-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EqtZJwPPt/an/wPnjpvNQekpfri0PKSxqQb0UMjvAzxwNasCywqCnTf43fcOa/QE EAoNNY8gIEgTOljTZGP46Q== 0001017062-98-002518.txt : 19981228 0001017062-98-002518.hdr.sgml : 19981228 ACCESSION NUMBER: 0001017062-98-002518 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOPPING COM CENTRAL INDEX KEY: 0001045360 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 330733679 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-29518 FILM NUMBER: 98773937 BUSINESS ADDRESS: STREET 1: 2101 E COAST HIGHWAY GARDEN LEVEL CITY: CORONA DEL MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 7146404393 10QSB 1 FORM 10QSB DATED OCTOBER 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ____________ Commission file number: 000-29518 SHOPPING.COM (Exact name of Registrant as specified in its charter) CALIFORNIA 33-0733679 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2101 EAST COAST HIGHWAY, CORONA DEL MAR, CALIFORNIA 92625 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 640-4393 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of December 8, 1998, there were 6,013,664 shares of the Registrant's no par value common shares outstanding. 1 FORM 10-QSB For the Quarterly Period Ended October, 1998
Item Page - ---- ---- PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS (condensed) 4 Balance Sheet at October 31, 1998 4 Statements of Operations for the nine months ended October 31, 1997 and 1998 5 Statements of Cash Flows for the nine months ended October 31, 1997 and 1998 6 Notes to Financial Statements 7 2. MANAGEMENT DISCUSSION AND ANALYSIS 19 Forward Looking Statements 20 Overview 20 Results of Operations 22 Liquidity and Capital Resources 26 Employees 29 Factors That May Affect Future Performance 29 PART II. OTHER INFORMATION 1. Legal Proceedings 46 2. Changes in Securities 51 3. Defaults Upon Senior Securities 63 4. Submission of Matters to a Vote of Security Holders 63
2 5. Other Information 63 6. Exhibits and Reports on Form 8-K 64 Signatures 65 Exhibit Index 66
3 PART I - FINANCIAL INFORMATION --------------------- Item 1. Financial Statements -------------------- SHOPPING.COM BALANCE SHEET As of October 31, 1998 (Unaudited) ----------- ASSETS ------
Current assets Cash and cash equivalents $ 336,319 Accounts/ advances receivable, net 74,904 Other receivables 19,778 Prepaid expenses 507,794 Inventories 46,163 Current portion of loan origination fees 1,150,246 ----------- Total current assets 2,135,204 Furniture and equipment, net 2,957,455 Deposits 504,041 Other assets 29,534 ----------- Total assets $ 5,626,234 =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Current portion of capital lease obligation $ 224,527 Accounts payable 2,032,973 Subordinated notes payable 1,325,000 Notes payable 900,000 Secured promissory note 300,000 Convertible promissory note 500,000 Accrued legal fees and related costs 323,535 Accrued termination and severance 260,000 Other accrued liabilities 729,470 ----------- Total current liabilities 6,595,505 Capital lease obligation, net of current portion 151,682 8% convertible debentures 2,500,000 ----------- Total liabilities 9,247,187 ----------- Commitments and contingencies Shareholders' equity (deficit) Preferred stock, no par value, 5,000,000 share authorized, shares issued and outstanding - none -- Common stock, no par value, 20,000,000 shares authorized, 4,404,601 shares issued and outstanding 21,049,706 Accumulated deficit (24,670,659) ----------- Total shareholders' equity (deficit) (3,620,953) ----------- Total liabilities and shareholders' equity $ 5,626,234 ============
The accompanying notes are an integral part of these financial statements. 4 SHOPPING.COM STATEMENTS OF OPERATIONS (UNAUDITED)
3 MONTHS ENDED 9 MONTHS ENDED OCTOBER 31, OCTOBER 31, ---------------------------- ------------------------------ 1998 1997 1998 1997 Net sales $ 2,056,850 $ 321,281 $ 4,008,467 $ 376,822 Cost of sales 2,274,428 306,738 4,196,451 357,246 ----------- ------------ ------------ ----------- Gross profit (deficit) (217,578) 14,543 (187,984) 19,576 Operating expenses: Advertising and marketing 732,618 262,504 3,183,925 274,107 Product development 663,595 258,677 2,734,707 523,419 General and administrative 2,366,922 778,926 10,129,343 1,572,789 ----------- ------------ ------------ ----------- Total operating expenses 3,763,135 1,300,107 16,047,975 2,370,315 ----------- ------------ ------------ ----------- Loss from operations (3,980,713) (1,285,564) (16,235,959) 2,350,739 Other income (expense): Loss on disposition of assets -- -- (89,913) -- Interest Income 6,141 -- 54,127 -- Interest Expense (1,681,414) ( 36,811) (2,675,188) (43,349) ----------- ------------ ------------ ----------- Total other income (expense) (1,675,273) ( 36,811) (2,710,974) (43,349) ----------- ------------ ------------ ----------- Net Loss $(5,655,986) $ (1,322,375) $(18,946,933) $(2,394,088) =========== ============ ============ =========== Basic Loss Per Share $ (1.32) $ (.98) $ (4.67) $ (1.83) =========== ============ ============ =========== Diluted Loss Per Share $ (1.32) $ (.98) $ (4.67) $ (1.83) =========== ============ ============ =========== Weighted Average Shares Outstanding 4,298,814 1,350,217 4,053,523 1,305,321 =========== ============ ============ ===========
The accompanying notes are an integral part of these financial statements. 5 SHOPPING.COM STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 31,
1998 1997 ------------- ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities Net loss $(18,946,933) $(2,394,088) Adjustments to reconcile net loss to net cash used in operating activities Depreciation of furniture and equipment 477,151 71,622 Common stock issued for advertising 1,596,600 -- Amortization of loan origination fees 181,608 65,361 Amortization of deferred financing costs related to beneficial conversion feature of debentures 1,240,300 -- Amortization of deferred financing costs related to beneficial conversion feature of convertible debentures 262,500 -- Expense recognized from issuing below-market stock options 2,812,626 -- Expense recognized from issuing warrants below market value 1,017,318 -- Expense recognized from issuing common stock below market value -- 6,000 Loss on disposition of assets 89,913 Other 86,233 Issuance of Common Stock to pay expenses -- 48,000 Decrease (Increase) in prepaid expenses 561,627 (263,672) Decrease (Increase) in inventories (46,163) -- Decrease (Increase) in other assets (333,834) (101,858) Decrease (Increase) in accounts/advances receivable 72,480 (174,747) Decrease (Increase) in other receivables (2,221) -- Increase (Decrease) in accounts payable 1,183,259 973,191 Increase (Decrease) in other accrued liabilities 1,087,942 (20,577) ------------ ----------- Net cash used in operating activities (87,599,594) (1,790,768) ------------ ----------- Cash flows from investing activities Purchase of furniture and equipment (799,757) (1,370,816) ------------ ----------- Net cash used in investing activities (799,757) (1,370,816) ------------ ----------- Cash flows from financing activities -- -- Payments on note payable - related party -- (50,000) Proceeds from the issuance of notes payable 3,225,000 1,960,000 Payments on Notes Payable (200,000) -- Payments of loan origination fees (395,000) (234,000) Payments on capital lease obligations (63,510) 5,842 Proceeds from the issuance of preferred stock, Series A -- 200,000 Proceeds from the issuance of preferred stock, Series B -- 1,489,781 Proceeds from the issuance of 8% convertible debentures 2,500,000 -- Payment of offering costs -- (57,226) Proceeds from the issuance of common stock -- 25,000 ------------ ----------- 5,066,490 Net cash provided (used) by financing activities -- 3,327,713 ------------ ----------- Net increase (decrease) in cash (4,492,861) 166,129 Cash, beginning of period 4,829,180 63 ------------ ----------- Cash, end of period $ 336,319 $ 166,192 ============ ===========
The accompanying notes are an integral part of these financial statements. 6 SHOPPING.COM NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION - ------ The accompanying condensed financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information as contemplated by the SEC under Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The interim financial statements should be read in conjunction with the Company's January 31, 1998 annual report on Form 10-KSB. The results of operations for the nine months ended October 31, 1998 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 31, 1999. NOTE 2: FURNITURE AND EQUIPMENT - ------ Furniture and equipment consist of the following:
October 31, 1998 ---------------- Computer hardware $1,943,637 Computer software 1,297,882 Furniture & equipment 297,248 Leasehold improvements 102,708 ---------- 3,641,475 Less: Accumulated depreciation 684,020 ---------- $2,957,455 ==========
In October 1998, the Company purchased computer equipment for $40,000 from Waldron and Company, Inc., the underwriter for the Company's initial public offering. NOTE 3: ADVANCES - RELATED PARTIES - ------ During the quarter ended October 31, 1998, an officer was advanced $367 from the Company of which $367 was repaid during the quarter ended October 31, 1998. Total advances to related parties as of October 31, 1998 were $19,240 which was included in "Other receivables" in the balance sheet. 7 NOTE 4: CONSULTING FEES - RELATED PARTY - ------ For the three months ended October 31, 1998, the Company retained the services of certain consultants, which were also shareholders. Consulting expenses amounted to approximately $126,748 of which $40,348 was unpaid as of October 31, 1998. NOTE 5: SHAREHOLDERS' EQUITY - ------ In September 1998, the Company executed an agreement whereby it issued 66,667 shares of common stock for $1,000,000 of radio advertising based on the average fair market value of the common stock as of that date. The $596,600 of advertisements were aired during the three months ending October 31, 1998,and accordingly, $596,600 was expensed during the quarter ended October 31, 1998. The remaining balance of $403,400 of advertisements will be aired in subsequent quarters and will be expensed when aired. Up to 133,333 additional shares of common stock may be issuable under the radio advertising agreement on the one- year anniversary of the agreement, if on such date the average closing price of the Company's common stock for the previous ten days is less than $15.00 per share (as adjusted for any stock splits or recapitalizations). NOTE 6: PROMISSORY NOTES - ------ On May 15, 1998 the Company issued $1,225,000 of Promissory Notes, which have a due date of six months from the date of issuance. In addition, on June 30, 1998 the Company issued a $100,000 Promissory Note that is also due six months from the date of issuance. The Promissory Notes are unsecured, subordinated and carry an interest rate of 10% per annum. The Promissory Notes include issuances to certain existing shareholders of the Company. In connection with the issuance of the $1,225,000 of Promissory Notes, warrants to purchase 122,500 shares of Common Stock were issued which warrants are exercisable until May 15, 2001 at a below-market exercise price of $14.00 per share of Common Stock. In addition, warrants to purchase 10,000 shares of Common Stock were issued relating to the $100,000 Promissory Note dated June 30, 1998 which are exercisable until June 8, 2001 at a below-market exercise price of $14.00 per share of Common Stock. The exercise price of these warrants were below market at the time of issuance and will therefore result in additional interest charges of approximately $837,500 over the term of the Promissory Notes of which $331,875 was expensed as interest during the quarter ended July 31, 1998. In addition, the Company issued warrants to purchase 20,000 shares of Common Stock at a then below-market exercise price of $14.00 per share of Common Stock to Waldron & Co., Inc. for acting as the placement agent. These below-market warrants will result 8 in additional interest charges of approximately $80,000 over the term of the Promissory Notes of which $39,999 was expensed as interest during the quarter ended October 31, 1998. NOTE 7: CONVERTIBLE PROMISSORY NOTE - ------- On August 25, 1998, the Company issued a $500,000 Convertible Promissory Note which has a due date of six months from the date of issuance. The Convertible Promissory Note carries an interest rate of 8% per annum and may be converted for the principal and accrued interest into common stock at $10.00 per share. In connection with the issuance of the Convertible Promissory Note, the Company issued 50,000 warrants to purchase shares of common stock at an exercise price of $10.00 per share when the Company's common stock was trading at $15.25 per share. The warrants expire on August 20, 2001. Subsequently, on November 5, 1998, the Company agreed to revise the Convertible Promissory Note, Warrant Agreement, and Subscription Agreement to reflect an exercise price of $3.30 per share and a conversion price of $3.30 per share when the Company's common stock was trading at $1.97 per share. The Company also issued warrants to purchase 10,000 shares of common stock to Waldron for acting as the placement agent. The warrants issued to Waldron were issued under the same terms and conditions as the warrants issued with the Convertible Promissory Note. The exercise prices of these warrants was below market at the time of issuance and will therefore result in additional interest charges of approximately $315,000 over the term of the Convertible Promissory Note of which $131,250 was expensed as interest during the quarter ending October 31, 1998. In addition, the conversion price was below market at the time of the issuance and resulted in an additional charge of $262,500 on August 25, 1998 as the Convertible Promissory Note was available for conversion immediately upon the Company issuing the note. NOTE 8: SECURED PROMISSORY NOTE - ------- On September 15, 1998, the Company issued a Promissory Note in the amount of $500,000 which is due at the earlier of the Company receiving $500,000 in additional financing from another source or October 14, 1998. On October 13, 1998, the Company repaid $200,000. On November 2, 1998, the Company renegotiated the outstanding balance of $300,000 and entered into a new Note which is due at the earlier of the Company receiving $300,000 in additional financing from another source or December 2, 1998. Currently the Company is attempting to renegotiate the terms of the Note as the amount remains unpaid as of December 21, 1998. In connection with the previous negotiations and issuance of the $300,000 Promissory Note, the Company also issued 30,000 additional warrants to purchase shares of the Company's common stock at an exercise price of $1.65 when the Company's common stock was trading at $1.81 per share. These warrants expire on November 2, 2003. The exercise price of these warrants was below market at the time of issuance and will therefore result in additional interest charges of $4,860. One of the Company's directors is also a member of the Board of Directors of the corporation to which the Company issued the Promissory Note. The Promissory Note carries an interest rate of 10% per annum and is secured by a Non-Recourse Guaranty and Pledge Agreement by Mr. Robert J. McNulty, a consultant of the Company. In connection with the issuance of the original 9 $500,000 Promissory Note, the Company also issued 30,000 warrants to purchase shares of common stock at an exercise price of $2.25 per share. The warrants expire on September 15, 2003. On October 1, 1998, the Company borrowed $900,000 from three accredited investors. On November 10, 1998, this amount was repaid out of the proceeds received from the issuance of 8% Convertible Debentures in the principal amount of $2,500,000 that were received from the above transaction during November, 1998. NOTE 9: 8% CONVERTIBLE DEBENTURES - ------ In June, 1998 the Company entered into an agreement whereby the Company issued 8% Convertible Debentures due May 31, 2000 in the principal amount of $1,250,000. In addition, in July, 1998 the Company entered into an agreement whereby the Company issued 8% Convertible Debentures due July 10, 2000 in the principal amount of $1,250,000. The Company completed the second and final tranche of Debenture financing of $2,500,000 for a total of $5,000,000 during November 1998. The 8% Convertible Debentures (the "Debentures") are convertible into shares of Common Stock at a conversion price (the "Conversion Rate") not to exceed $16.00 per share (the "Base Rate"). The holders of the Debentures will receive one warrant to purchase a share of Common Stock for each two shares of Common Stock issued in connection with the corresponding conversion of the Debentures (the "Warrants"). The Warrants attributable to each conversion shall have an exercise price equal to the lesser of (a) 120% of the lowest market price for any three trading days prior to conversion or (b) 125% of the Base Rate. The Warrants expire on June 5, 2003. In connection with the issuance of the 8% Convertible Debentures, the Company issued certain below-market warrants and common stock to the placement agents and affiliates of the placement agents and made certain payments to placement agents, which resulted in the Company capitalizing such financing costs as loan origination fees on the balance sheet. These loan origination fees will be amortized as additional interest expense ratably over the term of the Debenture agreements, or until the Debentures are converted to common stock, at which time a charge to interest expense for the balance of any unamortized loan origination fees will be recorded as additional interest expense. The subsequent issuance of warrants by the Company allows the holders of the Debentures to convert at 90% of the Conversion Rate and to require the Company to redeem the Debentures or any portion of them for cash. The Company has the right to redeem all or any portion of the Debentures, subject to certain "Redemption Premium" provisions of the agreement. The holder of the Debentures may require the Company to redeem the outstanding portion of this Debenture if certain breaches occur. On November 16, 1998, the Company issued 300,000 warrants in connection with the issuance of 8% Convertible Debentures to purchase shares of the Company's common stock at an exercise price of $2.00 when the Company's common stock was trading at $7.25 per share. The exercise price of these warrants was below market at the time of issuance and will therefore result in additional interest charges of approximately $1,575,000. Subsequently in December 8% Convertible Debentures in the amount of $2,500,000 and the corresponding interest accrued thereon has been converted into shares of Common Stock in the aggregate amount of 1,790,389 shares of Common Stock. 10 NOTE 10: STOCK OPTIONS - ------- As of October 31, 1998, the Company had outstanding options and warrants to purchase an aggregate of 3,056,436 shares of Common Stock without giving consideration to any warrants that may be issued upon conversion of the 8% Convertible Debentures. NOTE 11: WARRANTS - ------- On September 24, 1998, the Company agreed to issue warrants to purchase 10,000 shares of the Company's common stock at an exercise price of $2.00 per share as consideration to Typhoon Capital Consultants for its services related to securing additional capital for the Company. NOTE 12: COMMITMENTS AND CONTINGENCIES - ------- CONSULTING AGREEMENTS On August 1, 1998, the Company entered into a one-year Consulting Agreement with Lorica Ltd. (the "Lorica Ltd. Agreement"). Pursuant to the Lorica Ltd. Agreement, Lorica Ltd. will receive $3,500 per month plus reimbursement for out- of-pocket expense for providing general consulting services relating to the merchandising operations and specifically relating to the sourcing of toys and games. Mr. Matthew Hill is the President of Lorica Ltd. and the son of Mr. Paul Hill, a Director of the Company. This agreement was subsequently terminated on October 1, 1998. EMPLOYMENT AND RESIGNATION AGREEMENTS On August 1, 1998, the Company entered into an agreement with Mr. Howard Schwartz to serve as Executive Vice President. The term of the agreement is for three years and is automatically renewed for one-year terms unless terminated by either party with written notice given by June 1 of any year beginning June 1, 2001. The agreement provides for a bi-weekly base salary of $5,385 for the first year, $7,692 for the second year and $8,461 for the third year. The agreement also provides that Mr. Schwartz will participate in a formula based bonus program to be approved annually by the Board of Directors and provides the opportunity to receive up to an amount equal to his base compensation for 11 exceeding the Company's annual business plan net profit. In addition, Mr. Schwartz will receive an automobile allowance of $1,000 per month. On December 2, 1998 Mr. Schwartz resigned as the Company's Executive Vice President, Finance and Administration. On August 31, 1998, Mr. Michael Miramontes resigned his employment effective June 12, 1998. Pursuant to a Resignation Agreement dated August 31, 1998 between the Company and Mr. Miramontes, Mr. Miramontes will receive one year's salary in the total amount of $162,000 of which $160,000 was accrued on the Company's Balance Sheet as of July 31, 1998 and the remaining $2,000 was additionally accrued during the quarter ended October 31, 1998. The Company will make equal installments of $13,067 beginning September 1, 1998 for a period of ten months. On September 30, 1998, Mr. Douglas Hay resigned as Executive Vice President and as a director effective September 30, 1998. Pursuant to a Resignation Agreement dated September 30, 1998 between the Company and Mr. Douglas Hay, Mr. Hay will receive a total amount of $80,000 which was accrued on the Company's Balance Sheet as of October 31, 1998. The Company agreed to make two equal payments of $20,000 payable on October 1 and November 1 and the remaining $40,000 will be paid equally on the first of each month December 1, 1998 through March 1, 1999. LEGAL PROCEEDINGS As more fully described in Part I of the Company's Annual Report on Form 10-KSB for the fiscal year ended January 31, 1998, Part II of the Company's Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1998 and Part II of this Form 10-QSB, the Company is subject to various litigation and SEC investigations. In March of 1998, the Company became aware that the Securities and Exchange Commission (the "SEC") had initiated a private investigation to determine whether the Company, Waldron & Co., Inc. ("Waldron"), then the principal market maker in the Company's stock, or any of their officers, directors, employees, affiliates or others had engaged in activities in connection with transactions in the Company's stock in violation of the federal securities laws. The SEC suspended trading in the Company's stock from 9:30 a.m. EST, March 24, 1998 through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the Securities Exchange Act of 1934. On April 30, 1998, the National Association of Securities Dealers ("NASD") permitted the Company's Common Stock to resume trading on the electronic bulletin boards beginning on April 30, 1998. Because the SEC has not alleged any violations, it is difficult to predict the outcome of their investigation. The Company continues, however, to fully cooperate with the SEC inquiry. Nevertheless, the investigation by the SEC and the attendant adverse publicity may not only reduce significantly the liquidity of that stock but also make it difficult for the Company to raise additional capital to continue its development and expansion. The inability of the Company to raise additional capital would have material adverse effect on the Company's business, prospects, financial condition and results of operations and may prevent the Company from carrying out its business plan. 12 On May 6, 1998 Steven T. Moore on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998 filed suit in United States District Court for the Central District of California alleging violations of the federal securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those firm's executives. The complaint charges that the defendants "participated in a scheme and wrongful course of business to manipulate the price of [the Company's] stock, which included: (i) defendant Waldron's refusal to execute sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal above-market buy-ins to intimidate and dissuade potential short sellers from selling [Company] stock short; (iv) the sale of [Company] shares to discretionary accounts without regard to suitability; and (v) the dissemination of materially false and misleading statements about [the Company's] operating performance and its future prospects." The complaint further alleges that the Company "secretly arranged to sell $250,000 of product to Waldron as part of defendants' effort to have [the Company] post revenue growth prior to the [Company's] planned [initial public offering]," that such sales constituted almost 25% of the Company's revenues between its inception and March 26, 1998 and that the Company did not disclose such sales or their significance in the Prospectus used in the Company's initial public offering. The plaintiff seeks compensatory damages in an unspecified amount, attorneys' fees and costs, injunctive relief, disgorgement or restitution of the proceeds of the Company's IPO and the defendants' profits from trading in the Company's stock, and the imposition of a constructive trust over the Company's revenues and profits. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The amended complaint has since been filed. On April 28, 1998, Abraham Garfinkel on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the United States District Court for the Central District of California alleging violation of the federal securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and Cery Perle, an affiliate of Waldron. The complaint alleges that defendants acted in concert with each other to manipulate the price of the Company's stock by, inter alia, "work[ing] closely with defendant McNulty on a weekly basis whereby defendant McNulty would pass the supposedly confidential information of those who had 'hit' or contacted Shopping's website." The complaint alleges that the defendants also manipulated the market by engaging in conduct similar to that alleged in the Martucci and Moore actions. The complaint also alleges that the Company's prospectus was misleading by the failure to disclose sales to Waldron as discussed above. The plaintiffs seek damages similar to that sought by Martucci and Moore. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The amended complaint has since been filed. 13 The second amended consolidated complaint filed in each of the federal court actions expands the class period from the period beginning November 25, 1997 and ending March 26, 1998 to the period beginning November 25, 1997 and ending August 30, 1998. Further, the second amended complaint has added counts for violation of sections 11 and 12(2) of the Securities Act of 1933, as amended, as well as section 9 of the Securities Exchange Act of 1934. On July 1, 1998, Mr. Garfinkel filed a companion state court complaint in the Orange County Superior Court based on virtually the same operative facts as the federal court claim . The state court action alleges claims for negligent misrepresentation, common law fraud and deceit as well as violation of sections 25400, 25402 and 25500 of the California Corporations Code. On April 16, 1998, Michael A. Martucci on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the California Superior Court for the County of Orange alleging violations of the California securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those firm's executives. The complaint charges that the defendants "participated in a scheme and wrongful course of business to manipulate the price of [the Company's] stock, which included: (i) defendant Waldron's refusal to execute sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal above-market buy-ins to intimidate and dissuade potential short sellers from selling [Company] stock short; (iv) the sale of [Company] shares to discretionary accounts without regard to suitability; and (v) the dissemination of materially false and misleading statements about [the Company's] operating performance and its future prospects." The complaint further alleges that the Company "secretly arranged to sell $250,000 of product to Waldron as part of defendants' effort to have [the Company] post revenue growth prior to the [Company's] planned [initial public offering]," that such sales constituted almost 25% of the Company's revenues between its inception and March 26, 1998 and that the Company did not disclose such sales or their significance in the Prospectus used in the Company's initial public offering. The plaintiff seeks compensatory damages in an unspecified amount, attorneys' fees and costs, injunctive relief, disgorgement or restitution of the proceeds of the Company's IPO and the defendants' profits from trading in the Company' s stock, and the imposition of a constructive trust over the Company's revenues and profits. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The amended complaint has since been filed. 14 On May 13, 1998, Kate McCarthy, on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the Orange County Superior Court alleging violation of the California securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that defendants acted in concert with each other to manipulate the price of the Company's stock by, inter alia, "work[ing] closely with defendant McNulty on a weekly basis whereby defendant McNulty would pass the supposedly confidential information of those who had 'hit' or contacted Shopping's website." The complaint alleges that the defendants also manipulated the market by engaging in conduct similar to that alleged in the Martucci and Moore actions. The complaint also alleges that the Company's prospectus was misleading by the failure to disclose sales to Waldron as discussed above. The plaintiffs seek damages similar to that sought by Martucci and Moore. The individual actions in Orange County superior Court have been consolidated as well. The plaintiffs have filed a second amended complaint which increased the class period to the period beginning November 25, 1997 and ending August 30, 1998. The amended pleading added causes of action for violation of California Corporations Code sections 25401 and 25501 against all defendants as well as sections 25504 and 25504.1 against defendants Robert J. McNulty and Douglas R. Hay. On or about March 27, Gladstone filed a complaint against the company as well as its underwriters in the United States District Court for the Southern district of New York contending that the Company's common stock was being manipulated in violation of federal securities laws. The plaintiffs seeks equitable relief in the form of a temporary restraining order and order to show cause regarding the issuance of a preliminary injunction to enjoin certain trading of the Company's stock. The plaintiffs also requested that they be given the right to conduct expedited discovery. On March 30, 1998, the federal court, the Hon. Edelstein presiding, denied the temporary restraining order, denied order to show cause, denied the request for expedited discovery and ordered the case transferred to the United States District Court for the Central District of California. The plaintiffs have filed a first amended complaint against the Company and Mr. McNulty in the United States District Court for the Central District of California which alleges the same claims as the New York federal court action. The Company has yet to respond to the amended pleading but will vigorously defend the same. The Company denies that it engaged in any of the acts alleged in any of the above complaints and intends to defend against these actions vigorously. Nonetheless, and despite the Company's insurance coverage for such actions, these class action suits may be very harmful to the Company. Diversion of management time and effort from the Company's operations and the implementation of the Company's business plan at this crucial time in the Company's development may adversely and significantly affect the Company and its business. The continued pendency of this litigation may make it difficult for the Company to raise additional capital to continue its development and expansion and to attract and retain talented executives. The inability of the Company to raise additional capital would have material adverse effect on the Company's business, prospects, financial condition and results of operations and may prevent the Company from carrying out its business plan. 15 On July 8, 1997, Brian Leneck, a former officer of the Company, resigned. By letter dated July 10, 1997, Robert McNulty, the former Chief Executive Officer of the Company, tendered payment to Leneck to buy back 140,000 shares of Common Stock of the Company pursuant to a shareholder agreement. Leneck rejected the tender, claiming that the amount was not the fair market value of the shares. On March 17, 1998, Leneck filed a lawsuit in Orange County Superior Court of California against the Company, Robert McNulty and three members of the Board of Directors at the time, Bill Gross, Edward Bradley and Paul Hill. Leneck's lawsuit seeks damages for breach of contract, conversion, and breach of fiduciary duty with respect to 70,000 shares. The Company believes that it has meritorious defenses, as well as affirmative claims, against Leneck and intends to vigorously protect its rights in this matter. On March 27, 1998, the Company filed a lawsuit in Orange County Superior Court against Leneck asserting, inter ----- alia, breach of contract, breach of implied covenant of good faith and fair - ---- dealing, fraud and deceit, declaratory relief and specific performance. Subsequently, the charges against Bill Gross, Edward Bradley and Paul Hill were dismissed with prejudice. On November 23, 1998 Ray Fisk filed a complaint against the Company for breach of contract arising out of that certain Unsecured Promissory Note dated May 15, 1998 in the principal sum of $50,000 due and payable on or about November 15, 1998. The Company does not dispute its obligation under the terms of the note. In a similar circumstance, the Company received correspondence dated December 17, 1998 from counsel to Daniel Kern, a noteholder who demanded payment on the principal sum of $100,000 together with accrued interest. The Company does not dispute this obligation. The noteholder also claims that the quiet filing of the Company's registration statement on Form S-1 is misleading because it fails to disclose that the Company could not or would not make payment on the note. The Company vigorously disputes this contention. Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois & Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice of Client's Right to Arbitration" in connection with legal services performed on behalf of the Company. The law firm claims legal fees and costs in the amount of $328,818.97 are due. The Company disputes the amount of fees owed and is in the process of exploring whether the matter can be informally resolved. However, the Company has accrued the claimed amount as of January 31, 1998. Though settlement negotiations have occurred, it is more probable than not that the Company will proceed with its election to have the matter submitted to arbitration before the Los Angeles County Bar Association. By written contracts dated December 12, 1997, the Company retained SoftAware, Inc. to provide facilities and services relative to the maintenance, location and supply of T1 lines to the Company's servers. Subsequent to the execution of the contracts, SoftAware, Inc. experienced a prolonged electrical outage which resulted in the disruption of Internet access and communications. Based upon this and other factors, the Company determined that SoftAware, Inc. was incapable of performing under the agreements and declined to proceed. By letter dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon the Company for $120,000.00 which purportedly reflected the compensatory damages SoftAware suffered as a direct and proximate result of the Company's refusal to proceed with performance under the contract. The Company rejected this demand and offered to reimburse SoftAware, Inc. for reasonable costs incurred in reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has rejected this offer and the parties are continuing settlement negotiations. 16 On September 12, 1998 the Company was served with a summons and complaint by MTS, Incorporated filed in Sacramento County Superior Court of California for damages arising out of the Company's as well as two other merchants' sale of the video "Titanic" at below cost thereby purportedly constituting violation of section 17043 and 17044 of California's Business and Professions Code as well as the California Unfair Business Practices Act (Cal. Bus. & Prof. Code section 17200 et. seq.). The complaint alleges damages in excess of $25,000.00, that sum trebled should a statutory violation be established, and attorneys' fees and costs. The Company has not had an opportunity to investigate the allegations of the complaint. Accordingly, a reasonable assessment of the Company's potential exposure cannot be made until such time as discovery is completed. The action will, however, require the engagement of defense counsel; and it is estimated that substantial attorney fees may be incurred should litigation proceed to trial. On December 4, 1998, the Company received correspondence from counsel for Yahoo! Inc. alleging breach of contract arising out of two agreements. Despite acknowledging receipt of $200,000 from the Company in connection with these contracts, it is contended that the alleged breach of the agreements entitles Yahoo! Inc. to recover damages in excess of $2 million. Though the Company has not had the opportunity to fully investigate Yahoo!'s demands, the entitlement and measure of damages are disputed. Nevertheless, a reasonable assessment of the Company's potential liability cannot be made at this time. The Company is involved in two other labor related disputes. Although it is not possible to predict the outcome of these disputes, or any future claims against the Company related hereto, the Company believes that such disputes will not, either individually or in the aggregate, have a material adverse effect on its financial condition or results of operations. As the outcome of these matters is uncertain and damages, if any, are not estimable and the Company believes its insurance coverage is adequate to cover any resulting liability, the Company did not maintain any reserves for such matters at October 31, 1998. 17 TERMINATION AND BUY-OUT AGREEMENT On June 1, 1998 Mr. McNulty resigned as President, Chief Executive Officer and Director of Shopping.com. Pursuant to a Termination and Buy-Out Agreement dated as of June 1, 1998 between the Company and Mr. McNulty, Mr. McNulty will receive $500,000, with $100,000 payable on or before July 31, 1998 and the balance due in $50,000 increments on or before each succeeding fiscal quarter end beginning October 31, 1998 until fully paid. Amounts payable under this agreement are payable on demand in one lump-sum payment at the option of Mr. McNulty upon thirty days written notice to the Company in the event a majority of the current members of the Board of Directors are replaced by new members. During the three month period ended October 31, 1998, $10,000 was paid in cash as of October 31, 1998 pursuant to Mr. McNulty's Termination and Buy-out Agreement thus leaving an unpaid balance of $40,000. On September 25, 1998, the Company approved the conversion of $350,000 of its liability related to the Robert McNulty Termination and Buy Out Agreement, as previously discussed in Note 4, for common stock at a market price of $1.37 (the stock price on September 25, 1998), resulting in an issuance by the Company of 255,474 common shares. In addition the remaining $40,000 liability as of October 31, 1998 was paid on December 7, 1998. NOTE 13: SUBSEQUENT ISSUANCES OF SECURITIES - ------- On October 1, 1998, the Company borrowed $900,000 from three accredited investors. On November 10, 1998, this amount was repaid out of the proceeds received from the issuance of 8% Convertible Debentures in the principal amount of $1,000,000 that was received during November, 1998. On November 16, 1998, the Company issued 300,000 warrants in connection with the issuance of 8% Convertible Debentures to purchase shares of the Company's common stock at an exercise price of $2.00 when the Company's common stock was trading at $7.25 per share. The exercise price of these warrants was below market at the time of issuance and will therefore result in additional interest charges of approximately $1,575,000. On December 8, 1998 Robert McNulty, the Company's former Chief Executive Officer and founder was issued warrants to purchase 130,000 shares of the Company's common Stock at an exercise price of $8.00 per share, the market price on the date of issuance. The warrants were issued to Robert McNulty, the Company's former CEO and founder who is a consultant to and affiliate of the Company, in consideration for a pledge of Mr. McNulty's stock as security for the $2,500,000 Promissory Note described below. On December 7, 1998 the Company entered into a Secured Promissory Note (the Note") in the amount of $2,500,000 which has been received net of related fees and commissions 18 for which the proceeds are being used to fund ongoing operations. The Note is secured by the intellectual property of the Company and certain shares of the Company's Common Stock held by Robert McNulty, the Company's former Chief Executive Officer and founder. The Note carries a 10% interest rate per annum and is due and payable thirty (30) days from the date of the Note; provided however, if within thirty (30) days from the date of this Note, certain conditions are met the Payee would have the right at its option until January 10, 1999 to convert the principal amount of the Note together with all accrued but unpaid interest into preferred stock. The Company issued warrants to purchase 500,000 shares of Common Stock at an exercise price of $7.00 per share in connection with the Secured Promissory Note. The warrants have a term of three years. In December 1998 the Company issued 1,790,389 shares of Common Stock pursuant to terms of conversion related to the 8% Convertible Debentures in the principal amount of $2.5 million and accrued interest thereon. In addition, on December 10, 1998 the Company entered into an Agreement for A Private Equity Line of Common Stock and Warrants Pursuant to Regulation D. The commitment amount is $60 million, with an optional $40 million add-on, with Swartz Private Equity, LLC. On November 6, 1998 warrants to purchase 18,767 shares of the Company's Common Stock were granted to Mark Asdourian, the Company's General Counsel. The warrants have an exercise price of $1.781 per share which was the market price on the date of grant. The warrants expire on November 6, 2003. On November 6, 1998, Frank Denny, the Company's Chairman of the Board was granted options to purchase 1,000,000 shares of the Company's Common Stock as compensation for services to the Company. The options have an exercise price of $1.781 per share which was the market price on the date of grant. One-third of the options vest fully upon issuance, one-third vest on the first anniversary of the date of grant and the remainder vest on the second anniversary of the date of grant. The options expire five years from the date of grant. On November 6, 1998 options to purchase 25,000 shares of the Company's Common Stock were granted to each of Paul Hill, Ed Bradley and John Markley, each a Director of the Company. The options have an exercise price of $1.781 per share which was the market price on the date of grant. The options are fully vested upon issuance and have a term of five years. On November 6, 1998, options to purchase 347,000 shares of the Company's Common Stock were granted to certain employees, including senior management, under the Company's Stock Option Plan of 1997, as amended June 1998. The options have an exercise price of $1.781 per share which was the market price on the date of grant. Options to purchase 200,000 shares are fully vested upon issuance and the remainder vest one-fourth on each anniversary of the date of grant for four years. As of December 14, 1998 (the "Date of Issuance"), the Company issued warrants to purchase 490,385 shares of the Company's common stock at an exercise price of $8.375 per share to Swartz Private Equity, LLC ("Swartz") in consideration for Swartz entering into the Regulation D Common Stock Private Equity Line Subscription Agreement (hereinafter referred to as "Private Equity Line of Common Stock and Warrants Pursuant to Regulation D"). The warrants expire seven years after the Date of Issuance. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes thereto appearing elsewhere herein. 19 FORWARD LOOKING STATEMENTS The following statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" include "forward looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. The forward looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. All statements, trends, analyses and other information contained in this report relative to the actual future results of the Company could differ materially from those projected in the forward looking information. For a discussion of certain factors that could cause actual results to differ materially from those projected by the forward looking information, see "Factors That May Affect Future Performance" herein. Except as required by law, the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Readers, however, should carefully review the factors set forth in other reports or documents that the Company files from time to time with the SEC. OVERVIEW Shopping.com (the "Company") began operations in February, 1996, was incorporated on November 22, 1996 and commenced selling on the Internet on July 11, 1997. The Company is an innovative Internet-based electronic retailer ("E- retailer") specializing in retail marketing a broad range of products and services at wholesale prices to both consumer and trade customers. Utilizing proprietary technology, the Company has designed a fully-scalable systems architecture for the Internet shopping marketplace. The Company's management team combines the experiences of: . Executives with extensive background in both retail and warehouse/discount store formats. . Executives who have experience in computer and information systems design and development. . Directors with entrepreneurial skills who currently oversee and manage their own existing companies. The Company began generating sales on July 11, 1997. For the nine months ended October 31, 1998, the Company has generated sales of $4,009,314. The Company anticipates that sales from the Company's site on the Internet on the World Wide Web ("Web Site") will constitute substantially all of the Company's sales. Over the next twelve 20 months, the Company intends to increase its revenues by pursuing an aggressive advertising and marketing campaign aimed at attracting customers to shop on its Web Site and to co-brand with other commercial partners which will help increase the Company's brand name recognition as well as increase traffic on the Company's Web Site. The Company must seek additional financing estimated at $14 million over the next twelve months in order to sustain operations or achieve planned expansion. This figure is lower than previously anticipated due to the Management's change in the Company's choice of advertising media. Previously, the Company had used portal advertising which Management has subsequently determined is not as effective as using "referral site" advertising. Therefore, Management has changed its planned advertising expenditures and program to primarily utilize referral site advertising thus reaping the benefits of substantially lower advertising costs. The funding is anticipated to come from the Company entering into an agreement on December 10, 1998 for a Private Equity Line of Common Stock and Warrants Pursuant to Regulation D. The commitment amount is $60 million, with an optional $40 million add-on, with Swartz Private Equity, LLC. There can be no assurance that such additional funds will be available or that, if available, such additional funds will be on terms acceptable to the Company. The Company anticipates that its operations will incur significant operating losses for the foreseeable future. The Company believes that its success will depend upon its ability to increase obtain sales on its Web Site significantly over the next twelve months, which cannot be assured. The Company's ability to generate sales is subject to substantial uncertainty. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as online commerce. Such risks for the Company include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks, the Company must, among other things, obtain a customer base, implement and successfully execute its business and marketing strategy, continue to develop and upgrade its technology and transaction-processing systems, improve its Web Site, provide superior customer service and order fulfillment, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks; and the failure to do so could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Additionally, the Company's lack of an operating history makes predictions of future operating results difficult to ascertain. Accordingly, there can be no assurance that the Company will be able to generate sales, or that the Company will be able to achieve or maintain profitability. Since inception, the Company has incurred significant losses and, as of October 31, 1998, had an accumulated deficit of approximately $25 million. The Company substantially increased its operating expenses over the past quarter in order to, among other things, fund increased advertising and marketing efforts, expand and improve its Internet operations and user support capabilities, and develop new Internet content and applications. The Company expects to continue to incur significant operating expenses 21 on a quarterly and annual basis for the foreseeable future. To the extent such increases in operating expenses are not offset by revenues, the Company will continue to incur significant losses. The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of the Company's control. See "Factors That May Affect Future Performance - Unpredictability Of Future Revenues; Potential Fluctuations In Quarterly Operating Results; Seasonality." In seeking to effectively implement its business plan, the Company may elect, from time to time, to make certain marketing or acquisition decisions that could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Due to all of the foregoing factors, it is likely that in some future quarters, the Company's results of operations may be below the expectations of securities analysts and shareholders. In such event, the price of the Company's Common Stock could be materially adversely affected. RESULTS OF OPERATIONS The following is a discussion of the results of operations for the three months ended October 31, 1998. While the Company is providing some comparisons of its results of operations with the prior year, such comparisons may have a limited utility as the Company only commenced selling products over the Internet on July 11, 1997. Net Sales
Quarter Ended Nine Months ------------- ----------- Ended ----- - --------------------------------------------------------------------------------------------------- October 31, 1998 October 31, 1997 % Change October 31, 1998 October 13, 1997 % Change - ------------------- ---------------- -------- ---------------- ----------------- -------- - --------------------------------------------------------------------------------------------------- 2,056,850 321,281 540 4,008,467 376,822 964 - ---------------------------------------------------------------------------------------------------
Although the Company commenced operations in February 1996, it did not begin selling products and services on its Web Site until July 11, 1997 prior to which time it was still in the process of evaluating the technical features of its Web Site. For the nine months ended October 31, 1998, the Company generated net sales of $4,008,467. Net sales are composed of the selling price of merchandise sold by the Company, net of returns, and includes freight charged to the Company's customers. Growth in net sales reflects a significant increase over the prior year primarily due to the growth of the Company's customer base, as well as reflecting a full nine months of sales whereas in 1997 the Company only began selling on the Internet July 11, 1997. The sole source of funds for the Company from the date of inception through October 31, 1998, other than the sale of equity and debt securities, has been from sales of products. For the three months ended 22 October 31, 1998, sales of $1,758, which was less than 1% of the Company's net sales during the quarter ended October 31, 1998, were sales to Waldron & Co., Inc. ("Waldron"), the Company's former underwriter and market maker. Such sales consisted primarily of computer equipment and office supplies and some of these transactions allowed the Company to generate higher gross margins. The Company had sales to various shareholders which each were less than 1% of net sales of the Company for the three months ended October 31, 1998. The Company believes that it is not dependent upon Waldron or any other customer, related or otherwise, and that the loss of Waldron as a customer would not have a material adverse impact on the Company. The Company expects the sales to any one customer will continue to decline as a percentage of total sales. The Company's business model is based on a low profit margin coupled with a large volume of sales to a broad customer base. The Company records sales at the time products are shipped to customers, which includes the retail sales price of the product and any shipping and handling charges billed to its customers. Cost of Sales
Quarter Ended Nine Months ------------- ----------- Ended ----- - --------------------------------------------------------------------------------------------------- October 31, 1998 October 31, 1997 % Change October 31, 1998 October 31, 1997 % Change - ------------------- ---------------- -------- ---------------- ----------------- -------- - --------------------------------------------------------------------------------------------------- $2,274,428 $306,738 641 $4,196,451 $357,246 1,075 - ---------------------------------------------------------------------------------------------------
Cost of sales include the actual cost the Company pays its vendors for the products and the actual shipping and handling charges incurred by the Company to ship products to its customers. The cost of sales for the three months ending October 31, 1998 was $2,274,428 or approximately 110.6% of net sales. The Company's gross profit deficit was approximately a negative 10.6% for the three months ended October 31, 1998. The Company experienced a negative gross margin due, in part, from the unavailability of certain products as well as the inability and unwillingness of certain vendors to extend adequate credit to handle the increased volume. These products were obtained through other channels of distribution and from alternate suppliers at higher prices. In addition, the Company encountered additional price competition from other E-commerce retailers in several product categories. Finally, the decline in the Company's gross margin was due primarily to an overall increase in the percentage of sales for those products and categories which had highly promotional pricing such as computers and consumer electronics. The failure to generate sales with sufficient margins to cover its operating expenses will result in losses and could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. 23 Advertising and Marketing Expenses
Quarter Ended Nine Months ------------- ----------- Ended ----- - --------------------------------------------------------------------------------------------------- October 31, 1998 October 31, 1997 % Change October 31, 1998 October 31, 1997 % Change - ------------------- ---------------- -------- ---------------- ----------------- -------- - --------------------------------------------------------------------------------------------------- $ 732,618 $262,504 179 $3,183,925 $274,107 1,062 - ---------------------------------------------------------------------------------------------------
Advertising and marketing expenses consist primarily of media costs related to advertising, promotion and marketing literature. Advertising and marketing expenses incurred by the Company for the three months ending October 31, 1998 were $732,618 or approximately 35.6% of net sales. Of this amount, $596,000 was paid by issuing shares of the Company's Common Stock. The Company intends to significantly increase its advertising and marketing expenses in future periods, including utilizing the remaining balance of advertising purchased with the issuance of Common Stock in exchange for $1,000,000 of advertising to run during the fourth quarter ending January 31, 1999. While the Company is hopeful that its net sales will also increase in future periods so that its advertising and marketing expense will represent a decreasing percentage of net sales, the Company is not able to predict whether its sales will increase by a sufficient amount for this to occur. Furthermore the Company anticipates that it will take advantage of referral site advertising. No assurance can be given that the Company will achieve increased net sales or that marketing expense will decrease as a percentage of sales. Product Development Expenses
Quarter Ended Nine Months ---------------- ---------------- Ended ----- - -------------------------------------------------------------------------------------------------- October 31, 1998 October 31, 1997 % Change October 31, 1998 October 31, 1997 % Change - ------------------- ---------------- -------- ---------------- ---------------- -------- - -------------------------------------------------------------------------------------------------- $ 663,595 $258,677 157 $2,734,707 $523,419 422 - --------------------------------------------------------------------------------------------------
Product development expenses consist primarily of costs incurred by the Company to develop and enhance its Web Site. Product development expenses include compensation and related expenses, depreciation and amortization of computer hardware and software, and the cost of acquiring, designing, developing and editing Web Site content. Product development expenses incurred by the Company for the three months ended October 31, 1998 were approximately $663,595 or approximately 32.3% of net sales. The increase of product development expenses from the same periods in prior years was primarily related to the utilization of additional temporary personnel to enhance features, content and functionality of the Company's Web Site, transaction processing systems and proprietary customer service software. However, utilization of such personnel and, as a result, product development expense have decreased from the quarter ended July 31, 1998. The Company believes that significant investments in enhancing its Web Site will be necessary to become and remain competitive. As a result, the Company may continue to incur, or increase the level of, product development expenses. 24 General and Administrative Expenses
Quarter Ended Nine Months ------------- ----------- Ended ----- - -------------------------------------------------------------------------------------------------- October 31, 1998 October 31, 1997 % Change October 31, 1998 October 31, 1997 % Change - ------------------- ---------------- -------- ---------------- ---------------- -------- - -------------------------------------------------------------------------------------------------- $2,366,922 $778,926 204 $10,129,343 $1,572,789 544 - --------------------------------------------------------------------------------------------------
General and administrative expenses consist primarily of compensation, rent expense, fees for professional services and other general corporate expenses. General and administrative expenses incurred by the Company for the three months ended October 31, 1998 were $2,366,922, or approximately 115.1% of net sales. The Company recorded $80,000 of nonrecurring expenses related to the resignation of the Company's former Executive Vice President, of which $60,000 remains payable as of October 31, 1998. The increase in such expenses from the previous year resulted primarily from the Company commencing actual sales including hiring additional personnel to handle the increased volume. General and administrative expenses should significantly increase in future periods if the Company is successful in raising additional capital and able to, among other things, increase hiring and expansion of facilities. In addition, the Company experienced an increase in expenses related to legal and other professional fees incurred by the Company from prior periods. Interest Income and Expense
Quarter Six Months ------- ---------- Ended Ended ----- ----- - ------------------------------------------------------------------------------------------ October October October October 31, 31, % 31, 31, % 1998 1997 Change 1998 1997 Change ----------- ----------- ------- ----------- ----------- ---------- - ------------------------------------------------------------------------------------------ Interest Expense $1,681,414 $36,811 4,468 $2,675,188 $43,349 6,071 - ------------------------------------------------------------------------------------------ Interest Income $ 6,141 -0- N/A $ 54,127 -0- N/A - ------------------------------------------------------------------------------------------
Interest income on cash and cash equivalents was $6,141 or approximately .30% of net sales. Interest income earned was due to the Company having certain interest-bearing cash and cash equivalents accounts and decreased from the previous quarter due to lower cash and cash equivalent balances. Interest expense for the three months ended October 31, 1998 was $1,681,414 or approximately 81.7% of net sales and is partially attributable to accrued interest on Promissory Notes and 8% Convertible Debentures. In addition the noncash charge related to the issuance of below market stock warrants along with the charge for the below market beneficial conversion associated with the 8% Convertible Debentures. In addition the Company has had to incur additional general and administrative expenses related to professional fees related to being a public company, defending actions brought against the Company and expertise required to raise additional capital. 25 LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity were cash and cash equivalents derived from public and private sales of the Company's equity and debt securities. The sole source of funds for the Company from the date of inception through October 31, 1998, other than the sale of equity and debt securities, has been from sales of product. Capital expenditures from February 1, 1998 through October 31, 1998, were $799,757. The Company has current and long-term capital lease obligations for certain office equipment, the aggregate amount of which, as of October 31, 1998 was $376,208. The Company anticipates a substantial increase in its capital expenditures in 1998 consistent with its anticipated growth; provided that the Company is able to raise sufficient capital to fund that growth. The Company experienced a net loss of $18,946,933 and generated net sales of $4,008,467 for the nine month period ended October 31, 1998. THE COMPANY'S ABILITY TO SURVIVE AND GROW FOR THE IMMEDIATE FUTURE WILL DEPEND ON THE COMPANY'S ABILITY TO RAISE ADDITIONAL CAPITAL FROM PUBLIC OR PRIVATE EQUITY OR DEBT SOURCES. IN ADDITION, THE COMPANY BELIEVES THAT IT WILL NEED TO PROMPTLY RAISE ADDITIONAL FUNDS IN ORDER TO AVAIL ITSELF OF ANY UNANTICIPATED OPPORTUNITIES (SUCH AS MORE RAPID EXPANSION, ACQUISITIONS OF COMPLEMENTARY BUSINESSES OR THE DEVELOPMENT OF NEW PRODUCTS OR SERVICES), TO REACT TO UNFORESEEN DIFFICULTIES (SUCH AS THE LOSS OF KEY PERSONNEL OR THE REJECTION BY INTERNET USERS OF THE COMPANY'S WEB SITE CONTENT) OR TO OTHERWISE RESPOND TO UNANTICIPATED COMPETITIVE PRESSURES. THE COMPANY HAS USED RATHER THAN PROVIDED CASH FROM ITS OPERATIONS. THESE FACTORS RAISE A SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. IN VIEW OF THE MATTERS DESCRIBED ABOVE, RECOVERABILITY OF A MAJOR PORTION OF THE COMPANY'S RECORDED ASSET AMOUNTS IS DEPENDENT UPON THE COMPANY'S ABILITY TO RAISE SUFFICIENT CAPITAL TO FUND ITS WORKING CAPITAL REQUIREMENTS UNTIL THE COMPANY CAN GENERATE SUFFICIENT SALES VOLUME TO COVER ITS OPERATING EXPENSES. Given its lack of operating history and the uncertainty of the Company's ability to continue as a going concern, certain vendors of products sold by the Company are not prepared to advance normal levels of credit to the Company. In addition, a lack of available cash on hand has forced the Company to delay payment to most of its vendors exacerbating the unwillingness of vendors to extend credit to the Company. Such unwillingness to extend credit along with a substantial increase in product volume has caused the Company to exceed its current credit limits, resulting in some vendors refusing to ship to the Company's customers prior to payment. This has in turn slowed delivery to customers, putting the Company at a competitive disadvantage and increasing customer complaints. While the Company has increased its credit lines with some of its vendors and is working to resolve its credit problems with most of its vendors, a lack of capital to finance the Company's operations along with a large volume of sales may cause the Company to once again exceed its current credit limits. Subsequent to October 31, 1998, the Company entered into various agreements related to the issuance of debt and equity securities which include the issuance of a $500,000 Convertible Promissory Note on August 25, 1998 which has a due date of six months from the date of issuance. The Convertible Promissory Note carries an interest rate of 8% per annum and may be converted for the principal and accrued interest into common stock at $10.00 per share. In connection with the issuance of the Convertible Promissory Note, the Company issued 50,000 warrants to purchase shares of common stock at an exercise price of $10.00 per share when the Company's common stock was trading at $15.25 per share. The warrants expire on August 20, 2001. Subsequently, on November 5, 1998, the Company agreed to revise the Convertible Promissory Note, Warrant Agreement, and Subscription Agreement to reflect an exercise price of $3.30 per 26 share and a conversion price of $3.30 per share when the Company's common stock was trading at $1.97 per share. The Company also issued warrants to purchase 10,000 shares of common stock to Waldron for acting as the placement agent. The warrants issued to Waldron were issued under the same terms and conditions as the warrants issued with the Convertible Promissory Note but were subsequently revised. The exercise price of these warrants were below market at the time of issuance and will therefore result in additional interest charges of approximately $315,000 over the term of the Convertible Promissory Note. In addition, the conversion price was below market at the time of the issuance and resulted in an additional charge of $262,500 on August 25, 1998 as the Convertible Promissory Note is available for conversion immediately upon the issuance of the Note. On September 15, 1998, the Company issued a Promissory Note in the amount of $500,000 which became due at the earlier of the Company receiving $500,000 in additional financing from another source or October 14, 1998. During October, 1998, the Company repaid $200,000. On November 2, 1998, the Company renegotiated the outstanding balance of $300,000 and entered into a new Note which is due at the earlier of the Company receiving $300,000 in additional financing from another source or December 2, 1998. In connection with the renegotiations and issuance of the $300,000 Promissory Note, the Company also issued 30,000 additional warrants to purchase shares of the Company's common stock at an exercise price of $1.65 when the Company's common stock was trading at $1.81 per share. These warrants expire on November 2, 2003. The exercise price of these warrants was below market at the time of issuance and will therefore result in additional interest charges of $4,860. As of December 21, 1998 the Company has not repaid the $300,000 and is currently negotiating to extend the terms of the $300,000 Promissory Note. One of the Company's directors is also a member of the Board of Directors of the corporation to which the Company issued the Promissory Note. The Promissory Note carries an interest rate of 10% per annum and is secured by a Non-Recourse Guaranty and Pledge Agreement by Mr. Robert J. McNulty, a consultant of the Company. In connection with the issuance of the original $500,000 Promissory Note, the Company also issued 30,000 warrants to purchase shares of common stock at an exercise price of $2.25 per share. The warrants expire on September 15, 2003. The Company's 10% unsecured Promissory Notes in the principal amount of $1,225,000 were due on November 15, 1998 together with accrued interest thereon. In addition, the Company had a $100,000 Promissory Note come due in December 1998. The Company has not paid the amounts due, which constitutes an Event of Default under the terms of the Notes. The Company is negotiating with certain of the noteholders to either extend the term of the Notes or convert the Notes to equity. A few noteholders have expressed an interest in converting their notes to equity, while others remain insistent upon payment. On November 16, 1998, the Company issued 300,000 warrants in connection with the issuance of 8% Convertible Debentures to purchase shares of the Company's common stock at an exercise price of $2.00 when the Company's common stock was trading at $7.25 per share. The exercise price of these warrants was below market at the time of issuance and will therefore result in additional interest charges of approximately $1,575,000. As of October 31 1998, the Company's available cash and cash equivalents was minimal. Subsequent to October 31, 1998, the Company issued an additional $2,500,000 of 8% Convertible Debentures (the "Debentures) to existing Debenture holders. The Company received net proceeds of approximately $2,175,000 of which $900,000 was 27 used to repay certain existing debts and the balance was used to fund ongoing operations. At the present time, the Company's available cash and cash equivalents is sufficient to sustain operations through the Company's fiscal year ending January 31, 1999. On December 7, 1998 the Company entered into a Secured Promissory Note (the "Note") in the amount of $2,500,000 which has been received net of related fees and commissions, the proceeds of which are being used to fund ongoing operations. The Note is secured by the intellectual property of the Company and certain shares of the Company's Common Stock held by Robert McNulty, the Company's former Chief Executive Officer and founder. The Note carries a 10% interest rate per annum and is due and payable thirty (30) days from the date of the Note; provided, however, if within thirty (30) days from the date of this Note, certain conditions are met, the Payee would have the right at its option until January 10, 1999 to convert the principal amount of the Note together with all accrued but unpaid interest into preferred stock. Mr. McNulty, currently a consultant to and affiliate of the Company, was granted warrants to purchase 130,000 shares of the Company's Common Stock at an exercise price of $8.00 per share in consideration for his pledge of his Common Stock as security for the Note. In addition, on December 10, 1998 the Company entered into an Agreement for A Private Equity Line of Common Stock and Warrants Pursuant to Regulation D. The commitment amount is $60 million, with an optional $40 million add-on, with Swartz Private Equity, LLC ("Swartz"). Pursuant to such agreement and subject to some limitations, the Company may periodically require Swartz to purchase a number of shares equal to as much as 25% of the sum of the daily reported trading volumes in the outstanding Common Stock on the OTC Bulletin Board over a twenty trading day period following the date designated in the Company's election to draw down on the line. However, the Company may only require such a purchase after a registration statement for the resale of such shares becomes effective. It is not anticipated that proceeds from this agreement will be available to repay the Secured Promissory Note in the principal amount of $2,500,000 when such note becomes due and payable on January 6, 1999. The Company is currently seeking additional financing to meet that obligation. The Management of the Company believes that its current cash on hand will be sufficient to sustain current operations for the fiscal year ending January 31, 1999 excluding repayment of debt. The Company anticipates that if it can satisfy the conditions to the funding of the Private Equity Line of Common Stock and Warrants, it will have sufficient cash flow to sustain operations for the fiscal year ending January 31, 2000. However, if it is unable to satisfy those conditions, the Company would need to seek additional funds in order to sustain its ongoing operations. There can be no assurance that such capital resources will be available or, if available, that such funding will be on terms acceptable to the Company. In addition, the pendency of lawsuits and the attendant adverse publicity and the recent volatility in the market price of the Company's common stock may not only reduce significantly the liquidity of the Company's stock but also make it difficult for the Company to raise additional capital to sustain its operations and achieve its planned expansion. See "Factors That May Affect Future Performance - SEC Investigation, Interruption Of Trading and Shareholder Litigation." If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the Company's then existing shareholders will be reduced. Moreover, shareholders may experience additional and significant dilution, and 28 such equity securities may have rights, preferences or privileges senior to those of the Company's Common Stock. These factors raise a substantial doubt about the Company's ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the Company's recorded asset amounts is dependent upon the Company's ability to raise sufficient capital to fund its working capital requirements until the Company can generate sufficient sales volume to cover its operating expenses. EMPLOYEES As of December 11, 1998, the Company employed 121 full-time and 19 part- time employees. This is an increase from January 31, 1998, when the number of employees was 67 full time and 9 part time employees. The Company believes that its future success will depend in part on its ability to attract, hire and maintain qualified personnel. However, the Company believes there will not be a significant increase in employees over the next twelve months. Competition for such personnel in the on-line industry is intense. None of the Company's employees are represented by a labor union, and the Company has never experienced a work stoppage. The Company believes its relationship with its employees to be good. FACTORS THAT MAY AFFECT FUTURE PERFORMANCE The Company's business, financial condition and results of operations may be impacted by a number of factors including, without limitation, the factors discussed below. The Need for Additional Capital - ------------------------------- The Company must seek additional financing in order to sustain operations or achieve planned expansion. The Company anticipates that it needs to raise at least $14 million during the next twelve months in the form of debt and/or equity investments in the Company's securities in order to sustain operations or achieve planned expansion. This figure is lower than previously anticipated due to Management's change in the Company's choice of advertising media. Previously, the Company had used portal advertising, which Management has subsequently determined is not as effective as using "referral site" advertising. Therefore, Management has changed its planned advertising expenditures and program to primarily utilize referral site advertising thus reaping the benefits of substantially lower advertising costs. In addition, the Company must seek additional financing in order to repay debt now due and payable or coming due in fiscal 1999. Subsequent to October 31, 1998 the Company had $1,325,000 of unsecured promissory notes (the "Notes") come due which remains unpaid at this time. Currently the Company is negotiating with several of the promissory note holders to extend the terms of their notes or convert their notes to equity. The Company does not expect that all the holders will be willing to convert their notes. The Notes were due in November 15, 1998. As of December 20, 1998 the total arrearage on the Notes including interest was approximately $1,468,000. The Company is also negotiating with USFI regarding extending the terms of their secured promissory note in the amount of $300,000 which came due December 2, 1998. As of December 2, 1998 the total arrearages on the USFI note was approximately $305,000. In addition, the Secured Promissory Note in the principal amount of $2,500,000 becomes due and payable on January 6, 1999. There can be no assurance that such additional funds will be available or that if available, such additional funds will be on terms acceptable to the Company. 29 Limited Operating History; Accumulated Deficit; Anticipated Losses; Ability to - ------------------------------------------------------------------------------ Continue as a Going Concern - --------------------------- The Company commenced operations in February, 1996, was incorporated on November 22, 1996 and began selling products on its Web Site on July 11, 1997. Accordingly, the Company has a limited operating history on which to base an evaluation of its business and prospects. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly expanding markets such as online commerce. Such risks for the Company include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks, the Company must, among other things, obtain a customer base, implement and successfully execute its business and marketing strategy, continue to develop and upgrade its technology and transaction-processing systems, improve its Web Site, provide superior customer service and order fulfillment, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Since inception, the Company has incurred significant losses, and as of October 31, 1998 had an accumulated deficit of approximately $25 million. The Company believes that its success will depend in large part on its ability to (i) obtain wide-spread name recognition, (ii) provide its customers with an outstanding value and a superior shopping experience, (iii) achieve sufficient sales volume to realize economies of scale, and (iv) successfully coordinate the fulfillment of customer orders without the need to maintain expensive real estate warehousing facilities and personnel. Accordingly, the Company intends to invest heavily in marketing and promotion, site development and technology and operating infrastructure development. The Company also intends to offer attractive pricing programs, which will result in low or even negative gross margins from time to time. Because the Company has relatively low gross margins, achieving profitability depends upon the Company's ability to generate and sustain substantially increased sales levels. As a result, the Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred may increase significantly from current levels based primarily on marketing expenditures and the timing of those expenditures. The Company incurred a net loss of $201,697 and had negative cash flows from operations during the year ended January 31, 1997 of $136,546, and had a shareholders deficit of $78,647 as of January 31, 1997. For the year ended January 31, 1998 the Company had net losses totaling $5,522,029, negative cash flows from operations of $4,842,628 and an accumulated shareholder's equity of $6,580,236. Management raised capital during 1997 and 1998 through private placement offerings of equity and debt 30 securities and completed an initial public offering in the latter part on 1997, which provided funding to continue present operations, marketing and development activities. The Company has used a portion of the net proceeds of its initial public offering to fund its operating losses. As of January 31, 1998, the Company had approximately $4.8 million remaining of the net proceeds as of April 30, 1998, the Company had approximately $1.4 million remaining. As of July 31, 1998, the Company had used all of the proceeds from the Company's initial public offering. For the nine months ended October 31, 1998, the Company had net losses totaling $18,946,933, negative cash flows from operations of $8,759,594 and an accumulated deficit of $24,670,659. Although the Company has obtained additional financing subsequent to its initial public offering, the proceeds of such financing, together with cash generated by operations, will be insufficient to fund the Company's anticipated operating losses and repay its current debt until its sales increase to a sufficient level to cover operating expenses. Accordingly, in order to continue to sustain operations and implement its business plan, the Company must raise additional funds. There can be no assurance that such financing will be available, if at all, in amounts or on terms acceptable to the Company. In addition, the investigation by the SEC of trading in the Company's stock, the pendency of several class action suits against the Company, and related adverse publicity may also make it difficult for the Company to raise additional capital to continue its development. See "Legal Proceedings." Unpredictability of Future Revenues; Potential Fluctuations in Quarterly - ------------------------------------------------------------------------ Operating Results; Seasonality - ------------------------------ As a result of the Company's limited operating history and the emerging nature of the markets in which it competes, the Company is unable to accurately forecast its revenues. The Company's current and future expense levels are based largely on its investment plans and estimates of future revenues. Sales and operating results generally depend on the volume of, timing of, and ability to fulfill orders received, which are difficult to forecast. The Company anticipates its revenues will be insufficient to fund its operations on an ongoing basis until revenues grow substantially. Furthermore, the Company will not be able to adjust spending in a timely manner to compensate for the anticipated revenue shortfall. Accordingly, any significant shortfall in revenues in relation to the Company's planned expenditures could have an immediate adverse effect on the Company's business, prospects, financial condition and results of operations. The Company expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside the Company's control. Factors which may adversely effect the Company's quarterly operating results include: (i) the Company's ability to obtain and retain customers, attract new customers at a steady rate, maintain customer satisfaction and establish consumer confidence in conducting transactions on the Internet environment, (ii) the Company's ability to manage fulfillment operations electronically and without warehouse facilities and to establish 31 competitive gross margins, (iii) the announcement or introduction of new Web Sites, services and products by the Company and its competitors, (iv) price competition or higher vendor prices coupled with fluctuations in payment terms, (v) the level of use and consumer acceptance of the Internet and other online services for the purchase of consumer products such as those offered by the Company, (vi) the Company's ability to upgrade and develop its systems and infrastructure and attract new personnel in a timely and effective manner, (vii) the level of traffic on the Company's Web Site, (viii) technical difficulties, system downtime or Internet brownouts, (ix) the amount and timing of operating costs and capital expenditures relating to the expansion of the Company's business, operations and infrastructure, (x) delays in revenue recognition at the end of a fiscal period as a result of shipping or logistical problems, (xi) the level of merchandise returns expected by the Company, (xii) governmental regulation and taxation, (xiii) economic conditions specific to the Internet and online commerce, and (xiv) general economic conditions. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions that could have a material adverse effect on its business, prospects, financial condition and results of operations. The Company expects that it will experience seasonality in its business, reflecting a combination of seasonal fluctuations in Internet usage and traditional retail seasonality patterns. Internet usage and the rate of Internet growth may be expected to decline during the summer. Further, sales in the traditional retail industry are significantly higher in the quarter of each year ending January 31 than in the preceding three quarters. Due to the foregoing factors, in one or more future quarters, the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of the Common Stock would likely be materially adversely affected. Risk of Capacity Constraints; Reliance on Internally Developed Systems; System - ------------------------------------------------------------------------------ Development Risks - ----------------- A key element of the Company's strategy is to generate a high volume of traffic on, and use of, its Web Site. Accordingly, the satisfactory performance, reliability and availability of the Company's Web Site, transaction-processing systems and network infrastructure are critical to the Company's reputation and its ability to attract and retain customers, as well as maintain adequate customer service levels. The Company's revenues depend on the number of visitors who shop on its Web Site and the volume of orders it fulfills. Any systems interruptions that result in the unavailability of the Company's Web Site or reduced order fulfillment process would reduce the volume of goods sold and the attractiveness of the Company's product and service offerings. The Company may experience periodic systems interruptions from time to time. Currently, the Company is experiencing a significant increase in customer telephone inquiries 32 regarding pending orders resulting in an overload of its telephone system. The telephone system requires major enhancements immediately to handle the current telephone volume. Any substantial increase in the volume of traffic on the Company's Web Site or the number of orders placed by customers will require the Company to expand and upgrade further its technology, transaction-processing systems and network infrastructure. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its Web Site or timely expand and upgrade its systems and infrastructure to accommodate such increases. The Company uses a combination of industry supplied software and internally developed software and systems for its Web Site, search engine, and substantially all aspects of transaction processing, including order management, cash and credit card processing, shipping and accounting and financial systems. Any substantial disruptions or delays in any of its systems would have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Risk of System Failure; Single Site and Order Interface - ------------------------------------------------------- The Company's success, in particular its ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of its computer and communications hardware systems. Substantially all of the Company's computer and communications hardware is located at a single leased facility in Corona del Mar, California. Although the Company has redundant and back-up systems onsite and a disaster recovery plan, the Company's systems and operations may be vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break- ins, earthquake and similar events. The Company does not carry business interruption insurance sufficient to compensate fully for any or all losses from any or all such occasions. Despite the implementation of network security measures by the Company, including a proprietary firewall, its servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Management of Potential Growth; New Management Team; - ---------------------------------------------------- Limited Senior Management Resources - ----------------------------------- The Company has rapidly and significantly expanded its operations, and anticipates that further significant expansion will be required to address potential growth in its customer base and market opportunities. This expansion has placed, and is expected to continue to place, a significant strain on the Company's management, operations and financial resources. From January 31, 1997 to January 31, 1998, the Company expanded 33 from 4 employees to 67 full time and 9 part time employees, respectively, and has since grown to 121 full time and 19 part time employees as of December 11, 1998. Some of the Company's senior management joined the Company within the last year, and some officers have no prior senior management experience at public companies. The Company's new employees include a number of managerial, technical and operations personnel who have not yet been fully integrated into the Company's operations. To manage the increase in personnel and the expected growth of its operations, the Company will be required to improve existing, and implement new, transaction-processing, operational and financial systems, procedures and controls, and to train and manage its already expanded employee base. Although the Company believes that there will not be a significant increase in the number of employees over the next twelve months, the Company may be required to increase its finance, administrative and operations staff. Further, the Company's management will be required to maintain and expand its relationships with various manufacturers, distributors, freight companies, other Web Sites, other Internet Service Providers and other third parties necessary to the Company's operations. There can be no assurance that the Company's current and planned personnel, systems, procedures and controls will be adequate to support the Company's future operations, that management will be able to hire, train, retain, motivate and manage required personnel or that the Company's management will be able to successfully identify, manage, and exploit existing and potential market opportunities. If the Company is unable to manage growth effectively, its business, prospects, financial condition and results of operations would be materially adversely affected. Dependence of Continued Growth of Online Commerce - ------------------------------------------------- The Company's future revenues and any future profits are substantially dependent upon the widespread acceptance and use of the Internet and other online services as an effective medium of commerce by consumers. Rapid growth in the use of and interest in the Web, the Internet and other online services is a recent phenomenon, and there can be no assurance that acceptance and use will continue to develop or that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and other online services as a medium of commerce. Demand and market acceptance for recently introduced products and services over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. The Company relies, and will continue to rely, on consumers who have historically used traditional means of commerce to purchase merchandise. For the Company to be successful, these consumers must accept and utilize novel ways of conducting business and exchanging information. In addition, the Internet and other online services may not be accepted as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the Internet and other online services continue to experience significant growth in the number of users, their 34 frequency of use or an increase in their bandwidth requirements, there can be no assurance that the infrastructure for the Internet and other online services will be able to support the demands placed on them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services to support the Internet or other online services could also result in slower response times and adversely affect usage of the Internet and other online services generally and Shopping.com in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than expected, if the infrastructure for the Internet and other online services does not effectively support growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, the Company's business, prospects, financial condition, and results of operations would be materially adversely affected. Rapid Technological Change - -------------------------- To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of the Shopping.com online store. The online commerce industry is characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render the Company's existing Web Site and proprietary technology and systems obsolete. The Company's future success will depend, in part, on its ability to license leading technologies useful in its business, enhance its existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of its prospective customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of a Web Site and other proprietary technology entails significant technical and business risks. There can be no assurance that the Company will successfully use new technologies effectively or adapt its Web Site, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If the Company is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, its business, prospects, financial condition and results of operations would be materially adversely affected. Year 2000 - --------- The Company will be interacting with certain computer programs in connection with credit card transactions and programs used by the Company's vendors and suppliers. These programs may refer to annual dates only by the last two digits, e.g., "97" for "1997." Problems are anticipated to arise for many of these programs in the year 2000 35 ("Year 2000 Problems"). The Company has taken this problem into account with respect to its own internal programs and believes that its own internal software is not susceptible to Year 2000 Problems. However, the Company has not made a formal assessment of programs used by service providers or other third parties, including the financial institutions processing credit card transactions, with which the Company may have to interact, nor the Company's vulnerability which may result from any such party's failure to remediate their own Year 2000 issues. There can be no guarantee that the systems of other companies on which the Company relies will be converted timely and will not have an adverse effect on the Company's systems and the Company's business, prospects, financial condition and results of operations. All of the information systems that have been designed and integrated into the Company's infrastructure were built to be Year 2000 compliant. The company believes that at the present time, substantially all of its information systems are year 2000 compliant and that additional costs to bring the systems to full compliance will not be significant. The Company is in the process of implementing a general ledger and financial accounting software package which has received Year 2000 certification. The Company recognizes that it could be exposed to some risk arising from vendors or suppliers who may not be Year 2000 compliant. In these instances, the Company may have to implement system modifications to handle these issues when data is exchanged. The Company believes that the additional costs to implement such system modifications will not be significant. The Company currently does business with over four hundred vendors and suppliers. The Company believes that due to its ongoing practice of multiple product sourcing, no one vendor or supplier would have a material effect on the Company's business, results of operations, or financial condition if they do not timely become Year 2000 compliant. SEC Investigation and Shareholder Litigation - -------------------------------------------- The Company is party to an ongoing investigation by the Securities and Exchange Commission ("SEC") and various lawsuits, each discussed more fully herein under "Legal Proceedings." The Company is devoting management time and effort in its cooperation with the SEC investigation and its vigorous defense of the lawsuits to which it is a party. Diversion of management time and effort from the Company's operations and the implementation of the Company's business plan may adversely and significantly affect the Company and its business. The continued pendency of litigation may make it difficult for the Company to raise additional capital to continue its development and expansion and to attract and retain talented executives. 36 Debentures, Warrants and Options; Potential Dilution and - -------------------------------------------------------- Adverse Impact on Additional Financing - -------------------------------------- As of December 8, 1998, the Company had outstanding options and warrants to purchase an aggregate of 5,998,146 shares of Common Stock. The Company is also obligated to issue a currently indeterminate number of shares of Common Stock upon conversion of the Debentures and exercise of the warrants issued in connection with the Debentures (the "Warrants"). The exact number of shares of Common Stock issuable pursuant to such conversion cannot be estimated with certainty because, generally, such issuances of Common Stock will vary inversely with the market price of the Common Stock at the time of such conversion. The Debentures are also subject to various adjustments to prevent dilution resulting from stock splits, stock dividends or similar transactions. Further, the Company may, at its election, choose to issue additional shares of Common Stock in lieu of cash payments of accrued interest due to the holders of the Debentures. If all of the Debentures had been converted and the Warrants issued to the holders of the Debentures had been exercised on October 31, 1998, the Company would have been obligated to issue 7,500,000 shares of Common Stock in respect thereto, exclusive of interest on the Debentures and shares issuable upon exercise of the Warrants issued to the placement agent. Between November 25, 1998 and December 8, 1998, Debentures in the aggregate principal amount of $2,500,000 were converted, principal and interest, for an aggregate total of 1,790,389 shares of Common Stock. Each holder of the Debentures has agreed contractually not to convert the Debentures to the extent that such conversion would result in such holder and its affiliates beneficially owning more than 9.99% of the then outstanding Common Stock unless at such time the Company is in default under any provision of the Debentures or under the relevant Securities Purchase Agreement between the Company and the holder of the Debentures, or any of the agreements contemplated therein. The issuance of securities subsequent to the issuance of the Debentures and prior to the end of an agreed upon period allows the holders of the Debentures to convert into Common Stock at 90% of the conversion rate originally agreed upon. In addition, the holders of the Debentures may require the Company to immediately redeem all outstanding Debentures or any portion outstanding in cash. The volatility of the trading price of the Company's Common Stock may affect dilution associated with the exercise of warrants or conversion of convertible securities. Even if exercise prices and conversion rates are fixed at or in relation to the market price at the time of issuance, they are frequently adjusted in the event that securities are subsequently issued at a lower price. As the trading price fluctuates and the Company continues to rely on equity financing, the Company may be required to issue securities at prices which cause such adjustments to exercise prices or conversion rates and possibly increase the dilution of the interests of the Company's shareholders upon the exercise or conversion of any such convertible securities. See "--Volatility of Stock Price." To the extent that such options and warrants are exercised, shares of Common Stock are issued in lieu of payment of accrued interest or the Debentures are converted, substantial dilution of the interests of the Company's shareholders is likely to result and the market price of the Common Stock may be materially adversely affected. Such dilution will be greater if the future market price of the Common Stock decreases. For the life of the warrants, options and Debentures, the holders will have the opportunity to profit from a rise in the price of the Common Stock. The existence of the warrants, options and Debentures is likely to affect materially and adversely the terms on which the Company can obtain additional financing and the holders of the warrants, options and Debentures can be expected to exercise them at a time when the Company would otherwise, in all likelihood, be able to obtain additional capital by an offering of its unissued capital stock on terms more favorable to the Company than those provided by the warrants, options and Debentures. 37 Dependence on Key Personnel; Need for Additional Personnel - ---------------------------------------------------------- The Company's performance is substantially dependent on the continued services and on the performance of its senior management and other key personnel, particularly Frank Denny, the Chairman of the Board of Directors, and Mark S. Winkler, its Chief Information and Technology Officer. The Company's performance also depends on the Company's ability to retain and motivate its other officers and key employees. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. The Company has entered into written employment agreements with Mr. Markley for three years terminating on May 31, 2001, and with Mr. Winkler for one year ending May 20, 1998 which subsequently renewed for one year pursuant to an automatic renewal provision therein. Under his employment agreement, Mr. Winkler may only be terminated for "cause." The Company has decided not to maintain a $1,000,000 "key man" life insurance policy on the life of Mr. Markley. The Company's future success depends on its ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to successfully attract, assimilate and retain sufficiently qualified personnel. In particular, the Company may encounter difficulties in attracting and retaining a sufficient number of software developers for its Web Site and transaction-processing systems, and there can be no assurance that the Company will be able to retain and attract such developers. The investigation by the SEC, the pending class action litigation, and the attendant adverse publicity may also make it difficult for the Company to attract such developers and other qualified personnel to the Company. See "Legal Proceedings." The failure to attract and retain the necessary technical, managerial, editorial, merchandising, marketing and customer service personnel could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Online Commerce Security Risks - ------------------------------ A significant barrier to online commerce and communications is the need for secure transmission of confidential information over public networks. The Company relies on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as credit card numbers. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the algorithms used by the Company to protect customer transaction data. A party who is able to circumvent the Company's security measures could misappropriate confidential information or cause interruptions in the Company's operations. The Company may be required to expend significant capital and other resources to protect against such security breaches or to 38 alleviate problems caused by such breaches. If any such compromise of the Company's security were to occur, it could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Concerns over the security of transactions conducted on the Internet and other online services as well as users' desires for privacy may also inhibit the growth of the Internet and other online services generally, and the Web in particular, especially as a means of conducting commercial transactions. The activities of the Company and third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers and other confidential information. Any such security breaches could damage the Company's reputation and expose the Company to a risk of loss, litigation and/or possible liability. There can be no assurance that the Company's security measures will prevent security breaches or that failure to prevent such security breaches will not have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Merchants on the Internet are subject to the risk of credit card fraud and other types of theft and fraud perpetrated by hackers and online thieves. Credit card companies may hold merchants fully responsible for any fraudulent purchases made when the signature cannot be verified. Although credit card companies and others are in the process of developing anti-theft and anti-fraud protections, and while the Company itself is continually monitoring this problem and developing internal controls, at the present time the risk from such activities could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Risks of International Expansion - -------------------------------- The Company is currently contemplating expanding its presence in Europe and other foreign markets. To date, the Company has limited experience in sourcing, marketing and distributing products on an international basis and in developing localized versions of its Web Site and other systems. In the event that the Company should seek to expand its operations overseas, the Company believes that it would incur significant costs in establishing international facilities and operations, in promoting its name internationally, in developing localized versions of its Web Site and other systems and in sourcing, marketing and distributing products in foreign markets. There can be no assurance that the Company's international efforts would be successful. If the revenues resulting from international activities were inadequate to offset the expense of establishing and maintaining foreign operations, such inadequacy could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. In addition, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export and import restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, political instability, fluctuations in currency exchange rates, seasonal 39 reductions in business activity in other parts of the world and potentially adverse tax consequences, any of which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors would not have a material adverse impact on the Company's future international operations and, consequently, on the Company's business, prospects, financial condition and results of operations. Competition - ----------- The online commerce industry, particularly on the Internet, is new, rapidly evolving and intensely competitive. The Company expects such competition to intensify in the future. Barriers to entry are minimal, allowing current and new competitors to launch new Web Sites at a relatively low cost. The Company currently or potentially competes with a variety of other companies. These competitors include: (i) various online vendors of other consumer and trade products and services such as CUC International, Amazon.com, ONSALE, Peapod, Netgrocer, iMALL, Internet Shopping Network, Micro Warehouse, CDNow, QVC and Home Shopping Network; (ii) a number of indirect competitors that specialize in online commerce or receive a substantial portion of their revenues from online commerce, including America Online, Microsoft Network, Prodigy, and Compuserve; (iii) mail order catalog operators such as Spiegel, Lands End, and Sharper Image; (iv) retail and warehouse/discount store operators such as Wal-Mart, Home Depot, Target and Price/Costco; and (v) other international retail or catalog companies which may enter the online commerce industry. Both Wal-Mart and Home Depot have announced their intention to devote substantial resources to online commerce at discount prices, which, if successful, could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. However, the Company believes that retail and discount/warehouse operators will be somewhat restricted in their ability to lower prices by the need to protect their own pricing strategy to avoid cannibalizing their own store margins. The Company believes that the principal competitive factors in its market are price, speed of fulfillment, name recognition, wide selection, personalized services, ease of use, 24-hour accessibility, customer service, convenience, reliability, quality of search engine tools, and quality of editorial and other site content. Many of the Company's current and potential competitors have longer operating histories, larger customer bases, greater brand name recognition and significantly greater financial, marketing and other resources than the Company. In addition, online retailers may be acquired by, receive investments from or enter into other commercial relationships with larger, well- established and well-financed companies as use of the Internet and other online services increases. Certain of the Company's competitors may be able to secure merchandise from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to Web Site and systems development than the Company. 40 Increased competition may result in reduced operating margins, loss of market share and a diminished franchise value. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and competitive pressures faced by the Company may have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. Further, as a strategic response to make changes in the competitive environment, the Company may, from time to time, make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on its business, prospects, financial condition and results of operations. New technologies and the expansion of existing technologies may increase the competitive pressures on the Company. In addition, companies that control access to transactions through network access or Web browsers could promote the Company's competitors or charge the Company a substantial fee for inclusion. Reliance on Certain Suppliers and Shippers - ------------------------------------------ Unlike retail and warehouse/discount store operators and certain online commerce providers, the Company, as an E-retailer, carries no inventory, has no warehouse employees or facilities, and relies on rapid fulfillment from its vendors. The Company has no long term contracts or arrangements with any of its vendors or shippers that guarantee the availability of merchandise, the continuation of particular payment terms, the extension of credit limits or shipping schedules. There can be no assurance that the Company's current vendors will continue to sell merchandise to, or that shippers will be able to provide delivery service for, the Company on current terms or that the Company will be able to establish new, or extend current, vendor and shipper relationships to ensure acquisition and delivery of merchandise in a timely and efficient manner and on acceptable commercial terms. If the Company were unable to develop and maintain relationships with vendors and shippers that would allow it to obtain sufficient quantities of merchandise on acceptable commercial terms, or in the event of labor disputes or natural catastrophes, its business, prospects, financial condition and results of operations would be materially adversely affected. Availability of Merchandise; Vendor Credit for the Company - ---------------------------------------------------------- Although the Company's merchandising division maintains relationships with vendors which it believes will offer competitive sources of supply, and believes that other sources are available for most of the merchandise it will sell or may sell in the future, there can be no assurance that Shopping.com will be able to obtain the quantity of brand or quality of items that management believes are optimum. The unavailability of certain product lines could adversely impact the Company's operating results. Given its lack of operating history and the uncertainty of the Company's ability to continue as a going concern, certain vendors of products sold by the Company are not prepared to advance normal levels of credit to the Company. In addition, a lack of available cash on hand has forced the Company to delay payment to most of its vendors exacerbating the unwillingness of vendors to extend credit to the Company. Such unwillingness to extend credit along with a substantial increase in product volume has caused the Company to exceed its current credit 41 limits, resulting in some vendors refusing to ship to the Company's customers prior to payment. This has in turn slowed delivery to customers, putting the Company at a competitive disadvantage and increasing customer complaints. While the Company has increased its credit lines with some of its vendors and is working to resolve its credit problems with most of its vendors, a lack of capital to finance the Company's operations along with a large volume of sales may cause the Company to once again exceed its current credit limits. The interruption of the trading of the Company's stock on the over-the-counter bulletin board during March and April, 1998 made vendors reluctant to extend credit to the Company. In addition, the investigation by the SEC and the continuation of the attendant adverse publicity may continue to make vendors reluctant to extend credit to the Company. Risks Associated with Entry into New Business Areas - --------------------------------------------------- The Company may choose to expand its operations by developing new Web Sites, promoting new or complementary products or sales formats, expanding the breadth and depth of products and services offered or expanding its market presence through relationships with third parties. Although it has no present understandings, commitments or agreements with respect to any material acquisitions or investments, the Company may pursue the acquisition of new or complementary businesses, products or technologies. There can be no assurance that the Company would be able to expand its efforts and operations in a cost- effective or timely manner or that any such efforts would increase overall market acceptance. Furthermore, any new business or Web Site launched by the Company that is not favorably received by consumer or trade customers could damage the Company's reputation or the Shopping.com brand name. Expansion of the Company's operations in this manner would also require significant additional expenses and development, operations and editorial resources and would strain the Company's management, financial and operational resources. The lack of market acceptance of such efforts or the Company's inability to generate satisfactory revenues from such expanded services or products could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Limited Protection of Intellectual Property and Proprietary Rights - ------------------------------------------------------------------ The Company regards its Shopping.com name and related technology as proprietary and relies primarily on a combination of copyright, trademark, trade secret and confidential information laws as well as employee and third-party non-disclosure agreements and other methods to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect against technologies that are substantially equivalent or superior to the Company's technologies. The Company does not currently hold any patents or have any patent applications pending for itself or its products and has not obtained federal registration for any of its trademarks. The Company enters into non- disclosure and invention assignment agreements with certain of its employees and also enters into non-disclosure agreements with certain of its consultants and subcontractors. However, there can be no assurance that such measures will protect the Company's proprietary technology, or that its competitors will not develop software with features based upon, or otherwise similar to, the Company's software or that the Company will be able to prevent competitors from developing similar software. 42 The Company believes that its products, trademarks and other proprietary rights do not infringe on the proprietary rights of third parties. The Company has been displaying its Web Site on the Internet without receiving claims from third parties that its products or names infringe on any proprietary rights of other parties. However, the Company is a recent entrant in the sale of merchandise on the Internet, and there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products, trademarks or other Company works. Such assertion may require the Company to enter into royalty arrangements or result in costly litigation. The Company is also dependent upon obtaining additional technology related to its operations. To the extent new technological developments are unavailable to the Company on terms acceptable to it, or at all, the Company may be unable to continue to implement its business and any such inability would have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Governmental Regulation and Legal Uncertainties - ----------------------------------------------- The Company is not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to access to online commerce. However due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for the Company's products and services and increase the Company's cost of doing business, or otherwise have a material adverse effect on the Company's business, prospects, financial condition, and results of operations. Moreover, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Permits or licenses may be required from federal, state or local government authorities to operate or to sell certain products on the Internet. No assurances can be made that such permits or licenses will be obtainable. The Company may be required to comply with future national and/or international legislation and statutes regarding 43 conducting commerce on the Internet in all or specific countries throughout the world. No assurances can be made that the Company will be able to comply with such legislation or statutes. Sales and Other Taxes - --------------------- The Company does not currently collect sales or other similar taxes with respect to shipments of goods to consumers into states other than California. However, one or more states may seek to impose sales tax collection obligations on out-of-state companies such as the Company, which engage in online commerce. In addition, any new operation in states outside California could subject shipments into such states to state sales taxes under current or future laws. A successful assertion by one or more states or any foreign country that the Company should collect sales or other taxes on the sale of merchandise could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Risks Associated with Domain Names - ---------------------------------- The Company currently holds various Web domain names relating to its brand, including the "Shopping.com" domain name. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. For example, in the United States, the National Science Foundation has appointed Network Solutions, Inc. as the exclusive registrar for the ".com", ".net", and ".org" generic top-level domains. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, there can be no assurance that the Company will be able to acquire or maintain relevant domain names in all countries in which it conducts business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. The Company, therefore, may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of its trademarks and other proprietary rights. Any such inability could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Risks of Business Combinations and Strategic Alliances - ------------------------------------------------------ The Company may choose to expand its operations or market presence by entering into business combinations, investments, joint ventures or other strategic alliances with third parties. Any such transactions would be accompanied by the risks commonly encountered in such transactions. These include, among others, the difficulty of assimilating operations, technology and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key 44 technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls and policies and the impairment of relationships with existing employees and customers. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such business combinations, investments, joint ventures or other strategic alliances, or that such transactions will not have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Volatility of Stock Price - ------------------------- The trading price of the Common Stock has been highly volatile and subject to wide fluctuations and is likely to remain so in response to factors such as actual or anticipated variations in quarterly operating results, announcements of technological innovations, new sales formats or new products or services by the Company or its competitors, changes in financial estimates by securities analysts, conditions or trends in the Internet and online commerce industries, changes in the market valuations of other Internet, online service or retail companies, announcements by the Company of significant acquisitions, strategic partnerships, joint ventures or capital commitments, additions or departures of key personnel, sales of Common Stock and other events or factors, many of which are beyond the Company's control. In addition, the stock market in general, and the market for Internet-related and technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks reflect price earnings ratios substantially above historical levels. There can be no assurance that these trading prices and price earnings ratios will be sustained. These broad market and industry factors may materially and adversely affect the market price of the Common Stock, regardless of the Company's operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Additional such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Shares Eligible for Future Sale - ------------------------------- Sales of substantial amounts of the Company's Common Stock in the public market after any conversion of the 8% Convertible Debentures into shares of the Company's Common Stock and any registration of such shares could adversely affect prevailing market prices for the Common Stock. Such shares of Common Stock will be freely tradeable without restriction in the public market. As a consequence, the ability of the Company to raise any additional financing which may be needed by the Company or the 45 ability to raise such additional financing on terms acceptable to the Company may be adversely affected. PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- In March of 1998, the Company became aware that the Securities and Exchange Commission (the "SEC") had initiated a private investigation to determine whether the Company, Waldron & Co., Inc. ("Waldron"), then the principal market maker in the Company's stock, or any of their officers, directors, employees, affiliates or others had engaged in activities in connection with transactions in the Company's stock in violation of the federal securities laws. The SEC suspended trading in the Company's stock from 9:30 a.m. EST, March 24, 1998 through 11:59 p.m. EDT on April 6, 1998 pursuant to Section 12(k) of the Securities Exchange Act of 1934. On April 30, 1998, the National Association of Securities Dealers ("NASD") permitted the Company's Common Stock to resume trading on the electronic bulletin boards beginning on April 30, 1998. Because the SEC has not alleged any violations, it is difficult to predict the outcome of their investigation. The Company continues, however, to fully cooperate with the SEC inquiry. Nevertheless, the investigation by the SEC, and the attendant adverse publicity may not only reduce significantly the liquidity of that stock but also make it difficult for the Company to raise additional capital to continue its development and expansion. The inability of the Company to raise additional capital would have material adverse effect on the Company's business, prospects, financial condition and results of operations and may prevent the Company from carrying out its business plan. On May 6, 1998 Steven T. Moore on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998 filed suit in United States District Court for the Central District of California alleging violations of the federal securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those firm's executives. The complaint charges that the defendants "participated in a scheme and wrongful course of business to manipulate the price of [the Company's] stock, which included: (i) defendant Waldron's refusal to execute sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal above-market buy-ins to intimidate and dissuade potential short sellers from selling [Company] stock short; (iv) the sale of [Company] shares to discretionary accounts without regard to suitability; and (v) the dissemination of materially false and misleading statements about [the Company's] operating performance and its future prospects." The complaint further alleges that the Company "secretly arranged to sell $250,000 of product to Waldron as part of defendants' effort to have [the Company] post revenue growth prior to the [Company's] planned [initial public offering]," that such sales constituted almost 25% of the Company's revenues between its inception and March 26, 1998 and that the Company did not disclose such sales or their significance in the Prospectus used in the Company's initial public offering. The plaintiff seeks compensatory damages in an unspecified amount, attorneys' fees and costs, injunctive relief, disgorgement or restitution of the proceeds of the Company's IPO and the defendants' profits from trading in the Company's stock, and the imposition of a constructive trust over the Company's revenues and profits. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The second amended complaint has since been filed. 46 On April 28, 1998, Abraham Garfinkel on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the United States District Court for the Central District of California alleging violation of the federal securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and Cery Perle, an affiliate of Waldron. The complaint alleges that defendants acted in concert with each other to manipulate the price of the Company's stock by, inter alia, "work[ing] closely with defendant McNulty on a weekly basis whereby defendant McNulty would pass the supposedly confidential information of those who had 'hit' or contacted Shopping's website." The complaint alleges that the defendants also manipulated the market by engaging in conduct similar to that alleged in the Martucci and Moore actions. The complaint also alleges that the Company's prospectus was misleading by the failure to disclose sales to Waldron as discussed above. The plaintiffs seek damages similar to that sought by Martucci and Moore. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The second amended complaint has since been filed. The second amended consolidated complaint filed in each of the federal court actions expands the class period from the period beginning November 25, 1997 and ending March 26, 1998 to the period beginning November 25, 1997 and ending August 30, 1998. Further, the second amended complaint has added counts for violation of sections 11 and 12(2) of the Securities Act of 1933, as amended, as well as section 9 of the Securities Exchange Act of 1934. 47 On July 1, 1998, Mr. Garfinkel filed a companion state court complaint in the Orange County Superior Court based on virtually the same operative facts as the federal court claim. The state court action alleges claims for negligent misrepresentation, common law fraud and deceit as well as violation of sections 25400, 25402 and 25500 of the California Corporations Code. On April 16, 1998, Michael A. Martucci on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the California Superior Court for the County of Orange alleging violations of the California securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and one other broker-dealer and two of those firm's executives. The complaint charges that the defendants "participated in a scheme and wrongful course of business to manipulate the price of [the Company's] stock, which included: (i) defendant Waldron's refusal to execute sell orders; (ii) the use of illegal stock parking; (iii) the use of illegal above-market buy-ins to intimidate and dissuade potential short sellers from selling [Company] stock short; (iv) the sale of [Company] shares to discretionary accounts without regard to suitability; and (v) the dissemination of materially false and misleading statements about [the Company's] operating performance and its future prospects." The complaint further alleges that the Company "secretly arranged to sell $250,000 of product to Waldron as part of defendants' effort to have [the Company] post revenue growth prior to the [Company's] planned [initial public offering]," that such sales constituted almost 25% of the Company's revenues between its inception and March 26, 1998 and that the Company did not disclose such sales or their significance in the Prospectus used in the Company's initial public offering. The plaintiff seeks compensatory damages in an unspecified amount, attorneys' fees and costs, injunctive relief, disgorgement or restitution of the proceeds of the Company's IPO and the defendants' profits from trading in the Company' s stock, and the imposition of a constructive trust over the Company's revenues and profits. By order dated December 4, 1998, the plaintiffs were granted leave to file a second amended consolidated complaint on behalf of each of the federal court actions. The second amended complaint has since been filed. On May 13, 1998, Kate McCarthy, on behalf of all persons who purchased shares of the Company's stock between November 25, 1997 and March 26, 1998, filed suit in the Orange County Superior Court alleging violation of the California securities laws by the Company, Robert McNulty, Douglas Hay, Waldron and Cery Perle. The complaint alleges that defendants acted in concert with each other to manipulate the price of the Company's stock by, inter alia, "work[ing] closely with defendant McNulty on a weekly basis whereby defendant McNulty would pass the supposedly confidential information of those who had 'hit' or contacted Shopping's website." The complaint alleges that the defendants also manipulated the market by engaging in conduct similar to that alleged in the Martucci and Moore actions. The complaint also alleges that the Company's prospectus was misleading by the failure to disclose sales to Waldron as discussed above. The plaintiffs seek damages similar to that sought by Martucci and Moore. 48 The individual actions in Orange County superior Court have been consolidated as well. The plaintiffs have filed a second amended complaint which increased the class period to the period beginning November 25, 1997 and ending August 30, 1998. The amended pleading added causes of action for violation of California Corporations Code sections 25401 and 25501 against all defendants as well as sections 25504 and 25504.1 against defendants Robert J. McNulty and Douglas R. Hay. On or about March 27, Gladstone, et al. filed a complaint against the company as well as its underwriters in the United States District Court for the Southern district of New York contending that the Company's common stock was being manipulated in violation of federal securities laws. The plaintiffs seeks equitable relief in the form of a temporary restraining order and order to show cause regarding the issuance of a preliminary injunction to enjoin certain trading of the Company's stock. The plaintiffs also requested that they be given the right to conduct expedited discovery. On March 30, 1998, the federal court, the Hon. Edelstein presiding, denied the temporary restraining order, denied order to show cause, denied the request for expedited discovery and ordered the case transferred to the United States District Court for the Central District of California. The plaintiffs have filed a first amended complaint against the Company and Mr. McNulty in the United States District Court for the Central District of California which alleges the same claims as the New York federal court action. The Company has yet to respond to the amended pleading but will vigorously defend the same. The Company denies that it engaged in any of the acts alleged in any of the above complaints and intends to defend against these actions vigorously. Nonetheless, and despite the Company's insurance coverage for such actions, the class action suits may be very harmful to the Company. Diversion of management time and effort from the Company's operations and the implementation of the Company's business plan at this crucial time in the Company's development may adversely and significantly affect the Company and its business. The continued pendency of this litigation may make it difficult for the Company to raise additional capital to continue its development and expansion and to attract and retain talented executives. The inability of the Company to raise additional capital would have material adverse effect on the Company's business, prospects, financial condition and results of operations and may prevent the Company from carrying out its business plan. On July 8, 1997, Brian Leneck, a former officer of the Company, resigned. By letter dated July 10, 1997, Robert McNulty, the former Chief Executive Officer of the Company, tendered payment to Leneck to buy back 140,000 shares of Common Stock of the Company pursuant to a shareholder agreement. Leneck rejected the tender, claiming that the amount was not the fair market value of the shares. On March 17, 1998, Leneck filed a lawsuit in Orange County Superior Court of California against the Company, Robert McNulty and three members of the Board of Directors at the time, Bill Gross, Edward Bradley and Paul Hill. Leneck's lawsuit seeks damages for breach of contract, conversion, and breach of fiduciary duty with respect to 70,000 shares. The Company believes that it has meritorious defenses, as well as affirmative claims, against Leneck and intends to vigorously protect its rights in this matter. On March 27, 1998, the Company filed a lawsuit in Orange County Superior Court against Leneck asserting, inter alia, breach of contract, breach of implied covenant of good faith and fair dealing, fraud and deceit, declaratory relief and specific performance. Subsequently, the charges against Bill Gross, Edward Bradley and Paul Hill were dismissed with prejudice. On November 23, 1998 Ray Fisk filed a complaint against the Company for breach of contract arising out of that certain Unsecured Promissory Note dated May 15, 1998 in the principal sum of $50,000 due and payable on or about November 15, 1998. The Company does not dispute its obligation under the terms of the note. In a similar circumstance, the Company received correspondence dated December 17, 1998 from counsel to Daniel Kern, a noteholder who demanded payment on the principal sum of $100,000 together with accrued interest. The Company does not dispute this obligation. The noteholder also claims that the quiet filing of the Company's registration statement on Form S-1 is misleading because it fails to disclose that the Company could not or would not make payment on the note. The Company vigorously disputes this contention. 49 Though a formal complaint has not been filed, Lewis, D'Amato, Brisbois & Bisgaard, the Company's former counsel, forwarded on March 10, 1998, a "Notice of Client's Right to Arbitration" in connection with legal services performed on behalf of the Company. The law firm claims legal fees and costs in the amount of $328,818.97 are due. The Company disputes the amount of fees owed and is in the process of exploring whether the matter can be informally resolved. However, the Company has accrued the claimed amount as of January 31, 1998. Though settlement negotiations have occurred, it is more probable than not that the Company will proceed with its election to have the matter submitted to arbitration before the Los Angeles County Bar Association. By written contracts dated December 12, 1997, the Company retained SoftAware, Inc. to provide facilities and services relative to the maintenance, location and supply of T1 lines to the Company's servers. Subsequent to the execution of the contracts, SoftAware, Inc. experienced a prolonged electrical outage which resulted in the disruption of Internet access and communications. Based upon this and other factors, the Company determined that SoftAware, Inc. was incapable of performing under the agreements and declined to proceed. By letter dated May 22, 1998, SoftAware, Inc.'s counsel made written demand upon the Company for $120,000.00 which purportedly reflected the compensatory damages SoftAware suffered as a direct and proximate result of the Company's refusal to proceed with performance under the contract. The Company rejected this demand and offered to reimburse SoftAware, Inc. for reasonable costs incurred in reliance on the contracts in an amount less than $3,000. SoftAware, Inc. has rejected this offer and the parties are continuing settlement negotiations. On September 12, 1998 the Company was served with a summons and complaint by MTS, Incorporated filed in Sacramento County Superior Court of California for damages arising out of the Company's as well as two other merchants' sale of the video "Titanic" at below cost thereby purportedly constituting violation of section 17043 and 17044 of California's Business and Professions Code as well as the California Unfair Business Practices Act (Cal. Bus. & Prof. Code section 17200 et. seq.). The complaint alleges damages in excess of $25,000.00, that sum trebled should a statutory violation be established, and attorneys' fees and costs. The Company has not had an opportunity to investigate the allegations of the complaint. Accordingly, a reasonable assessment of the Company's potential exposure cannot be made until such time as discovery is completed. The action will, however, require the engagement of defense counsel and it is estimated that substantial attorney fees may be incurred should litigation proceed to trial. 50 On December 4, 1998, the Company received correspondence from counsel for Yahoo! Inc. alleging breach of contract arising out of two agreements. Despite acknowledging receipt of $200,000 from the Company in connection with these contracts, it is contended that the alleged breach of the agreements entitles Yahoo! Inc. to recover damages in excess of $2 million. Though the Company has not had the opportunity to fully investigate Yahoo!'s demands, the entitlement and measure of damages are disputed. Nevertheless, a reasonable assessment of the Company's potential liability cannot be made at this time. The Company is involved in two other labor related disputes. Although it is not possible to predict the outcome of these disputes, or any future claims against the Company related hereto, the Company believes that such disputes will not, either individually or in the aggregate, have a material adverse effect on its financial condition or results of operations. Item 2. Changes in Securities --------------------- The following are all securities sold by Registrant within the past three (3) years without registering the securities under the Securities Act/1/: DATE TITLE AMOUNT (1) (a) March 1997-June 1997 Common Stock 1,282,500 Shares (b) There were no underwriters used in connection with this offering. 1,150,000 shares of Common Stock were offered and sold to Robert J. McNulty, CEO of the Registrant. Subsequently, Mr. McNulty gifted an aggregate of 325,000 of such shares to various employees of the Company for no consideration. In addition, the Company ______________________ /1/ All share amounts and related information reflect a one-for-two reverse stock split effective upon the effective date of the Company's initial public offering. The warrants to purchase 122,500 shares of the Company's Common Stock issued to Waldron & Co., Inc. as the Underwriters' Representative are not included because such warrants were registered in connection with the Company's initial public offering. As of December 8, 1998, the Company had issued 2,605,250 options, largely to employees, officers and directors. 51 offered and sold shares of Common Stock to idealab!, a company controlled by Bill Gross, a former director of Registrant (100,000 shares); Alvin S. Morrow, (2,500 shares); and 30,000 shares to an independent consultant who provided the Registrant's Web Site address; all of whom were accredited investors and residents of the State of California. (c) The securities were sold for two cents ($.02) per share except for the 30,000 shares issued to an independent consultant which were valued at $.20 per share for an aggregate consideration of $30,650. (d) The issuer relied on Section 4(2) and 3(a)(11) of the Securities Act of 1933, as amended. (e) Not Applicable. DATE TITLE AMOUNT (2) (a) March 1997-April 1997 Series A Preferred Stock 750,000 Shares Warrants for 375,000 Warrants Common Stock (b) There were no underwriters used in connection with this offering. The securities were offered and sold only to two accredited investors, Cyber Depot, Inc., a corporation controlled by Robert J. McNulty, President and CEO of the issuer, and idealab! a corporation controlled by Bill Gross, a director of Registrant. One Warrant was issued for each two shares. (c) The securities were sold for forty cents ($.40) per share of Series A Stock. (d) The issuer relied on Rule 506 under Regulation D based on the fact that all offerees were accredited investors under Rule 501. (e) The Warrants are convertible into one share of the Company's Common Stock at an exercise price of $3.00 per share. The Warrants expire five years from the date of issuance. DATE TITLE AMOUNT (3) (a) April 1997 Series B Preferred Stock 536,500 Shares -September 1997 Warrants for 268,250 Warrants Common Stock (b) There were no underwriters used in connection with 536,500 shares of this offering. Waldron & Co., Inc. acted as placement agents for 200,000 shares of this 52 offering and received fees of $78,000. The securities were offered and sold only to accredited investors. One Warrant was issued for each two shares of Series B Stock. (c) The securities were sold for Three Dollars ($3.00) per share for an aggregate consideration of $1,609,500. The Warrants are exercisable for five years for the purchase of one share of Common Stock at a strike price of $3.00. (d) The issuer relied on Rule 506 under Regulation D based on the fact that all offerees were accredited investors under Rule 501. (e) Not applicable. DATE TITLE AMOUNT (4) (a) June 1997-Sept. 1997 Promissory Notes $1,150,000 Warrants for 382,950 Warrants Common Stock (b) No underwriters were used in connection with $50,000 principal amount of such Notes. Waldron & Co., Inc., acted as placement agents in connection with the placement of the $1,100,000 principal amount of such Notes, and received fees of $143,000. The securities were offered and sold only to qualified and accredited investors. 333 Warrants were issued for each $1,000 in principal amount of such Notes. (c) The Notes were sold for an aggregate consideration of $1,150,000. The accompanying Warrants are exercisable for five years for the purchase of one share of Common Stock at an exercise price of $6.00 per share. (d) The issuer relied on Rule 506 under Regulation D based on the fact that all offerees were accredited investors under Rule 501. (e) The Warrants are exercisable for five years for the purchase of one share of Common Stock at an exercise price of $6.00 per share. As of December 7, 1998, 83,250 Warrants had been exercised in a "cashless" exercise and 44,575 shares of the Company's Common Stock had been issued. DATE TITLE AMOUNT (5) (a) April 1997 Common Stock 8,000 Shares (b) There were no underwriters used in connection with this private placement. The securities were offered and sold to Typhoon Capital Consultants, LLC in exchange for consulting services. 53 (c) The securities were valued at $6.00 per share and were exchanged for business consulting services, for an aggregate consideration valued at $48,000. (d) The issuer relied on Section 4(2) of the Securities Act of 1933, as amended. (e) Not applicable. DATE TITLE AMOUNT (6) (a) September 1997 Common Stock 125,000 Shares Promissory Note $600,000 Warrants for 199,800 Shares Common Stock (b) Waldron & Co., Inc. acted as placement agent in connection with this private placement and was paid $78,000 in fees therefor. The securities were issued to En Pointe Technologies, Inc., an accredited investor. (c) The Common Stock was valued at $6.00 per share and was issued as consideration for a 5 year license to the Company to use En Pointe's EPIC software. The Notes were issued at face value for a $600,000 loan to the Company. 333 Warrants were issued for each $1,000 principal amount of the Note. The Warrants are exercisable for five years for the purchase of one share of stock at a strike price of $4.50 per share. (d) The issuer relied on Rule 506 under Regulation D based on the fact that En Pointe is an accredited investor. (e) The Warrants are exercisable for five years for the purchase of one share of stock at a strike price of $4.50 per share. DATE TITLE AMOUNT (7) (a) February 1998 Common Stock 47,059 Shares (b) There were no underwriters used in connection with this offering. The shares were offered pursuant to a Subscription Agreement between the Company and Premiere Radio Network, Inc., a Delaware corporation ("PRN"), dated February 19, 1998. (c) PRN agreed to purchase the shares in consideration of radio advertising valued at $1,000,000. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Securities Act of 1933, as amended. 54 (e) In the event that the average closing price of the Company's Common Stock for the ten days prior to February 19, 1999 is less than $21.25 per share, the Company will issue to PRN up to 52,941 additional shares. DATE TITLE AMOUNT (8) (a) May 1998 Warrants for 132,500 Shares Common Stock Promissory Notes $1,325,000 (b) Waldron & Co., Inc. acted as placement agent in connection with this private placement and was paid 7% of the total amount raised plus an expense allowance of 3%. (c) The shares were offered pursuant to Subscription Agreements, Promissory Notes and Warrant Agreements between the Company and individual investors, each dated May 15, 1998 (except Mr. Kern's dated June 8, 1998). Pursuant to the Subscription Agreements, each investor purchased units consisting of a promissory Note in the principal amount of $25,000 bearing interest at an annual rate of 10% interest and principal payable November 15, 1998 and warrants to purchase 2,500 shares of the Company's Common Stock at an exercise price of $14.00 per share. The units were sold to Ray Fisk (two units), Mike Weikamp (four units), Jon Aubry (twenty units), William Schweitzer (two units), Zahra Khiaban (three units), Carlos Beharie (sixteen units), Tony Nikolich (two units) and Daniel E. Kern (four units). A total consideration of $1,325,000 was paid in this offering. (d) The Company relied on Section 4(2) and Regulation D Rule 505 promulgated by the Securities and Exchange Commission as the exemption from registration. The investors were all accredited investors. DATE TITLE AMOUNT (9) (a) June, July and 8% Convertible $5,000,000 November 1998 Debentures Due in 2 years Warrants for 1 share for every Common Stock 2 shares issued upon conversion of the Debenture (b) Trautman, Kramer & Company, Incorporated ("Trautman") acted as placement agent in connection with this private placement, receiving 9% of the net proceeds for the first tranche and 15% of the net proceeds for the second tranche with the proceeds going to or on behalf of Trautman or affiliates of Trautman. In addition, 55 Waldron received 1% of the net proceeds of the first tranche. The Debentures in the aggregate amount of $5,000,000 were sold to ten accredited investors. Subject to certain restrictions on the ability of the holders of the Debentures to convert, the Debentures are convertible into shares of the Company's Common Stock at a conversion price for each share of Common Stock equal to the lower of (i) the lowest market price for any three trading days selected by the Debenture holder from the thirty trading days prior to the conversion, or (ii) $16.00. (c) The total consideration was $5,000,000. (d) The issuer relied on Section 4(2) and Regulation D Rule 506 promulgated by the Securities and Exchange Commission as the exemption from registration. Each investor was an accredited investor. DATE TITLE AMOUNT (10) (a) June 1998 Warrants for Common 300,000 Shares Stock (b) There were no underwriters used in connection with this offering. The warrants were issued to Ladenberg Thalmann & Co., Inc. pursuant to the Company's retainer of Ladenberg as its investment banker and financial advisor. The warrants are exercisable after December 15, 1998 until June 15, 2003 at $21.92 per share. (c) The warrants were issued to Ladenberg Thalmann & Co., Inc. pursuant to the Company's retainer of Ladenberg as its investment banker and financial advisor. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Act. (e) The warrants are exercisable after December 15, 1998 until June 15, 2003 at $21.92 per share. 56 DATE TITLE AMOUNT (11) (a) June 1998 Warrants for Common 33,000 Shares Stock (b) There were no underwriters in connection with this offering. The placement agent for the private placement of the 8% Convertible Debentures and its affiliates were issued the warrants. (c) The warrants were issued as consideration for the placement agent's services. (d) The Company relied on Section 4(2) of the Securities Act of 1993, as amended, and Regulation D promulgated under the Act. (e) The warrants are exercisable at $24.00 per share until June 30, 2003. DATE TITLE AMOUNT (12) (a) July 1998 Common Stock 7,500 Shares Warrants for Common 20,000 Shares Stock (b) There were no underwriters in connection with this offering. The placement agent for the private placement of the 8% Convertible Debentures and its affiliates were issued the warrants. (c) The Common Stock and warrants were issued as consideration for the placement agent's services and for waiver of certain of its contractual rights. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Act. (e) The warrants are exercisable at $16.00 per share until July 31, 2003. 57 DATE TITLE AMOUNT (13) (a) August 1998 Warrants for Common 2,936 Stock (b) There were no underwriters in connection with this offering. The warrants were issued to companies providing equipment leasing facilities to the Company. (c) The consideration was the provision of computer equipment leasing. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Act. (e) 1,079 shares are exercisable at $22.25 until February 2, 2000. 1,857 shares are exercisable at $14.75 until December 18, 1999. DATE TITLE AMOUNT (14) (a) August 1998 Warrants for Common Stock 60,000 shares Convertible Promissory Note $500,000 (b) Waldron & Co., Inc. acted as placement agent in connection with this private placement and received 10% of the total amount raised, $50,000, and warrants to purchase 10,000 shares of Common Stock. The securities were sold to an accredited investor. (c) The shares were offered pursuant to a Subscription Agreement and Convertible Promissory Note dated August 25, 1998 and Warrant Agreement dated as of August 20, 1998. Pursuant to the Subscription Agreement, the investor purchased 20 units consisting of a promissory note in the principal amount of $25,000 and warrants to purchase 2,500 shares of the Company's Common Stock at an exercise price of $10.00 per share. The Convertible Promissory Note bears interest at an annual rate of 8% and the principal amount, plus any accrued interest, is payable six months from the date of the note. The promissory note may be converted at the option of the investor into a number of shares of Common Stock equal to the quotient of the principal amount divided by the Conversion Price. The initial Conversion Price is $10.00 per share. 58 (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, as the exemption from registration. (e) The warrants issued to Waldron & Co., Inc. are exercisable for $10.00 per share and have all the rights and privileges received by the investor. The all warrants issued in the offering expire August 20, 2001. DATE TITLE AMOUNT (15) (a) August 1998 Common Stock 66,667 Shares (b) There were no underwriters used in connection with this offering. The shares were offered pursuant to a Subscription Agreement between the Company and Premiere Radio Network, Inc., a Delaware corporation ("PRN"), dated August 12, 1998. (c) PRN agreed to purchase the shares in consideration of radio advertising valued at $1,000,000. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Securities Act of 1933, as amended. (e) In the event that the average closing price of the Company's Common Stock for the ten days prior to August 12, 1999 is less than $15.00 per share, the Company will issue to PRN up to 133,333 additional shares. DATE TITLE AMOUNT (16) (a) September 1998 Warrants for 10,000 Shares Common Stock (b) There were no underwriters in connection with that offering. The warrants were issued to a consultant retained to assist the Company in securing additional capital. (c) The consideration was the provision of consulting services. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Act. (e) The warrants are exercisable at $2.00 per share until October 1, 2003. 59 DATE TITLE AMOUNT (17) (a) September 1998 Common Stock 255,474 Shares (b) There were no underwritings in connection with that offering. (c) The consideration was conversion of $350,000 of debt owed to Robert McNulty at a price of $1.37 per share. (d) The Company relied on Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under the Act. DATE TITLE AMOUNT (18) (a) October and Warrants for Common 300,000 Shares November 1998 Stock (b) There were no underwriters in connection with this offering. The placement agent for the private placement of the 8% Convertible Debentures and its affiliates and designees were issued the warrants. (c) The warrants were issued as consideration for the placement agent's services. (d) The Company relied on Section 4(2) of the Securities Act of 1993, as amended, and Regulation D promulgated under the Act. (e) The warrants are exercisable at $2.00 per share for five years from their issuance. DATE TITLE AMOUNT (19) (a) November 1998 Promissory Note $300,000 Warrants for 30,000 Shares Common Stock (b) There were no underwriters used in connection with this offering. The securities were issued to USFI Holdings, Inc. in connection with partial repayment of a loan to the Company. Robert McNulty, the former Chief Executive Officer of the Company, is a director of the note holder. 60 (c) The Note was issued at face value for the outstanding balance of a loan to the Company. One warrant was issued for each $10 principal amount of the Note. (d) The issuer relied on Section 4(2) of the Securities Act of 1933, as amended. (e) The Warrants are exercisable for five years for the purchase of one share of stock at a strike price of $1.65 per share. DATE TITLE AMOUNT (20) (a) November - Common Stock 1,790,339 shares December 1998 Warrants 865,943 shares (b) There were no underwriters used in connection with this offering. (c) The securities were issued to holders of the 8% Convertible Debentures ("Debentures") upon conversion of Debentures in the principal amount of $2,500,000. (d) The issuer relied on Section 4(2) of the Act, and Regulation D, Rule 506 promulgated under the Act. (e) Warrants to purchase 782,608 shares have an exercise price of $1.725 and Warrants to purchase 83,335 shares have an exercise price of $1.80. The Warrants expire after five years following the initial closing date of the Debentures converted. DATE TITLE AMOUNT (21) (a) December 1998 Warrants to purchase 130,000 shares Common Stock (b) There were no underwriters used in connection with this offering. (c) The securities were issued to Robert McNulty, a consultant to and affiliate of the Company, in consideration for a pledge of Mr. McNulty's stock as security for the $2,500,000 Promissory Note. (d) The issuer relied on Section 4(2) of the Act. (e) The warrants have an exercise price of $8.00 per share. 61 DATE TITLE AMOUNT (22) (a) December 1998 Secured Promissory Note $2,500,000 Warrants to purchase 500,000 shares Common Stock (b) Trautman, Kramer & Company, Incorporated acted as placement agent and received 10% of the face amount of the note. (c) The warrants were issued to the holder of the Secured Promissory Note, John Gainsford, in consideration for the $2,500,000 principal amount of the Secured Promissory Note. (d) The issuer relied on Section 4(2) of the Act. (e) The Secured Promissory Note carries an interest rate of 10% per annum and is due and payable thirty days from December 7, 1998; provided, however, that the holder may, upon the occurrence of certain conditions, convert the balance owed under the Secured Promissory Note, principal and interest, into shares of the Company's Common Stock. The warrants have an exercise price of $7.00 per share and a term of three years. DATE TITLE AMOUNT (23) (a) December 1998 Warrants to purchase 490,385 shares Common Stock (b) Wall & Broad Equities acted as a finder and will receive from the Company 2% of the total price per share paid by Swartz pursuant to the Regulation D Common Stock Private Equity Line Subscription Agreement (hereinafter referred to as "Private Equity Line of Common Stock and Warrants Pursuant to Regulation D"). (c) The warrants were issued to Swartz Private Equity, LLC ("Swartz") in consideration for Swartz entering into the Private Equity Line of Common Stock and Warrants Pursuant to Regulation D. The warrants expire seven years after the Date of Issuance. the $2,500,000 principal amount of the Secured Promissory Note. (d) The issuer relied on Section 4(2) of the Act. (e) The warrants have an exercise price of $8.375 per share and a term of seven years. Date Title Amount (24) (a) November 1998 Warrants to Purchase 18,767 shares Common Stock (b) There were no underwriters used in connection with this placement. (c) The warrants were issued to Mark Asdourian, legal counsel to the Company, as compensation for services rendered. (d) The Company relied on the exemption in Section 4(2) of the Act. (e) The warrants have an exercise price of $1.781 per share, which was the market price on the date of grant, and expire on November 6, 2003. 62 Item 3. Defaults Upon Senior Securities ------------------------------- Subsequent to October 31, 1998 the Company had $1,325,000 of unsecured promissory notes (the "Notes") come due which remains unpaid at this time. Currently the Company is negotiating with several of the promissory note holders to extend the terms of their notes or convert their notes to equity. The Company does not expect that all the holders will be willing to convert their notes. The Notes were due in November 15, 1998. As of December 20, 1998 the total arrearage on the Notes including interest was approximately $1,468,000. The Company is also negotiating with USFI regarding extending the terms of their secured promissory note in the amount of $300,000 which came due December 2, 1998. As of December 2, 1998 the total arrearages on the USFI note was approximately $305,000. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- On August 31, 1998, Mr. Michael Miramontes resigned his employment effective June 12, 1998. Pursuant to a Resignation Agreement dated August 31, 1998 between the Company and Mr. Miramontes, Mr. Miramontes will receive one year's salary in the total amount of $162,000 of which $160,000 was accrued on the Company's Balance Sheet as of July 31, 1998 and the remaining $2,000 was additionally accrued during the quarter ended October 31, 1998. The Company will make equal installments of $13,067 beginning September 1, 1998 for a period of ten months. On September 30, 1998, Mr. Douglas Hay resigned as Executive Vice President and as a director effective September 30, 1998. Pursuant to a Resignation Agreement dated September 30, 1998 between the Company and Mr. Douglas Hay, Mr. Hay will receive a total amount of $80,000 which was accrued on the Company's Balance Sheet as of October 31, 1998. The Company agreed to make two equal payments of $20,000 payable on October 1 and November 1 and the remaining $40,000 will be paid equally on the first of each month December 1, 1998 through March 1, 1999. On December 2, 1998 Howard Schwartz tendered his resignation as Executive Vice President, Finance and Administration citing personal reasons. 63 Item 6. Exhibits an, Reports on Form 8-K -------------------------------- (a) Exhibits: 4.1 Form of Secured Promissory Note in the principal amount of $2,500,000. 4.2 Form of Common Stock Purchase Warrant for the purchase of 500,000 shares of Common Stock at an exercise price of $7.00. 4.3 Warrant to Purchase Common Stock dated as of December 14, 1998 in the name of Swartz Private Wquity, LLC. 4.4 Form of Investor Purchase Warrant 10.1 Pledge Agreement between Robert McNulty and Krieger & Prager, as Agent dated December, 1998. 10.2 Form of Security Agreement. 10.3 Regulation D Common Stock Private Equity Line Subscription Agreement between Shopping.com and Swartz Private Equity, LLC dated December 14, 1998. 10.4 Registration Rights Agreement between Shopping.com and Swartz Private Equity, LLC dated December 15, 1998. 27.1 Financial Data Schedule/2/ (b) Reports on Form 8-K None - ---------------- /2/ This exhibit is being filed electronically in the electronic format specified by EDGAR. 64 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHOPPING.COM
December 22, 1998 /s/ FRANK W. DENNY --------------------------- Frank W. Denny, Chairman of the Board December ___, 1998 --------------------------- John H. Markley, Chief Executive Officer, President and Director December 22, 1998 /s/ KRISTINE E. WEBSTER --------------------------- Kristine E. Webster, Senior Vice President, Chief Financial Officer and Secretary December ___, 1998 --------------------------- Paul J. Hill, Director December ___, 1998 --------------------------- Edward F. Bradley,
Director 65 EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE 4.1 Form of Secured Promissory Note in the principal amount of $2,500,000. 4.2 Form of Common Stock Purchase Warrant for the purchase of 500,000 shares of Common Stock at an exercise price of $7.00. 4.3 Warrant to Purchase Common Stock dated as of December 14, 1998 in the name of Swartz Private Equity, LLC. 4.4 Form of Investor Purchase Warrant. 10.1 Pledge Agreement between Robert McNulty and Krieger & Prager, as Agent dated December, 1998. 10.2 Form of Security Agreement. 10.3 Regulation D Common Stock Private Equity Line Subscription Agreement between Shopping.com and Swartz Private Equity, LLC dated December 14, 1998. 10.4 Registration Rights Agreement between Shopping.com and Swartz Private Equity, LLC dated December 15, 1998. 27.1 Financial Data Schedule/1/
- -------------------- /1/ This exhibit is being filed electronically in the electronic format specified by EDGAR. 66 EX-4.1 2 FORM OF SECURED PROMISSORY NOTE EXHIBIT 4.1 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR PURSUANT TO AN EXEMPTION FROM REGISTRATION. SECURED PROMISSORY NOTE ----------------------- $2,500,000.00 Corona del Mar, California December __, 1998 1. Principal. --------- FOR VALUE RECEIVED, the undersigned, SHOPPING.COM, INC. ("Maker"), promises to pay to ________________________________________________________ ("Payee"), or order, at 2101 E. Coast Highway, Corona del Mar, California 92625, or at such other place as the holder of this Note shall specify, in lawful money of the United States of America, the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000), together with interest at the rate of Ten Percent (10%) per annum, payable as hereinafter provided. 2. Payment of Principal and Interest. --------------------------------- All principal of and interest accruing on this Note shall be due and payable thirty (30) days from the date of this Note; provided, however, if, within thirty (30) days from the date of this Note, the Maker closes a financing transaction with proceeds to the Maker of at least $____________ with Swartz Institutional Finance ("Swartz") with respect to the issuance of the Maker's preferred stock (the "Preferred Stock"), Payee shall have the right at its option until January 10, 1999 to convert the principal amount of this Note together with all accrued but unpaid interest thereon, into the same class of Preferred Stock issued to Swartz, at a conversion price equal to the per share purchase price paid by, and upon terms no less favorable than those provided to, Swartz. Interest shall be calculated on the unpaid principal balance of this Note on the basis of a year of 360 days and the actual number of days elapsed until payment, unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Interest shall accrue and be payable under this Note whether or not Maker, or Maker's successors or assigns, should avail themselves of the protection of the United States bankruptcy laws. From and after the occurrence of an "event of default" as set forth in Section 7 hereof, -1- interest shall continue to accrue on the unpaid principal balance of this Note at the same interest rate as set forth in Section 1 of this Note. 3. Security for Repayment. This Note is secured by (i) the Collateral ---------------------- identified in that certain Security Agreement of even date herewith between Maker and Payee and (ii) certain shares of Maker's common stock which are the subject of a Pledge Agreement of even date herewith between the Payee and Robert McNulty. 4. Prepayment. ---------- A. This Note may be prepaid at any time or from time to time, in whole or in part, without penalty. B. Each such prepayment shall include all interest then accrued but unpaid on this Note. C. Any partial prepayment of the outstanding principal balance shall in no way release, discharge or affect the obligation of the Maker to continue to make any other payments of principal or interest provided for herein until this Note is paid in full. 5. Application of Payments. ----------------------- Each payment on this Note (whether made when due or otherwise) shall be credited first, to late charges, fees and other charges due, including collection costs and attorneys' fees, second against interest then due, and the remainder of such payment shall be credited against the unpaid principal. 6. Waiver. ------ Maker and all endorsers, guarantors and all persons liable, or to become liable on this Note (each hereinafter referred to in this Section as the "Applicable Party"), jointly and severally, waive presentment, protest and demand, notice of protest, demand, dishonor and nonpayment of this Note, notice of acceleration, notice of intent to accelerate, and any and all other notices or matters of a like nature, and consent to any and all renewals and extensions of the time of payment hereof. Each Applicable Party agrees that at any time and from time to time, without notice, (i) the terms of payment herein, or (ii) the terms of any guaranty of this Note, or (iii) the security described in any documents at any time securing this Note, may be modified, increased, changed or exchanged, in whole or in part, without in any way affecting the liability of any Applicable Party. -2- 7. Late Charge. ----------- If any payment of interest and/or principal hereunder is not received by Payee within ten (10) days after the due date thereof, Maker agrees to pay Payee a late charge equal to five percent (5%) of the unpaid amount. Maker acknowledges that it would be extremely difficult to fix Payee's actual damages for the failure of Maker to timely pay any amount due under this Note. Accordingly, such late charge shall be deemed to be Payee's damages for any such late payment, provided that such late charge shall not limit Payee's right to compel prompt performance by Maker or to exercise other remedies available to Payee. 8. Default By Maker. ---------------- Any one or more of the following shall constitute an "Event of Default" by Maker under the terms of this Note: A. If Maker fails to pay any payment, whether at maturity or otherwise, of principal and/or interest upon the due date thereof. B. If Maker defaults in the performance or observance of any of the covenants, conditions or agreements set forth in this Note. C. If Maker institutes proceedings to be adjudicated a voluntary bankrupt; consents to the filing of a bankruptcy proceeding against Maker; files or consents to filing of a petition or answer or consent seeking reorganization under the federal bankruptcy laws or any other similar applicable federal or state law; consents to the appointment or a receiver of liquidator or trustee or assignee in bankruptcy or insolvency of the Maker or a substantial part of Maker's property; an assignment for the benefit of creditors is made by the Maker; or Maker admits in writing of Maker's inability to pay Maker's debts generally as they become due. 9. Remedies Upon Default. --------------------- If an Event of Default occurs, at the option of Payee, and upon written demand, the Payee may accelerate the due date of this Note and (i) declare the entire outstanding principal balance hereof, including all fees and costs (if any), and accrued but unpaid interest, immediately due and payable in full, or (ii) convert the entire outstanding principal amount, and accrued but unpaid interest, into shares of the Maker's existing authorized preferred stock. Each of the options, rights and remedies provided herein or available at law or in equity which may be exercised by Payee may be exercised separately or -3- concurrently with any one or more other options, rights or remedies available to Payee. Failure to exercise any option, right or remedy shall not constitute a waiver of the right of the Payee to exercise such option, right or remedy in the event of or with respect to any prior, subsequent or concurrent transaction or occurrence of the same or a different kind or character. 10. Attorneys' Fees. --------------- Maker agrees to pay all costs of collection or enforcement of this Note when incurred, including, but not limited to, reasonable attorneys' fees. If any suit or action is instituted to enforce this Note, Maker promises to pay, in addition to the costs and disbursements allowed by law, such sum as the court may adjudge as reasonable attorneys' fees in such suit or action. Maker shall also pay all reasonable attorneys' fees and costs incurred by Payee in connection with any modification, amendment or consent related to any renegotiation or modification of this Note. 11. Severability. ------------ Every provision of this Note is intended to be severable. If any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. 12. Governing Law. ------------- This Note shall be governed by and construed in accordance with the laws of the State of New York. 13. Notices. ------- All notices, statements or demands shall be in writing and shall be served in person, by telegraph, by express mail, by certified mail or by private overnight delivery. Service shall be deemed conclusively made (i) at the time of service, if personally served, (ii) at the time (as confirmed in writing by the telegraphic agency) of delivery thereof to the addressee, if served telegraphically, (iii) twenty-four (24) hours (exclusive of weekends and national holidays) after deposit in the United States mail, properly addressed and postage prepaid, if served by express mail, (iv) five (5) calendar days after deposit in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail, (v) twenty-four (24) hours after delivery by the party giving the notice, statement or demand to the private overnight deliverer, if served -4- by private overnight delivery and (vi) at the time of electronic transmission, if a copy of such notice is mailed within twenty-four (24) hours after the transmission. Any notice or demand to Maker shall be given to: Shopping.com, Inc. 2101 E. Coast Highway Corona del Mar, CA 92625 Attn: Frank Denny Any notice or demand to Payee shall be given to: _______________________________ _______________________________ _______________________________ Attn:__________________________ Any party hereto may change its address for the purpose of receiving notices, demands or other communications as herein provided by a written notice given in the manner aforesaid to the other party or parties hereto. 14. Successors and Assigns. ---------------------- All the terms and provisions of this Note shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 15. Assignability. ------------- Maker's obligation hereunder are nontransferable and nonassignable without the prior written consent of Payee. 16. Amendment. --------- Neither this Note nor any term or provision hereof may be modified, amended or altered except by a written instrument approved by Payee and signed by Maker. 17. Headings. -------- Headings at the beginning of each numbered Paragraph of this Note are intended solely for convenience and are not to be deemed or construed to be a part of this Note. -5- 18. Purpose of Loan. --------------- The proceeds of this Note are to be used by Maker exclusively for business purposes, and not for personal, family or household purposes. 19. Time of the Essence. ------------------- TIME IS EXPRESSLY DECLARED TO BE THE ESSENCE of each obligation of the Maker hereunder and in all matters concerning this Note, including all acts or things to be done or performed in connection herewith, and specifically of every provision of this Note in which time is an element. 20. Compliance With Usury Laws. -------------------------- Maker and Payee intent to comply with all applicable usury laws. In fulfilling this intention, all agreement between Maker and Payee are expressly limited so that the amount of interest paid or agreed to be paid to Payee for the use, forbearance, or detention of money under this Note shall not exceed the maximum amount permissible under applicable law. If for any reason payment of any amount required under this Note shall be prohibited by law, then the obligation shall be reduced to the maximum allowable bylaw. If for any reason Payee receives as interest an amount that would exceed the highest lawful rate, then the amount which would constitute excessive interest shall be applied to the reduction of the principal of this Note and not to the payment of interest. If any conflict arises between this provision and any provision of any other agreement between Maker and Payee, then this provision shall control. 21. Legal Representation. -------------------- Maker agrees and represents that such party has been represented by such party's own legal counsel with regard to all aspects of this Note, or if such party is acting without legal counsel, that such party has had adequate opportunity and has been encouraged to seek the advice of such party's own legal counsel prior to the execution of this Agreement. 22. Jurisdiction. ------------ Any action whatsoever brought upon or relating to this Note shall be instituted and prosecuted in the state courts of New York, County of New York, or the federal district court therefore, and each party waives the right to change the venue. The -6- parties hereto further consent to accept service of process in any such action or proceeding by certified mail, return receipt requested. "MAKER" "PAYEE" Shopping.Com, Inc. By: /s/ Kristine Webster By: /s/ John Gainsford ----------------------- ------------------------- Name: Kristine E. Webster Name: John Gainsford --------------------- ----------------------- Title: CFO Title: Director -------------------- ---------------------- -7- EX-4.2 3 FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 4.2 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. SHOPPING.COM COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and ----------------------------- valuable consideration, the receipt of which is hereby acknowledged by SHOPPING.COM a Delaware corporation (the "Company"), _______________ or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December ____, 2001, Five Hundred Thousand (500,000) fully paid and nonassessable shares of the Company's Common Stock, par value $.001 per share (the "Common Stock") at an initial exercise price per share (the "Exercise Price") of $7.00 per share, subject to further adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. This Warrant is exercisable in whole or in -------------------- part at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by certified or official bank check, or by "cashless exercise," by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed (which Notice of Exercise Form may be submitted either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof), together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market for the five (5) trading days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. -1- 3. Reservation of Shares. The Company hereby agrees that at all --------------------- times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of ----------------------------- evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be -------------------- entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution. --------------------------- 6.1 Adjustment Mechanism. If an adjustment of the Exercise -------------------- Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total purchase price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse ------------------- stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original purchase price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the ------------------------ exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, -2- operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the Average Market Price of the Common Stock for the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the Average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. For the purposes of this Section 6.3, the "Average Market Price of the Common Stock" shall mean, for the relevant period, (x) the average closing bid price of a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market or (y) if the Common Stock is listed on a stock exchange, the closing price on such exchange on the date indicated in the relevant provision hereof, as reported in The Wall Street Journal. 7. Transfer to Comply with the Securities Act; Registration Rights. --------------------------------------------------------------- (a) This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. -3- Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. (b) The Company hereby grants to the Holder piggyback registration rights with respect to the Warrant Shares. In the event the Company is filing a Registration Statement for itself or on behalf of any of its shareholders, the Company shall notify the Holder in writing reasonably in advance of such filing (but at least five business days) and give the Holder the opportunity to include all or any party of the Warrant Shares (whether or not previously issued, to the extent permissible under the Act or any regulation promulgated thereunder. Upon the Holder's notification that the Holder desires to have all or any portion of the Warrant Shares included in such registration, the Company shall, at no cost or expense to the Holder, include or cause to be included in such registration statement the Warrant Shares so identified by the Holder. 8. Notices. Any notice or other communication required or permitted ------- hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if the to Company, to: SHOPPING.COM 2101 East Coast Highway Garden Level Corona del Mar, CA 92625 ATTN: Frank Denny Telephone No.: (949) 640-4393 Telecopier No.: (949) 640-4374 (ii) if to the Holder, to: _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ -4- with a copy to: Krieger & Prager, Esqs. 319 Fifth Avenue New York, NY 10016 Attn: Samuel M. Krieger, Esq. Telephone: (212) 689-3322 Telecopier: (212) 213-2077 Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 9. Supplements and Amendments; Whole Agreement. This Warrant may be ------------------------------------------- amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant of even date herewith contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract ------------- made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 11. Counterparts. This Warrant may be executed in any number of ------------ counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. -5- 12. Descriptive Headings. Descriptive headings of the several -------------------- Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 7th day of December, 1998. SHOPPING.COM By: /s/ Kristine Webster ------------------------------------- Name: Kristine E. Webster Its: CFO Attest: ________________________ Name: Title: -6- NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of ___________________, 1998, to purchase ________ shares of the Common Stock, par value $.001 per share, of SHOPPING.COM and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:______________________ ____________________________ [Name of Holder] By:_______________________________________________ [_] CASH: $ _______________________ [_] CASHLESS EXERCISE -7- EX-4.3 4 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 4.3 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN REGULATION D COMMON STOCK EQUITY LINE SUBSCRIPTION AGREEMENT BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED THEREIN AS EXHIBIT J. ---------- Warrant to Purchase 490.385 shares - -------- Warrant to Purchase Common Stock of SHOPPING.COM THIS CERTIFIES that Swartz Private Equity, LLC or any subsequent holder -------------------------- hereof ("Holder"), has the right to purchase from SHOPPING.COM, a California corporation (the "Company"), up to 490,385 fully paid and nonassessable shares ------- of the Company's common stock, $.01 par value per share ("Common Stock"), subject to adjustment as provided herein, at a price equal to the Exercise Price as defined in Section 3 below, at any time beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New York time the date that is seven (7) years after the Date of Issuance (the "Exercise Period"). Holder agrees with the Company that this Warrant to Purchase Common Stock of Shopping.Com (this "Warrant") is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein. 1. Date of Issuance and Term. -------------------------- This Warrant shall be deemed to be issued on December 14, 1998 ("Date of -- Issuance"). The term of this Warrant is seven (7) years from the Date of Issuance. 2. Exercise. -------- (a) Manner of Exercise. During the Exercise Period, this Warrant may be exercised as to all or any lesser number of full shares of Common Stock covered hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A (the "Exercise Form") duly completed and --------- executed, together with the full Exercise Price (as defined below) for each share of Common Stock as to which this Warrant is exercised, at the office of the Company, Attention: Frank W. Denny, Chairman, Shopping.Com, 2101 East Coast Highway, Garden Level, Corona Del Mar, CA 92625, Telephone No. (949) 640-4393, Telecopy No. (949) 640-4374, or at such other office or agency as the Company may designate in writing, by overnight mail, with an advance copy of the Exercise Form sent to the Company and its Transfer Agent by facsimile (such surrender and payment of the Exercise Price hereinafter called the "Exercise of this Warrant"). (b) Date of Exercise. The "Date of Exercise" of the Warrant shall be defined as the date that the advance copy of the completed and executed Exercise Form is sent by facsimile to the Company, provided that the original Warrant and Exercise Form are received by the Company as soon as practicable thereafter. Alternatively, the Date of Exercise shall be defined as the date the original Exercise Form is received by the Company, if Holder has not sent advance notice by facsimile. (c) Cancellation of Warrant. This Warrant shall be canceled upon the Exercise of this Warrant, and, as soon as practical after the Date of Exercise, Holder shall be entitled to receive Common Stock for the number of shares purchased upon such Exercise of this Warrant, and if this Warrant is not exercised in full, Holder shall be entitled to receive a new Warrant (containing terms identical to this Warrant) representing any unexercised portion of this Warrant in addition to such Common Stock. (d) Holder of Record. Each person in whose name any Warrant for shares of Common Stock is issued shall, for all purposes, be deemed to be the Holder of record of such shares on the Date of Exercise of this Warrant, irrespective of the date of delivery of the Common Stock purchased upon the Exercise of this Warrant. Nothing in this Warrant shall be construed as conferring upon Holder any rights as a stockholder of the Company. 3. Payment of Warrant Exercise Price. --------------------------------- The Exercise Price shall initially equal $8.375 per share ("Exercise Price") ----- or, if the Date of Exercise is more than six (6) months after the Date of Issuance, the lesser of (i) the Initial Exercise Price or (ii) the "Lowest Reset Price", as that term is defined below. The Company shall calculate a "Reset Price" on each six-month anniversary date of the Date of Issuance which shall equal one hundred percent (100%) of the lowest Closing Bid Price of the Company's Common Stock for the five (5) trading days ending on such six-month anniversary date of the date of Issuance. The "Lowest Reset Price" shall equal the lowest Reset Price determined on any six-month anniversary date of the Date of Issuance preceding the Date of Exercise, taking into account, as appropriate, any adjustments made pursuant to Section 5 hereof. Payment of the Exercise Price may be made by either of the following, or a combination thereof, at the election of Holder: (i) Cash Exercise: cash, bank or cashiers check or wire transfer; or (ii) Cashless Exercise: subject to the last sentence of this Section 3, surrender of this Warrant at the principal office of the Company together with notice of cashless election, in which event the Company shall issue Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B)/A where: X = the number of shares of Common Stock to be issued to Holder. Y = the number of shares of Common Stock for which this Warrant is being exercised. 2 A = the Market Price of one (1) share of Common Stock (for purposes of this Section 3(ii), the "Market Price" shall be defined as the average Closing Bid Price of the Common Stock for the five (5) trading days prior to the Date of Exercise of this Warrant (the "Average Closing Price"), as reported by the O.T.C. Bulletin Board, National Association of Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market, or if the Common Stock is not traded on the Nasdaq Small Cap Market, the Average Closing Price in any other over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Market Price shall be the Average Closing Price on such exchange for the five (5) trading days prior to the date of exercise of the Warrants. If the Common Stock is/was not traded during the five (5) trading days prior to the Date of Exercise, then the closing price for the last publicly traded day shall be deemed to be the closing price for any and all (if applicable) days during such five (5) trading day period. B = the Exercise Price. For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price on the O.T.C. Bulletin Board, the National Market System ("NMS"), the New York Stock Exchange, the Nasdaq Small Cap Market, or if no longer traded on the O.T.C. Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq Small Cap Market, the "Closing Bid Price" shall equal the closing price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and, if not available, the mean of the high and low prices on the principal national securities exchange on which the Common Stock is so traded. For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended, understood and acknowledged that the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued. Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued. Notwithstanding anything to the contrary contained herein, this Warrant may not be exercised in a cashless exercise transaction if, on the Date of Exercise, the shares of Common Stock to be issued upon exercise of this Warrant would upon such issuance be then registered pursuant to an effective registration statement filed pursuant to that certain Registration Rights Agreement dated on or about December 14, 1998 by and among the Company and certain investors, or otherwise -- be registered under the Securities Act of 1933, as amended. 4. Transfer and Registration. ------------------------- (a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant, this Warrant may be transferred on the books of the Company, in whole or in part, in person or by attorney, upon surrender of this Warrant properly completed and endorsed. This Warrant shall be canceled upon such surrender and, as soon as practicable thereafter, the person to whom such transfer is made shall be entitled to receive a new Warrant or Warrants as to the portion of this Warrant transferred, and Holder shall be entitled to receive a new Warrant as to the portion hereof retained. (b) Registrable Securities. The Common Stock issuable upon the exercise of this Warrant constitutes "Registrable Securities" under that certain Registration Rights 3 Agreement dated on or about December 14, 1998 between the Company and certain -- investors and, accordingly, has the benefit of the registration rights pursuant to that agreement. 5. Anti-Dilution Adjustments. ------------------------- (a) Stock Dividend. If the Company shall at any time declare a dividend payable in shares of Common Stock, then Holder, upon Exercise of this Warrant after the record date for the determination of holders of Common Stock entitled to receive such dividend, shall be entitled to receive upon Exercise of this Warrant, in addition to the number of shares of Common Stock as to which this Warrant is exercised, such additional shares of Common Stock as such Holder would have received had this Warrant been exercised immediately prior to such record date and the Exercise Price will be proportionately adjusted. (b) Recapitalization or Reclassification. If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a larger or smaller number of shares, then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such recapitalization, reclassification or similar transaction, and the Exercise Price shall be, in the case of an increase in the number of shares, proportionally decreased and, in the case of decrease in the number of shares, proportionally increased. The Company shall give Holder the same notice it provides to holders of Common Stock of any transaction described in this Section 5(b). (c) Distributions. If the Company shall at any time distribute for no consideration to holders of Common Stock cash, evidences of indebtedness or other securities or assets (other than cash dividends or distributions payable out of earned surplus or net profits for the current or preceding years) then, in any such case, Holder shall be entitled to receive, upon Exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date fixing shareholders to be affected by such event (the "Determination Date") or, in lieu thereof, if the Board of Directors of the Company should so determine at the time of such distribution, a reduced Exercise Price determined by multiplying the Exercise Price on the Determination Date by a fraction, the numerator of which is the result of such Exercise Price reduced by the value of such distribution applicable to one share of Common Stock (such value to be determined by the Board of Directors of the Company in its discretion) and the denominator of which is such Exercise Price. (d) Notice of Consolidation or Merger. In the event of a merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or there is a sale of all or substantially all the Company's assets (a "Corporate Change"), then this Warrant shall be exerciseable into such class and type of securities or other assets as Holder would have received had Holder exercised this Warrant immediately prior to such Corporate Change; provided, however, that Company may not affect any Corporate Change unless it first shall have given thirty (30) days notice to Holder hereof of any Corporate Change. 4 (e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise Price" shall mean the purchase price per share specified in Section 3 of this Warrant, until the occurrence of an event stated in subsection (a), (b) or (c) of this Section 5, and thereafter shall mean said price as adjusted from time to time in accordance with the provisions of said subsection. No such adjustment under this Section 5 shall be made unless such adjustment would change the Exercise Price at the time by $.01 or more; provided, however, that all adjustments not so made shall be deferred and made when the aggregate thereof would change the Exercise Price at the time by $.01 or more. No adjustment made pursuant to any provision of this Section 5 shall have the net effect of increasing the Exercise Price in relation to the split adjusted and distribution adjusted price of the Common Stock. The number of shares of Common Stock subject hereto shall increase proportionately with each decrease in the Exercise Price. (f) Adjustments: Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 5, Holder shall, upon Exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 5. 6. Fractional Interests. --------------------- No fractional shares or scrip representing fractional shares shall be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may purchase only a whole number of shares of Common Stock. If, on Exercise of this Warrant, Holder would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon exercise shall be the next higher number of shares. 7. Reservation of Shares --------------------- The Company shall at all times reserve for issuance such number of authorized and unissued shares of Common Stock (or other securities substituted therefor as herein above provided) as shall be sufficient for the Exercise of this Warrant and payment of the Exercise Price. The Company covenants and agrees that upon the Exercise of this Warrant, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to preemptive rights, rights of first refusal or similar rights of any person or entity. 8. Restrictions on Transfer. ------------------------- (a) Registration or Exemption Required. This Warrant has been issued in a transaction exempt from the registration requirements of the Act by virtue of Regulation D and exempt from state registration under applicable state laws. The Warrant and the Common Stock issuable upon the Exercise of this Warrant may not be pledged, transferred, sold or assigned except pursuant to an effective registration statement or an exemption to the registration requirements of the Act and applicable state laws. (b) Assignment. If Holder can provide the Company with reasonably satisfactory evidence that the conditions of (a) above regarding registration or exemption have been satisfied, Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a written notice to Company, 5 substantially in the form of the Assignment attached hereto as Exhibit B, --------- indicating the person or persons to whom the Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms for the appropriate number of shares. 9. Benefits of this Warrant. ------------------------ Nothing in this Warrant shall be construed to confer upon any person other than the Company and Holder any legal or equitable right, remedy or claim under this Warrant and this Warrant shall be for the sole and exclusive benefit of the Company and Holder. 10. Applicable Law. -------------- This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the state of California, without giving effect to conflict of law provisions thereof. 11. Loss of Warrant. --------------- Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 12. Notice or Demands. ----------------- Notices or demands pursuant to this Warrant to be given or made by Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid and addressed, until another address is designated in writing by the Company, to the Attention: Frank W. Denny, Chairman, Shopping.Com, 2101 East Coast Highway, Garden Level, Corona Del Mar, CA 92625, Telephone No. (949) 640-4393, Telecopy No. (949) 640-4374. Notices or demands pursuant to this Warrant to be given or made by the Company to or on Holder shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, to the address of Holder set forth in the Company's records, until another address is designated in writing by Holder. IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the 14th ---- day of December, 1998. SHOPPING.COM By: /s/ FRANK W. DENNY ---------------------------- Frank W. Denny, Chairman 6 EXHIBIT A EXERCISE FORM FOR WARRANT TO: SHOPPING.COM The undersigned hereby irrevocably exercises the right to purchase ____________ of the shares of Common Stock (the "Common Stock") of SHOPPING.COM, a California corporation (the "Company"), evidenced by the attached warrant (the "Warrant"), and herewith makes payment of the exercise price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant. 1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any of the Common Stock obtained on exercise of the Warrant, except in accordance with the provisions of Section 8(a) of the Warrant. 2. The undersigned requests that stock certificates for such shares be issued free of any restrictive legend, if appropriate, and a warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the undersigned and delivered to the undersigned at the address set forth below: Dated: ________________________________________________________________________________ Signature ________________________________________________________________________________ Print Name ________________________________________________________________________________ Address ________________________________________________________________________________ NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. ________________________________________________________________________________ 7 EXHIBIT B ASSIGNMENT (To be executed by the registered holder desiring to transfer the Warrant) FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the "Warrant") hereby sells, assigns and transfers unto the person or persons below named the right to purchase ___________ shares of the Common Stock of SHOPPING.COM, evidenced by the attached Warrant and does hereby irrevocably constitute and appoint __________________ attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises. Dated: __________________________ Signature Fill in for new registration of Warrant: __________________________________________ Name __________________________________________ Address __________________________________________ Please print name and address of assignee (including zip code number) ________________________________________________________________________________ NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. ________________________________________________________________________________ EX-4.4 5 FORM OF INVESTOR PURCHASE WARRANT EXHIBIT 4.4 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN REGULATION D COMMON STOCK EQUITY LINE SUBSCRIPTION AGREEMENT BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED THEREIN AS EXHIBIT J. --------- Warrant to Purchase "N" shares - --- Warrant to Purchase Common Stock of SHOPPING.COM THIS CERTIFIES that Swartz Private Equity, LLC or any subsequent holder --------------------------- hereof ("Holder"), has the right to purchase from SHOPPING.COM, a California corporation (the "Company"), up to "N" fully paid and nonassessable shares, wherein "N" is defined below, of the Company's common stock, $.01 par value per share ("Common Stock"), subject to adjustment as provided herein, at a price equal to the Exercise Price as defined in Section 3 below, at any time beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New York time the date that is seven (7) years after the Date of Issuance (the "Exercise Period"); provided, that, with respect to each "Put," as that term is defined in that certain Regulation D Common Stock Equity Line Subscription Agreement (the "Subscription Agreement") by and between the Holder and Company, "N" shall equal fifteen percent (15%) of the number of shares of Common Stock purchased by the Holder in that Put. Holder agrees with the Company that this Warrant to Purchase Common Stock of Shopping.Com (this "Warrant") is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein. 1. Date of Issuance and Term. ------------------------- This Warrant shall be deemed to be issued on _______________, 19__ ("Date of Issuance"). The term of this Warrant is seven (7) years from the Date of Issuance. 2. Exercise. -------- (a) Manner of Exercise. During the Exercise Period, this Warrant may be exercised as to all or any lesser number of full shares of Common Stock covered hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A (the "Exercise Form") duly completed and --------- executed, together with the full Exercise Price (as defined below) for each share of Common Stock as to which this Warrant is exercised, at the office of the Company, Attention: Frank W. Denny, Chairman, Shopping.Com, 2101 East Coast Highway, Garden Level, Corona Del Mar, CA 92625, Telephone No. (949) 640-4393, Telecopy No. (949) 640-4374, or at such other office or agency as the Company may designate in writing, by overnight mail, with an advance copy of the Exercise Form sent to the Company and its Transfer Agent by facsimile (such surrender and payment of the Exercise Price hereinafter called the "Exercise of this Warrant"). (b) Date of Exercise. The "Date of Exercise" of the Warrant shall be defined as the date that the advance copy of the completed and executed Exercise Form is sent by facsimile to the Company, provided that the original Warrant and Exercise Form are received by the Company as soon as practicable thereafter. Alternatively, the Date of Exercise shall be defined as the date the original Exercise Form is received by the Company, if Holder has not sent advance notice by facsimile. (c) Cancellation of Warrant. This Warrant shall be canceled upon the Exercise of this Warrant, and, as soon as practical after the Date of Exercise, Holder shall be entitled to receive Common Stock for the number of shares purchased upon such Exercise of this Warrant, and if this Warrant is not exercised in full, Holder shall be entitled to receive a new Warrant (containing terms identical to this Warrant) representing any unexercised portion of this Warrant in addition to such Common Stock. (d) Holder of Record. Each person in whose name any Warrant for shares of Common Stock is issued shall, for all purposes, be deemed to be the Holder of record of such shares on the Date of Exercise of this Warrant, irrespective of the date of delivery of the Common Stock purchased upon the Exercise of this Warrant. Nothing in this Warrant shall be construed as conferring upon Holder any rights as a stockholder of the Company. 3. Payment of Warrant Exercise Price. --------------------------------- The Exercise Price shall initially equal $Y per share ("Exercise Price"), where "Y" shall equal 110% of the Closing Bid Price of the Company's Common Stock on the Pricing Period End Date (as defined in the Subscription Agreement) for the applicable Put or, if the Date of Exercise is more than six (6) months after the Date of Issuance, the lesser of (i) the Initial Exercise Price or (ii) the "Lowest Reset Price", as that term is defined below. The Company shall calculate a "Reset Price" on each six-month anniversary date of the Date of Issuance which shall equal one hundred percent (100%) of the lowest Closing Bid Price of the Company's Common Stock for the five (5) trading days ending on such six-month anniversary date of the Date of Issuance. The "Lowest Reset Price" shall equal the lowest Reset Price determined on any six-month anniversary date of the Date of Issuance preceding the Date of Exercise, taking into account, as appropriate, any adjustments made pursuant to Section 5 hereof. Payment of the Exercise Price may be made by either of the following, or a combination thereof, at the election of Holder: (i) Cash Exercise: cash, bank or cashiers check or wire transfer, or (ii) Cashless Exercise: subject to the last sentence of this Section 3, surrender of this Warrant at the principal office of the Company together with notice of cashless election, in which event the Company shall issue Holder a number of shares of Common Stock computed using the following formula: 2 X = Y (A-B)/A where: X = the number of shares of Common Stock to be issued to Holder. Y = the number of shares of Common Stock for which this Warrant is being exercised. A = the Market Price of one (1) share of Common Stock (for purposes of this Section 3(ii), the "Market Price" shall be defined as the average Closing Bid Price of the Common Stock for the five (5) trading days prior to the Date of Exercise of this Warrant (the "Average Closing Price"), as reported by the O.T.C. Bulletin Board, National Association of Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market, or if the Common Stock is not traded on the Nasdaq Small Cap Market, the Average Closing Price in any other over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Market Price shall be the Average Closing Price on such exchange for the five (5) trading days prior to the date of exercise of the Warrants. If the Common Stock is/was not traded during the five (5) trading days prior to the Date of Exercise, then the closing price for the last publicly traded day shall be deemed to be the closing price for any and all (if applicable) days during such five (5) trading day period. B = the Exercise Price. For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price on the O.T.C. Bulletin Board, the National Market System ("NMS"), the New York Stock Exchange, the Nasdaq Small Cap Market, or if no longer traded on the O.T.C. Bulletin Board, the NMS, the New York Stock Exchange, the Nasdaq Small Cap Market, the "Closing Bid Price" shall equal the closing price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and, if not available, the mean of the high and low prices on the principal national securities exchange on which the Common Stock is so traded. For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended, understood and acknowledged that the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued. Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued. Notwithstanding anything to the contrary contained herein, this Warrant may not be exercised in a cashless exercise transaction if, on the Date of Exercise, the shares of Common Stock to be issued upon exercise of this Warrant would upon such issuance be then registered pursuant to an effective registration statement filed pursuant to that certain Registration Rights Agreement dated on or about December 14, 1998 by and among the Company and certain investors, or otherwise be registered under the Securities Act of 1933, as amended. 3 4. Transfer and Registration. ------------------------- (a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant, this Warrant may be transferred on the books of the Company, in whole or in part, in person or by attorney, upon surrender of this Warrant properly completed and endorsed. This Warrant shall be canceled upon such surrender and, as soon as practicable thereafter, the person to whom such transfer is made shall be entitled to receive a new Warrant or Warrants as to the portion of this Warrant transferred, and Holder shall be entitled to receive a new Warrant as to the portion hereof retained. (b) Registrable Securities. The Common Stock issuable upon the exercise of this Warrant constitutes "Registrable Securities" under that certain Registration Rights Agreement dated on or about December 14, 1998 between the Company and certain investors and, accordingly, has the benefit of the registration rights pursuant to that agreement. 5. Anti-Dilution Adjustments. ------------------------- (a) Stock Dividend. If the Company shall at any time declare a dividend payable in shares of Common Stock, then Holder, upon Exercise of this Warrant after the record date for the determination of holders of Common Stock entitled to receive such dividend, shall be entitled to receive upon Exercise of this Warrant, in addition to the number of shares of Common Stock as to which this Warrant is exercised, such additional shares of Common Stock as such Holder would have received had this Warrant been exercised immediately prior to such record date and the Exercise Price will be proportionately adjusted. (b) Recapitalization or Reclassification. If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a larger or smaller number of shares, then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason of such recapitalization, reclassification or similar transaction, and the Exercise Price shall be, in the case of an increase in the number of shares, proportionally decreased and, in the case of decrease in the number of shares, proportionally increased. The Company shall give Holder the same notice it provides to holders of Common Stock of any transaction described in this Section 5(b). (c) Distributions. If the Company shall at any time distribute for no consideration to holders of Common Stock cash, evidences of indebtedness or other securities or assets (other than cash dividends or distributions payable out of earned surplus or net profits for the current or preceding years) then, in any such case, Holder shall be entitled to receive, upon Exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date fixing shareholders to be affected by such event (the "Determination Date") or, in lieu thereof, if the Board of Directors of the Company should so determine at the time of such distribution, a reduced Exercise Price determined by multiplying the Exercise Price on the Determination Date by a fraction, the numerator of which is the result of such Exercise Price reduced by the value of such distribution applicable to one share of Common Stock (such value to be 4 determined by the Board of Directors of the Company in its discretion) and the denominator of which is such Exercise Price. (d) Notice of Consolidation or Merger. In the event of a merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or there is a sale of all or substantially all the Company's assets (a "Corporate Change"), then this Warrant shall be exerciseable into such class and type of securities or other assets as Holder would have received had Holder exercised this Warrant immediately prior to such Corporate Change; provided, however, that Company may not affect any Corporate Change unless it first shall have given thirty (30) days notice to Holder hereof of any Corporate Change. (e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise Price" shall mean the purchase price per share specified in Section 3 of this Warrant, until the occurrence of an event stated in subsection (a), (b) or (c) of this Section 5, and thereafter shall mean said price as adjusted from time to time in accordance with the provisions of said subsection. No such adjustment under this Section 5 shall be made unless such adjustment would change the Exercise Price at the time by $.01 or more; provided, however, that all adjustments not so made shall be deferred and made when the aggregate thereof would change the Exercise Price at the time by $.01 or more. No adjustment made pursuant to any provision of this Section 5 shall have the net effect of increasing the Exercise Price in relation to the split adjusted and distribution adjusted price of the Common Stock. The number of shares of Common Stock subject hereto shall increase proportionately with each decrease in the Exercise Price. (f) Adjustments: Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 5, Holder shall, upon Exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 5. 6. Fractional Interests. -------------------- No fractional shares or scrip representing fractional shares shall be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may purchase only a whole number of shares of Common Stock. If, on Exercise of this Warrant, Holder would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon exercise shall be the next higher number of shares. 7. Reservation of Shares. --------------------- The Company shall at all times reserve for issuance such number of authorized and unissued shares of Common Stock (or other securities substituted therefor as herein above provided) as shall be sufficient for the Exercise of this Warrant and payment of the Exercise Price. The Company covenants and agrees that upon the Exercise of this Warrant, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to preemptive rights, rights of first refusal or similar rights of any person or entity. 5 8. Restrictions on Transfer. ------------------------ (a) Registration or Exemption Required. This Warrant has been issued in a transaction exempt from the registration requirements of the Act by virtue of Regulation D and exempt from state registration under applicable state laws. The Warrant and the Common Stock issuable upon the Exercise of this Warrant may not be pledged, transferred, sold or assigned except pursuant to an effective registration statement or an exemption to the registration requirements of the Act and applicable state laws. (b) Assignment. If Holder can provide the Company with reasonably satisfactory evidence that the conditions of (a) above regarding registration or exemption have been satisfied, Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a written notice to Company, substantially in the form of the Assignment attached hereto as Exhibit B, indicating the person or persons to whom the Warrant shall --------- be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms for the appropriate number of shares. 9. Benefits of this Warrant. ------------------------ Nothing in this Warrant shall be construed to confer upon any person other than the Company and Holder any legal or equitable right, remedy or claim under this Warrant and this Warrant &hall be for the sole and exclusive benefit of the Company and Holder. 10. Applicable Law. -------------- This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the state of California, without giving effect to conflict of law provisions thereof. 11. Loss of Warrant. --------------- Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 12. Notice or Demands. ----------------- Notices or demands pursuant to this Warrant to be given or made by Holder to or on the Company shall be sufficiently given or made if sent by certified or registered Mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, to the Attention: Frank W. Denny, Chairman, Shopping.Com, 2101 East Coast Highway, Garden Level, Corona Del Mar, CA 92625, Telephone No. (949)640-4393, Telecopy No. (949)640-4374. Notices or demands pursuant to this Warrant to be given or made by the Company to or on Holder shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, to the address of Holder set forth in the Company's records, until another address is designated in writing by Holder. 6 IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the ___ day of _______________, ______. Shopping.Com By: ----------------------------- Frank W. Denny, Chairman 7 EXHIBIT A EXERCISE FORM FOR WARRANT TO: SHOPPING.COM The undersigned hereby irrevocably exercises the right to purchase _________ of the shares of Common Stock (the "Common Stock") of SHOPPING.COM, a California corporation (the "Company"), evidenced by the attached warrant (the "Warrant"), and herewith makes payment of the exercise price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant. 1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any of the Common Stock obtained on exercise of the Warrant, except in accordance with the provisions of Section 8(a) of the Warrant. 2. The undersigned requests that stock certificates for such shares be issued free of any restrictive legend, if appropriate, and a warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the undersigned and delivered to the undersigned at the address set forth below: Dated: - -------------------------------------------------------------------------------- Signature - -------------------------------------------------------------------------------- Print Name - -------------------------------------------------------------------------------- Address - -------------------------------------------------------------------------------- NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. - -------------------------------------------------------------------------------- 8 EXHIBIT B ASSIGNMENT (To be executed by the registered holder desiring to transfer the Warrant) FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the "Warrant") hereby sells, assigns and transfers unto the person or persons below named the right to purchase _________ shares of the Common Stock of SHOPPING.COM, evidenced by the attached Warrant and does hereby irrevocably constitute and appoint _______________ attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises. Dated: ----------------------------------- Signature Fill in for new registration of Warrant: - --------------------------------------- Name - --------------------------------------- Address - --------------------------------------- Please print name and address of assignee (including zip code number) - -------------------------------------------------------------------------------- NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. - -------------------------------------------------------------------------------- EX-10.1 6 PLEDGE AGREEMENT EXHIBIT 10.1 PLEDGE AGREEMENT ---------------- December ___, 1998 Krieger & Prager, As Agent 319 Fifth Avenue New York, NY 10016 Attention: Samuel Krieger Gentlemen: 1. Pledge. The undersigned (the "Pledgor"), as an inducement for one or ------ more of your clients for whom you are acting as Agent (the "Pledgees"), to make loam, advances and extensions of credit to SHOPPING-COM, a California corporation (the "Debtor"), hereby pledges, grants a security interest in, mortgage, assign, transfer, deliver, set over and confirm unto you as Agent for the Pledgees, their successors and assigns, the shares of capital stock of the Debtor described in Exhibit A annexed hereto and made a part hereof, with attached stock powers duly endorsed to Pledgees, as collateral security for the payment in full when due of (i) all indebtedness of the Debtor under certain Notes or Debentures of the Debtor of even date herewith in the principal amount of $2,500,000 (the "Notes"), and (ii) all other obligations of the Debtor to the Pledgees, whether presently existing or hereafter arising (collectively, the "Obligations"). Pledgor warrants and represents that, except as set forth in Section 19 or as noted on the reverse side of the certificate(s) or instrument(s) evidencing the foregoing securities, there are no restrictions upon the transfer of any of the foregoing securities and that Pledgor has the right to transfer said securities free of any encumbrance. Pledgor hereby agrees promptly to pledge and deposit hereunder with the Pledgees any stock or other securities declared as a dividend with respect to or issued as a split of any securities now or hereafter held in pledge hereunder and any additional property hereto pledged to the Pledgees by Pledgor, whether taken in substitution for or in addition to the above-described property. Such stock other securities and property shall stand pledged and assigned for the Obligations in the same manner as the property described in the first paragraph hereof. (All of the property described in this paragraph and in the first paragraph hereof is hereinafter called the "Pledged Stock"). -1- 2. Representations, Warranties and Covenants of the Pledgor. -------------------------------------------------------- Pledgor hereby represents, warrants and covenants to the Pledgees as follows: (a) Except for the security interest and pledge hereunder, upon delivery of the Pledged Stock to the Pledgees, the Pledgor is, or to the extent that certain of the Pledged Stock is to be acquired after the date hereof, will be the sole owner of the Pledged Stock free from any adverse lion, security interest or encumbrance, and the Pledgor will defend the Pledged Stock against all claims and demands of all persons at any time claiming any interest therein. (b) The Pledgor will promptly pay any and all taxes, assessments and governmental charges upon the Pledged Stock prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by the Pledgor. (c) The Pledgor will not sell or otherwise assign, transfer or dispose of the Pledged Stock or any interest therein without the prior written consent of the Pledgees. (d) Except for the security Interest and pledge hereunder, the Pledgor will keep the Pledged Stock free from any adverse lien, security interest or encumbrance. (e) The Pledged Stock is duly and validly issued, fully paid and nonassesssable, and each certificate evidencing Pledged Stock is issued in the name of Pledgor. (f) The Debtor will not issue any shares of its capital stock or any securities or rights to acquire such shares or securities to Pledgor, and any such issuance shall not be effective, unless, the same shall be pledged to the Pledgees as additional security under this Pledge Agreement pursuant to documents in form and substance satisfactory to the Pledgees. 3. Voting Power, Dividends, Etc. ----------------------------- (a) Unless and until an Event of Default (as defined below) has occurred, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Pledged Stock, and the Pledgor shall be entitled to receive and retain any dividends or distributions on the Pledged Stock except: (i) stock dividends; (ii) dividends payable in securities or other property (except cash dividends); -2- (iii) dividends or distributions on dissolution or on partial or total liquidation or in connection with a reduction of capital, capital surplus or paid-in surplus; and (iv) other securities issued with respect to or in lieu of the Pledged Stock (whether upon conversion of the convertible securities included therein or through stock split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of shares or otherwise). The Pledgees shall have the right to receive and retain all dividends, interest and other payments and distributions made upon of with respect to the Pledged Stock, except those which the Pledgor is specifically authorized to receive as provided above, and the Pledgor shall take an such action as may be necessary or appropriate to give effect to such right. From time to time, upon receiving a written request from the Pledgor accompanied by a certificate signed by the Pledgor stating that no Event of Default has occurred and/or is continuing, the Pledgees shall deliver to the Pledgor suitable assignments and orders for the payment to the Pledgor (or upon its order) of all dividends, interest and other payments and distributions to which the Pledgor is entitled as aforesaid, upon or with respect to any Pledged Stock which is registered in the Pledgees' name. (b) Any provisions herein to the contrary notwithstanding, if any Event of Default (or, as to subsection (ii) below, an event which, with the passage of time and/or the giving of notice, or both, would constitute an Event of Default) shall have occurred, then and whether or not any holder of the Note or the Obligations exercise any available option to declare the Note or the Obligations due and payable or seeks or pursues any other relief or remedy available to such holder under this Pledge Agreement, the Note or any agreement evidencing or securing any of the Obligations: (i) The Pledgees, or their respective nominee or nominees, shall forthwith, without further act on the part of any person, have the sole and exclusive right to exercise all voting, consensual and other powers of ownership pertaining to the Pledged Stock and shall exercise such powers in such manner as the Pledgees, in their sole discretion, shall determine to be necessary, appropriate or advisable, and if the Pledgees shall so request in writing, the Pledgor agrees to execute and deliver to the Pledgees such other and additional powers, authorizations, proxies, dividends and such other documents as the Pledgees may request to secure to the Pledgees' the rights, powers and authorities intended to be conferred upon the Pledgees by this subsection (b); and (ii) All dividends and other distributions on the Pledged Stock shall be paid directly to the Pledgees and retained by it as part of its Pledged Stock, subject to the terms of this Pledge Agreement, and if the Pledgees shall so request in writing, the Pledgor agrees to execute and deliver to the Pledgees appropriate additional dividend, distribution and other orders and documents to that end. -3- 4. Sale of Pledged Stock After an Event of Default. ----------------------------------------------- If any Event of Default shall have occurred, and the principal amount of the Note or any of the Obligations shall have been declared forthwith due and payable, then unless the Note and the Obligations shall have been paid in full, the Pledgees may, in their sole discretion, without further demand, advertisement or notice, except as expressly provided for in subsection (a) of this Section 4, (i) apply the cash, if any, then held by it as collateral hereunder, for the purposes and in the manner provided in Section 5 hereof, and (ii) if there shall be no such cash or the cash so applied shall be insufficient to make in full all payments provided in subsections (a) and (b) of Section 5 hereof. (a) Sell the Pledged Stock, or any part thereof, in one or more Sales, at public or private sale, conducted by any officer or agent of, or auctioneer or attorney for, the Pledgees, at the Pledgees' place of business or elsewhere, for cash, upon credit or future delivery, and at such price or prices as the Pledgees shall, in their sole discretion, determine, and the Pledgees may be the purchaser of any or all of the Pledged Stock so sold. Upon any such sale the Pledgees shall have the right to deliver, assign and transfer to the purchaser thereof the Pledged Stock so sold. Each purchaser (including, without limitation, the Pledgees) at any such sale shall hold the Pledged Stock so sold absolutely free from any claim or right of whatsoever kind, including, without limitation, any equity or right of redemption of the Pledgor, which the Pledgor hereby specifically waives, to the extent it may lawfully do so, and all rights of redemption, stay or appraisal which Pledgor has or may have under any rule of law or statute now existing or hereafter adopted. The Pledgees shall give the Pledgor at least ten (10) days prior written notice of any such public or private sale. Any such public sale shall be held at such time or times within ordinary business hours as the Pledgees shall fix in the notice of such sale. At any such public or private sale the Pledged Stock may be sold in one lot as an entirety or in separate parcels. The Pledgees shall not be obligated to make any sale pursuant to any such notice. The Pledgees may, without notice or publication, adjourn any public or private sale from time to time by announcement at the time and place fixed for such sale, or any adjournment thereof, and any such sale may be made at any time or place to which the same may be so adjourned without further notice or publication. In case of any sale of all or any part of the Pledged Stock for credit or for future delivery, the Pledged Stock so sold may be retained by the Pledgees until the selling price is paid by the purchaser thereof, but the Pledgees shall not incur any liability in case of the failure of such purchaser to take up and pay for the Pledged Stock so sold, and in case of any such failure, such Pledged Stock may again be sold under and pursuant to the provisions hereof; or (b) Proceed by a suit or suits at law or in equity to foreclose upon this Pledge Agreement and sell the Pledged Stock, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. -4- If at any time when the Pledgees shall determine to exercise their right to sell all or any part of the Pledged Stock pursuant to Section 4(a) hereof, such Pledged Stock or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities. Act of 1933, as from time to time in effect (the "Securities Act"), the Pledgees, in their sole and absolute discretion, are hereby expressly authorized to sell such Pledged Stock or such part thereof by private sale in such manner and under such circumstances as the Pledgees may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Pledgees, in their sole and absolute discretion, (x) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Stock or such part thereof shall have been filed under such Securities Act; (y) may approach and negotiate with a restricted number of potential purchasers to effect such sale; and (z) may restrict such sale to purchasers as to their number, nature of business and investment intention, including, without limitation, to purchasers each of whom will represent and agree to the satisfaction of the Pledgees that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Stock or part thereof, it being understood that the Pledgees may require the Pledgor, and the Pledgor hereby agrees upon the written request of the Pledgees, to cause: (i) a legend or legends to be placed on the certificates to be delivered to such purchasers to the effect that the Pledged Stock represented thereby has not been registered under the Securities Act and setting forth or referring to restrictions on the transferability of such securities, or (ii) the issuance of stop transfer instructions to the transfer agent of any issuer (each an "Issuer") of such securities, if any, with respect to the Pledged Stock, or if the Issuer transfers its own securities, a notation in the appropriate records of such Issuer, and that the Pledgees may require to be obtained, and the Pledgor will cooperate with the Pledgees in obtaining from the purchasers a signed written agreement that the Pledged Stock will not be sold without registration or other compliance with the requirements of the Securities Act. In the event of any such sale, the Pledgor does hereby consent and agree that the Pledgees shall incur no responsibility or liability for selling all or any part of the Pledged Stock at a price which the Pledgees, in their sole and absolute discretion, may deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were public and deferred until after registration under the Securities Act. The Pledgees as attorney-in-fact pursuant to Section 6 hereof may, in the name and stead of the Pledgor, make and execute all conveyances, assignments and transfers of the Pledged Stock sold pursuant to this Section 4. The Pledgor shall, if so requested by the Pledgees, ratify and confirm any sale or sales by executing and delivering to the Pledgees, or to such purchaser or purchasers, all such instruments as may, in the judgment of the Pledgees, be advisable for the purpose. The receipt of the Pledgees for the purchase money paid at any such sale made by it shall be a sufficient discharge therefor to any purchaser of the Pledged Stock, or any -5- portion thereof, sold as aforesaid; and no such purchaser (or his or its representatives or assigns), after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money or any part thereof or in any manner whatsoever be answerable for any loss, misapplication, necessity, expediency or regularity of any such sale. Except as otherwise provided herein, the Pledgor shall have such rights of redemption as are afforded by the Uniform Commercial Code as then in effect in the State of Now York. 5. Application of Proceeds. ----------------------- The proceeds of any sale, or of collection, of all or any part of the Pledged Stock shall be applied by the Pledgees, without any marshaling of assets, in the following order: (a) first, to the payment of all of the reasonable com and expenses of such sale, including, without limitation, reasonable attorneys' fees, and all other expenses, liabilities and advances reasonably made or incurred by the Pledgees in connection therewith; and (b) second, to the payment of the Obligations in such order as the Pledgees shall determine, until payment in full thereof, and (c) finally, to the payment to the Pledgees, their respective successors or assigns, or their respective heirs, executors or administrators, or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction way direct, of any surplus remaining from such proceeds after payments of the character referred to in subsections (a) and (b) of this Section 5 shall have been made. 6. Pledgees Appointed Attorney-In-Fact. ----------------------------------- Effective upon the occurrence of an Event of Default, the Pledgees, their successors and assigns, are hereby appointed the attorney-in-fact, with full power of substitution, of the Pledgor for the purpose of carrying out the provisions of this Pledge Agreement and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest, including, without limitation, the power: (a) to demand, sue for, collect, receive and give acquittance for any and all monies due or to be owed due upon or by virtue thereof, -6- (b) to receive, take, endorse, assign and deliver any and all checks, notes, draft documents and other negotiable and non-negotiable instruments and chattel paper taken of received by the Pledgees in connection therewith; (c) to settle, compromise, prosecute or defend any action or proceeding with respect thereto; and (d) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon. 7. No Waiver. --------- No failure on the part of the Pledgees to exercise, and no delay on the part of the Pledgees in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Pledgees of any right, power or remedy hereunder preclude the single or partial exercise by the Pledgees of any other or further right, power or remedy. no remedies herein provided are cumulative and are not exclusive of any remedies provided by law. 8. Termination of Pledge. --------------------- When all of the Obligations, including, without limitation, the Note, shall have been paid in full, this Pledge Agreement shall terminate. The Pledgees shall forthwith assign, transfer and deliver to the Pledgor or its respective successors or assigns without representation, warranty or recourse, against appropriate receipts, all the Pledged Stock, ir any, then held by the Pledgees in pledge hereunder, free and clear of all liens and encumbrances created by the Pledgees or its representatives. This provision shall survive the termination of this Pledge Agreement. 9. Governing Law; Consent to Jurisdiction -------------------------------------- (a) This Pledge Agreement shall in all respects be construed and interpreted in accordance with and governed by the laws of the State of New York. (b) The Pledgor to the extent that Pledgor may lawfully do so, hereby submits to the jurisdiction of any courts, federal or state, sitting in the State of New York, as well as to the Jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceeding arising out of any of the Pledgor's obligations under or with respect to this Pledge Agreement, and Pledgor expressly waives any and all objections Pledgor may now or hereafter have as to the venue in any of such courts. The Pledgor also waives trial by jury in any such action or proceeding. -7- 10. Successors and Assigns. ---------------------- This Pledge Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, legal representatives, executors and administrators of the Pledgor and the Pledgees, and any subsequent holder of the Note or the Obligations. 11. Additional Instruments and Assurance. ------------------------------------ Pledgor hereby agrees, at Pledgor's own expense, to execute and deliver, from time to time, any and all further, or other, instruments, and to perform such acts, as the Pledgees may reasonably request to effect the purposes of this Pledge Agreement and to secure to the Pledgees, and to all persons who may from time to time be, the holder of the Note or the Obligations, the benefits of all right, authorities and remedies conferred upon the Pledgees by the terms of this Pledge Agreement. 12. Future Holders of Note. ---------------------- This Pledge Agreement is for the benefit of any and all future holders of the Note or the Obligations in addition to the Pledgees, each of whom shall, without further act, become a party hereto by becoming a holder of the Note of the Obligations. 13. Obligations of Each Pledgor --------------------------- Any and all references to the "Pledgor" herein shall be deemed to refer to the Pledgor executing this Pledge Agreement and all obligations of the Pledgor hereunder shall apply to the Pledgor. 14. Notices. ------- All notices, requests, demands, consents or other communications given hereunder or in connection herewith shall be in writing and sent by certified mail, return receipt requested, postage prepaid, addressed to the Pledgor at the address set forth below, and if to the Pledgees, addressed to the Pledgees at their principal offices set forth above. The Pledgor or the Pledgees may, by notice given as aforesaid, change their address for all subsequent notices. Notice shall be deemed given on the earlier to occur of: (i) the third day following deposit thereof in the mail as aforesaid, or (ii) receipt by the party to whom such notice is directed. 15. Separability. ------------ In case any one or more of the provisions of this Pledge Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, but this Pledge -8- Agreement shall be construed as if such invalid, illegal or unenforceable provision had not been included. 16. Events of Default. ----------------- The Pledgor shall be in default under this Pledge Agreement upon the occurrence of any of the following events (an "Event of Default"): (a) if any representation or warranty made by the Pledgor in this Pledge Agreement shall be false or misleading in any material respect; (b) if the Pledgor fails to duly observe or perform any covenant, condition or agreement contained in this Agreement and on Pledgor's part to be observed or performed, which default continues unremedied for five (5) days after the earlier to occur of (i) the discovery by the Pledgor, or any of them, of such default, or (ii) written notice thereof from the Pledgees to the Pledgor; (c) the occurrence of an Event of Default as defined in the Note; or (d) the occurrence of an Event of Default as defined in any of the other documents reflecting the Obligations. 17. Cumulative Remedies; Indemnification. ------------------------------------ The rights, powers and remedies provides herein in favor of Pledgees shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other rights and remedies in favor of the Pledgees existing at law or in equity, including (without limitation) all of the rights powers and remedies available to a secured party under any law or regulation. The Pledgor shall pay, indemnify and hold harmless the Pledgees from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may be imposed on, incurred by or asserted against the Pledgor in any way relating to or arising out of any misrepresentation by the Pledgor hereunder or any failure of the Pledgor to perform and observe its obligations hereunder. The obligation of the Pledgor under this Section 17 shall survive the payment in full of the Obligations and the termination of this Pledge Agreement. 18. Readings. -------- The headings of the Sections of this Pledge Agreement have been inserted for convenience of reference only and shall in no way affect the construction or interpretation or this Pledge Agreement. -9- 19. Governmental. ------------ Anything to the contrary contained herein notwithstanding, the Pledgees will not take any action pursuant to this Pledge Agreement which would constitute or result in any assignment of a governmentally issued license or any transfer of control of any entity owned or controlled by the Debtor if such assignment of license or transfer of control would require under then existing law the prior approval of a government agency (the "Agency"), without first obtaining such approval of the Agency. The Pledgor agrees to take any action which the Pledgees may request in order that the Pledgees obtain and enjoy the full rights and benefits granted to the Pledgees; by this Agreement, including, specifically, at the Pledgor's own cost and expense, the use of Pledgor's best efforts to assist and cooperate in obtaining approval of the Agency for any action or transaction contemplated by this Agreement which is then required by law, and specifically, without limitation, upon request, to prepare, sign (or cause to be signed) and file with the Agency any portion of any application or applications for consent to the assignment of license or transfer of control required to be signed by the Pledgor, the Debtor, its officers and/or directors, and necessary or appropriate under the Agency's rules and regulations for approval of (a) any sale or sales of the Pledged Stock by or on behalf of the Pledgees or the holder of the Note and the Obligations or (b) any assumption by the Pledgees of Voting rights or management rights in the Pledged Stock. 20. Additional Terms. ---------------- (a) Pledgor acknowledges that Krieger & Prager is acting as agent for the Pledgees. The Agent has acted as legal counsel for the Pledgees and the Placement Agent in the transaction between the Debtor and the Pledgees, and may continue to act as legal counsel for such parties, from time to time, notwithstanding its duties as the Agent hereunder. Pledgor consents to the Agent acting in such capacity as legal counsel for the Pledgees and the Placement Agent and waives any claim that such representation represents a conflict of interest on the part of the Agent. Pledgor understands that the Pledgees and the Agent are relying explicitly on the foregoing provisions in entering into these transactions wit the Debtor and accepting this Pledge Agreement, as the case may be. (b) With respect to the terms of this Pledge Agreement or any matter arising thereunder, Krieger & Prager shall use the same degree of care and skill in their exercise as reasonable men use in the conduct of their own affairs; provided, however, that notwithstanding the foregoing, on the event that Krieger & Prager shall have received written notice from the holders in excess of 66-2/3% or more of the Notes, to act or refrain from acting under the terms of the Pledge Agreement, Krieger & Prager shall be bound by such written direction, notwithstanding the foregoing provisions of this Pledge Agreement. -10- Please indicate you receipt of the property described in the first paragraph hereof and you agreement to the terms and provisions hereof by executing this Pledge Agreement in the space provided below. /s/ Robert J. McNulty ------------------------------- Name: Robert McNulty Accepted and agreed to as of the date first above written KRIEGER & PRAGER By: /s/ Illegible ------------------------------- Name: -11- EXHIBIT A PLEDGED STOCK ------------- T/B/S -12- EX-10.2 7 FORM OF SECURITY AGREEMENT EXHIBIT 10.2 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND THEREFORE THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT REGISTRATION THEREUNDER OR PURSUANT TO AN EXEMPTION FROM REGISTRATION. SHOPPING.COM, INC. SECURITY AGREEMENT THIS SECURITY AGREEMENT is entered into on the ____ day of ____________, 1998 by and between Shopping.com, Inc., a California corporation ("Company"), and ______________________________________("Secured Party"). R E C I T A L S: - - - - - - - - A. Company has executed that certain Secured Promissory Note of even date herewith in favor of the Secured Party in the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000) (the "Note"); and B. Company desires to grant to the Secured Party a security interest in all assets of Company to secure the Note. NOW, THEREFORE, the parties agree as follows: 1. Creation of Security Interest. In consideration of the loan pursuant ----------------------------- to the Note, Company hereby grants to the Secured Party a security interest in the collateral described on Schedule "A" hereto and all substitutions therefor and proceeds (including insurance proceeds) thereof (the "Collateral"). 2. Company's Representations and Warranties. Company represents and ---------------------------------------- warrants to the Secured Party that (a) Company has the absolute and unrestricted right, power, authority and capacity to execute and deliver the Note and to grant a security interest in the Collateral in accordance with the terms of this Agreement, (b) Company will do all acts necessary to maintain, preserve and protect the Collateral and to keep it in good condition and repair, and will pay, prior to delinquency, any taxes, charges or liens imposed or assessed upon the Collateral, (c) Company will observe and comply with all applicable laws, rules and regulations in its use of the Collateral, except where the failure to do so does not materially adversely affect Company, its business, assets or prospects, (d) this Agreement and the consummation of the transactions contemplated -1- hereunder creates a valid and perfected security interest in the Collateral, securing payment and performance of the Obligations (as defined below) and (e) the Company will not assign, sell, lease, transfer, or otherwise dispose of or abandon, nor will the Company suffer or permit any of the same to occur with respect to, any Collateral, without prior written notice to and consent of the Secured Party except for the sale or lease from time to time in the ordinary course of business of such items of the Collateral as may constitute Inventory, and the inclusion of "proceeds" of the Collateral under the security interest granted herein shall not be deemed a consent by the Secured Party to any sale or other disposition of any Collateral except as expressly permitted herein. 3. Purpose. The security interest created by this Agreement secures ------- payment in full when due of (a) all indebtedness of the Company to Secured Party under the Note, (b) the performance of all other obligations of Company under the Note and this Agreement and (c) any amounts advanced and expenditures made by Secured Party for the maintenance and preservation of the Collateral, or any part thereof (collectively, the "Obligations"). 4. Term of Security Agreement. This Agreement shall continue, and the -------------------------- Secured Party shall retain its security interest in the Collateral, until (a) payment in full of all amounts due under or by virtue of the Note and any provision of this Agreement, and (b) the full performance and discharge of all other obligations of Company under the Note and this Agreement. 5. Default. The occurrence of any one of the following events or ------- conditions shall constitute a default under this Agreement: (a) the Maker fails to pay when due the full amount of interest then accrued on this Note, or fails to pay when due the full amount of the principal payment and any unpaid accrued interest upon maturity of this Note, and (in either case) such nonpayment continues for thirty (30) days; (b) the Maker fails to perform or observe any other material provision contained in this Note, or any other agreement executed in connection with the transactions contemplated by this Note, and such default continues for a period of thirty (30) days after receipt of written notice thereof; (c) any representation or warranty made in any of the agreements, or in any writing furnished by the Maker to the Holder, is false or misleading (taken as a whole) in any materially adverse respect on the date made or furnished; or (d) the Maker makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due; or an order, judgment -2- or decree is entered adjudicating the Maker to be bankrupt or insolvent is entered under the federal Bankruptcy Code; or the Maker petitions or applies for the appointment of a custodian, trustee, receiver or liquidator of the Maker, or any substantial parts of the assets of the Maker; or commences any proceeding relating to the Maker under any bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding commenced, against the Maker and either (A) the Maker by any act indicates its approval thereof or (B) such petition, application or proceeding is not dismissed within 60 days. 6. Secured Party's Remedies. Upon default as specified in Section 5, the ------------------------ Secured Party may, at its option, exercise any one or more of the following rights: (a) declare all unpaid principal and accrued interest under the Note immediately due and payable; (b) exercise its rights and remedies under the California Commercial Code as a secured creditor having a security interest in the Collateral, and in particular, sell all or any part of the Collateral at one or more public or private sales to be conducted in California, on at least thirty days' prior notice and otherwise in a commercially reasonable manner and upon reasonable terms and conditions, taking into account all the circumstances; and (c) exercise any and all further rights or remedies of Secured Party under the California Commercial Code or other applicable law. To the extent permitted by law, Company hereby waives all requirements for the exercise of any of Secured Party's remedies other than those provided in this Agreement. Secured Party shall be entitled to enforce any of the remedies in this section successively or concurrently. The enforcement of any remedy provided in this section shall not prejudice the right of Secured Party to pursue any other or further remedy which it may have. 7. Disposition of Proceeds of Sale of Collateral. Secured Party may --------------------------------------------- retain from the proceeds of any sale of the Collateral provided for in Section 6 an amount sufficient to pay any and all amounts due Secured Party under the Note or this Agreement, together with all costs and expenses of preparing for, promoting, conducting and closing the sale, including reasonable attorneys' fees. Secured Party shall then pay any balance of the proceeds to Company, except as otherwise provided by law, subject to the rights of the holder of any then existing lien of which Secured Party has notice. -3- 8. Further Cooperation. Company agrees that upon reasonable request by ------------------- Secured Party, Company will promptly execute and deliver any documents, and take all additional actions reasonably deemed necessary or desirable by Secured Party to effect the purposes of this Agreement. 9. Financing Statement. ------------------- (a) Concurrently with the execution and delivery of this Agreement, Company shall execute and deliver a financing statement on Form UCC-1 with respect to the Collateral and shall cause said financing statement to be filed with the Uniform Commercial Code Division of the Office of the California Secretary of State and such county recorders offices as the Secured Party deems necessary to perfect its security interest in the Collateral. From time to time, as reasonably requested by Secured Party, Company shall execute and deliver to Secured Party such additional documents and instruments as may be necessary to perfect and maintain the Secured Party's security interest in the Collateral. (b) Upon termination of the security interest provided for herein, the Secured Party shall promptly execute and deliver to Company any and all documents (including a termination statement in a form suitable for filing under the Uniform Commercial Code of the State of California) which Company may deem to be necessary or appropriate in order to adequately evidence the termination of such security interest. 10. Personal Property. The parties hereby agree that the Collateral is, ----------------- and shall remain during the term of this Agreement, personal property. At no time shall the Collateral, or any portion thereof, be fixtures, trade or otherwise, even though attached or appurtenant to any building or real estate. 11. Severability. If any provision of this Agreement is determined to be ------------ invalid or unenforceable, all of its other provisions shall nevertheless remain in full force and effect. 12. Notices. All notices, requests and other communications required or ------- permitted under this Agreement shall be in writing and may be delivered personally or sent by first class mail, postage prepaid and addressed as follows: To Company: Shopping.com, Inc. 2101 E. Coast Highway Corona del Mar, CA 92625 Attn: Frank Denny -4- Secured Party: _____________ _____________ _____________ Attn:________ Any notice, request or other communication under this Agreement shall be effective when received by the addressee, but if sent by registered or certified mail postage prepaid and addressed as provided above, it shall be effective exactly three (3) business days after deposit in the United States Mail anywhere in the United States. The parties may change their addresses as listed above by giving notice of the new address to the other party in conformity with this section. 13. Binding Upon Successors. This Agreement shall inure to the benefit of ----------------------- and be binding upon the successors and assigns of the parties. 14. Entire Agreement; Modifications; Waiver. This Agreement, together --------------------------------------- with the Note and any financing statement executed in connection with this Agreement, constitutes the final, exclusive and complete understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings and discussions with respect thereto. No variation or modification of this Agreement and no waiver of any provision or condition hereof, or granting of any consent contemplated hereby, shall be valid unless in writing and signed by the party against whom enforcement of any such variation, modification, waiver or consent is sought. 15. Captions. The captions accompanying each section of this Agreement -------- are for convenience only and shall not be deemed part of the context of this Agreement. 16. Governing Law. This Agreement shall be governed by, and construed and ------------- enforced in accordance with the laws of the State of California, without regard to its choice-of-laws or conflicts-of-law rules. 17. Attorneys' Fees and Venue. In the event any action is brought by any ------------------------- party to this Agreement to enforce or interpret its terms or provisions, the prevailing party shall be entitled to reasonable attorneys' fees and costs. Any action to enforce or interpret the Agreement shall be brought and maintained in the State or Federal courts in and for the State of California, County of Orange. -5- 18. Counterparts. This Agreement may be executed in any number of ------------ counterparts, including electronically transmitted counterparts, each of which when so executed shall constitute an original copy hereof, but all of which together shall constitute one agreement. IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the day and year first above written. COMPANY Shopping.com, Inc. By: /s/ Kristine Webster -------------------- Title: CFO -------------------- SECURED PARTY __________________________ __________________________ -6- EXHIBIT A DESCRIPTION OF COLLATERAL The Collateral consists of all of the Company's right, title and interest in and to the trademarks listed below. The Company has filed Intent to Use applications with the United States Patent and Trademark Office ("PTO") for each of the listed trademarks. 1. Design only trademark, filed November 17, 1997, PTO Serial No. 75-391430. 2. "LOWER PRICES ON THE PLANET . . . PERIOD", filed November 17, 1997, PTO Serial No. 75-391729. 3. "LOWER PRICES ON THE PLANET . . . PERIOD", filed November 17, 1997, PTO Serial No. 75-391428. 4. "SHOPPING.STORE", filed November 17, 1997, PTO Serial No. 75-391427. 5. Design trademark, filed August 13, 1997, PTO Serial No. 75-340524. -7- EX-10.3 8 REGULATION D COMMON STOCK EXHIBIT 10.3 SHOPPING.COM REGULATION D COMMON STOCK PRIVATE EQUITY LINE SUBSCRIPTION AGREEMENT THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE FEDERAL AND STATE SECURITIES LAWS. THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. A-NY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUBSCRIBER MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT J. --------- SEE ADDITIONAL LEGENDS AT SECTIONS 4.7 and 10. THIS REGULATION D COMMON STOCK PRIVATE EQUITY LINE SUBSCRIPTION AGREEMENT (this "Agreement") is made as of the 14th day of December, 1998, by ---- and between SHOPPING.COM, a corporation duly organized and existing under the laws of the State of California (the "Company"), and the undersigned subscriber executing this Agreement ("Subscriber") RECITALS: WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue to the Subscriber, and the Subscriber shall purchase from the Company, from time to time as provided herein, shares of the Company's Common Stock, no par value per share (the "Common Stock"), as part of an offering of Common Stock by the Company to Subscriber, for a maximum aggregate offering amount of Sixty Million Dollars ($60,000,000) (the "Maximum Offering Amount"); and WHEREAS, the solicitation of this subscription and, if accepted by the Company, the offer and sale of the Common Stock are being made. in reliance upon the provisions Of Section 4(2) and upon the provisions of Regulation D ("Regulation D"), each promulgated under the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (the "Act! "), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the purchases of Common Stock to be made hereunder. TERMS: NOW, THEREFORE, the parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement (including the recitals above), the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accredited Investor" shall have the meaning set forth in Section 3.1. "Act" shall mean the Securities Act of 1933, as amended. "Advance Put Notice" shall have the meaning set forth in Section 2.3.1(a) the form of which is attached hereto as Exhibit E. --------- "Advance Put Notice Confirmation" shall have the meaning set forth in Section 2.3. 1 (a), the form of which is attached hereto as Exhibit F. --------- "Advance Put Notice Date" shall have the meaning set forth in Section 2.3.1(a). "Aggregate Issued Shares" equals the aggregate number of shares of Common Stock issued to Subscriber pursuant to the terms of this Agreement or the Registration Rights Agreement as of a given date, including Put Shares and Warrant Shares. "Agreement" shall mean this Regulation D Common Stock Private Equity Line Agreement. "Automatic Equity Line Termination" shall have the meaning set forth in Section 2.3.2. "Bid Price" shall mean the bid price of the Common Stock on the Company's Principal Exchange. "Bring Down Cold Comfort Letters" shall have the meaning set forth in Section 2.3.6(b). "Business Day" shall mean a time period beginning at the time of day in question and ending at the same time of day on the next day normally considered a business day. "Calendar Month" shall mean the period of time beginning on the numeric day in question in a calendar month (the "Numeric Day") and for Calendar Months thereafter, beginning on the earlier of (i) the same Numeric Day of the next calendar month or (ii) the last day of the next calendar month. Each Calendar Month shall end on the day immediately preceding the beginning of the next succeeding Calendar Month. "Cap Amount" shall have the. meaning set forth in Section 2.3.11. "Cap Limit Shares" shall have the meaning set forth in Section 2.3.11. "Capital Raising Limitations" shall have the meaning set forth in Section 6.6.1. "Capitalization Schedule" shall have the meaning set forth in Section 3.2.4, attached hereto as Exhibit K. --------- "Closing" shall mean one of the Private Equity Line Commitment Closing and closings of a purchase and sale of Common Stock pursuant to Section 2. 2 "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on the O.T.C. Bulletin Board, or, if the O.T.C. Bulletin Board is not the principal securities exchange or trading market for Such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by such principal securities exchange or trading market, or if the foregoing do not apply the last closing bid price of such security in the over- the-counter market on the electronic bulletin board for such security, or, if no closing bid price is reported for such security, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the Subscriber in this Offering, If the Company and the Subscriber in this Offering are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved by an investment banking firm mutually acceptable to the Company and the Subscriber in this offering and any fees and costs associated therewith shall be paid by the Company. "Commitment Evaluation Period" shall have the meaning set forth in Section 2.7. "Commitment Warrants" shall have the meaning set forth in Section 2.7. "Commitment Warrant Opinion of Counsel" shall mean an opinion from Company's independent counsel, in the form attached as Exhibit C. or such other --------- form as agreed upon by the parties, as to the issuance of Commitment Warrants to the Subscriber or its designated assignees. "Common Shares" shall mean the shares of Common Stock of the Company. "Common Stock" shall mean the, common stock of the Company, no par value per share. "Company" shall mean Shopping.Com, a corporation duly organized and existing under the laws of the State of California "Company Equity Line Termination" shall have the meaning set forth in Section 2.3.14. "Conditions to Subscriber's Obligations" shall have the meaning as set forth in Section 2.2.4. "Delisting Event" shall mean any time during the term of this Subscription Agreement, that the Company's Common Stock is not listed and available for trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the Nasdaq National Market, the American Stock Exchange, or the New York Stock Exchange or is suspended or delisted with respect to the trading of the shares of Common Stock on such market or exchange. "Disclosure Documents" shall have the meaning as set forth in Section 3.2.4. "Effective Date" shall have the meaning set forth in Section 2.3.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Extended Put Period" shall mean the period of time between the Advanced Put Notice Date until the Put Closing Date. "Gross Discount Amount" shall equal 17% of the aggregate Put Dollar --- Amount paid to the Company by the. Subscriber during the applicable Commitment Evaluation Period. 3 "Impermissible Put Cancellation" shall have the meaning set forth in Section 2.3.1 (d). "Individual Put Limit" shall have the meaning set forth in Section 2.3.3(a). "Ineffective Period" shall mean any period of time that the Registration Statement or any Supplemental Registration Statement (each as defined in the Registration Rights Agreement) becomes ineffective or unavailable for use for the sale or resale, as applicable, of any of all of the Registrable Securities (as defined in the Registration Rights Agreement) for any reason (or in the event the prospectus under either of the above is not current and deliverable) during any time period required under the Registration Rights Agreement. "Intended Put Share Amount" shall have the meaning set forth in Section 2.3.1 (a). "Key Employee" shall have the meaning set forth in Section 5.18, as set forth in Exhibit N. --------- "Legend shall have the meaning set forth in Section 4.7. "Major Transaction" shall mean and shall be deemed to have occurred at such time upon any of the following events: (i) a consolidation, merger or other business combination or event or transaction following which the holders of Common Stock of the Company immediately preceding such consolidation, merger, combination or event either (i) no longer hold a majority of the shares of Common Stock of the Company or (ii) no longer have the ability to elect the board of directors of the Company (a "Change of Control"); provided, however, that if the other entity involved in such consolidation, merger, combination or event is a publicly traded company with "Substantially Similar Trading Characteristics" (as defined below) as the Company and the holders of Common Stock are to receive solely Common Stock or no consideration (if the Company is the surviving entity) or solely common stock of such other entity (if such other entity is the Surviving entity), such transaction shall not be deemed to be a Major Transaction (provided the surviving entity, if other than the Company, shall have agreed to assume all obligations of the Company under this Agreement and the Registration Rights Agreement). For purposes hereof, an entity shall have Substantially Similar Trading Characteristics as the Company if the average daily dollar trading volume of the common stock of such entity is equal to or in excess of $1,000,000 --------- for the 90th through the 31st day prior to the public announcement of such transaction; (ii) the sale or transfer of all or substantially all of the Company's assets; or (iii) a purchase, tender or exchange offer made to the holders of outstanding shares of Common Stock, such that following such purchase, tender or exchange offer a Change of Control shall have occurred. "Market Price" shall equal the lowest Closing Bid Price of the Common Stock on any Trading Day during the applicable Pricing Period. "Maximum Offering Amount" shall mean Sixty Million Dollars ($60,000,000). "Maximum Pricing Period" shall have the meaning set forth in Section 2.3.1 (b). "Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.11. "Numeric Day" shall mean the numerical day of the month of the Subscription Date. "Offering" shall mean the Company's offering of the Private Equity Line hereunder. 4 "Officer's Certificate" shall mean a certificate, signed by an officer of the Company, to the effect that the representations and warranties of the Company in this Agreement required to be true for the applicable Closing are true and correct in all material respects and all of the conditions and limitations set forth in this Agreement for the applicable Closing are satisfied. "Opinion of Counsel" shall mean, as applicable, the Private Equity Line Commitment Opinion of Counsel, the Put Opinion of Counsel, the Commitment Warrant Opinion of Counsel and the Purchase Warrant Opinion of Counsel. "Pricing Confirmation Notice" shall mean a notice in the form attached as Exhibit P. - --------- "Pricing Period" shall have the meaning set forth in Section 2.3.1(b). "Pricing Period End Date" shall mean the last Trading Day of any Pricing Period. "Principal Market" shall mean the Nasdaq Small Cap Market, the O.T.C. Bulletin Board, of the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. "Private Equity Line" shall mean this Agreement. "Private Equity Line Commitment Closing" shall have the meaning set forth in Section 2.2.3. "Private Equity Line Commitment Opinion of Counsel" shall mean an opinion from Company's independent counsel, in the form attached as Exhibit B, or such ---------- other form as agreed upon by the parties, as to the Private Equity Line Commitment Closing. "Purchase Warrant Opinion of Counsel" shall mean an opinion from Company's independent counsel, in the form attached as Exhibit O, or such other form as ---------- agreed upon by the parties, as to the issuance of Purchase Warrants to the Subscriber or its designated assignees. "Purchase Warrants" shall have the meaning set forth in Section 2.4.2. "Put" shall have the meaning set forth in Section 2.3.1(b). "Put Cancellation" shall have the meaning set forth in Section 2.3.13. "Put Cancellation Confirmation Notice" shall have the meaning set forth in Section 2.3.13. "Put Cancellation Date" shall have the meaning set forth in Section 2.3.13. "Put Cancellation Notice" shall have the meaning set forth in Section 2.3.13. "Put Closing" shall have the meaning set forth in Section 2.3.7. "Put Closing Date" shall have the meaning set forth in Section 2.3.7. "Put Date" shall mean the date that is specified by the Company in any Put Notice for which the Company intends to exercise a Put under Section 2.3.1(b). 5 "Put Dollar Amount" shall be determined by multiplying the Put Share Amount by the Put Share Price with respect to such Put Date, subject to the Put Limitations pursuant to Section 2.3.2 below. "Put Notice" shall have the meaning set forth in Section 2.3.1(b), the form of which is attached hereto as Exhibit G. --------- "Put Notice Confirmation" shall have the meaning set forth in Section 2.3.1(b), the form of which is attached hereto as Exhibit H. --------- "Put Opinion of Counsel" shall mean an opinion from Company's independent counsel, in the form attached as Exhibit I, of such other form as agreed upon by --------- the parties, as to any Put Closing. "Put Share Amount" shall have the meaning as set forth Section 2.3.1(a). "Put Share Price" shall have the meaning set forth in Section 2.3.1 (c). "Put Shares" shall mean shares of Common Stock that are purchased by the Subscriber pursuant to a Put. "Registrable Securities" shall have the meaning as set forth in the Registration Rights Agreement. "Registration Opinion" shall have the meaning set forth in Section 2.3.6(a). "Registration Opinion Deadline" shall have the meaning set forth in Section 2.3.6(a). "Registration Rights Agreement" shall mean that certain registration rights agreement entered into by the Company and Subscriber on even date herewith, in the form attached hereto as Exhibit A, or such other form as agreed upon by the ---------- parties. "Registration Statement" shall have the meaning as set forth in the Registration Rights Agreement "Regulation D" shall have the meaning set forth in the Recitals hereto. "Reporting Issuer" shall have the meaning set forth in Section 6.2. "Required Put Documents" shall have the meaning set forth in Section 2.3.5. "Risk Factors" shall have the meaning set forth in Section 3.2.4, attached hereto as Exhibit J. --------- "SEC" shall mean the Securities and Exchange Commission "Securities" shall mean this Private Equity Line, together with the Common Stock of the Company, the Warrants and the Warrant Shares issuable pursuant to this Private Equity Line. "Semi-Annual Commitment Shortfall" shall have the meaning set forth in Section 2.7. "Six Month Anniversary" shall mean the date that is the same Numeric Day of the sixth (6th) calendar month after the Subscription Date, and the date that is the same Numeric Day of each 6 sixth (6th) calendar month thereafter, provided that if such date is not a Business Day, the next Business Day thereafter. "Stockholder 20% Approval" shall have the meaning set forth in Section 6.12. "Subscriber" shall have the meaning set forth in the preamble hereto. "Subscriber Due Date" shall have the meaning set forth in Section 2.5.1. "Subscription Date" shall mean the date of the Private Equity Line Commitment Closing. "Supplemental Registration Statement" shall have the meaning set forth in the Registration Rights Agreement. "Term" shall mean the term of this Agreement, which shall be a period of time beginning on the date of this Agreement and ending on the Termination Date. "Termination Date" shall mean the earlier of (i) the date that is three, (3) years after the date of this Agreement, or (ii) the date that is thirty (30) Trading Days after the later of (a) the Put Closing Date on which the sum of the aggregate Put Share Price for all Put Shares equal the Maximum Offering Amount, (b) the date that the Company has delivered a valid Termination Notice to the Subscriber, and (c) the date that all of the Warrants have been exercised. "Termination Notice" shall have the meaning set forth in Section 2.3.14. "Trading Cushion" shall have the meaning set forth in Section 2.3.1(b). "Trading Day" shall mean any day during which the Principal Market is open for business. "Transaction Documents" shall have the meaning set forth in Section 9. "Unlegended Share Certificates" shah mean a certificate or certificates (in denominations as instructed by Subscriber) representing the shares of Common Stock to which the Subscriber is then entitled to receive, registered in the name, of Subscriber or its nominee (as instructed by Subscriber) and not containing a restrictive legend, including but not limited to the Put Shares for the applicable Put, and Warrant Shares. "Use of Proceeds Schedule" shall have the meaning as set forth in Section 3.2.4, attached hereto as Exhibit L. --------- "Warrant Shares" shall mean the Common Stock issuable upon exercise of the Warrants. "Warrants" shall mean Commitment Warrants and the Purchase Warrants. 2. Purchase and Sale of Common Stock 2.1 Offer to Subscribe. ------------------ Subject to the terms and conditions herein and the satisfaction of the conditions to 9 closing set forth in Sections 2.2 and 2.3 below, Subscriber hereby agrees to purchase such amounts of Common Stock and accompanying Warrants as the Company may, in its sole and absolute discretion from time to time elect to issue and sell to Subscriber according to one or more Puts pursuant to Section 2.3 below. 7 2.2 Private Equity Line Commitment. ------------------------------- 2.2.1 [Intentionally Left Blank]. 2.2.2 (Intentionally Left Blank]. 2.2.3 Private Equity Line Commitment Closing. The closing of this Agreement (the "Private Equity Line, Commitment Closing") shall be deemed to occur when this Agreement and the Registration Rights Agreement have been executed, by both Subscriber and the Company, and the other Conditions to Subscriber's Obligations set forth in Section 2.2.4 below have been met. 2.2.4 Conditions to Subscriber's Obligations. As a prerequisite to the Private Equity Line Commitment Closing and the Subscriber's obligations hereunder, all of following (the "Conditions to Subscriber's Obligations") shall have been satisfied prior to or concurrently with the Company's execution and delivery of this Agreement: (a) the following documents shall have been delivered to the Subscriber: (i) the Registration Rights Agreement, in the form attached hereto as Exhibit A, or such other form as agreed upon by --------- the parties, (the, "Registration Rights Agreement") (executed by the Company and Subscriber), (ii) the Private Equity Line Commitment Opinion of Counsel and Commitment Warrant Opinion of Counsel (each signed by the Company's counsel), and (iii) a secretary's certificate, as to (A) the resolutions of the Company's board of directors authorizing this transaction, (B) the Company's Certificate of Incorporation, and (C) the Company's Bylaws; (b) this Subscription Agreement, accepted by the Company, shall have been received by the Subscriber; (c) the Commitment Warrants, executed by the Company, shall have been received by the Subscriber; (d) the Company's Common Stock shall be listed for and trading on the O.T.C. Bulletin Board; (e) other than continuing losses described in the Risk Factors below as described in the Disclosure Documents (as described in Section 3.2.4) and, as of the Closing there have been no material adverse, changes in the Company's business prospects or financial condition since the date of the last balance sheet included in the Disclosure Documents, including but not limited to incurring material liabilities other than a debenture in an amount up to $ 10 million after the date hereof to be used a bridge financing; and (f) the representations and warranties of the Company in this Agreement are true and correct in all material respects and the conditions to Subscriber's obligations set forth in this Section 2.2.4 are satisfied as of such Closing; and the Company shall deliver an Officer's Certificate, signed by an officer of the Company, to such effect to the Subscriber. 2.3 Puts of Common Shares to the Subscriber. --------------------------------------- 2.3.1 Procedure to Exercise a Put. Subject to the Individual Put Limit, the Maximum Offering Amount and the Cap Amount (if applicable), and the other conditions and limitations set forth in this Agreement at any time beginning on the date on which the Registration 8 Statement is declared effective by the SEC (the "Effective Date"), the Company may, in its sole and absolute discretion, elect to exercise one or more Puts according to the following procedure: (a) at least ten (10) Trading Days prior to any intended Put Date (unless otherwise agreed in writing by the Subscriber), the Company shall deliver advance written notice (the "Advance Put Notice," the form of which is attached hereto as Exhibit E, the date of such Advance Put Notice --------- being the "Advance Put Notice Date") to Subscriber stating the Put Date for which the Company shall, subject to the limitations and restrictions contained herein, exercise a Put and stating the number of shares of Common Stock (subject to the Individual Put Limit) for which the Company shall exercise a Put (the "Intended Put Share Amount"). The "Individual Put Limit" shall equal 25% of the summation of the daily reported trading volume in the outstanding Common Stock on the Company's Principal Market during the Maximum Pricing Period. The "Put Share Amount" is the number of shares of Common Stock that the Subscriber shall be obligated to purchase in a given Put, and shall equal the lesser of (i) the Intended Put Share Amount, or (ii) the "Individual Put Limit". Notwithstanding the Individual Put Limit, the Company shall, be obligated to issue to the Subscriber Unlegended Share. Certificates representing a number of shares of Common Stock equal to the number of shares of Common Stock sold, if any, by the Subscriber from the Advance Put Notice Date through the close of trading on the Pricing Period End Date, but not exceeding the Intended Put Share Amount. Notwithstanding the above, if more than two (2) Calendar Months have passed since the date of the previous Put Closing, the Company shall deliver the Advance Put Notice at least twenty (20) Trading Days prior to any intended Put Date. In order to effect delivery of the Advance Put Notice, the Company shall (i) send the Advance Put Notice by facsimile on such date so that such notice is received by the Subscriber by 6:00 p.m., New York, NY time, and (ii) surrender such notice on such date to a common courier for overnight delivery to the, Subscriber (or two (2) day delivery in the case of a Subscriber residing outside of the U.S.). Upon receipt by the Subscriber of a facsimile copy of the Advance Put Notice, the Subscriber shall, within two (2) Business Days, send, via facsimile, a confirmation of receipt (the "Advance Put Notice Confirmation," the form of which is attached hereto as Exhibit F) of the Advance Put Notice to --------- Company specifying that the Advance Put Notice has been received and affirming the intended Put Date and the Intended Put Share amount; (b) on the Put Date specified in the Advance Put Notice, the Company shall deliver written notice (the "Put Notice," the form of which is attached hereto as Exhibit G, the date of such Put Notice being the --------- "Put Date') to Subscriber stating (i) the Put Date, and (ii) the "Intended Put Share Amount" as specified in the Advance Put Notice (such exercise a ("Put"); provided, further, that the Company shall not send a Put Notice unless at least twenty (20) Trading Days, not including any Trading Day for which the Registration Statement is ineffective of subject to an Ineffective Period, have elapsed (the 'Trading Cushion") since the last Put Date for which a Put was closed. In order to effect delivery of the Put Notice, the Company shall (i) send the Put Notice by facsimile on the Put Date so that such notice is received by the Subscriber by 6:00 p.m., New York, NY time, and (ii) surrender such notice on the Put Date to a common courier for overnight delivery to the Subscriber (or two (2) day delivery in the case of a Subscriber residing outside of the U.S.). Upon receipt by the Subscriber of a facsimile copy of the Put Notice, the Subscriber shall, within two (2) Business Days, send, via facsimile, a confirmation of receipt (the "Put Notice Confirmation," the form of which is attached hereto as Exhibit H) of the Put Notice to Company specifying that the --------- Put Notice has been received and affirming the Put Date and the Intended Put Share Amount; For purposes hereof, the "Pricing Period," unless otherwise shortened under the terms of this Agreement shall equal the greater of (i) ten (10) Trading Days or (ii) the minimum period of consecutive Trading Days, beginning on the Trading Day immediately following the Put Date, for which 25% of the summation of the daily reported trading volume in the outstanding Common 9 Stock on the Company's Principal Market equals Or exceeds the Intended Put Share Amount; provided that the Pricing Period shall not exceed twenty (20) Trading Days (the "Maximum Pricing Period"); and provided that if a Put Cancellation Notice has been delivered to the, Subscriber after the Put Date, the Pricing Period for such Put shall end at 6:00 p.m., New York City time, on the Put Cancellation Date. (c) the "Put Share Price" shall equal the lesser of (i) 83% of the Market Price for such Put, or (ii) the Market Price for such Put minus $.50; and (d) on or before the Put Date for such Put, the Company shall deliver the Required Put Documents (as defined in Section 2.3.5 below) to the Subscriber (or to an agent of Subscriber, if Subscriber so directs). Unless otherwise specified by the Subscriber, the Put Shares of Common Stock shall be transmitted electronically pursuant to such electronic delivery system as the Subscriber shall request; otherwise delivery shall be by physical certificates. If the Company has not delivered all of the Required Put Documents to the Subscriber on or before the Put Date, the Subscriber, at its option, may cancel the Put or may agree to delay the Put Date by up to three (3) Trading Days, in which case the Pricing Period begins on the Trading Day following, such new Put Date. If the Company has not delivered all of the Required Put Documents to the Subscriber on or before the Put Dale (or new Put Date, if applicable), and the Subscriber has not agreed in writing to delay the Put Date, the Put is automatically canceled (an "Impermissible Put Cancellation") and, unless the Put was otherwise canceled in accordance with the terms of Section 2.3.13, the Company shall pay the Subscriber $15,000 for its reasonable due, diligence expenses incurred in preparation for the canceled put and the Company may deliver an Advance Put Notice for the subsequent Put no sooner than ten (10) Business Days after the date that such Put was canceled. 2.3.2 Termination of Right to Put. The Company's right to require the Subscriber to purchase any subsequent Put Shares shall terminate permanently (an "Automatic Equity Line Termination"), unless waived in writing by the Subscriber, upon the occurrence of any of the following: (a) the Company shall not exercise a Put or any Put thereafter if, at any time, either the Company or any director or executive officer of the Company has engaged in a transaction or conduct that gives rise to (i) a Securities Exchange Commission enforcement action, or (ii) a civil judgment or criminal conviction for fraud or misrepresentation, or for any other offense that, if prosecuted criminally, would constitute a felony under applicable law; (b) the Company shall not exercise a Put or any Put thereafter, on any date after (i) any Ineffective Period or Delisting Event, both as defined in the Registration Rights Agreement, that lasts for four (4) consecutive months, or (ii) after a cumulative time period including both Ineffective Periods and Delisting Events that lasts for an aggregate of four (4) months; (c) the Company shall not exercise a Put or any Put thereafter if at any time the Company has filed for and/or is subject to any bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors instituted by or against the Company or any subsidiary of the Company, provided that if an involuntary bankruptcy petition is filed against the Company or involuntary bankruptcy proceedings are instituted against the Company, the Company's right to initiate a Put shall be suspended until such time as the proceedings are dismissed and an Automatic Equity Line Termination shall occur if such petition or proceeding has not been dismissed within ninety (90) days of the date of filing; and 10 (d) the Company shall not exercise a Put after the sooner of (i) the date that is three (3) years after the date of this Agreement, or (ii) the Put Closing Date on which the aggregate of the Put Dollar Amount for all Puts equal the Maximum Offering Amount. 2.3.3 Put Limitations. The Company's right to exercise a Put shall be limited as follows, unless waived in writing by the Subscriber: (a) [Intentionally Left Blank). (b) notwithstanding the amount of any Put, the Subscriber shall not be obligated to purchase any additional Put Shares once the aggregate Put Dollar Amount paid by Subscriber equals the Maximum Offering Amount; (c) the Subscriber shall not be obligated to acquire and pay for the Put Shares with respect to any Put for which the Company has announced a subdivision or combination, including a reverse split, of its Common Stock or has subdivided or combined its Common Stock during the Extended Put Period; (d) the Subscriber shall not be obligated to acquire and pay for the Put Shares with respect to any Put for which the Company has paid a dividend of its Common Stock or has made any other distribution of its Common Stock during the Extended Put Period; (e) the Subscriber shall not be obligated to acquire and pay for the Put Shares with respect to any Put for which the Company has made, during the Extended Put Period, a distribution of all or any portion of its assets or evidences of indebtedness to the holders of its Common Stock; (f) the Subscriber shall not be obligated to acquire and pay for the Put Shares with respect to any Put for which a Major Transaction has occurred during the Extended Put Period, 2.3.4 Conditions Precedent to the Right of the Company to Deliver an Advance Put Notice or a Put Notice and the Obligation of the Subscriber to Purchase Put Shares. The right of the Company to deliver an Advance Put Notice or a Put Notice and the obligation of the Subscriber hereunder to acquire and pay for the Put Shares incident to a Closing is subject to the satisfaction, on (1) the date of delivery of such Advance Put Notice or Put Notice and (ii) the applicable Put Closing Date, of each of the following conditions, unless waived in writing by the Subscriber: (a) the Company's Common Stock shall be listed for and actively trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the Nasdaq National Market or the New York Stock Exchange and the Put Shares shall be so listed, and to the Company's knowledge there is no notice of any suspension or delisting with respect to the trading of the shares of Common Stock on such market or exchange; (b) the Company shall have satisfied any and all obligations pursuant to the Registration Rights Agreement, including, but not limited to, the filing of the Registration Statement with the SEC with respect to the resale of all Registrable Securities and the requirement that the Registration Statement shall have been declared effective by the SEC for the resale of all Registrable Securities and the Company shall have satisfied and shall be in compliance with any and all obligations pursuant to the Subscription Agreement and the Warrants; 11 (c) there have been no material adverse changes in the Company's business prospects or financial condition (defined below in Section 5.2), including but not limited to incurring material liabilities, except as disclosed in the SEC documents filed by the Company since the date of this Agreement; (d) the representations and warranties of the Company are true and correct in all material respects as if made on such date and the conditions to Subscriber's obligations set forth in this Section 2.3.4 are satisfied as of such Closing, and the Company shall deliver a certificate, signed by an officer of the Company, to such effect to the Subscriber; (e) the Company shall have reserved for issuance a sufficient number of Common Shares for the purpose of enabling the Company to satisfy any obligation to issue Common Shares pursuant to any Put and to effect exercise of the Warrants; (f) the Registration Statement is not subject to an Ineffective Period as defined in the Registration Rights Agreement, the prospectus included therein is current and deliverable and does not contain any untrue statement of material fact or omit a material fact required to make the statements contained therein, in light of the circumstances in which they were made, not misleading, and to the Company's knowledge there is no notice of any investigation or inquiry concerning any stop order with respect to the Registration Statement; (g) if the Aggregate Issued Shares after the Closing of the Put would exceed the Cap Amount, the Company shall have obtained the Stockholder 20% Approval as specified in Section 6.12; and 2.3.5 Documents Required to be Delivered on the Put Date as Conditions to Closing of any Put. The Closing of any Put and Subscriber's obligations hereunder shall additionally be conditioned upon the delivery to the Subscriber of each of the following (the "Required Put Documents") on or before the applicable Put Date, unless waived or extended in writing by the Subscriber: (a) a number of Unlegended Share Certificates equal to the intended Put Share Amount representing the Common Stock for which the Subscriber has subscribed, in denominations of not more than 50,000 shares per certificate; (b) the following documents: Put Opinion of Counsel, Officer's Certificate, Put Notice, any required Registration Opinion, and any report required under Section 2.3.6 or Section 2.6; (c) current Risk Factors; and (d) all documents, instruments and other writings required to be delivered on or before the Put Date pursuant to any provision of this Agreement in order to implement and effect the transactions contemplated herein. 12 2.3.6 Accountant's Letter and Registration Opinion. (a) The Company shall have caused to be delivered to the Subscriber, (i) to the extent provided by Section 2.6, and (ii) on the date that is three (3) Trading Days prior to each Put Date (the "Registration Opinion Deadline"), an opinion of the Company's independent counsel, in substantially the form of Exhibit R (the "Registration Opinion"), addressed to the Subscriber --------- stating, inter alia, that no facts ("Material Facts") have come to such counsel's attention that would cause it to believe that any of the following: the Registration Statement, any Supplemental Registration Statement, as applicable (as each may be amended, if applicable), and any related prospectuses, contains an untrue statement of material fact or omits a material fact required to make the statements contained therein, not misleading or that the underlying Prospectus (if applicable, as so amended or supplemented) contains an untrue statement of material fact or omits a material fact required to make the statements contained therein, in light of the circumstances in which they were made, not misleading. If a Registration Opinion cannot be delivered by the Company's independent counsel to the Subscriber on the Registration Opinion Deadline due to the existence of Material Facts, the Company shall promptly notify the Subscriber and promptly revise each of the Registration Statement and any Supplemental Registration Statement, as applicable, and deliver such Registration Opinion and updated prospectus as soon as possible thereafter. If at any time after a Put Notice shall have been delivered to Subscriber but before the Put Closing, the Company acquires knowledge of such Material Facts or any Ineffective Period occurs, the Company shall promptly notify the Subscriber and shall deliver a Put Cancellation Notice to the Subscriber pursuant to Section 2.3.13 by facsimile and overnight courier by the end of that Trading Day. The Company's independent counsel shall also deliver to the Subscriber on the Effective Date opinions in form and substance satisfactory to the Subscriber addressing, among other things, corporate matters and the exemption from registration under the Securities Act of the issuance of the Common Stock by the Company to the Subscriber under this Agreement. (b) (i) the Company shall engage its independent auditors to perform the procedures in accordance with the provisions of Statement on Auditing Standards No. 71, as amended, as agreed to by the parties hereto, and reports thereon (the "Bring Down Cold Comfort Letters") as shall have been reasonably requested by the Subscriber with respect to certain financial information contained in the Registration Statement and shall have delivered to the Subscriber a report addressed to the Subscriber, on the date that is three (3) Trading Days prior to each Put Date. (ii) in the event that the Subscriber shall have requested delivery of an "agreed upon procedures" report pursuant to Section 2.6, the Company shall engage its independent auditors to perform certain agreed upon procedures and report thereon as shall have been reasonably requested by the Subscriber with respect to certain financial information of the Company and the Company shall deliver to the Subscriber a copy of such report addressed to the Subscriber. In the event that the report required by this Section 2.3.6(b) cannot be delivered by the Company's independent auditors, the Company shall, if necessary, promptly revise the Registration Statement and the Company shall not deliver a Put Notice until such report is delivered. (c) in addition to the above, anytime that a Registration Opinion has not been given to the Subscriber during the prior three (3) Calendar Months, and the Subscriber then holds Common Stock issued pursuant to this Agreement valued at $250,000 or more, based upon the Closing Bid Price on the day in question, the Subscriber may require the Company to cause a Registration Opinion and a Bring Down Cold Comfort Letter to be delivered to the Subscriber. The Company shall provide such documents to the Subscriber within five (5) Trading Days of the Subscriber's written request. 13 2.3.7 Put Closing Mechanics. On or before the end of the Trading Day immediately following the Pricing Period End Date for each Put, the Company shall deliver to the Subscriber a Pricing Confirmation Notice in the form of Exhibit P attached hereto, setting forth the Put Share Price and the Put Dollar - --------- Amount for such Put. In the case of a dispute as to the calculation of the Put Share Price, the Subscriber shall pay the Put Share Price that it reasonably calculates, and the Company shall submit the disputed calculations to its outside accountant via facsimile within one (1) business day of the date that the Company is notified of such dispute. The Company shall cause the accountant to perform the calculations and notify the Company and Holder of the results no later than two (2) business days from the time it receives the disputed calculations. Accountant's calculation shall be deemed conclusive absent manifest error. On or before the fifth (5th) Trading Day after a Pricing Period End Date (the "Subscriber Due Date"), the Subscriber shall deliver to the Company the Put Dollar Amount in the manner specified in Section 8 below for such Put Shares as specified in the Put Notice; provided, however, if the Subscriber does not deliver to the Company the Put Dollar Amount for such Put on or before the Subscriber Due Date, then the Subscriber shall pay to the Company, in addition to the Put Dollar Amount, an amount (the "Late Payment Amount") at a rate of X% per month, accruing daily, multiplied by such Put Dollar Amount, where "X" equals one percent (1%) for the first month following the date in question, and increases by an additional one percent (1%) for each month that passes after the date in question, up to a maximum of five percent (5%). The closing (each a "Put Closing") for each Put shall occur on the date that both (i) the Company has delivered to the Subscriber all Required Put Documents, and (ii) the Subscriber has delivered to the Company such Put Dollar Amount and any Late Payment Amount, if applicable (each a "Put Closing Date"). 2.3.8 [Intentionally Left Blank]. 2.3.9 [Intentionally Left Blank]. 2.3.10 Limitation on Short Sales. The Subscriber and its Affiliates shall not engage in short sales of the Company's Common Stock; provided, however, that the Subscriber may enter into any short sale or other hedging or similar arrangement it deems appropriate with respect to Put Shares after it receives an Advance Put Notice with respect to such Put Shares so long as such sales or arrangements do not involve more than the number of such Put Shares specified in the Advance Put Notice (or, a good faith estimate of the number of Put Shares, if an exact number of shares is not specified in the Advance Put Notice). 2.3.11 Cap Amount. Unless the Company has obtained Stockholder 20% Approval as set forth in Section 6.12 or unless otherwise permitted by Nasdaq, in no event shall the Aggregate Issued Shares exceed the maximum number of shares of Common Stock (the "Cap Amount") that the Company can, without stockholder approval, so issue pursuant to Nasdaq Rule 4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor rule) (the "Nasdaq 20% Rule"). 2.3.13 Put Cancellation at Company's Option. (a) Mechanics of Put Cancellation. Subject to the ----------------------------- limitations below, at any time from the Advance Put Notice Date through the last day of the Pricing Period, the Company may cancel a Put (a "Put Cancellation"), in whole or in part, by delivering written notice to the Subscriber (the "Put Cancellation Notice"), attached as Exhibit O, by facsimile and overnight --------- courier. The "Put Cancellation Date" shall be the date that the Put Cancellation Notice is first received by the Subscriber, if such notice is received by the Subscriber by 6:00 p.m., New York, NY time, and shall be the following date, if such notice is received by the Subscriber after 6:00 p.m., New York, NY time. The Subscriber shall, within one (1) Trading Day of receipt of a 14 Put Cancellation, send, via facsimile, a confirmation of receipt (the "Put Cancellation Confirmation," the form of which is attached hereto as Exhibit T) --------- of the Put Cancellation Notice to Company specifying that the Put Cancellation Notice has been received; (b) Limitations on Put Cancellation. The Company may not ------------------------------- deliver a Put Cancellation Notice unless (i) the Company discovers the existence of Material Facts or my Ineffective Period occurs after a Put Date but before the Plat Closing (in which case Put Cancellation is mandatory), or (ii) the Closing Bid Price on the Put Cancellation Date is less than eighty percent (80%) of the Closing Bid Price on the applicable Advance Put Notice Date. Notwithstanding any Put Cancellation Notice, the Put shall remain effective with respect to the number of shares of Common Stock sold by the Subscriber from the Advance Put Notice Date through the close of trading on the Put Cancellation Date and the Pricing Period shall end on the Put Cancellation Date. (c) Effect of Cancelling a Put. Once the Company delivers -------------------------- a valid Put Cancellation Notice, (i) the Pricing Period shall end on the close of trading on the Put Cancellation Date ("Truncated Pricing Period") and the Pricing Period End Date shall be deemed to be the Put Cancellation Date for purposes of calculating the Put Share Price and (ii) the Subscriber shall not be obligated to purchase any shares of Common Stock for that Put. Notwithstanding the above, the Company shall. be obligated, upon canceling any Put, to issue to the Subscriber Unlegended Share Certificates representing a number of shares of Common Stock equal to the number of shares of Common Stock sold, if any, by the Subscriber from the Advance Put Notice Date through the close of trading on the Put Cancellation Date, but not exceeding the Intended Put Share Amount (d) Put Cancellation Notice Confirmation. Upon receipt by ------------------------------------ the Subscriber of a facsimile copy of the Put Cancellation Notice, the Subscriber shall promptly send, via facsimile, a confirmation of receipt (the "Put Cancellation Notice Confirmation") of the Put Cancellation Notice to Company specifying that the Put Cancellation Notice has been received and affirming the Put Cancellation Date and the number of shares of Common Stock that have been sold by the Subscriber from the Advance Put Notice Date through the close of trading on the Put Cancellation Date. 2.3.14 Private Equity Line Termination. The Company may terminate (a "Company Equity Line Termination") its right to initiate future Puts by providing written notice ("Equity Line Termination Notice") to the Subscriber, by facsimile and overnight courier, at any time after the sum of the aggregate Put Share Price for all Put Shares equal the Maximum Offering Amount, provided that such termination shall have no effect on the parties' other rights and obligations under this Agreement, the Registration Rights Agreement or the Warrants. Notwithstanding the above, any cancellation occurring during an Extended Put Period is governed by Section 2.3.13. 2.3.15 Return of Excess Common Shares. In the event that the Put Share Amount, as determined on the Pricing, Period End Date, is less than the Intended Put Share Amount, or in the event that a Put is partially or completely canceled, the Subscriber shall return to the Company any shares of Common Stock in the Subscriber's possession that axe not being purchased by the Subscriber. 2.4 Warrants. -------- 2.4.1 [Intentionally Omitted]. 2.4.2 Purchase Warrants. On each Put Closing Date, the Company shall issue and deliver to the Subscriber or its designated assignees a warrant ("Purchase Warrant"), in 15 the form attached hereto as Exhibit D, or such other form as agreed upon by --------- the parties, to purchase a number of shares of Common Stock equal to 15% of the, number of Put Shares issued to Subscriber in that Put. Each Purchase Warrant shall be exerciseable at a price (the "Purchase Warrant Exercise Price") which shall initially equal 110% of the Closing Bid Price of the Common Stock on the Pricing Period End Date, and shall have semi-annual reset provisions. Each Purchase Warrant shall be immediately exercisable at the Purchase Warrant Exercise Price, and shall have a term beginning on the date of issuance and ending on date that is seven (7) years thereafter. The Warrant Shares shall be registered for resale pursuant to the Registration Rights Agreement. Concurrently with the issuance and delivery of the Purchase Warrant to the Subscriber, the Company shall deliver to the Subscriber a Purchase Warrant Opinion of Counsel (signed by the Company's independent counsel). Notwithstanding the above, after $60 million of Put Shares are purchased by Subscriber under this Agreement or any extension or amendment hereof, Subscriber shall not be entitled to receive the first 425,000 accrued Purchase Warrants attributable to Put Shares purchased under this Agreement in excess of $60 million. 2.5 (Intentionally Left Blank]. 2.6 Due Diligence Review. The Company shall make available for --------------------- inspection and review by the Subscriber (the "Due Diligence Review"), advisors to and representatives of the Subscriber (who may or may not be affiliated with the Subscriber and who are reasonably acceptable to the Company), any underwriter participating in any disposition of Common Stock on behalf of the Subscriber pursuant to the Registration Statement, any Supplemental Registration Statement, or amendments or supplements thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Subscriber or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Subscriber and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. 2.6.1 Treatment of Nonpublic information. The Company shall not disclose nonpublic information to the Subscriber, advisors to or representatives of the Subscriber unless prior to disclosure of such information the Company identifies such information as being nonpublic information and provides the Subscriber, such advisors and representatives with the opportunity to accept or refuse to accept such nonpublic information for review. The Company may, as a condition to disclosing any nonpublic information hereunder, require the Subscriber's advisors and representatives to enter into a confidentiality agreement (including an agreement with such advisors and representatives prohibiting them from trading in Common Stock during such period of time as they are, in possession of nonpublic information) in form reasonably satisfactory to the Company and the Subscriber. Nothing herein shall require the Company to disclose nonpublic information to the Subscriber or its advisors or representatives, and the Company represents that it does not disseminate nonpublic information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Subscriber and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting nonpublic information (whether or not requested of the Company specifically or generally during the course of due diligence by and such persons or entities), which, 16 if not disclosed in the Prospectus included in the Registration Statement, would cause such Prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 2.6 shall be construed to mean that such persons or entities other than the Subscriber (without the written consent of the Subscriber prior to disclosure of such information) may not obtain nonpublic information in the course of conducting due diligence in accordance with the terms of this Agreement; provided, however, that in no event shah the Subscriber's advisors or representatives disclose to the. Subscriber the nature of the specific event or circumstances constituting any nonpublic information discovered by Such advisors or representatives in the course of their due diligence without the written consent of the Subscriber prior to disclosure of such information. 2.6.2 Disclosure of Misstatements and Omissions. The Subscriber's advisors or representatives shall make complete disclosure to the Subscribers counsel of all events or circumstances constituting nonpublic information discovered by such advisors or representatives in the course of their due diligence upon which such advisors or representatives form the opinion that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in the light of the circumstances in which they were made, not misleading. Upon receipt of such disclosure, the Subscriber's counsel shall consult with the Company's independent counsel in order to address the concern raised as to the existence of a material misstatement or omission and to discuss appropriate disclosure with respect thereto; provided, however, that such consultation shall not constitute the advice of the Company's independent counsel to the Subscriber as to the accuracy of the Registration Statement and related Prospectus. 2.6.3 Procedure if Material Facts are Reasonably Believed to be Untrue or are Omitted. In the event after such consultation the Subscriber's counsel reasonably believes that the Registration Statement contains an untrue statement or a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading, (a) the Company shall file with the SEC an amendment to the Registration Statement responsive to such alleged untrue statement or omission and provide the Subscriber, as promptly as practicable, with copies of the Registration Statement and related Prospectus, as so amended, (b) if the Company disputes the existence of any such material misstatement or omission, (i) the Company's independent counsel shall provide the Subscriber's counsel with a Registration Opinion and (ii) in the event the dispute relates to the adequacy of financial disclosure and the Subscriber shall reasonably request, the Company's independent auditors shall provide to the Company a letter outlining the performance of such "agreed upon procedures" as shall be reasonably requested by the Subscriber and the Company shall provide the Subscriber with a copy of such letter, or (c) if the Company disputes the existence of any such material misstatement or omission, and the dispute relates to the timing of disclosure of a material event and the Company's independent counsel is unable to provide the opinion referenced in clause (b)(i) above to the Subscriber, then this Agreement shall be suspended for a period of up to thirty (30) days, at the end of which, if the dispute still exists between the Company's independent counsel and the Subscriber's counsel, the Company shall either (i) amend the Registration Statement as provided above, (ii) provide to the Subscriber the Company's independent counsel opinion and a copy of the letter of the Company's independent auditors referenced above, or (iii) the obligation of the Subscriber to purchase shares of Common Stock pursuant to this Agreement shall terminate. 17 2.7 Commitment Payments. On the date of the Private Equity Line ------------------- Commitment Closing, the Company shall issue and deliver to Subscriber or its designated assignees warrants (the "Commitment Warrants") in the form attached hereto as Exhibit S, or such other form as agreed upon by the parties, to --------- purchase 490,385 shares of Common Stock. Each Commitment Warrant shall be exerciseable at a price (the "Commitment Warrant Exercise Price") which shall initially equal $8.375, and shall have semi-annual reset provisions. Each Commitment Warrant shall be immediately exercisable at the Commitment Warrant Exercise Price, and shall have a term beginning on the date of issuance and ending on date that is seven (7) years thereafter. The Warrant Shares shall be registered for resale pursuant to the Registration Rights Agreement. Concurrently with the issuance and delivery of the Commitment Warrant to the Subscriber, the Company shall deliver to the Subscriber a Commitment Warrant Opinion of Counsel (signed by the Company's independent counsel). On each six mouth anniversary of the Private Equity Line Commitment Closing, if the Subscriber has not received at least $100,000 in Gross Discount Amount for the preceding six (6) Calendar Months (each such period a "Commitment Evaluation Period"), the Company, in consideration of Subscriber's commitment costs, including, but not limited to, due diligence expenses, shall pay to the Subscriber an amount (the "Semi-Annual Commitment Shortfall") equal to the difference of (i) the Semi-Annual Commitment Fee, as defined below, minus (ii) the Gross Discount Amount received by the Subscriber during the preceding six (6) Calendar Months. In the event that the Company delivers a Termination Notice to the Subscriber or an Automatic Equity Line Termination occurs, the Company shall pay to the Subscriber the greater of (i) the Semi-Annual Commitment Fee, less the Gross Discount Amount on amounts put to the Subscriber in that six (6) month period, or (ii) the difference of (x) $200,000, minus (y) the aggregate of the Gross Discount Amounts for all Puts to date, and the Company shall not be required to pay the Semi-Annual Commitment Shortfall thereafter. For purposes hereof, the Semi-Annual Commitment Fee shall be as follows:
Commitment Evaluation Period Semi-Annual Commitment Fee ---------------------------- -------------------------- First 6 Calendar Months after Closing* $100,000 6 through 12 Calendar Months after Closing* $100,000 12 through 18 Calendar Months after Closing* $100,000 18 through 24 Calendar Months after Closing* $100,000 24 through 30 Calendar Months after Closing* $100,000 30 through 36 Calendar Months after Closing* $100,000
* = Private Equity Line Commitment Closing 3. Representations, Warranties and Covenants of Subscriber. Subscriber hereby represents and warrants to and agrees with the Company as follows: 3.1 Accredited Investor. Subscriber is an accredited investor, as ------------------- defined in Rule 501 of Regulation D, and has checked the applicable box set forth in Section 12 of this Agreement. 3.2 Investment Experience: Access to Information: Independent --------------------------------------------------------- Investigation - -------------- 3.2.1 Access to Information. Subscriber or Subscriber's professional advisor has been granted the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the terms and conditions of this Offering, the Company and its business and prospects, and to obtain any 18 additional information which Subscriber or Subscriber's professional advisor deems necessary to verify the accuracy and completeness of the information received. 3.2.2 Reliance on Own Advisors. Subscriber has relied completely on the advice of, or has consulted with, Subscriber's own personal tax, investment, legal or other advisors and has not relied on the Company or any of its affiliates, officers, directors, attorneys, accountants or any affiliates of any thereof and each other person, if any, who controls any of the foregoing, within the meaning of Section 15 of the Act for any tax or legal advice (other than reliance on information in the Disclosure Documents as defined in Section 3.2.4 below). The foregoing, however, does not limit or modify Subscriber's right to rely upon covenants, representations and warranties of the Company in this Agreement and upon the Opinions of Company's Counsel. 3.2.3 Capability to Evaluate. Subscriber has such knowledge and experience in financial and business matters so as to enable such Subscriber to utilize the information made available to it in connection with the Offering in order to evaluate the merits and risks of the prospective investment, which are substantial, including without limitation those set forth in the Disclosure Documents (as defined in Section 3.2.4 below), 3.2.4 Disclosure Documents. Subscriber, in making Subscriber's investment decision to subscribe for the Private Equity Line hereunder, represents that (a) Subscriber has received and had an opportunity to review (i) the Company's Annual Report on Form 10-K for the year ended January 31, 1998, (ii) the Company's quarterly reports on Form 10-Q for the quarters ended April 30, 1998 and July 31, 1998, (iii) the Risk Factors, attached as Exhibit J, (the ----------- "Risk Factors") (iv) the Capitalization Schedule, attached as Exhibit K, (the "Capitalization Schedule") and (v) the Use of Proceeds Schedule, attached as Exhibit L, (the "Use of Proceeds Schedule,); (b) Subscriber has read, reviewed, - ----------- and relied solely on the documents described in (a) above, the Company's representations and warranties and other information in this Agreement, including the exhibits, documents prepared by the Company which have been specifically provided to Subscriber in connection with this Offering (the documents described in this Section 3.2.4 (a) and (b) are collectively referred to as the "Disclosure Documents"), and an independent investigation made by Subscriber and Subscriber's representatives, if any; (c) Subscriber has, prior to the date of this Agreement, been given an opportunity to review material contracts and documents of the Company which have been filed as exhibits to the Company's filings under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has had an opportunity to ask questions of and receive answers from the Company's officers and directors; and (d) is not relying on any oral representation of the Company or any other person, nor any written representation or assurance from the Company other than those contained in the Disclosure Documents or incorporated herein or therein. The foregoing, however, does not limit or modify Subscriber's right to rely upon covenants, representations and warranties of the Company in Sections 5 and 6 of this Agreement Subscriber acknowledges and agrees that the Company has no responsibility for, does not ratify, and is under no responsibility whatsoever to comment upon or correct any reports, analyses or other comments made about the Company by any third parties, including, but not limited to, analysts' research reports or comments (collectively, "Third Party Reports"), and Subscriber has not relied upon any Third Party Reports in making the decision to invest. 3.2.5 Investment Experience; Fend for Self. Subscriber has substantial experience in investing in securities and he, she or it has made investments in securities other than those of the Company. Subscriber acknowledges that Subscriber is able to fend for Subscriber's self in the transaction contemplated by this Agreement, that Subscriber has the ability to bear the economic risk of Subscriber's investment pursuant to this Agreement and that Subscriber is an "Accredited Investor" by virtue of the fact that Subscriber meets the investor qualification standards set forth in Section 3.1 above. Subscriber has not been organized for the purpose of investing in securities of the Company, although such investment is consistent with Subscriber's purposes. 19 3.3 Exempt Offering Under Regulation D. ---------------------------------- 3.3.1 [Intentionally Left Blank]. 3.3.2 No General Solicitation. The Private Equity Line was not offered to Subscriber through, and Subscriber is not aware of, any form of general solicitation or general advertising, including, without limitation, (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 3.3.3 Restricted Securities. Subscriber understands that the Private Equity Line is, the Common Stock issued at each Put Closing will be, and the Warrant Shares will be, characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction exempt from the registration requirements of the federal securities laws and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption therefrom. In this connection, Subscriber represents that Subscriber is familiar with Rule 144 under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.3.4 Disposition. Without in any way limiting the representations set forth above, Subscriber further agrees not to sell, transfer, assign, or pledge the Securities (except for any bona fide pledge arrangement to the extent that such pledge does not require registration under the Act or unless an exemption from such registration is available) and provided further that if such pledge is realized upon, any transfer to the pledge shall comply with the requirements set forth herein), or to otherwise dispose of all or any portion of the Securities unless and until: (a) There is then in effect a registration statement under the Act and any applicable state securities laws covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Subscriber shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition to the extent relevant for determination of the availability of an exemption from registration, and (ii) if reasonably requested by the Company, Subscriber shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of the Securities under the Act or state securities laws. It is agreed that the Company will not require the Subscriber to provide opinions of counsel for transactions made pursuant to Rule 144 provided that Subscriber and Subscriber's broker, if necessary, provide the Company with the necessary representations for counsel to the Company to issue an opinion with respect to such transaction. 3.4 Due Authorization ----------------- 3.4.1 Authority. The person executing this Subscription Agreement has full power and authority to execute and deliver this Agreement and each other document included herein for which a signature is required in such capacity and on behalf of the subscribing individual, partnership, trust, estate, corporation or other entity for whom or which Subscriber is executing this Agreement. 3.4.2 Due Authorization. If Subscriber is a corporation, Subscriber is duly and validly organized, validly existing and in good tax and corporate standing as a corporation under the laws of the jurisdiction of its incorporation with full power and authority to purchase the Securities to be purchased by Subscriber and to execute and deliver this Agreement. 20 3.4.3 Partnerships. If Subscriber is a partnership, the representations, warranties, agreements and understandings set forth above are true with respect to all partners of Subscriber (and if any such partner is itself a partnership, 9 persons holding an interest in such partnership, directly or indirectly, including through one or more partnerships), and the person executing this Agreement has made due inquiry to determine the truthfulness of the representations and warranties made hereby. 4. Acknowledgments Subscriber is aware that: 4.1 Risks of Investment. Subscriber recognizes that an investment in ------------------- the Company involves substantial risks, including the potential loss of Subscriber's entire investment herein. Subscriber recognizes that the Disclosure Documents, this Agreement and the exhibits hereto do not purport to contain all the information, which would be contained in a registration statement under the Act; 4.2 No Government Approval. No federal or state agency has passed ---------------------- upon the Securities, recommended or endorsed the Offering, or made any finding or determination as to the fairness of this transaction; 4.3 No Registration, Restrictions on Transfer. As of the date of this ------------------------------------------- Agreement, the Securities and any component thereof have not been registered under the Act or any applicable state securities laws by reason of exemptions from the registration requirements of the Act and such laws, and may not be sold, pledged (except for any limited pledge in connection with a margin account of Subscriber to the extent that such pledge does not require registration under the Act or unless an exemption from such registration is available and provided further that if such pledge is realized upon, any transfer to the pledge shall comply with the requirements set forth herein), assigned or otherwise disposed of in the absence of an effective registration of the Securities and any component thereof under the Act or unless an exemption from such registration is available; 4.4 Restrictions on Transfer. Subscriber may not attempt to sell, -------------------------- transfer, assign, pledge or otherwise dispose of all or any portion of the Securities or any component thereof in the absence of either an effective registration statement or an exemption from the registration requirements of the Act and applicable state securities laws; 4.5 No Assurances of Registration. There can be no assurance that any ----------------------------- registration statement will become effective at the scheduled time, or ever, or remain effective Whom required, and Subscriber acknowledges that it may be required to bear the economic risk of Subscriber's investment for an indefinite period of time; 4.6 Exempt Transaction. Subscriber understands that the Securities are ------------------ being offered and sold in reliance on specific exemptions from the registration requirements of federal and state law and that the representations, warranties, agreements, acknowledgments and understandings set forth herein are being relied upon by the Company in determining the applicability of such exemptions and the suitability of Subscriber to acquire such Securities. 4.7 Legends. The certificates representing the Put Shares shall not ------- bear a Restrictive Legend. The certificates representing the Warrant Shares shall not bear a Restrictive Legend unless they are, issued at a time when the Registration Statement is not effective for resale. It is understood that the certificates evidencing any Warrant Shares issued at a time when the Registration Statement is not effective for resale, subject to legend removal under the terms of Section 6.9 below, shall bear the following legend (the "Legend"): 21 "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, nor the securities laws of any other jurisdiction. They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." 5. Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to Subscriber (which shall be true at the signing of this Agreement, and as of any such later date as contemplated hereunder) and agrees with Subscriber that: 5.1 Organization, Good Standing, and Qualification. The Company is a ---------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of California, USA and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have, a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole. The Company is not the subject of any pending, threatened or, to its knowledge, contemplated investigation or administrative or legal proceeding (a "Proceeding") by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, or the Securities and Exchange Commission ("SEC"), The National Association of Securities Dealer, Inc., The Nasdaq Stock Market, Inc. or any state securities commission, or any other governmental entity, which have not been disclosed in the Disclosure Documents. None of the disclosed Proceedings, if any, will have a material adverse effect upon tile Company or the market for the Common Stock. The Company has no subsidiaries. 5.2 Corporate Condition. The Company's condition is, in all material --------------------- respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the Company. Except for continuing losses, there have been no material adverse changes to the Company's business, financial condition, or prospects since the date of such Disclosure Documents. The financial statements as contained in the 10-K and 10-Q's have been prepared in accordance with generally accepted accounting principles, consistently applied (except as otherwise permitted by Regulation S-X of the Exchange Act), and fairly present the financial condition of the Company as of the dates of the balance sheets included therein and the consolidated results of its operations and cash flows for the periods then ended. Without limiting the foregoing, there am no material liabilities, contingent or actual, that are not disclosed in the, Disclosure Documents (other than liabilities incurred by the Company in the ordinary course of its business, consistent with its past practice, after the period covered by the Disclosure Documents). The Company has paid all material taxes that are due, except for taxes that it reasonably disputes. There is no material claim, litigation, or administrative proceeding pending or, to the best of the Company's knowledge, threatened against the Company, except as disclosed in the Disclosure Documents. This Agreement and the Disclosure Documents do not contain any untrue statement of a material fact and do not omit to state any material fact required to be stated therein or herein necessary to make the statements contained therein of heroin not misleading in the light of the, circumstances under which they were made. No event or circumstance exists relating to the Company which under applicable law, requires public disclosure but which has not been so publicly announced or disclosed. 5.3 Authorization. All corporate action on the pan of the Company by --------------- its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance and delivery of the Common Stock being sold hereunder and the issuance (and/or the reservation for issuance) of the Warrants and the Warrant Shares have been taken, and this Agreement and the Registration Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, except insofar as the enforceability 22 may be limited by applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally or by principles governing the availability of equitable remedies. The Company has obtained all consents and approvals required for it to execute, deliver and perform each agreement referenced in the previous sentence. 5.4 Valid Issuance of Common Stock. The Common Stock and the ------------------------------ Warrants, when issued, sold and delivered in accordance with the terms hereof, for the consideration expressed herein, will be validly issued, fully paid and nonassessable and, based in part upon the representations of Subscriber in this Agreement, will be issued in compliance with all applicable U.S. federal and state securities laws. The Warrant Shares, when issued in accordance with the terms of the Warrants, shall be duly and validly issued and outstanding, fully paid and nonassessable, and based in part on the. representations and warranties of Subscriber, will be issued in compliance with all applicable U.S. federal and state securities laws. The Put Shares, the Warrants and the Warrant Shares will be issued free of any preemptive rights. 5.5 Compliance with Other Instruments. The Company is not in --------------------------------- violation or default of any provisions of its Certificate of Incorporation or Bylaws, each as amended and in effect on and as of the date of the Agreement, or of any material provision of any material instrument or material contract to which it is a party or by which it is bound or of any provision of any federal or state judgment, writ, decree, order, statute, rule or governmental regulation applicable to the Company, which would have a material adverse effect on the Company's business or prospects, or on the performance of its obligations under this Agreement or the Registration Rights Agreement. The execution, delivery and performance of this Agreement and the other agreements entered into in conjunction with the Offering and the consummation of the, transactions contemplated hereby and thereby will not (a) result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company, which would have a material adverse effect on the Company's business or prospects, or on the performance of its obligations under this Agreement, the Registration Rights Agreement, (b) violate the Company's Certificate of Incorporation or By-Laws or (c) violate any statute, rule or governmental regulation applicable to the Company which violation would have a material adverse effect on the Company's business or prospects. 5.6 Reporting Company. The Company is subject to the reporting ----------------- requirements of the Exchange Act, has a class of securities registered under Section 12 of the Exchange Act, and has filed a reports required by the Exchange Act since the date the Company first became subject to such reporting obligations. The Company undertakes to furnish Subscriber With copies of such reports as may be reasonably requested by Subscriber prior to consummation of this and thereafter, to make such reports available, for the AM term of this Agreement, including any extensions thereof, and for as long as Subscriber holds the Securities. The Common Stock is duly listed on the O.T.C. Bulletin Board. The Company is not in violation of the listing requirements of the O.T.C. Bulletin Board and does not reasonably anticipate that the Common Stock will be delisted by the O.T.C. Bulletin Board for the foreseeable future. The Company has filed all reports required under the Exchange Act. The Company has not furnished to the Subscriber any material nonpublic information concerning the Company. 5.7 Capitalization. The capitalization of the Company as of December -------------- 10, 1998 is, and the capitalization as of the Closing, subject to conversion of any outstanding Series I Preferred Stock, exercise of my outstanding warrants and/or exercise of any outstanding stock options, after taking into account the offering of the Securities contemplated by this Agreement and all other share issuances occurring prior to this Offering, will be, as set forth in the Capitalization Schedule as set forth in Exhibit K. There are no securities or --------- instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities. Except as disclosed in 23 the Capitalization Schedule, as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and (ii) except as disclosed in the Disclosure Documents, there are no agreements or arrangements tinder which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Act 5.8 Intellectual Property. The Company has valid, unrestricted and --------------------- exclusive ownership of or rights to use the patents, trademarks, trademark registrations, trade names, copy rights, know-how, technology and other intellectual property necessary to the conduct of its Exhibit M lists all --------- patents, trademarks, trademark registrations, trade names and copyrights of the Company. The Company has granted such licenses or has assigned or otherwise transferred a portion of (or all of) such valid, unrestricted and exclusive patents, trademarks, trademark registrations, trade names, copyrights, know-how, technology and other intellectual property necessary to the conduct of its business asset forth in Exhibit M. The Company has been granted licenses, know- --------- how, technology and/or other intellectual property necessary to the conduct of its business as set forth in Exhibit M. To the best of the Company's knowledge --------- after due inquiry, the Company is not infringing on the intellectual property rights of any third party, nor is any third party infringing on the Company's intellectual property rights. There are no restrictions in any agreements, licenses, franchises, or other instruments that preclude the Company from engaging in its business as presently conducted. 5.9 Use of Proceeds. As of the date hereof, the Company expects to --------------- use the proceeds from this Offering (less fees and expenses) for the purposes and in the approximate amounts set forth on the Use of Proceeds Schedule set forth as Exhibit L hereto. These purposes and amounts are estimates and are --------- subject to change without notice to any Subscriber. 5.10 No Rights of Participation. No person or entity, including, but -------------------------- not limited to, current or former stockholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the financing contemplated by this Agreement which has not been waived. 5.11 Company Acknowledgment. The Company hereby acknowledges that ---------------------- Subscriber may elect to hold the Securities for various periods of time, as permitted by the term of this Agreement, the Warrants, and other agreements contemplated hereby, and the Company further acknowledges that Subscriber has made no representations or warranties, either written or oral, as to how long the Securities will be held by Subscriber or regarding Subscriber's trading history or investment strategies. 5.12 [Intentionally Left Blank]. -------------------------- 5.13 Underwriter's Fees and Rights of First Refusal. The Company is ---------------------------------------------- not obligated to pay any compensation or other fees, costs or related expenditures in cash or securities to any underwriter, broker, agent or other representative other than the Subscriber in connection with this Offering. 5.14 Availability of Suitable Form for Registration. The Company is ---------------------------------------------- currently eligible and agrees to maintain its eligibility to register the resale of its Common Stock on a registration statement on a suitable form under the Act. 5.15 No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any of 24 the Company's securities or solicited any offers to buy any security under circumstances that would prevent the parties hereto from consummating the transactions contemplated hereby pursuant to an exemption from registration under Regulation D of the Act or would require the issuance of any other securities to be integrated with this Offering under the Rules of Nasdaq. The Company has not engaged in any form of general solicitation or advertising in connection with the offering of the Common Stock or the Warrants. 5.16 [Intentionally Left Blank]. -------------------------- 5.17 Foreign Corrupt Practices. Neither the Company, nor any of its ------------------------- subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has, in the course of its actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign of domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 5.18 Key Employees. Each Key Employee (as defined in Exhibit N is ----------- --------- currently serving the Company in the capacity disclosed in Exhibit N. No Key --------- Employee, to the best knowledge of the Company and its subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non- competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each Key Employee does not subject the Company or any of its subsidiaries to any liability with respect to any of the foregoing matters. No Key Employee has, to the best knowledge of the Company and its subsidiaries, any intention to terminate his employment with, or services to, the Company or any of its subsidiaries. 5.19 Representations Correct. The foregoing representations, ----------------------- warranties and agreements are true, correct and complete in all material respects, and shall survive any Put Closing and the issuance of the shares of Common Stock thereby. 5.20 Tax Status. The Company has made or filed all federal and state ---------- income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and as set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. 5.21 Transactions With Affiliates. Except as set forth in the ---------------------------- Disclosure Documents, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 25 5.22 Application of Takeover Protections. The Company and its board of ----------------------------------- directors have taken all necessary action, if any, in order to render inapplicable, any control share acquisition, business combination or other similar anti-takeover provision under California law which is or could become applicable to the Subscriber as a result of the transactions contemplated by this Agreement, including, without limitation, the issuance of the Common Stock, any exercise of the Warrants and ownership of the Common Shares and Warrant Shares. The Company has not adopted and will not adopt any "poison pill" provision that will be applicable to Subscriber as a result of transactions contemplated by this Agreement. 5.23 Other Agreements. The Company has not, directly or indirectly, ---------------- made any agreements with the Subscriber under a subscription in the form of this Agreement for the purchase of Common Stock, relating to the terms or conditions of the transactions contemplated hereby or thereby except as expressly set forth herein, respectively, or in exhibits hereto or thereto. 5.24 Major Transactions. Other than a potential Bergen Brunswick ------------------ transaction, there are no other Major Transactions currently pending or contemplated by the Company. 5.25 Financings. Other than a potential Bergen Brunswick transaction, ---------- there are no other financings currently pending or contemplated by the Company. 5.26 Shareholder Authorization. The Company shall, at its next annual ------------------------- shareholder meeting, or at a special meeting to be held as soon as practicable thereafter, use its best efforts to obtain approval of its shareholders to (i) authorize the issuance of the full number of shares of Common Stock which would be issuable under this Agreement and eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities with respect to the Company's ability to issue shares of Common Stock in excess of the Cap Amount (such approvals being the "20% Approval") and (ii) the increase in the number of authorized shares of Common Stock of the Company (the "Share Authorization Increase Approval") such that at least 15,000,000 shares can be reserved for this Offering. In connection with such shareholder vote, the Company shall use its best efforts to cause all officers and directors of the Company to promptly enter into irrevocable agreements to vote all of their shares in favor of eliminating such prohibitions. As soon as practicable after the 20% Approval and the Share Authorization Increase Approval, the Company agrees to use its best efforts to reserve 15,000,000 shares of Common Stock for issuance under this Agreement. 6. Covenants of the Company 6.1 Independent Auditors. The Company shall, until at least the -------------------- Termination Date, maintain as its independent auditors an accounting firm authorized to practice before the SEC. 6.2 Corporate Existence and Taxes. The Company shall, until at least ----------------------------- the Termination Date, maintain its corporate existence in good standing and remain a "Reporting Issuer" (defined as a Company which files periodic reports under the Exchange Act) (provided, however, that the foregoing covenant shall not prevent the Company from entering into any merger or corporate reorganization as long as the surviving entity in such transaction, if not the Company, assumes the Company's obligations with respect to the Common Stock and has Common Stock listed for trading on a stock exchange or on Nasdaq and is a Reporting Issuer) and shall pay all its taxes when due except for taxes which the Company disputes. 6.3 Registration Rights. The Company will enter into a registration ------------------- rights agreement covering the resale of the Common Shares and the Warrant Shares substantially in the form of the Registration Rights Agreement attached as Exhibit A. - --------- 26 6.4 [Intentionally Omitted]. 6.5 Asset Transfers. The Company shall not (i) transfer, sell, convey --------------- or otherwise dispose of any of its material assets to any Subsidiary except for a cash or cash equivalent consideration and for a proper business purpose or (ii) transfer, sell, convey or otherwise dispose of any of its material assets to any Affiliate, as defined below, during the Term of this Agreement. For purposes hereof, "Affiliate" shall mean any officer of the Company, director of the Company or owner of twenty percent (20%) or more of the Common Stock or other securities of the Company. 6.6 Capital Raising Limitations; Rights of First Refusal. ---------------------------------------------------- 6.6.1 Capital Raising Limitations. From the date of this Agreement until the earlier of (i) the date that the sum of the aggregate Put Share Price for all Put Shares equal the Maximum Offering Amount, or (ii) the Termination Date (the "Lock Up Period"), the Company may not issue any equity securities or securities convertible into equity securities for cash consideration to anyone other than Subscriber, without Subscriber's written permission. Notwithstanding the above, for a period of ninety (90) days after the Private Equity Line Commitment Closing, the Company may issue debt convertible into common stock to Bergen Brunswick (a "Bergen Brunswick" transaction). In the event that Bergen Brunswick invests $25,000,000 or more into the Company prior to the date that is ninety (90) days after the Private Equity Line Commitment Closing, the Company may terminate this Agreement by paying $100,000 to Subscriber, in which case the Subscriber is entitled to keep its Commitment Warrants. 6.6.2 Subscriber's Right of First Refusal. Subscriber shall have a right of first refusal to purchase the first forty million dollars ($40 million) of equity securities or securities convertible into equity securities offered or issued by the Company for cash consideration after the Lock Up Period. 6.7 Financial 10-K Statements, Etc. and Current Reports on Form 8-K. ---------------------------------------------------------------- The Company shall deliver to the Subscriber copies of its annual reports on Form 10-K, and quarterly reports on Form 10-Q and shall deliver to the Subscriber current reports on form 8-K within two (2) days of filing for the Term of this Agreement. 6.8 Opinion of Counsel. Subscriber shall, concurrent with the purchase -------------------- of the Common Stock and accompanying Warrants pursuant to this Agreement, receive an opinion letter from the Company's legal counsel, in the form attached as Exhibit B or in such form as agreed upon by the parties, as to the Private --------- Equity Line Commitment Closing and in the form attached as Exhibit I or in such --------- form as agreed upon by the parties, as to any Put Closing. 6.9 Removal of Legend. If the certificates representing any ----------------- Securities are issued with a restrictive Legend in accordance with the terms of this Agreement, the Legend shall be removed and the Company shall issue a certificate without such Legend to the holder of any Security upon which it is stamped, and a certificate for a security shall be originally issued without the Legend, if (a) the sale of such Security is registered under the Act, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions (the reasonable cost of which shall be borne by the Company), to the effect that a public sale or transfer of such Security may be made without registration under the Act, or (c) such holder provides the Company with reasonable assurances that such Security can be, sold pursuant to Rule 144. Each Subscriber agrees to sell all Securities, including those represented by a certificate(s) from which the Legend his been removed, or which were originally issued without the Legend, pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Act. 27 6.10 Listing. Subject to the remainder of this Section 6.10, the Company ------- shall ensure that its shares of Common Stock (including all Warrant Shares) are listed and available for trading on the O.T.C. Bulletin Board. Thereafter, the Company shall (i) use its best efforts to continue the listing and trading of its Common Stock on the NMS, or on the New York Stock Exchange ("NYSE") or any other national exchange; and (ii) comply in all material respects with the Company's reporting, filing and other obligations under the By-Laws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.11 The Company's Instructions to Transfer Agent. The Company will -------------------------------------------- instruct the Transfer Agent of the Common Stock to issue certificates, registered in the name of each Subscriber or its nominee, for the Put Shares, and Warrant Shares in such amounts as specified from time to time by the Company upon any exercise by the Company of a Put and/or exercise of the Warrants by the holder thereof. Such certificates shall not bear a Legend unless issuance with a Legend is permitted by the terms of this Agreement and Legend removal is not permitted by Section 6.9 hereof and the Company shall cause the Transfer Agent to issue such certificates without a Legend. Nothing in this Section shall affect in any way each Subscriber's obligations and agreement set forth in Sections 3.3.3 or 3.3.4 hereof to resell the Securities pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of applicable securities laws. If (a) a Subscriber provides the Company with an opinion of counsel, which opinion of counsel shall be in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from registration or (b) a Subscriber transfers Securities to an affiliate which is an accredited investor pursuant to Rule 144, the Company shall permit the transfer, and, in the case of Put Shares and Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denomination as specified by such Subscriber. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Subscriber by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 6.11 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 6.11, that a Subscriber shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 6.12 Stockholder 20% Approval. Prior to the closing of any Put that ------------------------ would cause the Aggregate Issued Shares to exceed the Cap amount, the Company shall obtain approval of its stockholders to authorize (i) the issuance of the full number of shares of Common Stock which would be issuable pursuant to this Agreement but for the Cap Amount and eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities with respect to the Company's ability to issue shares of Common Stock in excess of the Cap Amount (such approvals being the "Stockholder 20% Approval"). 6.13 Press Release. The Company agrees that the Subscriber shall have ------------- the right to review and comment upon any press release issued by the Company in connection with the Offering which approval shall not be unreasonably withheld by Subscriber. 7. Subscriber Covenant/Miscellaneous. 7.1 Representations and Warranties Survive the Closing; --------------------------------------------------- Severability. Subscriber's and the Company's representations and warranties - ------------ shall survive the Subscription Date 28 and any Put Closing contemplated by this Agreement notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, or is altered by a term required by the Securities Exchange Commission to be included in the Registration Statement, this Agreement shall continue in full force and effect without said provision; provided that if the removal of such provision materially changes the economic benefit of this Agreement to the Subscriber, the Subscriber, at its option, may terminate this Agreement or require that other terms of the Agreement be amended to compensate for such material economic changes. 7.2 Successors and Assigns. This Agreement shall not be assignable ---------------------- without the Company's written consent, If assigned, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Subscriber may assign Subscriber's rights hereunder, in connection with any private sale of the Common Stock of such Subscriber, so long as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement in a form acceptable to the Company and provides an original copy of such acknowledgment to the Company. 7.3 Execution in Counterparts Permitted. This Agreement may be ----------------------------------- executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 7.4 Titles and Subtitles; Gender. The titles and subtitles used in ---------------------------- this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The use in this Agreement of a masculine, feminine or neither pronoun shall be deemed to include a reference to the others. 7.5 Written Notices, Etc. Any notice, demand or request required or -------------------- permitted to be given by the Company or Subscriber pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally, or by facsimile or upon receipt if by overnight or two (2) day courier, addressed to the parties at the addresses and/or facsimile telephone number of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing; provided, however, that in order for any notice to be effective as to the Subscriber such notice shall be delivered and sent, as specified herein, to all the addresses and facsimile telephone numbers of the Subscriber set forth at the end of this Agreement or such other address and/or facsimile telephone number as Subscriber may request in writing. 7.6 Expenses. Except as set forth in the Registration Rights -------- Agreement, each of the Company and Subscriber shall pay all costs and expenses that it respectively incurs, with respect to the negotiation, execution, delivery and performance of this Agreement. 7.7 Entire Agreement; Written Amendments Required. This Agreement, --------------------------------------------- including the Exhibits attached hereto, the Common Stock certificates, the Warrants, the Registration Rights Agreement, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived discharged 29 or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 7.8 Arbitration. Except as otherwise provided in Section 6.11 of this ----------- Agreement, any controversy or claim arising, out of or related to the Transaction Documents or the breach thereof, shall be settled by binding arbitration in Wilmington, Delaware in accordance with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding shall be commenced upon written demand by Company or any Subscriber to the other. The arbitrator(s) shall enter a judgment by default against any party, which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators shall preside. The arbitrator(s) will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator(s). The arbitrators must be experts in securities law and financial transactions. The arbitrators shall assess costs and expenses of the arbitration, including all attorneys' and experts' fees, as the arbitrators believe is appropriate in light of the merits of the parties' respective positions in the issues in dispute. Each party submits irrevocably to the jurisdiction of any state court sitting in Wilmington, Delaware or to the United States District Court sitting in Delaware for purposes of enforcement of any discovery order, judgment of award in connection with such arbitration. The award of the arbitrator(s) shall be final and binding upon the parties and may be enforced in any court having jurisdiction. The arbitration shall be held in such place as set by the arbitrator(s) in accordance with Rule 55. Although the parties, as expressed above, agree that all claims, including claims that are equitable in nature, for example specific performance, shall initially be prosecuted in the binding arbitration procedure outlined above, if the arbitration panel dismisses or otherwise fails to entertain any or all of the equitable claims asserted by reason of the fact that it lacks jurisdiction, power and/or authority to consider such claims and/or direct the remedy requested, then, in only that event, will the parties have the right to initiate litigation respecting such equitable claims or remedies. The forum for such equitable relief shall be in either a state or federal court sitting in Wilmington, Delaware. Each party waives any right to a trial by jury, assuming such right exists in an equitable proceeding, and irrevocably submits to the jurisdiction of said Delaware court. Delaware law shall govern both the proceeding as well as the interpretation and construction of the Transaction Documents and the transaction as a whole. 8. Subscription and Wiring Instructions; Irrevocability. 8.1 Subscription ------------- (a) Wire transfer of Subscription Funds. Subscriber shall deliver Put Dollar Amounts (as payment towards any Put Share Price) by wire transfer, to the Company pursuant to a wire instruction letter to be provided by the Company, and signed by the Company. (b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees, subject to the provisions of any applicable laws providing for the refund of subscription amounts submitted by Subscriber, that this Agreement is irrevocable and that Subscriber is not entitled to cancel, terminate or revoke this Agreement or any other agreements executed by such Subscriber and delivered pursuant hereto, and that this Agreement and such other agreements shall survive. the death or disability of such Subscriber and shall be, binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and assigns. If 30 the Securities subscribed for are to be owned by more than one person, the obligations of all such owners under this Agreement shall be joint and several, and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be. binding upon each such person and his heirs, executors, administrators, successors, legal representatives and assigns. Notwithstanding the foregoing, (i) if the conditions to Closing are. not satisfied or (ii) if the Disclosure Documents are discovered prior to Closing to contain statements which are materially inaccurate, or omit statements of material fact, Subscriber may revoke or cancel this Agreement. 8.2 Acceptance of Subscription. Ownership of the number of Securities ---------------------------- purchased hereby will pass to Subscriber upon the Equity Line Commitment Closing or any Put Closing. 8.3 (Intentionally Omitted] 9. Indemnification. In consideration of the Subscriber's execution and delivery of the Subscription Agreement, the Registration Rights Agreement and the Warrants (the "Transaction Documents") and acquiring the Securities thereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless Subscriber and all of its stockholders, officers, directors, employees and direct or indirect investors and any of the foregoing person's agents, members, partners or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorney's fees and disbursements (the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or documents contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim, derivative or otherwise, by any stockholder of the Company based on a breach or alleged breach by the Company or any of its officers or directors of their fiduciary or other obligations to the stockholders of the Company. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make me, maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which it would be required to make if such foregoing undertaking was enforceable which is permissible under applicable law. Promptly after receipt by an Indemnified Party of notice of the commencement of any action pursuant to which indemnification may be sought, such Indemnified Party will, if a claim in respect thereof is to be made against the other party (hereinafter "Indemnitor") under this Section 9, deliver to the Indemnitor a written notice of the commencement thereof and the Indemnitor shall have the right to participate in and to assume the defense thereof with counsel reasonably selected by the Indemnitor, provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of such counsel to be paid by the Indemnitor, if representation of such Indemnified Party by the counsel retained by the Indemnitor would be inappropriate due to actual or potential conflicts of interest between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure to deliver 31 written notice to the Indemnitor within a reasonable time of the commencement of any such action, if prejudicial to the Indemnitor's ability to defend such action, shall relieve the Indemnitor of any liability to the Indemnified Party under this Section 9, but the omission to so deliver written notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnified Party other than under this Section 9 to the extent it is prejudicial. 10. [Intentionally Left Blank]. [INTENTIONALLY LEFT BLANK] 32 11. [Intentionally Left Blank]. 12. Accredited Investor. Subscriber is an "accredited investor" because (check all applicable boxes): (a) [_] It is an organization described in Section 501(c)(3) of the Internal Revenue Code, or a corporation, limited duration company, limited liability company, business trust, or partnership not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. (b) [_] any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchased is directed by a sophisticated person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment. (c) [_] a natural person, who [_] is a director, executive officer or general partner of the issuer of the securities being offered or sold or a director, executive officer or general partner of a general partner of that issuer. [_] has an individual net worth, or joint net worth that person's spouse, at the time of his purchase exceeding $1,000,000. [_] had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. (d) [_] an entity each equity owner of which is an entity described in a - b above or is an individual who could check one (1) of the last three (3) boxes under subparagraph (c) above. (e) [_] other [specify] ___________________________________________________________________ 33 The undersigned hereby subscribes for 100% of The Equity Line Maximum Offering Amount and acknowledges that this Agreement and the subscription represented hereby shall not be effective unless accepted by the Company as indicated below. IN WITNESS WHEREOF, the undersigned Subscribes does represent and certify under penalty of purjury that the foregoing statements are true and correct and that Subscriber by the following signature(s) executed this Agreement. Dated this 15th day of December __, 1998. /s/ E.S. SWARTZ Swartz Private Equity, L.L.C. - -------------------------------- ---------------------------------------------- Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE SECURITIES TO BE REGISTERED Eric S. Swartz SECURITY DELIVERY INSTRUCTIONS: - -------------------------------- ---------------------------------------------- Name: Please Print Please type or print address where your security is to be delivered Manager ATTN: Eric S. Swartz - -------------------------------- ---------------------------------------- Title/Representative Capacity (if applicable) 1080 Holcomb Bridge Rd. - -------------------------------- ---------------------------------------------- Name of Company You Represent Street Address (if applicable) Blding 200, Suite 285 Roswell, GA 30076 - -------------------------------- ---------------------------------------------- Place of Execution of this City, State or Province, Country, Offshore Agreement Postal Code NOTICE OF DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO: - -------------------------------- ------------------------- Please print address where any Please print address where Copy is to Notice is to be delivered be delivered ATTN: /s/ CARLTON JOHNSON ATTN: /s/ BRAD HATHORN --------------------------- -------------------------------- 1070 Holcomb Bridge Rd. Blding 200, Suite 285 Same as Johnson - -------------------------------- ------------------------------------- Street Address Street Address Roswell, GA 30076 Same as Johnson - -------------------------------- ------------------------------------- City, State or Province, Country, City, State or Country, Offshore Offshore Postal Code Postal Code Telephone: 770-640-8130 Telephone: 770-640-8130 ---------------------- --------------------------- Facsimile: 770-640-7150 Facsimile: 770-640-7150 ---------------------- --------------------------- Facsimile: Facsimile: ---------------------- --------------------------- THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF 100% OF THE EQUITY LINE MAXIMUM OFFERING AMOUNT OF THE 15th DAY OF DECEMBER 1998. SHOPPING.COM By: /s/ FRANK W. DENNY -------------------------------------- Frank W. Denny, Chairman Address: SHOPPING.COM 2101 E. Coast Highway, Garden Level Corona Del Mar, CA 92625 Telephone No. (949)-640-4393 Fax: (949)-640-4374 34 ADVANCE PUT NOTICE SHOPPING.COM (the "Company") hereby intends, subject to the Individual Put Limit (as defined in the Subscription Agreement), to elect to exercise a Put to sell the number of shares of Common Stock of the Company specified below, to _________________________, the Subscriber, as of the Intended Put Date written below, all pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Date of Advance Put Notice: ______________________ Intended Put Date: _______________________________ Intended Put Share Amount: _______________________ SHOPPING.COM By: _______________________________________ Frank W. Denny, Chairman Address: Shopping.Com 2101 E. Coast Highway, Garden Level Corona Del Mar, CA 92625 Telephone No. (949) 640-4393 Facsimile No. (949) 640-4374 EXHIBIT E CONFIRMATION of ADVANCE PUT NOTICE _______________________________, the Subscriber, hereby confirms receipt of SHOPPING.COM's (the "Company") Advance Put Notice on the Advance Put Date written below, and its intention to elect to exercise a Put to sell shares of common stock ("Intended Put Share Amount") of the Company to the Subscriber, as of the intended Put Date written below, all pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Date of Confirmation: __________________________ Date of Advance Put Notice: ____________________ Intended Put Date: _____________________________ Intended Put Share Amount: _____________________ SUBSCRIBER(S) ________________________________________________ Subscriber's Name By: ____________________________________________ (Signature) Address: ________________________________________________ ________________________________________________ ________________________________________________ Telephone No.: ________________________________________________ Facsimile No.: ________________________________________________ EXHIBIT F 36 PUT NOTICE SHOPPING.COM (the "Company") hereby elects to exercise a Put to sell shares of common stock ("Common Stock") of the Company to __________________, the Subscriber, as of the Put Date, at the Put Share Price and for the number of Put Shares written below, all pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Put Date: _______________________ Intended Put Share Amount (from Advance Put Notice): ________________________ Note: "Pricing Period" and "Individual Put Limit" shall have the meanings ascribed to them in this Equity Line Subscription Agreement. SHOPPING.COM By: ______________________________________ Frank W. Denny, Chairman Address: Shopping.Com 2101 E. Coast Highway, Garden Level Corona Del Mar, CA 92625 Telephone No. (949) 640-4393 Facsimile No. (949) 640-4374 EXHIBIT G 37 CONFIRMATION of PUT NOTICE _____________________________, the Subscriber, hereby confirms receipt of Shopping.Com (the "Company") Put Notice and election to exercise a Put to sell ________________________ shares of common stock ("Common Stock") of the Company to Subscriber, as of the Put Date, all pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Date of Confirmation: ________________________ Put Date: ____________________________________ Intended Put Share Amount: ___________________ SUBSCRIBER(S) ______________________________________________ Subscriber's Name By: __________________________________________ (Signature) Address: ______________________________________________ ______________________________________________ ______________________________________________ Telephone No.: ______________________________________________ Facsimile No.: ______________________________________________ EXHIBIT H 38 PRICING CONFIRMATION NOTICE SHOPPING.COM (the "Company") hereby states that the Market Price, Put Share Price and Put Dollar Amount for the Put Shares of Common Stock put to the Subscriber in the Put Notice referred to below are as follows, pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Put Date: ___________________________________ Intended Put Share Amount on Put Date: ___________________ shares Individual Put Limit: ________________ shares Pricing Period: _______ Trading Days Market Price for Put: _______________________ Applicable Put Share Price: _________________ Put Dollar Amount: __________________________ SHOPPING.COM By: _________________________________________ Frank W. Denny, Chairman Address: Shopping.Com 2101 E. Coast Highway, Garden Level Corona del Mar, CA 92625 Telephone No. (949) 640-4393 Facsimile No. (949) 640-4374 EXHIBIT P 39 PUT CANCELLATION NOTICE SHOPPING.COM (the "Company") hereby cancels the Put specified below, pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"), as of the close of trading on the date specified below (the "Cancellation Date," which date must be on or after the date that this notice is delivered to the Subscriber), provided that such cancellation shall not apply to the number of shares of Common Stock that the Subscriber has sold on or after the date of the applicable Advance Put Notice up through the close of trading on the Cancellation Date: Cancellation Date: _______________________ Put Date of Put Being Canceled: __________ Number of Shares Put on Put Date: ________ The Company understands that, by canceling this Put, it must give twenty (20) Business Days advance written notice to the Subscriber before effecting the next Put. SHOPPING.COM By: ______________________________________ Frank W. Denny, Chairman Address: Shopping.Com 2101 E. Coast Highway, Garden Level Corona del Mar, CA 92625 Telephone No. (949) 640-4393 Facsimile No. (949) 640-4374-1416 EXHIBIT Q 40 CONFIRMATION of PUT CANCELLATION NOTICE ____________________________, the Subscriber, hereby confirms receipt of Shopping.Com (the "Company") Put Cancellation Notice, dated _____________ delivered pursuant to that certain Regulation D Private Equity Line Subscription Agreement (the "Subscription Agreement"). Date of Confirmation: ___________________________ Put Date of Cancelled Put: ______________________ Intended Put Share Amount of Cancelled Put: _______________________________ SUBSCRIBER(S) ____________________________________ Subscriber's Name By: ________________________________ (Signature) Address: ____________________________________ ____________________________________ ____________________________________ Telephone No.: ____________________________________ Facsimile No.: ____________________________________ EXHIBIT T 41 EX-10.4 9 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.4 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of December 15, 1998, by and among Shopping.Com, a corporation duly incorporated and existing under the laws of the State of California (the "Company") and the subscriber as named on the signature page hereto (hereinafter referred to as "Subscriber"). RECITALS: WHEREAS, pursuant to the Company's offering ("Offering") of up to Sixty Million Dollars ($60,000,000), excluding any funds paid upon exercise of the Warrants, of Common Stock of the Company pursuant to that certain Regulation D Common Stock Equity Line Subscription Agreement of even date herewith (the "Subscription Agreement") between the Company and the Subscriber, the Company has agreed to sell and the Subscriber has agreed to purchase, from time to time as provided in the Subscription Agreement, shares of the Company's Common Stock for a maximum aggregate offering amount of Sixty Million Dollars ($60,000,000); WHEREAS, pursuant to the terms of the Subscription Agreement, the Company has agreed to issue to the Subscriber, from time to time, Commitment Warrants and Purchase Warrants, each as defined in the Subscription Agreement, to purchase a number of shares of Common Stock, exercisable for seven (7) years from their respective dates of issuance (collectively, the "Subscriber Warrants" or the "Warrants"); and WHEREAS, pursuant to the terms of the Subscription Agreement, the Company has agreed to provide the Subscriber with certain registration rights with respect to the Common Stock to be issued in the Offering and the Common Stock issuable upon exercise of the Subscriber Warrants as set forth in this Registration Rights Agreement; TERMS: NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement (including the Recitals above), the following terms shall have the following meanings (such meanings to be equally applicable to both singular and plural forms of the terms defined): "1934 Act" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "Accrual Rate" shall mean X% per month, accruing daily from the date that the applicable payment, as specified herein, begins to accrue, multiplied by the applicable principal amount, where "X" equals one percent (1%) for the first month following the date in question, and increases by an additional one percent (1%) for each month that passes after the date in question, up to a maximum of five percent (5%) per month; provided, however, that if the payments resulting from such accrual are not paid to the Holder within five (5) business days of the date they are required to be paid, "X" shall be deemed to have equaled five percent (5%) from the beginning of such unpaid accrual until such payments are made. 1 "Additional Registration Statement" shall have the meaning set forth in Section 3(b). "Amended Registration Statement" shall have the meaning set forth in Section 3(b). "Closing Bid Price" shall have the meaning set forth in the Subscription Agreement. "Common Stock" shall mean the common stock, par value $0.01, of the Company. "Due Date" shall man the date that is one hundred twenty (120) days after the date of this Agreement. "Effective Date" shall have the meaning set forth in Section 2.4. "Filing Date" shall mean the date that is forty five (45) days after the date of this Agreement. "Holder" shall mean Subscriber, and any other person or entity owning or having the right to acquire Registrable Securities or any permitted assignee thereof; "Piggyback Registration" and "Piggyback Registration Statement" shall have the meaning set forth in Section 4. "Put" shall have the meaning as set forth in the Subscription Agreement. "Register," "Registered," and "Registration" shall mean and refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and pursuant to Rule 415 under the Act or any successor rule, and the declaration or ordering of effectiveness of such registration statement or document; "Registrable Securities" shall have the meaning set forth in Section 2.1. "Registration Statement" shall have the meaning set forth in Section 2.2. "Rule 144" shall mean Rule 144, as amended, promulgated under the Act. "Subscriber" shall have the meaning set forth in the preamble to this Agreement. "Subscriber Warrants" shall have the meaning set forth in the above Recitals. "Subscription Agreement" shall have the meaning set forth in the Recitals hereto. "Supplemental Registration Statement" shall have the meaning set forth in Section 3(b). "Trading Day" shall have the meaning set forth in the Subscription Agreement. "Warrants" shall have the meaning set forth in the above Recitals. "Warrant Shares" shall mean shams of Common Stock issuable upon exercise of any Warrant. 2 2. Required Registration. 2.1 Registrable Securities. "Registrable Securities" shall mean those ----------------------- shares of the Common Stock of the Company together with any capital stock issued in replacement of, in exchange for or otherwise in respect of such Common Stock, that are: (i) issuable or issued to the Subscriber pursuant to the Subscription Agreement or in this Agreement, and (ii) issuable or issued upon exercise of the Subscriber Warrants; provided, however, that notwithstanding the above, the following shall not be considered Registrable Securities: (a) any Common Stock which would otherwise be deemed to be Registrable Securities, if and to the extent that those shares of Common Stock may be resold in a public transaction without volume limitations or other material restrictions without registration under the Act, including without limitation, pursuant to Rule 144 under the Act; and (b) any shares of Common Stock which have been sold in a private transaction in which the transferor's rights under this Agreement are not assigned. 2.2 Filing of Initial Registration Statement. The Company shall, by ----------------------------------------- the Filing Date, file a registration statement ("Registration Statement") on Form S-1 (or other suitable form, at the Company's discretion, but subject to the reasonable approval of Subscriber), covering the resale of a number of shares of Common Stock as Registrable Securities equal to at least Eight Million (8,000,000) shares of Common Stock and shall cover, to the extent allowed by applicable law, such indeterminate number of additional shares of Common Stock that may be issued or become issuable as Registrable Securities by the Company pursuant to Rule 416 of the Act. 2.3 [Intentionally Left Blank]. --------------------------- 2.4 Registration Effective Date. The Company shall use its best ---------------------------- efforts to have the Registration Statement declared effective by the SEC (the date of such effectiveness is referred to herein as the "Effective Date") by the Due Date. 2.5 [Intentionally Left Blank]. --------------------------- 2.6 [Intentionally Left Blank]. --------------------------- 2.7 Shelf Registration. The Registration Statement shall be prepared ------------------- as a "shelf" registration statement under Rule 415, and shall be maintained effective until all Registrable Securities are resold pursuant to such Registration Statement. 2.8 Supplemental Registration Statement. Anytime the Registration ------------------------------------ Statement does not cover a sufficient number of shares of Common Stock to cover all outstanding Registrable Securities, the Company shall promptly prepare and file with the SEC such Supplemental Registration Statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all such Registrable Securities and shall use its best efforts to cause such Supplemental Registration Statement to be declared effective as soon as possible. 3. Obligations of the Company. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously and reasonably possible: (a) Prepare and file with the Securities and Exchange Commission ("SEC") a Registration Statement with respect to such Registrable Securities and use its best efforts to cause 3 such Registration Statement to become effective and to remain effective until all Registrable Securities are resold pursuant to such Registration Statement. (b) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement ("Amended Registration Statement") or prepare and file any additional registration statement ("Additional Registration Statement," together with the Amended Registration Statement, "Supplemental Registration Statements") as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such Supplemental Registration Statements or such prior registration statement and to cover the resale of all Registrable Securities. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or Blue Sky laws of the jurisdictions in which the Holders are located and of such other jurisdictions as shall be reasonably requested by the Holders of the Registrable Securities covered by such Registration Statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states jurisdictions. (e) [Intentionally Omitted]. (f) As promptly as practicable aft becoming aware of such event, notify each Holder of Registrable Securities of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Holder as such Holder my reasonably request. (g) Provide Holders with notice of the date that a Registration Statement or any Supplemental Registration Statement registering the resale of the Registrable Securities is declared effective by the SEC, and the date or dates when the Registration Statement is no longer effective. (h) Provide Holders and their representatives the opportunity and a reasonable amount of time, based upon reasonable notice delivered by the Company, to conduct a reasonable due diligence inquiry of Company's pertinent financial and other records and make available its officers and directors for questions regarding such information as it relates to information contained in the Registration Statement. (i) Provide Holders and their representatives the opportunity to review the Registration Statement and all amendments or supplements thereto prior to their filing with the SEC by giving the Holder at least ten (10) business days advance written prior to such filing. (j) Provide each Holder with prompt notice of the issuance by the SEC or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceeding for such purpose. The Company shall use its best efforts to prevent the issuance of any stop order and, if any is issued, to obtain the removal thereof 4 at the earliest possible date. (k) Use its best efforts to fist the Registrable Securities covered by the Registration Statement with all securities exchanges or markets on which the Common Stock is then listed and prepare and file any required filing with the American Stock Exchange, NASD and any other exchange or market on which the Common Stock is listed. 4. Piggyback Registration. If anytime prior to the date that the Registration Statement is filed or during any Ineffective Period (as defined in the Subscription Agreement)(but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely for the sale of securities to participants in a Company stock plan or a registration on Form S-4 promulgated under the Act or any successor or similar form registering stock issuable upon a reclassification, upon a business combination involving an exchange of securities or upon an exchange offer for securities of the issuer or another entity), the Company shall, at such time, promptly give each Holder written notice of such registration (a "Piggyback Registration Statement"). Upon the written request of each Holder given by fax within ten (10) days after mailing of such notice by the Company, the Company shall cause to be included in such registration statement under the Act all of the Registrable Securities that each such Holder has requested to be registered ("Piggyback Registration") to the extent such inclusion does not violate the registration rights of any other security holder of the company granted prior to the date hereof; provided, however, that nothing herein shall prevent the Company from withdrawing or abandoning such registration statement prior to its effectiveness. 5. Limitation on Obligations to Register under a Piggyback Registration. In the case of a Piggyback Registration pursuant to an underwritten public offering by the Company, if the managing underwriter determines and advises in writing that the inclusion in the registration statement of all Registrable Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered by the Company, then the number of such Registrable Securities to be included in the Piggyback Registration Statement, to the extent such Registrable Securities may be included in such Piggyback Registration Statement, shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder, including Placement Agent, seeks to register bears to the total number of Registrable Securities sought to be included by all Holders, including Placement Agent. If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement limiting the number of Registrable Securities to be included in such Piggyback Registration Statement and the terms, if any, regarding the future sale of such Registrable Securities. 6. Dispute as to Registrable Securities, In the event the Company believes that shares sought to be registered under Section 2 by Holders do not constitute "Registrable Securities" by virtue of Section 2.1 of this Agreement, and the status of those shares as Registrable Securities is disputed, the Company shall provide, at its expense, an Opinion of Counsel, reasonably acceptable to the Holder, of the Securities at issue (and satisfactory to the Company's transfer agent to permit the sale and transfer), that those securities may be sold immediately, without volume limitation or other material restrictions, without registration under the Act, by virtue of Rule 144 or similar provisions. 7. Furnish Information. At the Company's request, each Holder shall furnish to the Company such information regarding Holder, the Registrable Securities held by it, and the intended method of disposition of such securities to the extent required to effect the registration of 5 its Registrable Securities or to determine that registration is not required pursuant to Rule 144 or other applicable provision of the Act. The Company shall include all information provided by such Holder pursuant hereto in the Registration Statement, substantially in the form supplied, except to the extent such information is not permitted by law. 8. Expenses. All expenses, other than commissions and fees and expenses of counsel to the selling Holders, incurred in connection with registrations, filings or qualifications pursuant hereto, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, shall be borne by the Company. 9. Indemnification. In the event any Registrable Securities art included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers, directors, partners, legal counsel, and accountants of each Holder, any underwriter (as defined in the Act, or as deemed by the Securities Exchange Commission, or as indicated in a registration statement) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of Section 15 of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements or omissions: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, and the Company will reimburse each such Holder, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, officer, director, underwriter or controlling person; provided however, that the above shall not relieve the Company from any other liabilities which it might otherwise have. (b) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume, the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of one such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its 6 ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 9. (c) In the event that the indemnity provided in paragraph (a) of this Section 9 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and each Holder agree to contribute to the aggregate claims, losses, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and one or more of the Holders may be subject in such proportion as is appropriate to reflect the relative fault of the Company and the Holders in connection with the statements or omissions which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by the Holders. The Company and the Holders agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation that does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person who controls a Holder of Registrable Securities within the meaning of either the Securities Act or the Exchange Act and each director, officer, partner, employee and agent of a Holder shall have the same rights to contribution as such holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act and each director and officer of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (c). (d) The obligations of the Company and Holders under this Section 9 shall survive the resale, if any, of the Common Stock, the completion of any offering of Registrable Securities in a Registration Statement under this Agreement, and otherwise. 10. Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; and (b) use its best efforts to file with the SEC in a timely manner all reports other documents required of the Company under the Act and the 1934 Act. 11. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the written consent of each Holder affected thereby. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder, each future Holder, and the Company. 12. Notices. All notices required or permitted under this Agreement shall be made in writing signed by the party making the same, shall specify the section under this Agreement pursuant to which it is given, and shall be addressed if to (i) the Company at: Shopping.Com, 2 101 East Coast Highway, Garden Level, Corona Del Mar, CA 92625, Telephone No. (949) 640-4349, Facsimile No. (949) 640-4374 (or at such other location as directed by the Company in writing) and (ii) the Holders at their respective last address as the party as shown on the records of 7 the Company. Any notice, except as otherwise provided in this Agreement, shall be made by fax and shall be deemed given at the time of transmission of the fax. 13. Termination. This Agreement shall terminate on the date all Registrable Securities cease to exist (as that term is defined in Section 2.1 hereof); but without prejudice to (i) the parties' rights and obligations arising from breaches of this Agreement occurring prior to such termination (ii) other indemnification obligations under this Agreement. 14. Assignment. No assignment, transfer or delegation, whether by operation of law or otherwise, of any rights or obligations under this Agreement by the Company or any Holder, respectively, shall be made without the prior written consent of the majority in interest of the Holders or the Company, respectively; provided that the rights of a Holder may be transferred to a subsequent holder of the Holder's Registrable Securities (provided such transferee shall provide to the Company, together with or prior to such transferee's request to have such Registrable Securities included in a Registration, a writing executed by such transferee agreeing to be bound as a Holder by the terms of this Agreement), and the Company hereby agrees to Me an amended registration statement including such transferee or a selling security holder thereunder; and provided further that the Company may transfer its rights and obligations under this Agreement to a purchaser of all or a substantial portion of its business if the obligations of the Company under this Agreement are assumed in connection with such transfer, either by merger or other operation of law (which may include without limitation a transaction whereby the Registrable Securities are converted into securities of the successor in interest) or by specific assumption executed by the transferee. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made in and wholly to be performed in that jurisdiction, except for matters arising under the Act or the Securities Exchange Act of 1934, which matters shall be construed and interpreted in accordance with such laws. 16. Execution in Counterparts Permitted. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 17. Specific Performance. The Holder shall be entitled to the remedy of specific performance in the event of the Company's breach of this Agreement, the parties agreeing did a remedy at law would be inadequate. 18. Indemnity. Each party shall indemnify each other party against any and all claims, damages (including reasonable attorney's fees), and expenses arising out of the first party's breach of any of the terms of this Agreement. 19. Entire Agreement; Written Amendments Required. This Agreement, including the Exhibit: attached hereto, the Subscription Agreement, the Common Stock certificates, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 8 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this 14th day of December, 1998. SHOPPING.COM By: /s/ FRANK W. DENNY ------------------------------ Frank W. Denny, Chairman Address: Shopping.Com 2101 East Coast Highway, Garden Level Corona Del Mar, CA 92625 Telephone No. (949) 640-4393 Facsimile No. (949) 640-4374 SUBSCRIBER: SWARTZ PRIVATE EQUITY, LLC. By: /s/ ERIC S. SWARTZ ------------------------------ Eric S. Swartz, Manager Address: 1080 Holocomb Bridge Road Bldg. 200 Suite 285 Roswell, GA 30076 Telephone: (770) 640-8130 Facsimile: (770) 640-7150 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 9-MOS JAN-31-1999 FEB-01-1998 OCT-31-1998 336,319 0 135,504 60,600 46,163 2,135,204 3,641,475 684,020 5,626,234 6,595,505 0 0 0 21,049,706 (24,670,659) 5,626,234 2,056,850 2,056,850 2,274,428 3,763,135 0 0 1,681,414 (5,655,986) 0 (5,655,986) 0 0 0 (5,655,986) (1.32) (1.32)
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