UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998. Commission File No. 0-28720.
SALES ONLINE DIRECT INC.
(Exact name of small business issuer in its charter)
Delaware 73-1479833
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
4 Brussels Street, Worcester, Massachusetts 01610
(Address of principal executive office)(Zip Code)
Issuer's Telephone Number, Including Area Code: (508) 753-0945
Securities Resolution Advisors, Inc.
(Former Name)
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $0.001 Par Value
(Title of each class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained on this Form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: NONE .
As of March 1, 1999, the registrant had outstanding 46,411,140 shares of its
Common Stock, par value of $0.001, its only class of voting securities. The
aggregate market value of the shares of common stock of the registrant held by
non-affiliates on March 1, 1999 was approximately $14,792,276 based upon the
average over the counter sales price of $1.25 per share on such date (See Item
5).
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit Index.
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business.................................................... 3
Item 2. Description of Property.................................................... 23
Item 3. Legal Proceedings.......................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders........................ 23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................... 23
Item 6. Management's Discussion and Analysis or Plan of Operation.................. 24
Item 7. Financial Statements....................................................... 29
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure........................................ 29
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................... 30
Item 10. Executive Compensation..................................................... 31
Item 11. Security Ownership of Certain Beneficial
Owners and Management...................................................... 32
Item 12. Certain Relationships and Related Transactions............................. 33
Item 13. Exhibits and Report on Form 8-K............................................ 33
Signatures ............................................................................... 34
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PART I
Sales OnLineDirect Inc. (the "Company") was incorporated in Delaware as
Rose International Ltd. on August 9, 1995. As used in this Report, unless the
context otherwise requires, the term "Company" refers to Sales OnLineDirect
Inc., a Delaware corporation. The Company's Websites are located at
http://www.auctioninc.com, www.rotmanauction.com, and www.wwcd.com. Information
contained in the Company's Websites shall not be deemed to be a part of this
Report. The Company's principal executive offices are located at 4 Brussels
Street, Worcester, Massachusetts 01610, and the Company's telephone number is
(508) 753-0945.
Item 1. Description of Business.
BUSINESS
After its formation on August 9, 1995, the Company acted primarily as a
non-operating holding company overseeing the operations of its subsidiaries and
joint ventures. The Company's two wholly-owned subsidiaries included RCI, a New
Jersey corporation, organized on December 2, 1987, and SPS Alfachem, Inc.
("SPS"), a New Jersey corporation, organized on May 22, 1995 and acquired May
14, 1996. RCI was primarily engaged in the manufacturing and marketing of
specialty organic chemical dyes used principally in the petroleum and plastics
industries. On September 30, 1997, the Company transferred to the Chiralt Corp.
its ownership of RCI and SPS in exchange for three million (3,000,000) common
shares of NexTech Enterprises International, Inc. (formerly International
Imaging, Inc.), a Delaware corporation ("NexTech"), which resulted in the
Company's owning less than 20% of NexTech.
On June 5, 1998, the Company acquired 82.02% of the issued and
outstanding common stock of The Accord Group, Inc. ("Accord"), a Delaware
corporation, located in Port Washington, New York and on July 8, 1998, changed
its name to Securities Resolution Advisors, Inc. ("SRAD"). Accord, through its
operating subsidiary Securities Resolution Advisors, Inc. ("SRA"), served
members of the investing community who had lost money due to the advice, lack of
fiduciary responsibility or fraudulent practices of brokers and broker dealers.
SRA advised its customers as to appropriate courses of action with respect to
arbitration, as well as settlement with brokers and brokerage firms. All
services were rendered on a contingency fee basis. The acquisition was accounted
for utilizing the purchase method of accounting, wherein the assets of the
Company were recorded at fair value and the operations of Accord have become the
historical operations of the Company. The Company issued 8,000,000 shares common
stock to three individuals in exchange for 8,000,000 shares (82.02%) of the
common stock of Accord. In December 1998, as a part of a restructuring, SRA
became a wholly owned subsidiary of SRAD, and the Company sold Accord, which had
no other assets, for $40,000.
On February 24, 1999, the Company sold the SRA business to Richard
Singer, the former president the Company in exchange for 8,000,000 shares of the
Company's common stock, all of which were cancelled. On February 25, 1999, the
Company purchased all of the outstanding common stock of Internet Auction, Inc.,
a Massachusetts corporation ("Internet Auction"), and subsequently changed its
name to Sales OnLineDirect, Inc. The acquisition (the "Transaction") was
pursuant to an Agreement and Plan of Reorganization (the "Agreement") dated
January 31,
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1999 between the Company and Gregory Rotman, Richard Rotman, Marc Stengel and
Hannah Kramer, the principal shareholders (the "IA Shareholders") of Internet
Auction. Pursuant to the Agreement, the Company acquired all of the issued and
outstanding shares of the capital stock of Internet Auction in exchange for the
issuance to the IA Shareholders of an aggregate of 37,368,912 shares,
representing approximately 80%, of the Company's common stock. At the time that
the transaction was agreed upon by the then current management of the Company,
the average price of the Common Stock was approximately $.28 per share. As a
result of the Transaction, Internet Auction became a wholly-owned subsidiary of
the Company, the IA Shareholders own approximately 80% of the Company's issued
and outstanding common stock, and the principal business of the Company is the
business of Internet Auction. Prior to the transaction, Richard Singer was a
principal beneficial owner of the common stock of the Company.
In accordance with the Agreement, after the Transaction, the IA
Shareholders were appointed to the Company's Board of Directors, and the
previously serving directors resigned, or will resign, from the Board.
As a result of the Transaction, Internet Auction became a wholly-owned
subsidiary of the Company, and the principal business of the Company is now the
business of Internet Auction, Inc. The following is a description of the
Company's current business.
Overview
The Company currently has four main divisions under its corporate
umbrella. The Company offers consumers a branded network of comprehensive
shopping services, a person to person auction site, a full service consignment
auction house and a collectible site. The Company is developing an Internet
community that specializes in e-commerce sales. Through the Internet Websites of
its operating Divisions, the Company brings buyers and sellers together in an
efficient and enjoyable format to buy and sell items including collectibles such
as antiques, coins, computers, memorabilia, stamps and toys. The Company,
through its four Divisions, maintains a person-to-person trading community in a
variety of formats consisting of auctions, e-commerce, classifieds, and store
fronts web design and hosting. These services permit sellers to list items for
sale, buyers to bid on items of interest, and all users to browse through listed
items in a fully-automated, topically-arranged, intuitive and easy-to-use online
service that is available 24 hours a day, seven days a week. The Company
believes that sellers are attracted to its Websites as a result of the variety
of formats available and that buyers in turn are attracted to the Company's
Websites because of the broad selection of goods available.
Industry Background
Consumers are spending an increasing amount of time on the Web. The
growth in the number of Web users and the amount of time spent on the Web is
being driven by the increasing importance of the Internet as a communications
medium, an information resource, and a sales and distribution channel. The
Internet has also evolved into a unique marketing channel. Some examples of
business transactions which occur on the Internet include trading securities,
buying consumer goods, paying bills and purchasing airline tickets. Unlike the
traditional marketing channels, Internet retailers do not have many of the
overhead costs borne by traditional retailers. The Internet offers the
opportunity to create a large, geographically dispersed customer base more
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quickly than traditional retailers. The Internet also offers customers a broader
selection of goods to purchase, provides sellers the opportunity to sell their
goods more efficiently to a broader base of buyers and allows business
transactions to occur at all hours.
History of the Company
The Company was created from four separate companies - Auction Inc.,
Rotman Auction, Inc., World Wide Collectors Digest, Inc., and the wholesale and
retail collectibles business owned and operated by the Rotman family. The Rotman
collectibles business was founded by Steve and Leslie Rotman, the parents of
Richard Rotman and Gregory Rotman, officers of the Company. The Rotmans engage
in the business of buying, warehousing, distributing, marketing and selling
collectibles and other memorabilia--particularly sports related memorabilia--to
dealers, collectors, and consumers. Through Rotman Auction, Inc., founded by
Richard Rotman, the collectibles business expanded into auction formats in 1991.
Rotman Auction, Inc. went online on the Internet in 1996, hosted on the store
front Website of World Wide Collectors Digest, Inc.
World Wide Collectors Digest, Inc. was formed in 1994 by Marc Stengel,
Vice President of the Company, to host Websites for companies in the
collectibles industry. Mr. Stengel, the President of World Wide Collectors
Digest, in collaboration with Richard Rotman, Gregory Rotman and Hannah Kramer,
founded Internet Auction, Inc. Internet Auction, Inc., an internet-based auction
company, provides an online service for sellers to list items for sale. The
Rotmans, Stengel and Kramer saw an opportunity to bring these four businesses
together to service the collectibles industry online through the Internet.
The Business
Sales OnLineDirect Inc. is a fully integrated internet auction company
specializing in collectibles and other memorabilia. The business, conducted
through its four Divisions, offers the following services:
o The Auction Inc. Division is a public person-to-person trading
community that offers sellers a vehicle for listing items for sale. By
developing a Web-based community in which buyers and sellers are brought
together in an efficient and entertaining auction format to buy and sell
personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The Sales Online Direct service permits sellers to list items
for sale, buyers to bid on items of interest and all Sales Online Direct users
to browse through listed items in a fully-automated, topically- arranged,
intuitive and easy-to-use online service that is available 24 hours a day, seven
days a week. The company's new "No Sale - No Fee Policy" allows sellers to place
items for sale without being charged any up-front fees. A commission is charged
only when an item is sold, thereby allowing sellers to place more of their items
for sale without the risk of being charged for items that are not sold. The
Auction Inc. Division is in competition with other internet companies such as
eBay Inc., uBid Inc., Onsale Inc., Excite Auction and Yahoo Auction. The website
is located at www.auctioninc.com.
o The Rotman Auction Division is a full service consignment
auction house which has been in business for over 20 years and started its
online service in 1996. Rotman
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Auction provides a full range of services to sellers and buyers including live
online bidding of premier collectibles, consignment services, authentication of
merchandise, digital photography, and the purchase and sale of authentic
memorabilia. Rotman Auction operates a state-of-the-art 40,000 square foot
facility in Worcester, Massachusetts and items can be previewed in the showroom,
with 30 wall to wall showcases. Last year Rotman Auction hosted over 25 auctions
containing some 20,000 lots. In addition Rotman Auction buys and sells its own
merchandise. Rotman Auction always has an ongoing auction 24 hours a day 7 days
a week. Rotman Auction unconditionally guarantees an item is genuine and a
certificate of authenticity is provided with every autographed item Rotman
Auction sells. Rotman Auction is in competition with other companies such as
Sotheby's Holdings Inc. The website is located at www.rotmanauction.com.
o The World Wide Collectors Digest Division (WWCD) was established
in 1994. This Division is the Company's premier e-commerce website for dealers
in the collectibles community. WWCD is a full-service company that designs,
hosts and maintains dealer Websites. WWCD's software allows clients to operate
online storefronts, set prices, and sell directly to online shoppers. WWCD
contains many facets, including classifieds, live sports scores, live chats, a
full listing of stadiums and arenas with seating charts, directions, team
schedules, addresses and phone numbers for all major league teams as well as a
complete listings of the Halls of Fame. Some of the companies that WWCD hosts
include The Dick Butkus Football Network, Internet Sports Awards, Deacon Jones
and the MCI National Sports Gallery. Rich Sports, also hosted on the site,
finished No. 2 last year with The Upper Deck Company and currently is one of
only two Master Hobby Distributors with Steiner Sports. Also included in this
group are Phils Collectibles, which reported to be one of the largest Sports
Illustrated magazine dealers in the world; Trumpets East, the largest trading
card repacker in the country; and Card Collectors Company, which sells trading
cards and produces reprints of high quality cards. WWCD services consumers from
120 countries some of which include Japan, Australia, Germany, Brazil, India,
China, Indonesia, and Cyprus. WWCD is in competition with other companies such
as Shop-At-Home. The website is located at www.wwcd.com.
o The Internet Collectibles Division maintains a substantial
inventory of memorabilia with popular and historical significance which allows
customers to directly purchase the memorabilia without the competition from
bidders in an auction format,.
The Company believes that these online services for the collectibles
industry under the umbrella of one company provides online shoppers and
businesses access to many of the services and resources they may desire.
Business Strategy
The Company operates in a market in which name recognition is critical
to attracting a high level of customer traffic. The Company has retained the
services of a marketing consultant to promote the name of the Company. The
marketing plan developed by the consultant consists of establishing
relationships with leading internet service providers and Web browsers through
which the Company's name will be listed, such as Yahoo!, AOL, Erols and others
as well as employing a mix of media and promotional activities. The Company has
taken a disciplined and selective approach in its marketing that primarily
considers the costs of customer acquisition.
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The Company attempts to maximize the return from promotional expenditures by
choosing advertising media based on the cost relative to the likely audience and
ability to generate increased traffic for the Company's Websites. In addition,
each of the Company's Websites hyperlinks to its other Websites. The Company
actively markets to its own base of customers through e-mail broadcasts. All
customers who registered on Company's Websites are automatically added to the
Company's electronic mailing list.
The Company believes it differentiates itself from other online auction
and e-commerce companies by providing the variety of formats offered by the
three online Divisions, Rotman Auction, Auction, Inc. and World Wide Collectors
Digest. These formats provide sellers with a variety of service formats designed
to meet their particular needs and to provide the format most suitable for the
sale of the particular product.
Sellers of high-end collectibles are offered the services of the Rotman
Auction Division. This Division is a full service consignment auction house
which has been in business for over 20 years and started its online service in
1996. Rotman Auction provides a full range of services to sellers and buyers
including live online bidding for premier collectibles, consignment services,
authentication of merchandise, digital photography, and the purchase and sale of
authentic memorabilia. The Division also offers fulfillment services to those
customers which may need assistance in completing their sales. The Company's
warehouse is located in Worcester, Massachusetts. The services are an
inexpensive solution for customers to conclude their sales.
On the other hand, for sellers of merchandise that is not of high-end
collectible quality, the Auction Inc. Division offers a vehicle for listing such
items for sale through an auction model. Since most of these products are not
premier collectibles, it does not offer the level of services provided by the
Rotman Auction Division.
The World Wide Collectors Digest Division is a premier e-commerce
website for dealers in the collectibles community such as Rotman Auction and
Auction, Inc. The World Wide Collectors Digest's proprietary software allows
other auction houses to create online storefronts, set prices, and sell directly
to online shoppers. Because World Wide Collectors Digest contains many facets,
including hosting web-based auctions, classifieds, live sports scores, live
chats, a full listing of stadiums and arenas with seating charts, directions and
other pertinent information, it does not compete with Rotman Auction and
Auction, Inc. Lastly, the Internet Collectibles Division allows customers to
directly purchase memorabilia from a substantial inventory without the
competition from bidders in an auction format.
The Company believes that one of its competitive advantages is its
software program. Because of its simplicity, customers can navigate the
Company's Website easily without having to spend money on more powerful
computers or software. The Company intends to develop its software to provide a
fun and user-friendly shopping experience. The Company has implemented customer
support, transaction-processing and fulfillment systems using a combination of
both proprietary and commercially available, licensed technologies. These
systems are scalable and secure, and are designed to make the customer
experience as simple as possible. The hardware and software systems are designed
to integrate seamlessly and manage real-time transactions with limited human
intervention. The current strategy is to focus the Company's internal software
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development efforts on creating and enhancing specialized, proprietary software
that is unique to its business.
The merchandising strategy is designed to combine broad product
selection and appeal to all classes of online shoppers. The Company intends to
become a one stop shopping service by virtue of its tiered platform of choices
including its auction and e-commerce sites. The search engine tools currently in
use allows customers to navigate through the Company's various Websites.
Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software. The
Company currently or potentially competes with a variety of other companies
depending on the type of merchandise and sales format offered to customers.
These competitors include: (i) various Internet auction houses such as ONSALE,
uBID, Yahoo! Auctions, First Auction, Surplus Auction, WebAuction and Insight
Auction; (ii) a number of indirect competitors that specialize in electronic
commerce or derive a substantial portion of their revenue from electronic
commerce, including Internet Shopping Network, AOL, Shopping Com and Cendant
Corp.; and (iii) a variety of other companies that offer merchandise similar to
that of the Company but through physical auctions.
The Company believes that the principal competitive factors affecting
its market are the ability to attract customers at favorable customer
acquisition costs, operate the Websites in an uninterrupted manner and with
acceptable speed, provide effective customer service and obtain merchandise at
satisfactory prices. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources than the Company. Increased competition
is likely to result in reduced operating margins, loss of market share and a
diminished brand franchise, any one of which could materially adversely affect
the Company's business, results of operations and financial condition. Many of
the Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company.
Intellectual Property
The Company's software programs are proprietary. To protect its
interest in its intellectual property, the Company has non-disclosure agreements
with its employees and restricts access by others to its proprietary software.
The Company believes that its products and other proprietary rights do
not infringe on the proprietary rights of third 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
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or other Company works. Such an assertion may require the Company to enter into
royalty arrangements or result in costly litigation.
The Company is also dependent upon existing technology related to its
operations. To the extent that new technological developments are unavailable to
the Company on terms acceptable to it, or not at all, the Company may be unable
to continue to implement its business plan which would have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Employees
The Company currently employs 15 people, including eight full time
employees. The Company believes that its future success will depend in part on
its continued ability to attract, hire and retain qualified personnel.
Government Regulation
The Company is not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access or commerce on the
Internet, other than regulations applicable to businesses generally. 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, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security.
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RISK FACTORS
This Report (including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)
regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements in this
Report. Additionally, statements concerning future matters such as the
development of new services, technology enhancements, purchase of equipment,
credit arrangements, possible changes in legislation and other statements
regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this Report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
below as well as those discussed elsewhere in this Report. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this Report, which attempts to advise interested parties of the risks and
factors that may affect the Company's business, financial condition, results of
operations and prospects.
Extremely Limited Operating History
The Company was formed in stages and placed together as one company in
February, 1999. Accordingly, there is an extremely limited operating history
upon which to base an evaluation of the Company and its business and prospects.
The Company's business and 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 electronic commerce. Such risks for the Company include: an evolving and
unpredictable business model; management of growth, if any; the Company's
ability to anticipate and adapt to a developing market; acceptance by customers
of the Company's services and merchandise sold at such auctions; dependence upon
the level of hits to the Company's sites; development of equal or superior
Internet auctions and related services by competitors; dependence on vendors for
merchandise; and the ability to identify, attract, retain and motivate qualified
personnel. To address these risks, the Company must, among other things,
increase traffic to its Websites, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to develop
and upgrade its technologies and customer services. There can be no assurance
that the Company will be successful in addressing these risks.
Need For Additional Capital
The Company requires substantial working capital to fund its business.
If the Company is unable to obtain financing in the amounts desired and on
acceptable terms, or at all, the
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Company may be required to reduce significantly the scope of its presently
anticipated advertising and other expenditures, which could have a material
adverse effect on the Company's growth prospects and the market price of the
Common Stock.
Anticipated Losses And Negative Cash Flow
The Company expects to expend significant resources on its technology,
Website development, advertising, hiring of personnel and startup costs. As a
result, the Company expects to continue to incur losses for the foreseeable
future. The Company intends to expend significant financial and management
resources on brand development, marketing and advertising, Website development,
strategic relationships, and technology and operating infrastructure. Primarily
as a result of the anticipated significant increase in marketing and promotional
expenses, the Company expects to incur additional losses, and such losses are
expected to increase significantly from current levels. In addition, the Company
plans to continue to increase its operating expenses significantly in order to
increase its customer base, increase the size of its staff, expand its marketing
efforts to enhance its brand image, increase its visibility on other companies'
high-traffic Websites, purchase larger volumes of merchandise to be sold at
auction, increase its software development efforts, and support its growing
infrastructure. Moreover, to the extent that increases in such operating
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition will be
materially adversely affected. There can be no assurance that the Company's
revenues will increase or even continue at their current level or that the
Company will achieve or maintain profitability or generate positive cash flow
from operations in future periods. The Company has made and expects in the
future to continue to make significant investments in infrastructure and
personnel in advance of levels of revenue necessary to offset such expenditures.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall.
Unpredictability of, And Fluctuations In, Operating Results
The Company's operating results are unpredictable and are expected to
fluctuate in the future, due to a number of factors, many of which are outside
the Company's control. These factors include: (i) the Company's ability to
significantly increase its customer base and traffic to its sites, manage its
inventory mix and the mix of products offered, liquidate its inventory in a
timely manner, maintain gross margins, and maintain customer satisfaction; (ii)
the availability and pricing of merchandise from vendors; (iii) consumer
confidence in encrypted transactions in the Internet environment; (iv) the
timing, cost and availability of advertising on the Company's Websites and other
entities' Websites; (v) the amount and timing of costs relating to expansion of
the Company's operations; (vi) the announcement or introduction of new types of
merchandise, service offerings or customer services by the Company or its
competitors; (vii) technical difficulties with respect to consumer use of the
Company's Websites; (viii) the level of merchandise returns experienced by the
Company; (ix) governmental regulation by federal or local governments; and (x)
general economic conditions and economic conditions specific to the Internet and
electronic commerce. As a strategic response to changes in the competitive
environment, the Company may from time to time make certain service, marketing
or supply decisions or acquisitions that could have a material adverse effect on
the Company's results of
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operations and financial condition. Due to all of the foregoing factors, the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's Common
Stock would likely be materially adversely affected.
Seasonal Fluctuations In Result of Operations
The Company believes that its results of operations are somewhat
seasonal in nature, with fewer auctions listed around the Thanksgiving and
Christmas holidays in the fourth quarter. The Company's limited operating
history, however, makes it difficult to fully assess the impact of these
seasonal factors or whether or not its business is susceptible to cyclical
fluctuations in the U.S. economy. There can be no assurance that seasonably or
cyclical variations in the Company's operations will not become more pronounced
over time or that they will not materially adversely affects its results of
operations in the future. Moreover, consumer "fads" and other changes in
consumer trends may cause significant fluctuations in the Company's operating
results from one quarter to the next.
Reliance On Relationships With OnLine Companies
The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include, but are
not limited to, agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. Generally, these agreements are not
exclusive and do not provide for guaranteed renewal. The risks included in this
dependence include: (i) the possibility that a competitor will purchase
exclusive rights to attractive space on one or more key sites; (ii) the
uncertainty that significant spending on these relationships will increase the
Company's revenues substantially or at all; (iii) the possibility that potential
revenue increases resulting from such spending will not occur within the time
periods that the Company is expecting; (iv) the possibility that space on other
Websites or the same sites may increase in price or cease to be available on
reasonable terms or at all; (v) the possibility that, if these relationships are
successful, the Company may not be able to obtain adequate amounts of
merchandise to meet the increased demand that is generated; (vi) the possibility
that such online companies will be unable to deliver a sufficient number of
customer visits or impressions; and (vii) the possibility that such online
companies will compete with the Company for limited online auction revenues. Any
termination of the Company's arrangements with other online companies could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Reliance On Merchandise Vendors
The Company depends upon vendors to supply it with some merchandise for
sale through the Company's Internet auctions, and the availability of such
merchandise can be unpredictable. Since inception, the Company has sourced
merchandise from numerous vendors. None of these vendors is subject to a
long-term supply contract with the Company. There can be no assurance that the
Company's current vendors will continue to sell merchandise to the Company or
otherwise provide merchandise for sale in the Company's auctions or that the
Company will be able to establish new vendor relationships that ensure
merchandise will be available for auction on the Company's Websites. If the
Company is unable to develop and maintain satisfactory
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relationships with vendors on acceptable commercial terms, if the Company is
unable to obtain sufficient quantities of merchandise, if the quality of service
provided by such vendors falls below a satisfactory standard or if the Company's
level of returns exceeds its expectations, the Company's business, results of
operations and financial condition will be materially adversely affected.
Reliance On Other Third Parties
In addition to its merchandise vendors, the Company's operations depend
on a number of third parties for Internet/telecom access, delivery services,
credit card processing and software services. The Company has limited control
over these third parties and no long-term relationships with any of them. For
example, the Company does not own a gateway onto the Internet, but instead,
relies on an Internet service provider to connect the Company's Websites to the
Internet. From time to time, the Company has experienced temporary interruptions
in its Websites connection and also its telecommunications access. Continuous or
prolonged interruptions in the Company's Websites connection or in its
telecommunications access, or slow Internet transmissions, would have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company uses overnight courier and delivery services for
substantially all of its products. Should these services be unable to deliver
the Company's products for a sustained time period as a result of a strike or
other reason, the Company's business, results of operations and financial
condition would be adversely affected. If, due to computer systems failures or
other problems related to these third-party service providers, the Company
experiences any delays in shipment, its business, results of operations and
financial condition would be adversely affected. The Company's
internally-developed auction software depends on operating system, database and
server software that was developed and produced by and licensed from third
parties. The Company has from time to time discovered errors and defects in the
software from these third parties and, in part, relies, on these third parties
to correct these errors and defects in a timely manner. If the Company is unable
to develop and maintain satisfactory relationships with such third parties on
acceptable commercial terms, or the quality of products and services provided by
such third parties falls below a satisfactory standard, the Company's business,
results of operations and financial condition will be materially adversely
affected.
Management Of Potential Growth; New Management Team
The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company's new
employees include a number of key technical employees who have not yet been
fully integrated into the Company's management team, and the Company expects to
add additional key personnel in the near future. Increases in the number of
employees and the volume of merchandise sales have placed significant demands on
the Company's management, which as of March 1, 1999 included only four executive
officers. In order to manage the expected growth of its operations, the Company
will be required to expand existing operations, particularly with respect to
customer service and merchandising, to improve existing and
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implement new operational, financial and inventory systems, procedures and
controls. The Company may also be required to hire an accounting staff. Further,
the Company's management will be required to maintain relationships with various
merchandise vendors, freight companies, warehouse operators, other Websites and
services, Internet service providers and other third parties and to maintain
control over the strategic direction of the Company in a rapidly changing
environment. There can be no assurance that the Company's current personnel,
systems, procedures and controls will be adequate to support the Company's
future operations, that management will be able to identify, hire, train,
retain, motivate and manage required personnel or that management will be able
to manage and exploit existing and potential market opportunities successfully.
If the Company is unable to manage growth effectively, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business-Employees."
Dependence On Key Personnel; Need For Additional Personnel
The Company's future performance depends to a significant degree upon
the continued contributions of members of Company's senior management and other
key personnel, particularly its President, Gregory Rotman; Vice President,
Treasurer and Secretary, Richard Rotman; Vice President, Marc Stengel; and Vice
President, Hannah Kramer. The loss of any of these individuals could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company does not have a long-term employment agreements
with any of its key personnel and maintains no key person life insurance. In
order to meet expected growth, the Company believes that its future success will
depend upon its ability to identify, attract, hire, train, motivate and retain
other highly-skilled managerial, merchandising, engineering, marketing and
customer service personnel. Competition for such personnel is intense. There can
be no assurance that the Company will be successful in attracting, assimilating
or retaining the necessary personnel, and the failure to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Risks Of A Purchased Inventory Model
The Company purchases some of its merchandise from vendors and thereby
assumes the inventory and price risks of these products to be sold at auction.
Since the Company relies on purchased inventory, its success will depend on its
ability to liquidate its inventory rapidly through its auctions, the ability of
its staff to purchase inventory at attractive prices relative to its resale
value at auction and its ability to manage customer returns. Due to the
inherently unpredictable nature of auctions, it is impossible to determine with
certainty whether an item will sell for more than the price paid by the Company.
Further, because minimum opening bid prices for the merchandise listed on the
Company's Websites generally are lower than the Company's acquisition costs for
such merchandise, there can be no assurance that the Company will achieve
positive gross margins on any given sale. If the Company is unable to liquidate
its purchased inventory rapidly, if the Company's staff fails to purchase
inventory at attractive prices relative to its resale value at auction, or if
the Company fails to predict with accuracy the resale prices for its purchased
merchandise, the Company may be forced to sell its inventory at a discount or at
a loss and the Company's business, results of operations and financial condition
would be materially adversely affected.
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Uncertain Acceptance Of The Evolving And Unpredictable Business Model
The Company believes that the importance of brand recognition will
increase as more companies engage in commerce over the Internet. Development and
awareness of the Company will depend largely on the Company's success in
increasing its customer base. If vendors do not perceive the Company as an
effective marketing and sales channel for their merchandise, or consumers do not
perceive the Company as offering an entertaining and desirable way to purchase
merchandise, the Company will be unsuccessful in promoting and maintaining its
brand. Furthermore, in order to attract and retain customers and to promote and
maintain the Company in response to competitive pressures, the Company may find
it necessary to increase its marketing and advertising budgets and otherwise to
increase substantially its financial commitment to creating and maintaining
brand loyalty among vendors and consumers. If the Company is unable to or incurs
significant expenses in an attempt to achieve or maintain a leading position in
Internet commerce or to promote and maintain its brand, the Company's business,
results of operations and financial condition will be materially adversely
affected.
The Company also intends to continue to develop its business model and
to explore other opportunities such as the use of the Company's Websites as an
advertising medium for services and products of other companies, promoting new
or complementary products or sales formats and expanding the breadth and depth
of products and services offered on its Websites. As its business model evolves,
the Company risks diluting its business model, confusing customers and
decreasing interest from vendors. In addition, the Company could be exposed to
additional or new risks associated with these new opportunities. If the Company
is unable to address these risks, the Company's business, results of operations
and financial condition will be materially adversely affected.
Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future. The
Company currently or potentially competes with a variety of other companies
depending on the type of merchandise and sales format offered to customers.
These competitors include: (i) various Internet auction houses such as eBay,
ONSALE, uBID, Yahoo! Auctions, First Auction (the auction site for Internet
Shopping Network, a wholly-owned subsidiary of Home Shopping Network Inc.),
Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.), WebAuction (the
auction site for MicroWarehouse, Inc.) and Insight Auction (the auction site for
Insight Enterprises, Inc.); (ii) a number of indirect competitors that
specialize in electronic commerce or derive a substantial portion of their
revenue from electronic commerce, including Internet Shopping Network, AOL,
Shopping Com and Cendant Corp.; and (iii) a variety of other companies that
offer merchandise similar to that of the Company but through physical auctions
and with which the Company competes for sources of supply.
The Company believes that the principal competitive factors affecting
its market are the ability to attract customers at favorable customer
acquisition costs, operate the Websites in an uninterrupted manner and with
acceptable speed, provide effective customer service and obtain merchandise at
satisfactory prices. There can be no assurance that the Company can maintain
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its competitive position against current and potential competitors, especially
those with greater financial, marketing, customer support, technical and other
resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible
that new competitors or alliances among competitors and vendors may emerge and
rapidly acquire market share. Increased competition is likely to result in
reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect the Company's
business, results of operations and financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
marketing, customer support, technical and other resources than the Company. As
a result, such competitors may be able to secure merchandise from vendors on
more favorable terms than the Company, and they may be able to respond more
quickly to changes in customer preferences or to devote greater resources to the
development, promotion and sale of their merchandise than can the Company.
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 to, and use of, its Websites. The Company's revenues depend entirely on
the number of customers who use its Websites to purchase merchandise.
Accordingly, the satisfactory performance, reliability and availability of the
Company's Websites, transaction-processing systems, network infrastructure and
delivery and shipping systems are critical to the Company's operating results,
as well as to its reputation and its ability to attract and retain customers and
maintain adequate customer service levels.
The Company periodically has experienced minor systems interruptions,
including Internet disruptions, which it believes may continue to occur from
time to time. Any systems interruptions, including Internet disruptions, that
result in the unavailability of the Company's Websites or reduced order
fulfillment performance would reduce the volume of goods sold, which could have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company is continually enhancing and expanding its
transaction-processing systems, network infrastructure, delivery and shipping
systems and other technologies to accommodate a substantial increase in the
volume of traffic on the Company's Websites. There can be no assurance that the
Company will be successful in these efforts or that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Websites or timely expand and upgrade its systems and infrastructure to
accommodate such increases. There can be no assurance that the Company's or its
suppliers' network will be able to timely achieve or maintain a sufficiently
high capacity of data transmission, especially if the customer usage of the
Company's Websites increases. The Company's failure to achieve or maintain high
capacity data transmission could significantly reduce consumer demand for its
services and have a material adverse effect on its business, results of
operations and financial condition.
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Risks Associated With Technological Change; Dependence On The
Internet
The Internet and electronic commerce industries are characterized by
rapid technological change, changes in user and customer requirements, frequent
new service or product introductions embodying new technologies and the
emergence of new industry standards and practices that could render the
Company's existing Websites and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license or acquire leading
technologies, enhance its existing services, and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. The development of Websites and other proprietary
technology entails significant technical and business risks. There can be no
assurance that the Company will be successful in using new technologies
effectively or adapting its Websites and proprietary technology to emerging
industry standards. If the Company is unable, for technical, legal, financial or
other reasons, to adapt in a timely manner to changing market conditions or
customer requirements, or if the Company's Websites do not achieve market
acceptance, the Company's business, results of operations and financial
condition would be materially adversely affected. The success of the Company's
services will depend in large part upon the development of an infrastructure for
providing Internet access and services. The Internet could lose its viability
due to delays in the development or adoption of new standards and protocols
intended to handle increased levels of Internet activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace will be developed or that, if they are developed, the Internet will
become a viable marketing and sales channel for merchandise such as that offered
by the Company. The recent growth in the use of the Internet has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet service providers and other organizations with
links to the Internet. Any perceived degradation in the performance of the
Internet as a whole could undermine the benefits of the Company's services. The
Company's ability to increase the speed with which it provides services to
customers and to increase the scope of such services ultimately is limited by
and reliant upon the speed and reliability of the networks operated by third
parties. Consequently, the emergence and growth of the market for the Company's
services is dependent on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion. If the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace are not developed or if the Internet does not become a viable
commercial marketplace, the Company's business, results of operations and
financial condition will be materially adversely affected.
Risk Of System Failure; Single Site
The Company's success is largely dependent upon its communications
hardware and computer hardware, substantially all of which are located at a
leased facility in Owings Mills, Maryland. The Company's systems are vulnerable
to damage from fire, flood, power loss, telecommunication failure, break-in and
similar events. The Company does not presently have fully redundant systems, a
formal disaster recovery plan or alternative providers of hosting services and
does not carry sufficient business interruption insurance to adequately
compensate
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the Company for all losses that may occur. A substantial interruption in these
systems would have a material adverse effect on the Company's business, results
of operations and financial condition. To date, the Company has experienced
variable interruptions to its service as a result of loss of power and
telecommunications connections. Despite the implementation of network security
measures and firewall security by the Company, its servers are also vulnerable
to computer viruses, physical or electronic break-ins, attempts by third parties
deliberately to exceed the capacity of the Company's systems and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays, loss of data or cessation in
service to users of the Company's services and products. The occurrence of any
of these risks could have a material adverse effect on the Company's business,
results of operations and financial condition.
Risks Related To Consumer Trends
The Company obtains some of its revenues from fees from sellers for
listing products for sale on its service and fees from successfully completed
auctions. The Company's future revenues will depend upon continued demand for
the types of goods that are listed by users of the Company service. The
popularity of certain categories of items, such as toys, dolls and memorabilia,
among consumers may vary over time due to perceived scarcity, subjective value,
and societal and consumer trends in general. A decline in the popularity of, or
demand for, certain collectibles or other items sold through the Company service
could reduce the overall volume of transactions on the Company service,
resulting in reduced revenues. In addition, certain consumer "fads" may
temporarily inflate the volume of certain types of items list on the Company
service, placing a significant strain upon the Company's infrastructure and
transaction capacity. These trends may also cause significant fluctuations in
the Company's operating results from one quarter to the next. Any decline in
demand for the goods offered through the Company service as a result of changes
in consumer trends could have a material adverse effect.
Internet Commerce Security Risks; Risk Of Credit Card Fraud
A significant barrier to electronic commerce and communications is the
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. 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. If any such
compromise of the Company's security were to occur, it could have a material
adverse effect on the Company's business, results of operations and financial
condition. A party who is able to circumvent the Company's security measures
could misappropriate proprietary information or cause interruptions in the
Company's operations. The Company may be required to expend significant capital
and other resources to protect against the threat of such security breaches or
to alleviate problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, and the Web in particular, especially as a means of
conducting commercial transactions. To the extent that activities of the Company
or third-party contractors involve the storage and transmission of proprietary
information, such as credit card
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numbers, security breaches could expose the Company to a risk of loss or
litigation and 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, results of operations and financial condition.
Government Regulation And Legal Uncertainties
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
laws applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing, and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
Internet commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business over
the Internet. The adoption of any additional laws or regulations may decrease
the growth of the Internet, which, in turn, could decrease the demand for the
Company's Internet auctions and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, results of
operations and financial condition. Moreover, the applicability to the Internet
of existing laws in various jurisdictions governing issues such as property
ownership, auction regulation, sales tax, libel and personal privacy is
uncertain and may take years to resolve. In addition, as the Company's service
is available over the Internet in multiple states, and as the Company sells to
numerous consumers resident in such states, such jurisdictions may claim that
the Company is required to qualify to do business as a foreign corporation in
each such state. The failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company to
taxes and penalties for the failure to qualify. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to the Company's business, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Protection Of Intellectual Property
As part of its confidentiality procedures, the Company generally enters
into agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions taken by the
Company, it might be possible for a third party to copy or otherwise obtain and
use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's technology is difficult, particularly because
the global nature of the Internet makes it difficult to control the ultimate
destination or security of software or other data transmitted. The laws of other
countries may afford the Company little or no effective protection of its
intellectual property.
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The Company may in the future receive notices from third parties
claiming infringement by the Company's software or other aspects of the
Company's business. While the Company is not currently subject to any such
claim, any future claim, with or without merit, could result in significant
litigation costs and diversion of resources, including the attention of
management, and require the Company to enter into royalty and licensing
agreements, which could have a material adverse effect on the Company's
business, results of operations and financial condition. Such royalty and
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the future, the Company may also need to file lawsuits
to enforce the Company's intellectual property rights, to protect the Company's
trade secrets, or to determine the validity and scope of the proprietary rights
of others. Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company also relies on a variety of technology that it licenses
from third parties. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms. The loss of or inability of the Company to maintain or obtain upgrades to
any of these technology licenses could result in delays in completing its
proprietary software enhancements and new developments until equivalent
technology could be identified, licensed or developed and integrated. Any such
delays would materially adversely affect the Company's business, results of
operations and financial condition.
Risks Associated With Global Expansion
The Company does not currently have any overseas fulfillment or
distribution facility or arrangement or any Websites content localized for
foreign markets, and there can be no assurance that the Company will be able to
establish a global presence. In addition, there are certain risks inherent in
doing business on a global level, such as regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, difficulties in protecting intellectual property
rights, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences, which could adversely impact the success of the
Company's global operations. In addition, the export of certain software from
the United States is subject to export restrictions as a result of the
encryption technology in such software and may give rise to liability to the
extent the Company violates such restrictions. There can be no assurance that
the Company will be able to successfully market, sell and distribute its
products in foreign markets or that one or more of such factors will not have a
material adverse effect on the Company's future global operations, and
consequently, on the Company's business, results of operations and financial
condition.
Risks Associated With Acquisitions
The Company may choose to expand its market presence through
acquisitions of complementary businesses. Although no such acquisitions are
currently being negotiated, any future acquisitions would expose the Company to
increased risks, including risks associated with the assimilation of new
operations, sites and personnel, the diversion of resources from the Company's
existing businesses, sites and technologies, the inability to generate revenues
from
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new sites or content sufficient to offset associated acquisition costs, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. Acquisitions may also result in
additional expenses associated with amortization of acquired intangible assets
or potential businesses. There can be no assurance that the Company would be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, and its inability to overcome such risks
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Control By Principal Stockholders, Officers And Directors
The Company's executive officers and directors, in the aggregate,
beneficially own approximately 80% of the Company's outstanding Common Stock. As
a result, such persons, acting together, will have the ability to control all
matters submitted to stockholders of the Company for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets) and to control the management and
affairs of the Company. Accordingly, such concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of the
Company, impede a merger, consolidation, takeover or other business combination
involving the Company or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company, which in turn
could have an adverse effect on the market price of the Company's Common Stock.
Anti-Takeover Effects Of Delaware Law And Certain Charter
Provisions
Certain provisions of Delaware law may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions also may render the removal of directors and
management more difficult. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law may also have the effect of
discouraging or preventing certain types of transactions involving an actual or
threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "DGCL"), which will
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless the
business combination is approved in a prescribed manner. The application of
Section 203 of the DGCL also could have the effect of delaying or preventing a
change of control of the Company.
Possible Volatility Of Stock Price
The market price of the shares of Common Stock has been, and is likely
to be, highly volatile and could be subject to wide fluctuations in response to
factors such as actual or
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anticipated variations in the Company's results of operations, announcements of
technological innovations, new sales formats by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights, changes
in financial estimates by securities analysts, conditions and trends in the
Internet and electronic commerce industries, adoption of a new accounting
standards affecting the retail sales industry, general market conditions and
other factors. Further, the stock markets, have experienced extreme price and
volume fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stock are at or near historical highs and
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 factors may adversely affect the market price of
the Company's Common Stock. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates or
international currency fluctuations, may adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect of the
Company's business, results of operations and financial condition.
Year 2000 Readiness Disclosure
Computer systems, software packages, and microprocessor dependent
equipment may cease to function or generate erroneous data when the year 2000
arrives. The problem affects those systems or products that are programmed to
accept a two-digit code in date code fields. To correctly identify the year
2000, a four-digit date code field will be required to be what is commonly
termed "year 2000 compliant." The Company may realize exposure and risk if the
systems for which it is dependent upon to conduct day-to-day operations are not
year 2000 compliant by January 1, 2000. The potential areas of exposure include
electronic data exchange systems operated by third parties with whom the Company
transacts business, certain products purchased from third parties for resale,
and computers, software, telephone systems and other equipment used internally.
If systems material to the Company's operation have not been made year 2000
compliant prior to January 1, 2000, or if third parties with whom the Company
does business fail to make their systems year 2000 compliant in a timely manner,
the year 2000 issue could have a disastrous effect on the Company's business,
financial condition and results of operations.
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Item 2. Description of Properties.
The Company's corporate headquarters are presently located at 4
Brussels Street, Worcester, Massachusetts 01610.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information - The Company's common stock began trading on
August 11, 1995 and is presently traded on the NASDAQ Bulletin Board under the
symbol, "PAID". The following table sets forth the high and low bid prices for
the Company's Common Stock for the eight quarters ended December 31, 1998.
1998 High Low
---- ---
Quarter ended March 31, 1998 3/8 5/32
Quarter ended June 30, 1998 3/8 1/8
Quarter ended September 30, 1998 1 3/16 3/8
Quarter ended December 31, 1998 7/8 1/4
1997 High Low
---- ---
Quarter ended March 31, 1997 1 3/8 11/16
Quarter ended June 30, 1997 1 1/4 3/8
Quarter ended September 30, 1997 7/16 3/8
Quarter ended December 31, 1997 3/8 3/8
(b) Holders - As of December 31, 1998, there were approximately 145
holders of record of the Company's Common Stock.
(c) Dividends - The Company has not previously paid cash dividends on
its common stock, and intends to utilize current resources to expand the
business; thus, it is not anticipated that cash dividends will be paid on the
Company's Common Stock in the foreseeable future.
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
As of December 31, 1998, the sole business of the Company was the
business of SRA, its sole, wholly-owned subsidiary, which served members of the
investing community who had lost money due to the advice, lack of fiduciary
responsibility or fraudulent practices of brokers and broker dealers. In
December 1998, the management of the Company decided to discontinue the
operations of that business. In February 1999, the Company sold SRA to the
management of SRA, in exchange for eight million shares of the Company's Common
Stock, with the goal of entering into the Internet business. In furtherance of
that goal, on February 25, 1999, the Company purchased all of the outstanding
stock of Internet Auction in exchange for 37,368,912 shares of the Company's
Common Stock. At the time the transaction was agreed upon by the then current
management of the Company, the average price of the common stock was
approximately $.28 per share. As a result of this transaction, Internet Auction
became a wholly-owned subsidiary of the Company, and the principal business of
the Company is now the business of Internet Auction, Inc.
Prior to the transaction with the Company, the business currently
conducted by the Company was conducted through four related companies: Auction,
Inc., Rotman Auction, Rotman Collectibles and World Wide Collectors Digest, Inc.
Prior to, and in anticipation of the transaction with the Company, the companies
were combined and their operations were integrated. As a part of this
integration, a substantial inventory of Rotman Collectibles was transferred into
Internet Auction. The following provides financial information regarding
Internet Auction as of February 15, 1999.
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Internet Auction, Inc.
Balance Sheet
February 25, 1999
Assets
Current assets:
Cash and Equivalents $ 18,216
Accounts receivable 4,040
Inventories (1) 834,153
Loans receivable 1,000
Due from affiliates (4) 15,483
Due from shareholders (4) 2,280
Total current assets $ 875,172
Property and equipment, net (2) 50,429
Intangible assets (3) 5,980
Total assets $ 931,581
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 79,544
Accrued liabilities 18,986
Due to shareholders 12,000
Due to affiliates 4,745
Total current liabilities $ 115,275
Shareholders' equity:
Common stock 845,194
Accumulated deficit (27,888)
817,036
Less stock subscriptions receivable (1,000)
Total shareholders' equity 816,036
Total liabilities and shareholders' equity $ 931,581
- - -------------------
(1) Inventory is stated at the lower of cost (using the first-in first-out
(FIFO) method or market).
(2) Property and equipment are stated at cost. Depreciation is computed using
straight line and double declining balance methods over estimated useful
life of 5 years. Expenditures for additions, improvements and major
renewals are capitalized while those for repairs and maintenance are
charged to expense as incurred.
(3) Intangible assets, comprised of organization expenses and intellectual
property, are being amortized over five years on a straight line basis.
(4) Due to/from affiliates and shareholders consist of non-interest bearing
advances and are all due on demand. These advances were subsequently
repaid.
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Operations
The following is a description of the operations of each of the Company's
divisions:
Auction Inc. Division. The Auction Inc. is a public person-to-person
trading community that offers sellers a vehicle of listing items for sale.
Substantially all of the Division's revenues are derived from placement and
success fees paid by sellers. Auction Inc.charges no fees to buyers and, to
date, has chosen to sell almost no advertising on its Web site. By paying
additional placement fees, sellers can have items featured in various ways. In
the near future, Sellers will be able to highlight their auctions by utilizing a
bold font for the auction heading for an additional fee of $2.00. Sellers for
whom a three to fourteen day auction is successfully concluded (i.e., there is
at least one bid above the seller's specified minimum or reserve price,
whichever is higher) also pay a success fee for each item sold that is equal to
5% of the first $25 of the purchase price, 2.5% of any purchase price between
$25.01 and $1,000 and 1.25% of any purchase price over $1,000. Revenues from
placement fees are recognized at the time that the item is listed; revenues
related to success fees are recognized at the time that the auction is
successfully concluded. At no point during the auction process does the Company
take possession of either the item being sold or the buyer's payment for the
item. Fees to sellers are aggregated and billed on a monthly basis. A
substantial majority of customer accounts are settled by directly charging
credit card numbers provided by sellers. Provisions for estimated uncollectible
accounts and authorized credits are recorded as percentages of revenues and are
provided for at the time of revenue recognition.
The Company is considering offering banner advertising on Auction Inc's
site in the future.
Rotman Auction Division. Rotman Auction is a full service consignment
auction house which has been in business for over 20 years and started its
online service in 1996. Rotman Auction provides a full range of services to
sellers and buyers including live online bidding of premier collectibles,
consignment services, authentication of merchandise, digital photography, and
the purchase and sale of authentic memorabilia. The Company auctions a wide
variety of property, including, jewelry, decorative art and rare books, posters
and has a mainstay in the sports memorabilia and trading cards. Most of the
objects auctioned by the Company are unique items, and their value, therefore,
can only be estimated prior to sale. The Company's principal role as an
auctioneer is to identify, evaluate and authenticate items through its staff of
experts and consultants, to stimulate purchaser interest through professional
marketing techniques and to match sellers and buyers through the auction
process.
In its role as auctioneer, the Company functions as an agent, accepting
property on consignment from its selling clients. The Company conducts its
auctions as agent of the consignor, billing the buyer for property purchased,
receiving payment from the buyer and remitting to the consignor the consignor's
portion of the buyer's payments. The Company frequently releases property sold
at auction to buyers, primarily dealers, before the Company receives payment. In
such event, the Company is liable to the seller for the net sale proceeds even
if the Company never receives payment from the buyer.
All buyers using the services pay a premium (known as the buyer's
premium) to the Company on auction purchases. The buyer's premium is 15% of the
hammer price on all items
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sold for $50,000 or less, and 15% of the first $50,000 for items sold in excess
of that amount (10% on the remainder). Generally, similar structures were
simultaneously implemented throughout most of Rotman Auction's auction
operations. A selling commission, which can vary depending on the sale location,
type of seller (for example, dealers) and the selling price of the property, is
charged to the seller. In situations involving major individual collections or
collectors, the selling commission tends to be negotiated to a level below that
which otherwise would apply.
In addition, on certain occasions, the Company will assure the consignor
a minimum price in connection with the sale of property. The Company must
perform under its assurances only in the event that (a) the property fails to
sell at auction and (b) the consignor prefers to be paid the minimum price
rather than retain ownership of the unsold property. In such event, the Company
purchases the property at the minimum price.
World Wide Collectors Digest Division (WWCD). WWCD, established in
1994, is the Company's premier e-commerce website for dealers in the
collectibles community. WWCD is a full-service company that designs, hosts and
maintains dealer Websites. WWCD's software allows clients to operate online
storefronts, set prices, and sell directly to online shoppers.
The Company has derived substantially all of its revenues to date from
the sale of advertisements and hosting sites. These revenue sources include
placement fees, promotions, banner advertisements, sponsorships, direct
marketing, and transactions on WWCD properties. The Company's advertising
products currently consist of banner advertisements that appear on pages within
WWCD properties, higher profile promotional sponsorships that are typically
focused on a particular event, such as a sweepstakes, and merchant buttons on
targeted advertising inventory encouraging users to complete a transaction.
Hypertext links are embedded in each banner advertisement or button to provide
the user with instant access to the advertiser's Web site, to obtain additional
information, or to purchase products and services.
WWCD derives other revenues primarily from its web-hosting program, which
offers premium services for a monthly fee, providing dealers with a website,
shopping cart services and additional disk space and enhanced publishing tools
for their web pages.
Internet Collectibles Division. Internet Collectibles maintains a
substantial inventory of memorabilia with popular and historical significance.
This inventory is sold through the Company's various divisions and to third
party vendors.
The Company believes that these online services for the collectibles
industry under the umbrella of one company provides online shoppers and
businesses access to many of the services and resources they may desire.
Working Capital and Liquidity
The Company will require working capital to operate and grow its business. Prior
to the acquisition by the Company, Internet Auction acquired significant
inventories of collectibles that the Company believes will help generate some of
the working capital. The Company believes that its current cash and financing
plans currently being negotiated by management are sufficient to meet its
current cash needs. While the Company expects that funds generated from the
Company's operations and funds to be realized from financing plans will be
sufficient to meet its capital needs for 1999, there can be no assurance that
these funds will be sufficient.
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Year 2000 Systems Readiness Disclosure
Computer systems, software packages, and microprocessor dependent
equipment may cease to function or generate erroneous data when the year 2000
arrives. The problem affects those systems or products that are programmed to
accept a two-digit code in date code fields. To correctly identify the year
2000, a four-digit date code field will be required to be what is commonly
termed "year 2000 compliant."
The Company may realize exposure and risk if the systems for which it
is dependent to conduct day-to-day operations are not year 2000 compliant. The
potential areas of exposure include electronic data exchange systems operated by
third parties with whom the Company transacts business, certain products
purchased from third parties for resale, and computers, software, telephone
systems and other equipment used internally. To minimize the potential adverse
affects of the year 2000 problem, the Company has established an internal
project team. This project team has begun a process of identifying internal
systems (both information technology and non-information technology systems)
that are not year 2000 compliant, determining their significance in the
effective operation of the Company, and developing plans to resolve any issues.
The Company has been communicating with the suppliers and others with whom it
does business to coordinate year 2000 readiness. The responses received by the
Company to date have indicated that steps are currently being undertaken to
address this concern. However, if such third parties are not able to make all
systems year 2000 compliant, there could be a material adverse impact on the
Company.
The Company has determined that its principal transaction processing
software is year 2000 compliant. Accordingly, the Company does not anticipate
any material adverse operational issues to arise. The Company plans to complete
the year 2000 compliance assessment by the end of the second quarter 1999 and
implement corrective solutions before the end of the third quarter 1999. Because
the principal transaction processing software was already year 2000 compliant,
when it was acquired, management expects that the Company's present and future
costs in connection with its year 2000 compliance project are and will be
minimal; however, future anticipated costs are difficult to estimate with any
certainty and may differ materially from those currently projected. The
estimated costs do not include time and costs that may be incurred as a result
of any potential failure of third parties to become year 2000 compliant or costs
to implement the Company's future contingency plans. The Company has not yet
developed a contingency plan in the event that any non-compliant critical
systems are not remedied by January 1, 2000, nor has it formulated a timetable
to create such contingency plan. If systems material to the Company's operations
have not been made year 2000 compliant, or if third parties with whom the
Company does business fail to make their systems year 2000 compliant in a timely
manner, the year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
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Item 7. Financial Statements.
As of December 31, 1998, the sole business of the Company was the
business of SRA, its sole, wholly-owned subsidiary. In December 1998, the
management of the Company decided to discontinue that business and in February
1999 sold SRA to the management of SRA, which was also the management of the
Company at the time, in exchange for eight million shares of the Company's
Common Stock.
Pursuant to the sale, the management of SRA agreed to provide financial
statements for SRA for the year ended December 31, 1998. The Company has not
received financial statements from SRA that are in a form ready for filing.
Accordingly, no financial statements are available for the Company's business
from SRA in 1998.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company.
Director
Name Age Position Since
Gregory Rotman* 33 Director & President 1999
Richard Rotman* 28 Director & Vice President, 1999
Treasurer and Secretary
Marc Stengel 41 Director & Vice President 1999
Hannah Kramer 60 Director & Vice President 1999
Robert Bertsch 33 Director 1998
- - ----------------------
*Gregory Rotman and Richard Rotman are brothers.
The following is a description of the current occupation and business
experience for the last five years for each director and executive officer.
Gregory P. Rotman has served as a Director and the President of the
Company since its acquisition of Internet Auction. Prior to joining the Company,
he was involved in starting a group known as Teamworks, Inc., LLC. Its sole
purpose from 1991-1995 was to facilitate the design, financing and build-out of
The MCI National Sports Museum in Washington, D.C. Today the MCI National Sports
Museum is the only interactive, all encompassing, sports-based museum in the
United States.
Richard S. Rotman has served as a Director and the Vice President,
Treasurer and Secretary of the Company since its acquisition of Internet
Auction. Prior to joining the Company, he was involved in the management and
day-to-day operations of Rotman Auction, which he formed in February 1997. From
1995 until February 1997, Mr. Rotman worked for the family business, Rotman
Collectibles, where he began in sales and distribution in the new product
division. As the industry was changing, Rotman Collectibles began focusing on
auctions as a more permanent division and during 1996, he began to create a
presence on the Internet. Mr. Rotman's primary expertise is in management and
daily operations. From 1994 to 1995, Mr. Rotman served as the director of an art
gallery in Jackson, Wyoming, selling original artwork to high-end clientele.
Marc Stengel has served as a Director and Vice President of the Company
since its acquisition of Internet Auction. He runs the daily operations of the
websites for the Company, including systems administration and overseeing the
programming for each of the Company's divisions. Prior to joining the Company,
he served as president of Worldwide Collectors Digest,
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Inc., which he co-founded in 1994 in an effort to combine his knowledge of
computer technology with his interest in sports. Prior to that, Mr. Stengel ran
his family clothing business.
Hannah Kramer has served as a Director and Vice President of the
Company since its acquisition of Internet Auction. Prior to joining the Company,
she served as vice president of World Wide Collectors Digest, Inc., which she
co-founded in 1994. She also owns two women's and two men's clothing stores.
Robert Bertsch has served as a Director of the Company since June 1998,
when the Company was known as Securities Resolutions Advisors, Inc. Mr. Bertsch
is a partner at the law firm Bertsch & Associates. In 1997, Mr. Bertsch was
named to the Board of Directors of SRA, where he also serves as head of
arbitration. From 1995 to 1997, Mr. Bertsch worked in the retail brokerage
business. From 1992 to 1995, Mr. Bertsch was employed as an associate at
Milberg, Weiss, Bershad, Hynes and Lerach, a leading plaintiff securities class
action firm. In addition to his law degree, he holds NASD licenses under series
7, 63, 24 and 27.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.
To the Company knowledge, based solely on a review of the copies of
such reports furnished to the Company and representations that no other reports
were required, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent beneficial owners have been complied with
for the period which this Form 10-KSB relates.
Item 10. Executive Compensation.
The following table sets forth the compensation of the Company's chief
executive officer and each officer whose total cash compensation exceeded
$100,000, for the three fiscal years ended December 31, 1998. The Company has no
current long term compensation plans.
Summary Compensation Table
Name and
Principal Position Year Salary Bonus Other
Richard Singer II 1998 $72,000 $30,000 $ --
President
Robert Bertsch 1998 $72,000 $30,000 $ --
Head of Arbitration of SRA
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G. David Gordon 1998 - -
Former President 1997 - - $42,350(1)
1996 - - 27,286(1)
- - ---------------
(1) Includes fees paid G. David Gordon & Associates, P.C., the firm for which G.
David Gordon is owner.
In 1998, Directors were compensated $200 for each Directors Meeting
attended.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table indicated all persons who, as of February 28, 1999,
the most recent practicable date, are known by the Company to own beneficially
more than 5% of any class of the Company's voting securities and all directors
and all officers of the Company as a group. The address of each person named
below is address of the Company.
Amount and
Name of Beneficial Nature of % of
Owner Beneficial Owner Class
Gregory Rotman 8,309,005 17.90%
Richard Rotman 10,155,451 21.88%
Marc Stengel 12,925,119 27.85%
Hannah Kramer 5,539,337 11.94%
Robert Bertsch 0 0.00%
All directors and 36,928,912 79.57%
officers as a group
Changes in Control
On February 25, 1999, the Company purchased all of the outstanding
stock of Internet Auction, Inc., a Massachusetts corporation ("Internet
Auction"). The acquisition (the "Transaction") was pursuant to an Agreement and
Plan of Reorganization (the "Agreement") dated January 31, 1999 between the
Company and Gregory Rotman, Richard Rotman, Marc Stengel and Hannah Kramer, the
principal shareholders (the "IA Shareholders") of Internet Auction. Pursuant to
the Agreement, the Company acquired all of the issued and outstanding shares of
the capital stock of Internet Auction in exchange for the issuance to the IA
Shareholders of an aggregate of 37,368,912 shares, representing approximately
80%, of the Company's common stock. At the time that the transaction was agreed
upon by the then current management of the Company, the average price of the
Common Stock was approximately $.28 per share. As a result of the Transaction,
Internet Auction became a wholly-owned subsidiary of the Company, the IA
Shareholders now own 80% of the Company's issued and outstanding common stock,
and the principal business of the Company is now the business of Internet
Auction. Prior to the transaction, Richard Singer, the former President of the
Company, was a principal beneficial owner of the common stock of the Company.
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The Company did not pay any cash or other consideration, other than the
issuance of its shares of common stock to the IA Shareholders, as consideration
for the Transaction. Prior to the consummation of the Transaction, no
relationship existed between the Company and its officers, directors or other
affiliates and Internet Auction and its officers, directors or other affiliates.
The number of shares of the Company's common stock received by the IA
Shareholders as a result of the Transaction was determined by arms-length
negotiations between the IA Shareholders and the persons then serving as
officers and directors of the Company.
In accordance with the Agreement, after the Transaction, the IA
Shareholders were appointed to the Company's Board of Directors, and the
previously serving directors resigned, or will resign, from the Board.
Item 12. Certain Relationships and Related Transactions.
None
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Description of Exhibits
No.
2.1 Agreement and Plan of Reorganization dated January 31, 1999
among the Company and Gregory Rotman, Richard Rotman, Marc
Stengel and Hannah Kramer. (Incorporated by reference from
Form 8-K - File No. 0-28720, filed on March 10, 1999.)
21 Subsidiaries of the Company (included in Item I)
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned hereunto duly authorized.
SALES ONLINE DIRECT INC.
Date: April 15, 1999 By: /s/ Gregory Rotman
---------------------------------------
Gregory Rotman, President
In accordance with the Exchange Act, this annual report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
Date: April 15, 1999 /s/ Gregory Rotman
------------------------------------------
Gregory Rotman, President and Director
Date: April 15, 1999 /s/ Richard Rotman
------------------------------------------
Richard Rotman, Vice President, Treasurer,
Secretary and Director
Date: April 15, 1999 /s/ Marc Stengel
------------------------------------------
Marc Stengel, Vice President and Director
Date: April 15, 1999 /s/ Hannah Kramer
------------------------------------------
Hannah Kramer, Vice President and Director
C76992c.636
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