U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003,
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 0-28690
SHOPNET.COM, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 13-3871821
State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
112 West 34th Street, Suite 902, New York, New York 10120
(Address of Principal Executive Offices)
(212) 967-8303
(Issuer's Telephone Number, Including Area Code)
14 East 60th Street, Suite 402, New York, NY 10022
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer (1) 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares of each of the issuer's classes of common
equity outstanding as of the latest practicable date: Common Stock, par value
$.001 par value: 8,067,462 shares outstanding as of May 15, 2003.
SHOPNET.COM, INC.
Attachment to form 10QSB/A
Commission file number 0-28690
This amended form 10-QSB/A is being filed to reflect the correction of an
accounting error in the previously filed form 10-QSB for the quarter ended March
31, 2003. The correction of this error properly restates selling, general and
administrative expenses as well as accounts payable.
The following pages and line items have been changed as a result of this
correction, and are indicated as highlighted items:
ITEM I- FINANCIAL STATEMENTS
Description Page #
---------------------------------------------------------------- -----------
Balance sheet
Accounts payable 3
Total current liabilities 3
Accumulated deficit 3
Total Stockholders' equity 3
Statement of Operations
Selling, general and administrative expenses 4
Total expenses 4
Income (loss) before provision for income taxes 4
Net income (loss) 4
Comprehensive (loss) 4
Net income (loss) per share 4
Statement of Stockholders' equity
Net loss (unaudited) for the nine months ended 3/31/03 5
Balances at 3/31/03 5
Cash flows
Net loss 6
Accounts payable 6
Note 12- Segment information
Operating income (loss): swimwear sales 17
Total operating income (loss) 17
Loss from operating before (benefit) 17
Net (loss) 17
ITEM II- MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Three months ended March 31, 2003 as compared to the three months ended March 31, 2002
General
Net income 21
Breaking Waves
S,G & A, variance, variance % and reason-par #3 21
S,G & A, variance, variance % and reason-par #3 22
Net income- paragraph 4 22
Nine months ended March 31, 2003 as compared to the nine months ended March 31, 2002
General
Net income 23
Breaking Waves
S,G & A, variance, variance % and reason-par #3 23
S,G & A, variance, variance % and reason-par #3 24
Net income- paragraph 4 24
Liquidity and Capital Resources
Working capital deficit amount 26
SHOPNET.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Number
---------
Item I. FINANCIAL STATEMENTS
Consolidated balance sheets as of March 31, 2003 (Unaudited) and June 30, 2002 3
Consolidated statements of operations and comprehensive income (Unaudited) for the nine and three
months ended March 31, 2003 and March 31, 2002 4
Consolidated statements of stockholders' equity for the nine months ended March 31, 2003
(Unaudited) 5
Consolidated statements of cash flows for the nine months ended March 31, 2003, and March 31,
2002 (Unaudited) 6
Notes to consolidated financial statements (Unaudited) 7
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. 19
Item 3. CONTROLS AND PROCEDURES 31
PART II. OTHER INFORMATION 32
SHOPNET.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 2003 and June 30, 2002
March 31, June 30,
2003 2002
----------------- ----------------
(Unaudited) (Audited)
ASSETS (Note 2)
Current assets:
Cash $ 3,021 $ 3,309
Accounts receivable, net 14,304 19,109
Other receivables 70,196 88,118
Inventory 1,549,900 230,049
Prepaid expenses 238,961 298,968
Advances to officer 40,000 40,000
----------------- -----------------
Total current assets 1,916,382 679,553
----------------- -----------------
Property and equipment, net 87,378 70,044
Film production and distribution costs, net 1,204,728 1,204,728
Costs in excess of net assets of business acquired 727,261 727,261
Investments in movie ventures 232,159 246,399
Deferred tax asset-non-current 224,240 224,240
Other assets 27,306 27,078
----------------- ----------------
2,503,072 2,499,750
----------------- ----------------
Total assets $ 4,419,454 $ 3,179,303
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor $ 1,364,327 $ 690,595
Accounts payable 1,115,279 280,003
Loan payable 50,000 -
Accrued expenses 115,096 4,782
Capital lease obligations current portion 5,225 3,938
Other taxes payable 2,328 2,214
Deferred tax liability 5,188 5,188
Total current liabilities 2,657,443 986,720
----------------- ----------------
Long term liabilities:
Capital lease obligations-net of current portion
Total long term liabilities 10,115 -
----------------- ----------------
Total liabilities 2,667,558 986,720
----------------- ----------------
Commitments and contingencies
Stockholders' equity
Common stock- $.001 par value, 20,000,000 shares authorized, 8,067,462 shares
issued and outstanding at March 31, 2003 and 7,472,224 shares issued and
outstanding at June 30, 2002 8,067 7,472
Capital in excess of par value 6,653,257 6,638,852
Accumulated deficit (4,909,428) (4,453,741)
----------------- ----------------
Total stockholders' equity 1,751,896 2,192,583
----------------- ----------------
Total liabilities and stockholders' equity $ 4,419,454 $ 3,179,303
================= ================
The accompanying notes should be read in conjunction with the consolidated financial statements
-3-
SHOPNET.COM, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Comprehensive Income (Loss)
(Unaudited)
Nine Months Ended Three Months Ended
--------------------------- ----------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------ ----------- ----------- -------------
Net sales ............................................... $ 5,849,229 $6,313,067 $ 5,098,551 $4,612,362
Cost of sales ........................................... 3,688,757 3,927,537 3,441,519 2,828,915
------------ ----------- ----------- -------------
Gross profit ............................................ 2,160,472 2,385,530 1,657,032 1,783,447
------------ ----------- ----------- -------------
Expenses:
Selling, general, and administrative .................... 2,246,686 2,007,246 1,264,939 1,028,099
Amortization of costs in excess of net assets of
business acquired ................................... -- 53,214 -- 17,738
------------ ----------- ----------- -------------
Total expenses .......................................... 2,246,686 2,060,460 1,264,939 1,045,837
------------ ----------- ----------- -------------
Income (loss) before other income (expenses) and
provision for income taxes .............................. 86,214 325,070 392,093 737,610
------------ ----------- ----------- -------------
Other income (expenses):
Equity in earnings (loss) of affiliate .................. (15,928) (595) (15,928) (532)
Write down of film costs ................................ -- --
Rental income ........................................... -- 9,050 -- --
Interest and financial expense .......................... (355,258) (357,941) (265,073) (202,022)
Interest income ......................................... 1,713 11,008 777 75
------------ ----------- ----------- -------------
Total other income (expense) ............................ (369,473) (338,478) (280,224) (202,479)
------------ ----------- ----------- -------------
Income (loss) before provision for income taxes
(455,687) (13,408) 111,869 535,131
Provision (benefit) for income taxes .................... -- -- -- --
------------ ----------- ----------- -------------
Net income (loss) ....................................... (455,687) (13,408) 111,869 535,131
------------ ----------- ----------- -------------
Other items of comprehensive income (loss) .............. -- (6,350) -- --
------------ ----------- ----------- -------------
Comprehensive (loss) .................................... $ (455,687) $ (19,758) $ 111,869 $ 535,131
------------ ----------- ----------- -------------
Basic:
Net income (loss) per share ............................. $ (.058) $ (Nil) $ .014 $ .07
============ =========== =========== =============
Weighted average number of common shares outstanding 7,802,912 7,472,244 8,067,462 7,472,244
============ =========== =========== =============
The accompanying notes should be read in conjunction with the consolidated financial statements
-4-
SHOPNET.COM, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For The Six Months Ended December 31, 2002
(Unaudited)
Additional 5% Total
Common Stock Paid-in Accumulated Convertible Stockholders'
Shares Amount Capital Deficit Debentures equity
----------- ----------- ----------- ------------ -------------- -----------
Balances at June 30, 2002 (Audited) ............ 7,472,224 $ 7,472 $6,638,852 $(4,453,741) $ -- $2,192,583
August 28, 2002, issuance of 5% Convertible
debentures ..................................... -- -- -- -- $ 15,000 15,000
Nov. 6, 2002-Conversion of debentures into
595,238 shares ................................. 595,238 595 14,405 (15,000) --
Net loss (Unaudited) for the nine months ended
March 31, 2003 .................................. (455,687) (455,687)
----------- ----------- ----------- ------------ -------------- -----------
Balances at March 31, 2003 ..................... 8,067,462 $ 8,067 $6,653,257 $(4,909,428) $ -- $1,751,896
=========== =========== =========== ============ ============== ===========
The accompanying notes should be read in conjunction with the consolidated financial statements
-5-
SHOPNET.COM, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For The Nine Months Ended March 31, 2003 And 2002
(Unaudited)
March 31, March 31,
2003 2002
----------- ---------
Cash flows from operating activities:
Net loss ....................................................................... $ (455,687) $ (13,408)
Adjustments to reconcile net income to net cash used in operating activities:
Equity in loss of affiliate ............................................... 15,928 595
Amortization and depreciation ............................................. 22,081
73,857
Decrease (increase) in:
Accounts receivable ....................................................... 4,805 (19,884)
Other receivables ......................................................... 17,922 62,734
Inventory ................................................................. (1,319,851) (577,528)
Prepaid expenses .......................................................... 60,007 (187,906)
Advances to officer ....................................................... -- (1,971)
Other assets .............................................................. (288) (4,700)
Marketable securities affiliate ........................................... -- 6,350
Increase (decrease) in:
Due to factor ............................................................. 673,732 (835,407)
Accounts payable .......................................................... 833,648 547,905
Accrued expenses .......................................................... 110,314 (834)
Other taxes payable ....................................................... 114 104
----------- ---------
Net cash used in operating activities ............................................. (37,275) (950,093)
----------- ---------
Cash flows from investing activities:
Acquisition of property and equipment .......................................... (39,415) (28,636)
----------- ---------
Net cash used in investing activities ............................................. (39,415) (28,636)
----------- ---------
Cash flows from financing activities:
Principal payments on capital leases ............................................ (6,261) (14,098)
Issuance of stock ............................................................... 15,000 --
Issuance of new capital leases .................................................. 17,663 --
Loans Payable ................................................................... 50,000 --
----------- ---------
Net cash used in financing activities ............................................. 76,402 (14,098)
----------- ---------
Net decrease in cash and restricted cash .......................................... (288) (992,827)
Cash and restricted cash, beginning of period ..................................... 3,309 994,285
----------- ---------
Cash and restricted cash, end of period ........................................... $ 3,021 $ 1,458
=========== =========
Supplemental disclosure of cash flow information: cash paid during the period for :
Interest .................................................................. $ 251,270 $282,737
=========== =========
Income taxes .............................................................. $ -- $ --
=========== =========
The accompanying notes should be read in conjunction with the consolidated financial statements
-6-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1- ORGANIZATION
Shopnet.com, Inc. ("Shopnet" or the "Company") 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, the Company
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. As of June 30,
2002, Shopnet and all of its subsidiaries changed their financial year
end from December 31 to June 30.
NOTE 2- INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of
March 31, 2003 and for the six month periods ended March 31, 2003 and
March 31, 2002 and for the three month periods ended March 31, 2003 and
March 31, 2002 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Items 303 and 310 of Regulation S-B. In
the opinion of management, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and
reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the financial position as of
March 31, 2003 and the results of operations and cash flows for the six
month periods ended March 31, 2003 and March 31, 2002 are not
necessarily indicative of the results to be expected for any subsequent
quarter or the entire fiscal year. The balance sheet at June 30, 2002
has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. The Company
believes, however, that the disclosures in this report are adequate to
make the information presented not misleading in any material respect.
The accompanying consolidated financial statements should be read in
conjunction with the audited financial statements of Shopnet.com, Inc.
and Subsidiaries as of June 30, 2002 and for the year then ended and
notes thereto included in the Company's report on Form 10-KSB filed on
October 15, 2002.
The Company in the quarter ended March 31, 2003 has implemented a
number of initiatives which it believes will reduce its costs of
operations and alleviate in the following six months its working
capital deficiency. In particular, the Company believes that the
repayment of its indebtedness to Century (See Note 7) and the recent
reductions in interest rates will reduce interest expense.
-7-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2- INTERIM RESULTS AND BASIS OF PRESENTATION (continued)
In December 2001, the Company consolidated all of its operation's in
the New York metropolitan region into one new facility (See Note 9(a)
), creating a savings through synergies in office expense and decrease
in rent and salaries. The Company has, also, recently refocused its
sales efforts, to the extent possible, to eliminate unprofitable or low
margin sales and has had improved sales and orders for the current
fiscal year.
NOTE 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Recently adopted accounting principles - Film accounting
Pursuant to SFAS no. 139, the Company adopted Statement of Position
("SOP") 00-2, "Accounting by Producers or Distributors of Films"
during the nine months ended March 31, 2003. SOP 00-2 established new
film accounting standards, including changes in revenue recognition
and accounting for advertising, development and overhead costs.
Specifically, SOP 00-2 requires advertising costs for theatrical and
television products to be expensed as incurred. This compares to the
Company's previous policy of first capitalizing these costs and then
expensing them over the related revenue streams. In addition, SOP 00-2
requires development costs for abandoned projects and certain indirect
overhead costs to be charged to film costs, which was required under
the previous accounting rules, SOP 00-2 also in other areas, such as
revenue recognition, generally are consistent with the Company's
existing accounting policies. SOP 00-2 was adopted as of July 1, 2001,
and had no effect on the Company's consolidated results of operations,
financial position or cash flows.
b) Recently issued accounting pronouncements
The Company does not believe that any recently issued but not yet
effective accounting standards, have a material effect on the
Company's consolidated financial position, results of operations or
cash flows except for the effect of adoptions of SFAS No. 142, "
Goodwill and Other Intangible assets". It addresses how intangible
assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. SFAS 142 also
addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial
statements. The Company adopted the provisions of this new standard
beginning with the first quarter of 2002.
c) Earnings per share:
Basic earnings (loss) per share is computed by dividing net income
(loss) income attributable to common shares, by the weighted average
number of common shares outstanding during each period. Diluted
earnings (loss) per share is similar to basic earnings (loss) share,
except that the weighted average number of common shares outstanding
is increased to reflect the dilutive effect of potential common shares
as if they had been issued.
-8-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 was being amortized over the useful lives
of the related assets which was fifteen years.
Effective for the year ended June 30, 2002, the Company adopted FAS
142 "Goodwill and Other Intangible Assets". Under FAS 142, goodwill
and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Goodwill is tested for impairment at
the reporting level. Under FAS 142, the fair value of a reporting unit
is compared to its carrying amount, including goodwill. If the book
value (carrying amount) is below the fair value assessment, there will
be no impairment or loss. If the fair value is below the book value
(carrying amount), the Company needs to perform a second test to
determine the gap between the impaired fair value of goodwill and its
carrying amount.
The Company had determined that no impairment existed as of March 31,
2003. Accordingly, the book value was not further written down.
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 March 31, 2003,
$217,500 for a 50% interest in a new entity, Battle Studies
Productions, LLC ("Battle Studies") a limited liability company.
Battle Studies is accounted for 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.
b) The Girl
Pursuant to an agreement dated July 1, 1999 with Artistic License
Films Inc., Hollywood invested through March 31, 2003 $35,000 for a
22.533% interest in a new entity, The Girl, LLC ("The Girl") a limited
liability company. In return for its participation in The Girl,
Hollywood is 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.
The Company accounts for the investments in Battle Studies and The
Girl under the equity method. For the nine months ended March 31, 2003
and 2002, the Company recorded an equity loss of $13,928 on this
investment.
-9-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6- MARKETABLE SECURITIES- AFFILIATE
Breaking Waves owned 1,270,000 unregistered common shares of Play Co.
Toys & Entertainment Corp. ("Play Co."), a toy retailer and a publicly
traded company whose Chairman of the Board was also the President of
Shopnet and Breaking Waves.
Breaking Waves' ownership percentage was approximately 1.5% of Play
Co. The investment in Play Co. was accounted for under the
requirements of SFAS No. 115, "Accounting for Certain investments in
Debt and Equity Securities." Under SFAS 115, the securities were
considered available for sale and therefore the carrying value was
based on the fair market value of the securities at March 31, 2003 and
2002 which amounted to $0 as of both dates.
The change in the fair market value of the securities during the
periods are recorded as an unrealized gain or loss as a component of
comprehensive income. The Company 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 were therefore considered non-current (See
Note 7).
On March 28, 2001 Play Co. filed for protection under Chapter Eleven
of the United States Code with the United States Bankruptcy Court for
the Southern District of New York. The filing was converted into a
Chapter Seven filing on August 28, 2001.
NOTE 7- DUE TO FACTOR
Century Business Credit Corporation
On or about September 12, 2000, Breaking Waves entered into a
factoring and revolving inventory loan and security agreement
("factoring agreement") with Century Business Credit Corporation
("Century") to sell its 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 eligible receivables and up to 50% of the value of
finished goods in inventory, with interest payable monthly at the rate
of 1 3/4% over prime.
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 ("CEO") and a relative
of a principal 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.
On September 15, 2001, Century required the Company to increase the
amount of collateralized standby letters of credit by $300,000 raising
such amount to $1,450,000.
-10-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7- DUE TO FACTOR
Century Business Credit Corporation
On May 3, 2001, the Agreement with the Trust was amended so that the
letter of credit secured by the Trust was increased to $400,000. As a
condition of the amendment, the Company entered into a guarantee
agreement with Gal Capital Corp., whose President is a relative of the
Company's President and CEO and a principal stockholder of the Company
to act as guarantor of the obligation to the Trust up to $400,000 in
exchange for a fee of $42,500 which the Company paid on May 3, 2001.
The amended letter of credit expired on September 1, 2001 and was
subsequently amended on September 15, 2001.
On September 15, 2001, the Amended and Restated Reimbursement and
Compensation Agreement was entered into and further amended the
agreement with the Trust, so that the letter of credit secured by the
Trust was increased to $750,000. The amended letter of credit expired
on September 1, 2002 but can be extended year to year at the Company's
option for a period of ten years. On September 1, 2002, the letter of
credit was extended. 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
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.
In December 2002, Breaking Waves entered into a Reimbursement and
Compensation Agreement with TERE, S.A., a Swiss entity. As a
consequence of Century being unwilling to grant credit to Breaking
Waves unless it received one or more letters of credit satisfactory to
it as well as cash collateral to partially secure the line of credit
in such amounts as it deems appropriate, the Trust reduced the letter
of Credit secured by it to $500,000. TERE, S.A. agreed to loan
Breaking Waves the sum of $250,000 represented by a promissory note.
The funds were deposited as cash collateral with Century to replace
the reduced portion of the letter of credit secured by the Trust.
All obligations under this agreement are guaranteed by the Company and
are secured by a security interest in all of the Company's assets.
As compensation, Breaking Waves paid all interest received from or
credited to it by Century on the sums deposited pursuant to the Cash
Collateral Agreement when received.
The term of the loan is for ten years.
ARC has agreed to pay to TERE, interest at the rate of 8% per annum on
quarterly basis.
On September 15, 2001, the Company entered into a Reimbursement
Agreement with relatives of a principal stockholder who is related to
the President and CEO of the Company ("RAYA") who pledged assets as
collateral for securing a $300,000 letter of credit as additional
collateral to secure Breaking Waves' Loan and Security Agreement with
Century. Absent any default, the letter of credit will remain in
effect for ten years. The Agreement is guaranteed by Shopnet under a
separate Security Agreement dated September 15, 2001.
-11-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7- DUE TO FACTOR
Century Business Credit Corporation (continued)
In exchange for the letters of credit, the Trust and RAYA will
proportionately, based on the total outstanding letters of credit,
receive a fee of one and one quarter percent (1-1/4%) of net sales of
Breaking Waves through June 30, 2002 and thereafter one and three
quarters percent (1-3/4%) of net sales through September 30, 2011. In
October 2001, the Trust and RAYA received advance payments to be
applied towards future fees of $24,500 and $12,250, respectively. All
future payments are payable forty five days after the close of each
fiscal quarter. The fees are effective October 1, 2001.
In September 2001, the Company and Breaking Waves retained Arc
Financial Corp. ("ARC"), a British Virgin Island company, for a ten
year term to provide financial consulting services.
Pursuant to the terms of a consulting services. Pursuant to the terms
of a consulting agreement ("ARC Consulting Agreement"), ARC was
retained to assist the Company in the acquisition of financing to
acquire inventory and for other corporate purposes ("Financing"), as
well as consult with the Company with regard to its ongoing
operations, promote sales of Breaking Waves' products and improving
production.
Pursuant to the terms of the ARC Consulting Agreement, the Company and
Breaking Waves agreed to compensate ARC (i) an annual fee of $20,000
("Base Fee") and (ii) a percentage of annual net sales in the amount
of 1-1/4% through June 30, 2002 and 1-3/4% of net sales for each year
of the term thereafter through September 30, 2011 ("ARC Percentage
Fee"), payable 45 days after the closing of each fiscal quarter.
In October 2001, ARC received (I) a lump sum payment of $209,000
reflecting full advance payment of the Base Fee and (ii) $36,750
reflecting advance payment of the Arc Percentage Fee. The agreement
with Arc expires September 30, 2011. The Company and Breaking Waves
are entitled to terminate the ARC Consulting Agreement any time after
September 30, 2006, in which event all prepaid fees are forfeited.
The following table summarizes the percentage due each party, as noted
above, as a percentage of net sales for the three months ended March
31, 2003:
% of
Net Sales Amount
--------------- ---------------
RAYA 0.58 $ 29,572
ZAT 1.16 59,143
ARC 1.75 89,225
--------------- --------------
3.49 $177,940
=============== ==============
Interest expense related to the factor agreement totaled $144,027 and
$190,908 for the nine months ended March 31, 2003 and 2002,
respectively. Century has a secured interest in Breaking Waves'
inventory as collateral for the advances. As of March 31, 2003, the
net advances to Breaking Waves from Century amounted to $1,364,327.
-12-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 8- NOTE PAYABLE
On November 8, 2002, the Company borrowed the sum of $50,000 in the
form of a promissory note from Amigal Salit, Ltd., an unrelated party.
The note which is non-interest bearing is due on or before August 15,
2003.
On the same date, the Company entered into an agreement with ARC
Financial Corporation, whereby the Company using the proceeds received
from Amigal Salit, Ltd., agreed to pay $50,000 as an advance against
fees to be owed by Breaking Waves to ARC Financial Corporation in
connection with Breaking Waves obligation to pay certain fees to ARC
as part of a consulting agreement as described in Note 7 (b) herein.
NOTE 9- COMMITMENTS AND CONTINGENCIES
a) Lease commitments
Shopnet and Breaking Waves jointly share their administrative offices
under a lease agreement signed July 2001 by Breaking Waves. Shopnet is
provided office space by Breaking Waves on a rent-free basis. The
lease agreement expires on September 30, 2007. Annual rent under this
lease is $84,915 through December 31, 2004 and $97,560 for the
remainder of the lease period. Additionally, Breaking Waves leases an
offsite office for one of its designers on a month to month basis with
annual payments approximating $13,200.
The approximate annual future minimum rentals under non-cancelable
operating lease signed by Breaking Waves are as follows:
For the fiscal year ended June 30:
2003 $ 35,228
2004 84,915
2005 90,338
2006 95,760
2007 95,760
Thereafter 23,940
-----------------
$ 425,941
=================
Rent expense for the nine months ended March 31, 2003 and 2002
amounted to $81,646 and $94,508, respectively.
b) Significant vendors and customers
Breaking Waves purchases 100% of its inventory from three vendors, two
in Indonesia (74%) and the other in the Republic of Korea (26%).
Breaking Waves believes other sources and vendors are available and
that it is not dependent exclusively on these vendors. For the three
months ended March 31, 2003 Breaking Waves had two customers, which
comprised approximately 28%, of net sales. For the nine months ended
March 31, 2002, Breaking Waves had 2 customers which compromised 43%
of net sales.
-13-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9- COMMITMENTS AND CONTINGENCIES
c) Seasonality
Breaking Waves' business is considered seasonal with a large portion
of its revenues and profits being derived between December and April.
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 it incurs the majority of its production
costs with limited revenues and also engages in the sale of product at
negative gross margins to remove slow moving items and decrease its
carrying cost.
d) License agreements
During June 2000, Breaking Waves entered into a license agreement with
an effective date of November 1, 2001 with Gottex Models Ltd., as
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 $113,019 and $68,430
for the nine months ended March 31, 2003 and 2002, respectively.
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-production. The Company retains all
rights to the motion picture with the co-producer agreeing to finance
$100,000 of the cost 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 March 31, 2003, the Company invested $1,971,956 for the
co-production and distribution of such motion pictures whereas the
co-producers have invested $100,000. For the nine months ended March
31, 2003 and 2002, the Company derived no revenue from the motion
picture and amortized no film costs.
For the nine months ended March 31, 2003 and 2002 the Company has not
written down its film production and distribution costs, as the
carrying value of the asset equals its estimated net realizable value.
f) 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).
-14-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9- COMMITMENTS AND CONTINGENCIES (continued)
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 intends to
contest the action vigorously and believes that such claims against it
are baseless and without merit.
NOTE 10- STOCKHOLDERS' EQUITY
a) 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, 2002. On August 31, 2002, the
Company extended the term of its warrants by 18 months, the
Warrants will now expire on March 10, 2003. 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 affected 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, the January 2001 10% common stock
dividend and the May 2001 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 shareholders of the Company's
common stock as of May 8, 1998. Pursuant to the distribution,
each shareholder of record will receive 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 and receipt by
shareholder, shall be issued and distributed once the Company has
file 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.
-15-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE - 11 RELATED PARTIES TRANSACTIONS
a) For the nine months ended March 31, 2003 and 2002 financial consulting
fees were paid to a corporation and an individual who are related to
the Company's President and CEO amounting to $18,725 and $17,445,
respectively.
b) 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 March 31,
2003, the unpaid portion amounted to $37,000, which has been
classified as current. As of March 31, 2003, 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.
-16-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE - 12 SEGMENT INFORMATION
The Company's operations have been classified into two segments:
swimwear sales and film productions. These operating segments
were based on the nature of the projects and services offered.
Operating segments are defined as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and assess performance. The
Company's CEO has been identified as the chief decision maker.
The Company's chief operating decision maker directs the
allocation of resources to operating segments based on the
profitability and cash flow of the respective segments.
Nine Months Ended March 31,
2003 2002
-------------------------------------- ----------------------------------------
Segment Consolidated Segment Consolidated
---------------- ------------------ ----------------- -------------------
Sales:
Swimwear sales $5,849,229 $ 6,313,067
Film production - -
---------------- -----------------
Total sales $ 5,849,229 $ 6,313,067
================== ===================
Operating income (loss):
Swimwear sales $ 130,585 $ 649,892
Film production (2,000) (600)
------------------ -------------------
Total operating income (loss) $ 128,585 $ 649,292
------------------ -------------------
Corporate:
General and administrative expense $ (216,799) $ (271,008)
------------------ -------------------
(Loss) equity in earnings of affiliate (13,928) (595)
Amortization expense - (53,214)
Interest income 1,713 11,008
Interest and finance expense (355,258) (357,941)
Other - 9,050
------------------ -------------------
Loss from operating before (benefit) (455,687) (13,408)
Provision for income tax - -
------------------ -------------------
Net (loss) $ (455,687) $ (13,408)
================== ===================
Identifiable assets:
Swimwear sales $ 1,780,870 $ 1,604,943
Film productions 1,436,659 1,451,104
Corporate 1,201,925 1,143,940
------------------ -------------------
Total assets $ 4,419,454 $ 4,199,987
================== ===================
-17-
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE - 12 SEGMENT INFORMATION (continued)
Operating profit is total revenue less cost of sales and
operating expenses and excludes general corporate expenses,
interest expenses and income taxes. Identifiable assets are those
used by each segment of the Company's operations. Corporate
assets are primarily cash and investments.
-18-
ITEM 2. 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 and
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.com, Inc. ("Shopnet" or the "Company") 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 new
wholly-owned subsidiary, Hollywood, to which it assigned its motion picture
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. As of June 30, 2002, the
company changed its year end from December 31 to June 30.
The consolidated financial statements at March 31, 2003 and 2002
included 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 entity in order to be more
meaningful.
Critical 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) Inventory
Inventory 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
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Critical Accounting Policies (continued)
c) 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 revenue can change significantly due
to the level of amortization, as 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.
d) 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.
e) Income taxes
The Company accounts for income taxes in accordance with the "liability
method" of accounting for income taxes. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis 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.
f) 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 Financial Accounting Standards Board's Statement of
Financial Accounting Standards ("SFAS") No. 53, "Financial Reporting by
Producers and Distributors of Motion Pictures Films," the individual film
forecast method is used to amortize film costs.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Critical Accounting Policies (continued)
g) Earnings per share
Earnings per common share is computed pursuant to SFAS No. 128 "Earnings
Per Share." Basic earnings per share is computed as net income (loss)
available to common share holders divided by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and convertible preferred stock.
h) Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumption 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.
i) Fair value disclosure at March 31, 2003 and June 30, 2002:
The carrying value of cash, accounts receivable, inventory, accounts
payable, accrued expenses, and capital lease obligations are a reasonable
estimate of their fair value.
Three months ended March 31, 2003 as compared to the three months ended March
31, 2002
For the three months ended March 31, 2003, the Company reported
consolidated net income of $111,869 as compared to a consolidated income of
$535,131 for the three months ended March 31, 2002.
Breaking Waves
For the three months ended March 31, 2003 and 2002, Breaking Waves
generated net sales of $5,098,551 and $4,612,362, respectively, with related
cost of sales amounting to $3,441,519 and $2,828,915 respectively. The increase
in sales amounting to $486,189, or approximately 11%, from 2002 to 2003 was
primarily attributable an increase in orders from the Company's customers.
The gross profit for the three months ended March 31, 2003 amounted to
$1,657,032, or 33% of sales as compared to the three months ended March 31,
2002 during which it amounted to $1,783,447, or 39% of sales.
Selling, general, and administrative expenses during the three months
ended March 31, 2003 and 2002 amounted to $1,183,397 and $946,295,
respectively. The increase amounting to $237,102 or approximately 25%, is
primarily attributable to an increase in warehousing and selling expenses as a
result of increased sales efforts.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Breaking Waves (continued)
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the three months ended March 31:
2003 2002
---------------- ----------------
Officers, office staff, designer and sales , salaries and related benefits $150,792 $157,810
Commission expense 195,912
173,593
Warehousing costs 456,919 270,087
Royalty fees 31,269 45,819
Rent expense 28,458 26,381
Factor commissions 71,060 49,222
Miscellaneous general corporate overhead expenses 271,306 201,064
Interest expense in connection with the factoring agreement amounted to
$80,325 and $88,075 for the three months ended March 31, 2003 and 2002,
respectively. The decrease is due primarily to a decrease in interest rates.
Breaking Waves generated net income of $210,340 and $635,014 for the
three months ended March 31, 2003 and 2002 respectively.
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 three months ended March 31, 2003 and 2002, Hollywood generated
no sales form its motion picture "Dirty Laundry". Although sales prior to and
including the nine months ended June 30, 2002 were minimal, the company expects
to effect increased sales during the fiscal year ending June 30, 2002 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". Upon a review of the net
realizable value of the movie cost, management has determined that no write
down was necessary as of March 31, 2003 and 2002, respectively, Accordingly,
Hollywood generated a loss of $14,728 and $600 for the three months ended March
31, 2003 and 2002, respectively. The loss of $14,728 includes an equity loss of
$13,928 from Hollywood's investment in The Girl, LLC, a joint venture.
Subsequent to "Dirty Laundry", Hollywood also has invested in other
movie ventures, some of which have generated revenue to date. See "Investment
in Joint Ventures."
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Shopnet.com
For the three months ended March 31, 2003 and 2002, Shopnet generated no
income.
Shopnet's selling, general, and administrative expense amounted to
$82,742 and $99,283 for the three months ended March 31, 2003 and 2002. This
represents a decrease of $15,241, or approximately 16%.
The major components of the Company's expenses are as follows for the
three months ended March 31:
2003 2002
--------------- --------------
Salaries (officer and office staff) and stock compensation and related benefits
$ 34,071 $ 28,741
Rent 0 0
Legal and professional fees 14,600 17,234
Consulting fees 21,400 10,400
Other general corporate and administrative expense 12,671 42,908
Shopnet generated a net loss of $83,742 and $99,283 for the three months
ended March 31, 2003 and 2002, respectively.
Nine months ended March 31, 2003 as compared to the nine months ended
March 31, 2002
For the nine months ended March 31, 2003 and 2002, the Company reported
a consolidated net loss of $455,687 and $13,408 after an income tax expense of
$0 respectively, and a comprehensive net loss of $455,687 and $19,632,
respectively.
Breaking Waves
For the nine months ended March 31, 2003 and 2002, Breaking Waves
generated net sales of $5,849,229 and $6,313,067, respectively, with related
cost of sales amounting to $3,688,757 and $3,927,537, respectively. The
decrease in sales amounting to $463,838, or approximately 8%, from 2002 to 2003
was primarily attributable to the subsequent deferment of new orders into the
next period.
The gross profit for the nine months ended March 31, 2003 amounted to
$2,160,472, or 37% of sales as compared to the nine months ended March 31, 2002
during which it amounted to $2,385,530, or 38% of sales. The decrease in the
gross profit percentage can be attributable to a deferment of orders into the
next period.
Selling, general, and administrative expenses during the nine months
ended March 31, 2003 and March 31, 2002 amounted to $2,030,887 and $1,735,638,
respectively. The increase amounted to $295,249 or 17%.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Breaking Waves (continued)
The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the nine months ended March 31:
2003 2002
--------------- ----------------
Officers, office staff, designer and sales , salaries and related benefits $428,793 $433,239
Commission expense 193,552 189,093
Warehousing costs 454,749 355,751
Royalty fees 127,950 98,430
Rent expense 81,646 74,998
Factor commissions 80,037 62,687
Miscellaneous general corporate overhead expenses 664,160 521,440
Interest expense in connection with its factoring agreement amounted to
$144,027 and $190,908 for the nine months ended March 31, 2003 and 2002,
respectively. The decrease is due to a decrease in sales, as well as a
reduction in the stated prime interest rate.
Breaking Waves generated a net loss of $222,960 for the nine months
ended March 31, 2003 and net income of $296,607 for the nine months ended March
31, 2002.
Hollywood
For the nine months ended March 31, 2003 and 2002, Hollywood generated
no sales form its motion picture "Dirty Laundry". Although sales prior to and
including the six months ended June 30, 2002 were minimal, the company expects
to effect increased sales during the fiscal year ending June 30, 2002 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". Upon a review of the net
realizable value of the movie cost, management has determined that no write
down was necessary as of March 31, 2003 and 2002, respectively, Accordingly,
Hollywood generated a loss of $15,928 and $663 for the nine months ended March
31, 2003 and 2002, respectively. The loss of $15,928 includes an equity loss of
$13,928 from Hollywood's investments in The Girl, LLC, a joint venture.
Subsequent to "Dirty Laundry", Hollywood also has invested in other
movie ventures, some of which have generated revenue to date. See "Investment
in Joint Ventures."
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Shopnet.com
For the nine months ended March 31, 2003 and 2002, Shopnet generated no
income.
Shopnet's selling, general, and administrative expense amounted to
$215,799 and $309,352 for the nine months ended March 31, 2003 and 2002. This
represents a decrease of $93,553, or approximately 31%.
The major components of the Company's expenses are as follows for the
nine months ended March 31:
2003 2002
------------- -------------
Salaries (officer and office staff) and stock compensation and related
benefits $ 98,922 $99,385
Rent - 19,510
Legal and professional fees 34,710 72,314
Consulting fees 43,375 22,345
Other general corporate and administrative expense 38,792 95,798
Shopnet generated a net loss of $216,799 and $309,352 for the nine
months ended March 31, 2003 and 2002, respectively. The net loss for the nine
months ended March 31, 2002 included, on a consolidated basis, amortization of
goodwill of $53,214.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
At March 31, 2003, the Company's consolidated working capital deficit
amounted to $741,061.
At March 31, 2003, current assets consisted primarily of inventory of
$1,549,900 and prepaid expenses of $238,961.
On or about September 12, 2000, Breaking Waves entered into a factoring
and revolving inventory loan and security agreement ("factoring agreement")
with Century Business Credit Corporation ("Century") to sell its 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
eligible receivables and up to 50% of the value of finished goods in inventory,
with interest payable monthly at the rate of 1 3/4% over prime.
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 ("CEO") and a relative of a principal
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. On September 15, 2001, Century required
the Company to increase the amount of collateralized standby letters of credit
by $300,000 raising such amount to $1,450,000.
On May 3, 2001, the Agreement with the Trust was amended so that the
letter of credit secured by the Trust was increased to $400,000. As a condition
of the amendment, the Company entered into a guarantee agreement with Gal
Capital Corp., whose President is a relative of the Company's President and CEO
and a principal stockholder of the Company to act as guarantor of the
obligation to the Trust up to $400,000 in exchange for a fee of $42,500 which
the Company paid on May 3, 2001. The amended letter of credit expired on
September 1, 2001 and was subsequently amended on September 15, 2001.
On September 15, 2001, the Amended and Restated Reimbursement and
Compensation Agreement was entered into and further amended the agreement with
the Trust, so that the letter of credit secured by the Trust was increased to
$750,000. The amended letter of credit expired on September 1, 2002 but can be
extended year to year at the Company's option for a period of ten years. On
September 1, 2002, the letter of credit was extended. 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 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.
In December 2002, Breaking Waves entered into a Reimbursement and
Compensation Agreement with TERE, S.A., a Swiss entity. As a consequence of
Century being unwilling to grant credit to Breaking Waves unless it received
one or more letters of credit satisfactory to it as well as cash collateral to
partially secure the line of credit in such amounts as it deems appropriate,
the Trust reduced the letter of Credit secured by it to $500,000. TERE, S.A.
agreed to loan Breaking Waves the sum of $250,000 represented by a promissory
note.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources (continued)
The funds were deposited as cash collateral with Century to replace the
reduced portion of the letter of credit secured by the Trust.
All obligations under this agreement are guaranteed by the Company and
are secured by a security interest in all of the Company's assets.
As compensation, Breaking Waves paid all interest received from or
credited to it by Century on the sums deposited pursuant to the Cash Collateral
Agreement when received.
The term of the loan is for ten years.
ARC has agreed to pay to TERE, interest at the rate of 8% per annum on
quarterly basis.
On September 15, 2001, the Company entered into a Reimbursement
Agreement with relatives of a principal stockholder who is related to the
President and CEO of the Company ("RAYA") who pledged assets as collateral for
securing a $300,000 letter of credit as additional collateral to secure
Breaking Waves' Loan and Security Agreement with Century. Absent any default,
the letter of credit will remain in effect for ten years. The Agreement is
guaranteed by Shopnet under a separate Security Agreement dated September 15,
2001.
In exchange for the letters of credit, the Trust and RAYA will
proportionately, based on the total outstanding letters of credit, receive a
fee of one and one quarter percent (1-1/4%) of net sales of Breaking Waves
through June 30, 2002 and thereafter one and three quarters percent (1-3/4%) of
net sales through September 30, 2011. In October 2001, the Trust and RAYA
received advance payments to be applied towards future fees of $24,500 and
$12,250, respectively. All future payments are payable forty five days after
the close of each fiscal quarter. The fees are effective October 1, 2001.
In September 2001, the Company and Breaking Waves retained Arc Financial
Corp. ("ARC"), a British Virgin Island company, for a ten year term to provide
financial consulting services.
Pursuant to the terms of a consulting services. Pursuant to the terms of
a consulting agreement ("ARC Consulting Agreement"), ARC was retained to assist
the Company in the acquisition of financing to acquire inventory and for other
corporate purposes ("Financing"), as well as consult with the Company with
regard to its ongoing operations, promote sales of Breaking Waves' products and
improving production.
Pursuant to the terms of the ARC Consulting Agreement, the Company and
Breaking Waves agreed to compensate ARC (i) an annual fee of $20,000 ("Base
Fee") and (ii) a percentage of annual net sales in the amount of 1-1/4% through
June 30, 2002 and 1-3/4% of net sales for each year of the term thereafter
through September 30, 2011 ("ARC Percentage Fee"), payable 45 days after the
closing of each fiscal quarter.
In October 2001, ARC received (I) a lump sum payment of $209,000
reflecting full advance payment of the Base Fee and (ii) $36,750 reflecting
advance payment of the Arc Percentage Fee. The agreement with Arc expires
September 30, 2011. The Company and Breaking Waves are entitled to terminate
the ARC Consulting Agreement any time after September 30, 2006, in which event
all prepaid fees are forfeited.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources (continued)
The following table summarizes the percentage due each party, as noted
above, as a percentage of net sales for the three months ended March 31, 2003:
% of
Net Sales Amount
--------------- ---------------
RAYA 0.58 $ 29,572
ZAT 1.16 59,143
ARC 1.75 89,225
--------------- ---------------
3.49 $ 177,940
=============== ===============
Interest expense related to the factor agreement totaled $144,027 and
$190,908 for the nine months ended March 31, 2003 and 2002, respectively.
Century has a secured interest in Breaking Waves' inventory as collateral for
the advances. As of March 31, 2003, the net advances to Breaking Waves from
Century amounted to $1,364,327.
On November 8, 2002, the Company borrowed the sum of $50,000 in the form
of a promissory note from Amigal Salit, Ltd., and unrelated party. The note
which is non-interest bearing is due on or before August 15, 2003.
On the same date, the Company entered into an agreement with ARC
Financial Corporation, whereby the Company using the proceeds received from
Amigal Salit, Ltd., agreed to pay $50,000 as an advance against fees to be
owned by Breaking Waves to ARC Financial Corporation in connection with
Breaking Waves obligation to pay certain fees to ARC as part of a consulting
agreement as described in Note 7 (b) herein. The consulting fees being paid in
advance under this agreement are those fees which would become due and payable
for the periods ending March 31, 2003 and March 31, 2003.
Investments in Joint Ventures
Battle Studies Productions, LLC
In April 1998, the Company entered into a co-production agreement with
North Fork Bank 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 cost 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 $425,000 of which the Company has funded approximately
$218,500. 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 cost incurred by
same, any remaining proceeds shall be distributed 50% to North Fork and 50% to
the Company. The film was shown in January 1999 in both New York and the
Brussels Film Festival.
The Company accounts for the investment in Battle Studies on the equity
method. For the nine months ended March 31, 2003 and 2002, the Company,
recorded no equity losses for its proportionate share of Battle Studies. No
revenues have been derived from this film as of March 31, 2003.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
On October 12, 2001, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures") to distribute
Battle Studies' motion picture ("Macheavelli 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
expense.
On January 17, 2002, Battle Studies entered into a distribution
agreement with KOAN to distribute and promote Battle Studies' motion picture
("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 March 31, 2003,
$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 video and
foreign distribution arrangements for the film.
Hollywood accounts for the investment in Girl LLC under the equity
method. Accordingly, as of March 31, 2003, the Company has recorded its
investment at $21,072. This represents its initial investment of $35,000 less
$13,928 of equity loss for its proportionate share of Girl LLC.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Lease Commitments
Shopnet and Breaking Waves jointly share their administrative offices
under a lease agreement signed July 2001 by Breaking Waves. Shopnet is
provided office space by Breaking Waves on a rent-free basis. The lease
agreement expires on September 30, 2007. Annual rent under this lease is
$84,915 through December 31, 2004 and $97,560 for the remainder of the
lease period. Additionally, Breaking Waves leases an offsite office for
one of its designers on a month to month basis with annual payments
approximating $13,200.
The approximate annual future minimum rentals under non-cancelable
operating lease signed by Breaking Waves are as follows:
For the fiscal year ended June 30:
2003 $ 35,228
2004 84,915
2005 90,338
2006 95,760
2007 95,760
Thereafter 23,940
-----------------
$ 425,941
=================
Rent expense for the nine months ended March 31, 2003 and 2002 amounted
to $81,646 and $94,508, respectively.
License Agreement
During June 2000, Breaking Waves entered into a license agreement with
an effective date of November 1, 2000 with Gottex Models Ltd., as 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
$113,019 and $68,430 for the nine months ended March 31, 2003 and March 31,
2002, respectively.
-30-
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, The Company's management including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure,
our disclosure controls and procedures were effective as of March 31, 2003,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect our internal controls subsequent
to March 31, 2003.
-31-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit
99.1 Certification by Harold Rashbaum, Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports
None
-32-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHOPNET.COM, INC.
By:/s/ Harold Rashbaum
Harold Rashbaum, President,
Chief Executive Officer and
Chief Financial Officer
Dated: May 16, 2003
-33-
CERTIFICATION
I, Harold Rashbaum, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Shopnet.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made know to me by other within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function);
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/s/ Harold Rashbaum
Harold Rashbaum
President
-34-