account in order to
collateralize standby letters of credit. In addition, during the
year ended December 31, 1999, Breaking Waves was required to
transfer an additional $200,000 of cash as collateral for the
standby letter of credit.
On or about September 12, 2000 the agreement with CIT was
cancelled and a new factoring agreement was entered into as
discussed below. As of December 31, 2000, a balance of $312 is
due CIT. Interest expense related to this agreement totaled
$204,821 and $228,772 for the years ended December 31, 2000 and
1999.
b) Century Business Credit Corporation
-----------------------------------
On or about September 12, 2000, Breaking Waves entered into a
factoring and revolving inventory loan and security agreement
with Century to sell their interest in all present and future
receivables without recourse. Breaking Waves submits all sales
offers to Century for credit approval prior to shipment, and
pays a factoring commission of .75% of receivables sold. Century
retains from the amount payable to Breaking Waves a reserve for
possible obligations such as customer disputes and possible
credit losses on unapproved receivables. Breaking Waves may take
advances of up to 85% of the receivables, with interest at the
rate of 1 3/4% over prime.
In connection with the factoring agreement, the Company agreed
to continue maintaining $1,150,000 of cash in a segregated
account in order to collateralize standby letters of credit for
Breaking Waves. Additionally, Breaking Waves was required to
pledge as additional collateral $200,000 of its own cash and its
investment in Play Co. which is represented by 1,270,000 shares
of Play Co's common stock.
Pursuant to the terms of a Reimbursement and Compensation
Agreement, a trust ("Trust"), the beneficiary of which is a
relative of the Company's President and Chief Executive Officer
and a majority stockholder, pledged assets as collateral for
securing a $250,000 letter of credit to replace a portion of a
letter of credit previously pledged by the Company. Accordingly,
on December 20, 2000 the original agreement with the factor was
amended to allow such replacement of collateral. Breaking Waves'
Loan and Security Agreement with Century dated December 20, 2000
requires the provision of one or more letters of credit in the
aggregate amount of $1,150,000 to partially secure the line of
credit.
F-14
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 8 - DUE TO FACTOR (cont'd)
b) Century Business Credit Corporation (cont'd)
--------------------------------------------
Breaking Waves agreed to reimburse the Trust for any and all
losses, fees, charges and expenses to the Trust in the event the
letter of credit is called by Century and/or the issuing bank
demands reimbursement from the Trust. Breaking Waves'
obligations to the Trust are secured by a subordinate security
interest in Breaking Waves' assets. Breaking Waves paid a fee of
$42,500 to the Trust and reimbursed the Trust for all related
professional and other fees incurred by the Trust in connection
with such transaction.
Interest expenses related to this agreement totaled $100,488 for
the year ended December 31, 2000. Century has secured interest
in Breaking Wave's inventory as collateral for the advances. As
of December 31, 2000, the net advances to Breaking Waves from
Century amounted to $3,165,597.
NOTE 9 - LINE OF CREDIT
On March 30, 2000, the Company entered into a revolving line of
credit agreement with a bank. Total available credit under the
line of credit was $250,000. The outstanding balance was payable
in monthly installments including 9% interest. As a condition of
the line of credit, the Company was required to deposit $250,000
in a certificate of deposit as collateral with the bank. The
line of credit was repaid in full and closed as of July 12,
2000.
NOTE 10 - CAPITAL LEASE OBLIGATIONS
During the year ended December 31, 1998, the Company acquired
computer equipment and proprietary software for its subsidiary,
Breaking Waves, pursuant to the following terms and conditions:
i) The Company acquired various computer and related
components for $28,583 by entering into a capital lease
obligation with interest at approximately 9.2% per annum,
requiring 48 monthly payments of principal and interest of
$762. The lease is secured by the related computer equipment.
ii)The Company acquired proprietary software for $32,923 by
entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments
of principal and interest of $850. The lease is secured by the
related software.
F-15
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 10 - CAPITAL LEASE OBLIGATIONS (cont'd)
ii) At December 31, 2000, the aggregate future minimum lease
payments due pursuant to the above capital lease obligations
are as follows:
Year ended
December 31:
2001 $ 19,335
2002 13,486
-------------
Total minimal lease payments 32,821
-------------
Less: Amounting representing interest 2,787
-------------
Present value of net minimum
lease payments $ 30,034
=============
At December 31, 2000 equipment and software under capital
leases is carried at a book value of $30,750.
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES
(Benefit of) provision for income taxes is comprised of the
following for the years ended December 31, 2000 and 1999:
2000 1999
------------- ------------
Current:
Federal $ - $ -
State and local 4,332 21,234
------------- ------------
4,332 21,234
------------- ------------
Deferred:
Federal (6,150) -
State and local (4,186) (8,961)
-------------- -------------
(10,336) (8,961)
------------- ------------
Total (benefit of) provision for income taxes $ (6,004) $ 12,273
============= ============
F-16
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)
A reconciliation of the provision for income taxes on income per
the federal statutory rate to the reported income tax expense is
as follows for the years ended December 31, 2000 and 1999:
2000 1999
------------- ------------
Federal statutory rate applied to
pretax loss $ - $ -
State and local income taxes, net of federal
income tax benefit, applied to pretax loss - -
Permanent differences - -
Increase in valuation allowance 865,023 34,298
Current provision for state and local taxes 4,332 21,234
(Increase) in deferred tax assets - -
Increase (Decrease) in deferred tax liability (875,359) (43,259)
-------------- -------------
Total provision (benefit) for income taxes $ (6,004) $ 12,273
============== ============
Income taxes are provided fo r the tax effects of
transactions reported in the financial statements and consist of
taxes currently due plus deferred taxes related to differences
between the financial statement and income tax bases of assets
and liabilities for financial statement and income tax reporting
purposes. Deferred tax assets and liabilities represent the
future tax return consequences of these temporary differences,
which will either be taxable or deductible in the year when the
assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities
attributable to the book-tax basis differentials are computed at
a rate of 34% federal and 11% state and local pursuant to SFAS
No. 109.
The tax effect of significant items comprising the Company's net
non-current deferred tax asset and liability are as follows as
of December 31, 2000:
Net operating loss carryforwards $ 966,552
Section 263A - inventory capitalization 7,530
Write down of film costs 256,373
Valuation allowance (1,027,955)
---------------
Deferred non-current tax asset 202,500
---------------
Equity earnings of affiliate 12,430
Depreciable assets (7,726)
---------------
Deferred non-current tax liability 4,704
---------------
Net non-current deferred tax asset $ 197,796
===============
F-17
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 11 - (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)
Shopnet and its subsidiaries file a consolidated tax return for
federal tax purposes. For state and local purposes, Shopnet and
its subsidiaries file separate tax returns. As such, each entity
computes its state and local tax based on its own taxable income
or loss.
At December 31, 2000, the Company had a net operating loss
carryforward (NOL) for federal and state tax purposes of
approximately $2,148,000 and $1,941,000, respectively, both of
which expire between 2010 and 2015. Management believes it is
more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax
asset.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
a) Lease commitments
Shopnet and Breaking Waves have entered into lease agreements
for their administrative offices. Shopnet leases its
administrative office pursuant to a 5-year lease expiring
November 30, 2001 at annual rent amounting to approximately
$70,000, before annual escalations. Breaking Waves leases its
administrative offices pursuant to a lease requiring annual
payments of $71,600 expiring December 2004. Lastly, Breaking
Waves leases an offsite office for one of its designers on a
month-to-month basis with annual payments approximating $11,000.
The Company and Breaking Waves' approximate future minimum
rentals under non-cancelable operating leases in effect on
December 31, 2000 are as follows:
2001 $ 135,452
2002 71,600
2003 71,600
2004 71,600
Thereafter -
---------------
$ 350,252
Rent expense for the years ended December 31, 2000 and 1999
amounted to approximately $163,924 and $172,709, respectively.
b) Significant vendors and customers
---------------------------------
Breaking Waves purchases 100% of its inventory from two vendors,
one in Indonesia and the other from Samoa. Breaking Waves
believes other sources and vendors are available and that it is
not dependent exclusively on these vendors. For the years ended
December 31, 2000 and 1999, Breaking Waves had three and four
customers, respectively, which comprised 22%, 14%, and 10% and
17%, 13%, 12%, and 10% of net sales, respectively.
F-18
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont'd)
c) Seasonality
Breaking Waves' business is considered seasonal with a large
portion of its revenues and profits being derived between
November and March. Each year from April through October,
Breaking Waves engages in the process of designing and
manufacturing the following season's swimwear lines, during
which time its incurs the majority of its production costs with
limited revenues.
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a
license agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States.
The agreement covered a term from January 1, 1996 to June
30, 1998 and contained a provision for an additional three
year extension, at the option of Breaking Waves, through and
until June 30, 2001. Breaking Waves has exercised this
opinion, thereby extending the agreement. The agreement
calls for minimum annual royalties of $75,000 to $200,000
over the life of the agreement with options based on sales
levels from $1,000,000 for the first year to $4,000,000 in
the sixth year. Breaking Waves has negotiated an additional
two year extension thereby extending the agreement through
and until June 30, 2003, and it contains a provision for an
additional two year extension, at the option of Breaking
Waves, through and until June 30, 2005. The new agreement
signed February 28, 2001 and effective July 1, 2001 calls
for minimum annual royalties of $50,000 to $87,500 over the
life of the extension with options based on sales levels
from $1,000,000 for the seventh year to $1,750,000 in the
tenth year. Breaking Waves recorded royalties under this
agreement totaling $163,009 and $162,501 during the years
ended December 31, 2000 and 1999, respectively.
ii) On October 31, 1996, Breaking Waves entered into a
license agreement with North-South Books, Inc. ("N-S") for
the exclusive use of certain art work and text in the making
of swimsuits and accessories in the United States and
Canada. The agreement expired on March 1, 1999. Breaking
Waves recorded $-0- and $784 royalties under this agreement
during the years ended December 31, 2000 and 1999,
respectively.
iii) On October 17, 1997, Breaking Waves entered into a
license agreement with Kawasaki Motors Corp., U.S.A. ("KMC")
with an effective date of July 1, 1997 for the exclusive use
of certain trademarks in the making of swimwear in the
United States. The fee for the exclusive use of certain
trademarks is five percent (5%) of net sales. The agreement
expired on May 31, 1999 and was not renewed. Breaking Waves
recorded royalties under this agreement totaling $-0- and
$10,415 during the years ended December 31, 2000 and 1999,
respectively.
iv) During June 2000, Breaking Waves entered into a
license agreement with an effective date of November 1, 2000
with Gottex Models Ltd., an Israeli corporation and Gottex
Models (USA) Corp., a New York corporation for the use of
the trademark "Gottex" in the United States of America for
children's swimwear. The agreement calls for a royalty fee
of 7% of net sales with guaranteed minimum annual royalties
of $70,000 to $140,000 over the life of the agreement.
Breaking Waves recorded royalties under the agreement
totaling $8,859 for the year ended December 31, 2000. .
F-19
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (cont'd)
e) Co-production and property purchase agreements
----------------------------------------------
Pursuant to co-production and property purchase agreements dated
March 15, 1996, as amended, the Company acquired the rights to
co-produce a motion picture and to finance the costs of
production and distribution of such motion picture with the
co-producer agreeing to finance $100,000 of the costs of
production. The Company retains all rights to the motion
picture, the screenplay, and all ancillary rights attached
thereto. The motion picture was completed during the latter part
of 1996 and, accordingly, the Company commenced the marketing
and distribution process.
As of December 31, 2000, the Company invested $1,971,956 for the
co-production and distribution of such motion picture whereas
the co-producers have invested $100,000. For the years ended
December 31, 2000 and 1999, the Company derived no revenues from
the motion picture and amortized no film costs.
For the year ended December 31, 2000 and 1999, the Company has
written down its film production and distribution costs by
$308,564 and $261,153, respectively, in order to reduce the
asset to its estimated net realizable value.
f) Employment agreements
---------------------
On November 27, 1996, Breaking Waves entered into two employment
agreements (as amended) with two key employees. Such employees
are responsible for the designing, marketing and sales of
Breaking Waves. The employment agreements are for a term of
three years with annual salaries of $110,000 each for 1997 and
$60,000 and $130,000 for 1998 (as amended), respectively.
One of the employment agreements was further amended effective
January 1, 1999 with an annual salary increase from $60,000 to
$70,000. In addition to the salaries, the Company agreed to
issue on each of November 27, 1996, 1997, and 1998, shares of
common stock in the amount equal to the fair market value of
$25,000 (before amendment) to each employee subject to a vesting
schedule. In connection with the decrease in salary from
originally $110,000 per year to $70,000 per year for one of the
key employees, the Company reduced the value of shares to be
issued to $13,636 for 1998. As of December 31, 2000, the
employees are still employed, however, Breaking Waves has not
renegotiated the employment agreements with the two key
employees and accordingly, all prior arrangements are in effect.
g) Litigation
----------
On or about June of 2000, an action was brought in the Queens
County Supreme Court against the Company and several others
claiming, among other things, that the Company allegedly
breached a contract and engaged in fraudulent statements
(including supposedly promising the plaintiff options and then
not allowing the plaintiff to exercise these options). The
plaintiff seeks, among other things, compensatory damages in the
amount of $497,500, punitive damages in the amount of $995,000,
together with costs and attorney's fees. The Company has
responded to the complaint and denied the allegations. The
Company intends to contest the action vigorously and believes
that such claims against it are baseless and without merit.
F-20
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDER'S EQUITY
a) Stock Dividends
----------------
i) On January 14, 1999, the Company declared a 100%
stock dividend to all shareholders of record as of January
29, 1999 amounting to a total of 2,686,944 shares of common
stock. The stock dividend was issued on February 5, 1999. In
order for shareholders to receive their stock dividend, they
must exchange the old shares for the new shares. As a result
of such stock dividend, the Company issued 2,686,027 shares
of its common stock. An additional 917 shares are entitled
to the dividend, and such shares shall be issued to the
holders upon the redemption of the old shares. Effective for
stock dividends these shares are 2,420 at December 31, 2000.
ii) On January 7, 2000, the Company declared a 10%
stock dividend to all shareholders of record as of January
20, 2000 amounting to 537,389 shares of common stock. Such
stock dividend was issued on February 1, 2000.
iii) On May 8, 2000, the Company declared a 20% stock
dividend to all shareholders of record as of May 19, 2000
amounting to 1,245,235 shares of common stock. Such stock
dividend was distributed on June 19, 2000.
b) Sale of common stock
--------------------
On February 1, 2000, the Company sold 100,000 shares of common
stock for $300,000 (before certain transaction costs) pursuant
to a private transaction with an unrelated party. Giving effect
to the May 2000 20% stock dividend the related shares are
120,000.
c) 1996 Senior Management Incentive Plan
-------------------------------------
The shareholders approved the 1996 Senior Management Incentive
Plan ("Incentive Plan") in May 1996. Officers, key employees and
non-employees, who in the judgment of the Company render
significant service to the Company, are eligible to participate.
The Incentive Plan provides for the award of a broad variety of
stock-based compensation alternatives such as non-qualified
stock options, incentive stock options, restricted stock,
performance awards and stock appreciation rights. The Incentive
Plan provided 750,000 shares of common stock to be offered from
either authorized and unissued shares or issued shares, which
have been reacquired by the Company.
On March 14, 1997, the Company granted 132,000 options to
purchase shares of common stock pursuant to the Company's
Incentive Plan consisting of 88,000 options to the Company's
President and 44,000 options to another officer. The exercise
price of each option was fixed at $1.46 (as revised) per share
and the options expire March 2002. The terms of the options
state that in the event of termination of optionee's employment
the vested portion of the options shall remain exercisable for
six months after termination, at which time the options expire.
The officer granted the 44,000 options has resigned as an
officer of the Company and is currently performing consulting
services for the Company. Based on the terms of the option
agreement his options should have terminated. The Company has
agreed to extend the expiration date of such options to December
2001.
F-21
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDER'S EQUITY (cont'd)
c) 1996 Senior Management Incentive Plan (cont'd)
----------------------------------------------
During April 1999, the Company granted its President 44,000
stock options. The exercise price of each option is a $1.38 per
share and the options expire April 16, 2004.
A summary of the status of the Company's stock options
outstanding as of December 31, 2000 and changes during the years
ended December 31, 2000 and 1999 are as follows:
Number of Exercise
Options
---------------- ------------------
Price
Outstanding at December 31, 1998 132,000 1.46
Granted 44,000 1.38
Exercised - -
Cancelled - -
----------------- -------------------
Outstanding at December 31, 1999 176,000 1.46 - 1.38
Granted - -
Exercised - -
Cancelled - -
----------------- -------------------
Outstanding at December 31, 2000 176,000 $ 1.46 - 1.38
================= ===================
d) Warrants
--------
i)Initially, each Warrant issued in the initial public offering
of September 24, 1996 entitled the holders thereof to purchase
one share of the Company's common stock at an exercise price
of $6.50 per share, until September 9, 2001. On June 23, 1997,
the Board of Directors approved a reduction in the exercise
price of the Warrants from $6.50 to $3.00. On February 5,
1998, the Company effected a one for three reverse split of
the Company's common stock. Accordingly, the Company adjusted
the terms of the Warrants to reflect the reverse split such
that exercise of three Warrants would entitle the holder to
purchase one share of common stock at an exercise price of
$9.00. Giving effect to the January 1999 100% common stock
dividend, January 2000 10% common stock dividend and May 2000
20% common stock dividend the warrants have been cumulatively
adjusted such that the exercise of each Warrant at an exercise
price of $3.41 purchases .88 of a share of common stock.
ii)On April 15, 1998, the Company's Board of Directors authorized
the distribution of warrants to all holders of shares of the
Company's common stock as of May 8, 1998. Pursuant to the
distribution, each shareholder of record received one warrant
to purchase one share of common stock at an exercise price of
$4.00 per share. The warrants, which are exercisable for a
period of three years, commencing one year after issuance,
shall be issued and distributed once the Company has filed a
registration statement for same and same has been declared
effective by the Securities and Exchange Commission. The
Company to date has not filed the registration statement.
F-22
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 13 - STOCKHOLDER'S EQUITY (cont'd)
e) Grant of Stock Options
In connection with a consulting and option agreement entered
on September 1, 1999, the Company granted 400,000 options to
purchase shares of the Company as follows; 100,000 shares at an
exercise price of $2.50 per share, 100,000 shares at an exercise
of $3 per share, 100,000 shares at an exercise price of $3.50
per share and 100,000 shares at an exercise price of $4.00 per
share. No consulting expenses were recorded in connection with
such options based on the underlying value of the stock on the
grant date. As of September 2000, the options expired and no
options were ever exercised.
NOTE 14 - RELATED PARTIES TRANSACTIONS
a) During November 1998, the Company agreed to issue 215,732 shares
of common stock in the amount equal to the fair market value of
$38,636, to two key employees of Breaking Waves in connection
with their employment agreements. The shares vested in November
1999 and the Company recorded compensation expense amounting to
$38,636 during the year ended December 31, 1999. The employees
agreed to postpone the issuance of such shares of common stock
as follows fifty percent of the shares in May 2000 and fifty
percent of the shares in November 2000.
b) For the years ended December 31, 2000 and 1999, $51,080 and
$36,000, respectively, of financial consulting fees were paid to
a corporation and an individual who are related to the Company's
President.
c) During October 1996, pursuant to two promissory notes, the
Company loaned two of its officers a total of $87,000 bearing
interest at six and one-half percent (6 1/2%) payable over three
years. As of December 31, 2000, the one note remains which
amounted to $37,000 and has been classified as current. As of
December 31, 2000, the Company's President was also advanced
additional funds totaling $3,000 which are non-interest bearing
and due on demand and are classified as current.
d) During October 1999, Play Co. loaned funds to Breaking Waves
in return for an unsecured promissory note in the amount of
$200,000. Such note was due and was repaid in full on March 29,
2000 plus interest at 9% per annum.
e) On November 29, 1999, Play Co. loaned additional funds to
Breaking Waves in return for an unsecured promissory note in the
amount of $400,000. Such note is due in two installments. The
first installment of $100,000 was due and repaid January 30,
2000 and the second installment of $300,000 was due and repaid
April 30, 2000. Interest accrued at 9% per annum.
f) During October 1999, Play Co. loaned funds to the Shopnet in
return for an unsecured promissory note in the amount of
$50,000. Such note is due in full and was repaid on March 29,
2000 plus interest at 9% per annum.
F-23
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 15 - INDUSTRY SEGMENTS
The Company's operations have been classified into two segments:
swimwear sales and film productions. Information about the two
segments for the years ended December 31, 2000 and 1999, is as
follows:
2000 1999
------------------ -----------------
Segment Consolidated Segment Consolidated
Sales:
Swimwear sales $ 5,713,133 $ 4,756,497
Film production - -
------------- -------------
Total sales $ 5,713,133 $ 4,756,497
============= ==============
Gross profit (loss):
Swimwear sales $ 310,068 $ 37,800
Film production (314,135) (268,880)
-------------- ---------------
Total gross profit (4,067) (231,080)
Corporate:
General and administrative
expense (564,346) (626,175)
(Loss) equity in earnings of affiliate (4,290) (994,305)
Gain on sale of equity investment - 130,093
Amortization expense (70,952) (70,952)
Interest income 80,156 56,212
Interest and finance expense (371,752) (243,148)
Other 22,271 15,549
-------------- ---------------
Loss from operations before (benefit)
provision for income tax (912,980) (1,963,806)
(Benefit) provision for income tax (6,004) 12,273
-------------- ---------------
Net (loss) income $ (906,976) $ (1,976,079)
============== ==================
Identifiable assets:
Swimwear sales $ 4,072,174 $ 3,219,328
Film productions 1,598,210 1,906,064
Corporate 1,993,411 2,302,228
------------- --------------
Total assets $ 7,663,795 $ 7,427,620
============= ==============
Operating profit is total revenue less cost of sales and operating
expenses and excludes general corporate expenses, interest expense,
and income taxes. Identifiable assets are those used by each
segment of the Company's operations. Corporate assets are primarily
cash and investments.
F-24
SHOPNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED)
Investment in Affiliates
a) On March 28, 2001, Play Co. filed for protection under Title
Eleven of the United States Code with the United States
Bankruptcy Court for the Southern District of New York. The
Company is in the process of developing a plan for the orderly
liquidation of the Company's operations through discussions with
representatives of its secured lender, other creditors,
landlords and others under the supervision of the Bankruptcy
Court. The fair market value of the investment as of March 29,
2001 is $12,700.
b)On January 17, 2001, Battle Studies entered into a distribution
agreement with KOAN, Inc. ("KOAN") to distribute and promote
Battle Studies' motion pictures ("Machiavelli Rises") in the
United States and Canada. Battle Studies has granted rights
under the agreement for free TV, pay TV, cable, satellite, video
and DVD markets. The terms of the agreement is for twenty - four
months and it will be automatically renewed unless KOAN receives
a letter of cancellation at least thirty days prior to the date
of termination or if sales have not exceeded $250,000 over the
twenty - four month period. Battle Studies expects to realize
70% (which is net of a 30% fee to KOAN) of the expected
estimated gross revenues derived from the United States and
Canada less $5,000 per year for promotional costs.
F-25