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, 1999. Commission File No. 0-28720.
SALES ONLINE DIRECT INC.
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(Exact name of small business issuer in its charter)
Delaware 73-1479833
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
4 Brussels Street, Worcester, Massachusetts 01610
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(Address of principal executive office)(Zip Code)
Issuer's Telephone Number, Including Area Code: (508) 753-0945
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $0.001 Par Value
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(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
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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: $1,003,200.
As of March 24, 2000, the registrant had outstanding 47,056,140 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 24, 2000 was approximately $25,868,989 based upon the
average over the counter sales price of $2.625 per share on such date (See Item
5).
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant's definitive Information Statement for the
2000 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business........................................... 3
Item 2. Description of Property...........................................12
Item 3. Legal Proceedings.................................................12
Item 4. Submission of Matters to a Vote of Security Holders...............12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..........13
Item 6. Management's Discussion and Analysis or Plan of Operation.........14
Item 7. Financial Statements..............................................16
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...............................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................17
Item 10. Executive Compensation............................................18
Item 11. Security Ownership of Certain Beneficial
Owners and Management.............................................18
Item 12. Certain Relationships and Related Transactions....................18
Item 13. Exhibits and Report on Form 8-K...................................18
Signatures .............................................................19
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FORWARD LOOKING STATEMENTS
This Report (including without limitation the Risk Factors included as
Exhibit 99) 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.
PART I
Sales On Line Direct 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 OnLine Direct
Inc., a Delaware corporation. The Company's main website is located at
www.collectingexchange.com, which features the following websites:
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
History of the Company
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.
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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"), advised
investors who had lost money due to the advice, lack of fiduciary responsibility
or fraudulent practices of brokers and broker dealers as to appropriate courses
of action with respect to arbitration and settlement with brokers and
brokerage firms. 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 of 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 Online Direct, Inc. 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. 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 Internet Auction
became the business of the Company. Prior to the Transaction, Richard Singer was
a principal beneficial owner of the common stock of the Company.
For accounting purposes, the Transaction is considered a capital
transaction rather than a business transaction. This accounting treatment is
identical to that resulting from a reverse acquisition, except that no goodwill
or other intangible asset has been recorded. The Company's financial statements
reflect the acquisition by Internet Auction of the net assets of the Company and
the recapitalization of Internet Auction's common stock based on the exchange
rate in the Agreement.
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 from the Board.
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The following is a description of the Company's current business.
Overview
Following the Transaction, the Company's mission was to offer
a branded network of comprehensive shopping services to buyers and seller of
collectibles. This was accomplished through its four main business divisions:
Rotman Auction--a full service auction house specializing in sports
memorabilia and high end collectibles. 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.
Internet Auction, Inc.--a person to person auction site that functions
similar to eBay, offering sellers a vehicle for listing items for sale and
buyers to bid on items of interest.
World Wide Collectors Digest ("WWCD")--a 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
create online storefronts, set prices, and sell directly to online shoppers.
Internet Collectibles--a wholesale and retail collectibles division
that engages in the business of buying, warehousing, distributing, marketing and
selling collectibles. Internet Collectibles maintains a substantial inventory of
memorabilia with popular and historical significance that allows customers to
directly purchase the memorabilia without the competition from bidders in an
auction format.
The Company's primary business is collectibles. Because of the large
growth in both the online auction and e-commerce industries, and the concomitant
increase in mergers and strategic alliances, the Company has focused its
resources and efforts to create a unique suite of Internet applications for the
collectibles industry that includes a collectibles portal, a global auction
search and a research center. All visitors to the new website at
"www.collectingexchange.com" will be able to use the collectibles portal and
establish home pages tailored to their individual preferences and needs.
The Company's new refocused mission is to become the premier
collectibles portal site for the collectibles industry by adding value to the
collectible process. The Company will strive to become the premier educator and
global source of information for the collectibles community. The site's tools
will provide information to collectors to help them make informed decisions
about price, authenticity and trading sites to buy or sell. The site is intended
to provide users with a comprehensive, one-stop shopping collectible experience
through a collectibles marketplace, linking top collectible sites to buyers and
sellers from around the world.
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When fully operational, the site will contain components developed by
the Company as well as components licensed from others or developed for the
Company. The site is planned to be a general information search engine like
"Yahoo" that is specific to collectible web sites. The portal has several main
functions. First, it searches and collects information from every collectible
site on the Internet. Through a technique known as "spidering," the Web will be
searched 24 hours a day, to retrieve collectibles information. This information
is then stored in the site's database where users can retrieve it instantly.
Second, the portal provides information on a variety of collectible topics
including price guides, show calendars, auction listings, library information,
grading and authentication, publications restoration services, collecting
software, dealers, classifieds, etc. Third, it serves as a gatekeeper by linking
collectors immediately to selected websites. Finally, when fully operational,
the portal will enable users to customize their home pages with both real time
auction prices of specific collectible items and more traditional Internet
services (stock quotes, news, weather, etc.) and view these while pursuing their
collectible interests on the site's search engine. The portal was initially
launched on January 27, 2000.
In addition, when more fully operational, the site is expected to
integrate with a global auction search and bidding platform--a one-stop, feature
rich resource for online auctions. The advanced cross-auction search engine will
provide a comprehensive, categorized and searchable index of all auction sites
for a specific item, eliminating the need to search multiple auction sites.
Additionally, bidders can be notified about the listing of new items, have them
monitored and participate on multiple auction sites simultaneously. Sellers,
too, will benefit from this search engine as they will be able to list items
across multiple sites simultaneously. Sellers also benefit from the ability to
quickly and easily list items across multiple sites. They will also be able to
better manage the selling process, working in conjunction with leading auction
sites, through use of the following features:
Scheduled postings--sellers can schedule the specific day and time they
want their items listed, freeing them from constant computer monitoring
Auction tracking--sellers can track all of their auctions from one
centralized location. They can also view current auctions, pending auctions,
closed auctions and even track offline activities.
Track post auction activity--sellers can track emails, receipt of
payment, shipping status and receive feedback
Customized templates--sellers can create effective, eye-catching
listings with automated, customized templates
Cross Auction Postings--sellers only need to list their sale items once
before posting on multiple auction sites
Inventory Management--software to automatically recalculate the value
of available inventory, track existing inventory and inform sellers when to
restock
Quick Start--online sellers can immediately import existing auctions
into collectingexchange.com's interface
One-Click Re-list--sellers can re-enter unsold items with one keystroke
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The site is also expected to provide research information for users.
The research feature will be a real-time, industry-wide repository of accurate
information that can be used to research specific collectible items. The search
engine will store information on each and every collectible item, enabling users
to have access to historical pricing information based on realized prices,
actual views of the collectible articles, experts on authentication, appraisal
and grading services, feedback opportunities and community discussions.
As a search engine for the collectibles industry,
collectingexchange.com is intended to provide its visitors with information with
which to make educated decisions regarding collectibles. The advanced
architectural technology of the search engine will allow for the collection of
information about collectible items. Because fraudulently sold items are the
largest concern facing the industry and its consumers, the Company will provide
visitors with the research tools to complete transactions based on the most
accurate, verified material available. Buyers and sellers will also benefit from
direct linkage to auctions, storefronts, and classifieds, thus reducing the
buyer's search time for desired items while accelerating the sale cycle for the
seller.
The Company believes that as a "collectibles community," the site will
not only meet the collectibles needs of its visitors but their other service
needs as well. The web site's user friendly approach will personalize the Web by
providing visitors with a wide range of the more typical search engine services,
e.g., news, email, stock quotes, travel, etc.
In March, 2000, the Company acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles Web sites in a variety of categories.
Industry Background
Growth of the Internet and the Web
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Consumers are spending an increasing amount of time on the Web.
International Data Corporation, a company that reports on Internet traffic, has
estimated that at the end of 1998 there were over 51 million Web users in the
United States and that by the end of 2002 the number of Web users in the United
States will increase to over 135 million. 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 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.
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Growth of the Collectibles and Online Auction Industries
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The Company serves both the collectibles and online auction industries.
Collectibles Industry Report, 1999 reported that total consumer sales
rose 6%, to reach $10.7 billion, in 1998. The Internet captured $280 million
dollars in collectible sales. As an industry, collectibles are enjoying a 10%
compounded annual growth rate for the fifth continuous year. There are 37
million collectors in America today, 10 million of whom use the Internet as a
source to buy, sell and trade collectibles. (NewsEdge Corporation). The
industry, according to Collectibles Industry Report, 1999, has seen a shift in
demographics as baby-boomers have begun to take up the collecting pastime. The
new market has more male collectors, higher household incomes, children in the
home, and a willingness to use a range of distribution channels, including the
Internet. The new demographics have also created a shift in interest from
traditional collectibles, e.g. figurines and dolls, to products that meet the
demands of this generation of collectors.
The online auction industry is a large and rapidly growing industry and
is expected to become a permanent player in e-commerce. Online auctions resolve
the weaknesses of traditional auctions (i.e. limited geographical coverage, a
dearth of product variety, high transaction costs and information inefficiency),
as it is capable of handling large quantities of data and supporting an infinite
number of products and services. It also allows buyers and sellers to trade on a
global basis. Online auctions also drive user retention and build brands.
Auctions fit the definition of a sticky application--something that engages
users and keeps them coming back.
According to Forrester Research, a consulting firm that reports on the
online auction industry, online auction sales are estimated to reach $19 billion
by 2003. According to the Online Reporter (11/1/99), eBay is the largest of the
online auctions, with a user base of 7.7 million people, up from 1.3 million a
year ago. Two-thirds of these users are repeat customers. It is also estimated
that users, in general, spend an average of 130 minutes per month on this site,
making it one of the most visited sites on the entire Internet. The number of
auction sites and the recent industry mergers suggest that the online auction
industry is not a passing fad.
Business Strategy
Because of the enormous growth in the online auction industry and its
concomitant increase in merger and acquisition activity, the Company decided to
consolidate its entities in order to focus on the collectors' "stock exchange."
The integrated collectibles portal, global auction search and research center
have become the Company's core businesses.
The Company has adopted an incremental growth strategy and has in place
agreements with the companies to complete the three milestones in year 2000:
o The launch of the collectibles portal
o The launch of the global auction search
o The launch of the research center
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This approach provides the Company with the ability to begin growing
its business through the portal while providing sufficient time for development
and testing of the research center. During this research and development period,
the Company will begin implementing an innovative marketing and sales campaign.
This campaign will focus on building the Company's advertising and sponsor base
as well as implementing a more traditional media buying strategy.
The Company believes that "stickiness" is one of the most important
trends in today's Internet. Stickiness refers to finding ways of keeping web
users "glued" to a particular web site. The key to stickiness is providing users
with so much useful content that they can find virtually everything they need
onsite without having to go to another site. The collectibles portal will
provide the "stickiness factor" for www.collectingexchange.com. Individuals will
have the opportunity to create personalized home pages, providing them with
access to their daily Internet services while pursuing their collectibles
interests on a search engine designed to provide general information by
category. Together, the three site components will provide site visitors with a
comprehensive, one-stop shopping collectible experience.
On February 1, 2000, the Company launched a financial website that
offers its visitors real-time financial and business news and a comprehensive
source for stock quotes, charts, news, financial analysis, portfolios and
investment research. The Company plans to add message boards and online trading
to the site in the future. The new site is located at
"www.collectingexchange.com/finance".
Marketing and Sales
The success of collectingexchange.com is incumbent upon the visibility
it will receive on the Internet and the associated revenues generated by sales
of product, advertising and services. Branding the Company's corporate identity
and its services is a key to its success.
The marketing plan is designed to position the Company as the premier
collectibles site on the Internet. Its unique feature will be its value as an
information provider to buyers and sellers in the collectible marketplace. The
Company will target both the traditional collector and the new generation of
collectors (as previously described in "Industry Background"). The Company will
also target dealers, licensors, licensees, distributors and others to host
collectible pavilions and other e-commerce sites and storefronts.
Marketing Internet companies is a relatively new phenomenon. Whereas
earlier Internet advertising was mostly accomplished through banner advertising,
the industry is now marketing web sites through a combination of online
advertising and more traditional media and direct mail advertisement. The
Company is adopting this approach in its marketing campaign.
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Revenue Sources
Following the Transaction on February 25, 1999, the Company primarily
generated revenue from sales of the Company's purchased inventory and from fees
and commissions on sales of merchandise under consignment type arrangements.
However, it is anticipated that future sources of revenue generation will
include advertising revenue and service revenue, particularly through the sale
of pavilion spots and referral links. Pavilion spots are company sponsorships
that the Company will sell. These sponsorships give companies exclusive
storefront rights for their collectible category. For example, if Sony were to
purchase a pavilion, it would host the only site on collectingexchange.com
dealing with music and music videos. In the Sony pavilion, visitors would be
able to research the history of these items, the historical pricing of these
collectibles, read articles and speak with experts on authentication. Visitors
would also be provided with referral links to Sony and other sites for purchase
of merchandise.
It is anticipated that referral links may also become a source of
advertising income for the Company. Sellers of merchandise will pay the Company
for listing their storefronts on collectingexchange.com. When a site visitor
requests a search for a collectible item, the Company will provide the visitor
with a direct link to the seller's site, thus driving the sale. This referral
link is the manner in which the seller can obtain visibility for its collectible
item.
In addition to pavilions and referral links, advertising revenues may
also come from targeted banner advertising and general banner advertising.
In terms of services, the Company anticipates users will pay for
appraisal and grading services. Other services generating revenue will include
training seminars, online autograph signings, fulfillment services for
merchants, and the selling of historical price trend reports.
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. Under
it's former structure, the Company was competing 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 Egghead, 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.
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Because the Company's new collectibles portal structure is not a buyer
or seller of collectibles, it is not in direct competition with existing
collectible or online auction sites. The portal will not compete with either the
giants or the small players in the collectibles auction and e-commerce
industries. Rather, the Company will work in collaboration with these companies.
Further, because the research capacity of the new website will be able to
validate the authenticity of collectible items, other sites will value its
services. Because collectingexchange.com is the provider of information, not
sales, it stands alone at the present time. However, the Company's Rotman
Auction operations will still continue to face the competition discussed above.
Many collectible and online auction sites are beginning to use a
portal, or community, as a means of retaining its users. What distinguishes
collectingexchange.com from these other sites will be its research center. The
industry currently lacks an independent repository of expert and verifiable
collectible information to enable collectors to make educated purchases.
Although no other site currently has the technology to store the extent
of collectible information as the Company, the Company runs the risk of other
sites entering into this sector and there can be no assurance that the Company
can maintain its competitive position against 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.
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 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.
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Research and Development
Over the past 12 months the Company invested approximately $300,000
into Collecting Exchange web site for design, graphics, labor and various
software components. The Company licensed an e-commerce software system for
$50,000 that will allow the Company's merchant customers to create and manager
their own storefront on the web. An additional $10,000 was paid for the source
code. The Company spent $200,000 to design and install a high scalability,
reliable and secure network/communications infrastructure to sustain the
Company's anticipated web traffic going forward. Other labor and consulting fees
amounted to $250,000 for system security and integrity.
Employees
The Company currently employs 28 people, including 20 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.
Item 2. Description of Property.
The Company's corporate headquarters are presently located at 4
Brussels Street, Worcester, Massachusetts 01610. In July, 1999, the Company
opened a second office located at 100 Painters Mill Road in Owings Mills,
Maryland 21117. The Company leases the Maryland office, which is the primary
location of the host computers and Internet access lines. The lease is a five
year lease with a monthly rent of $7,494.67. The Company pays rent on the
Brussels Street, Worcester location and another office in Canton, Massachusetts
in the amount of approximately $2,500 per month on a tenant-at-will basis.
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.
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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, 1999.
1999 High Low
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Quarter ended March 31, 1999 2 1/2 1/4
Quarter ended June 30, 1999 8 3/16 1 1/4
Quarter ended September 30, 1999 3 1/32 1 3/16
Quarter ended December 31, 1999 1 3/8 13/32
1998 High Low
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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
(b) Holders - As of December 31, 1999, there were approximately 146
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 or Plan 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 fraudulent practices of brokers.
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: Internet
Auction, Inc., Rotman Auction, Internet 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 Internet Collectibles was
transferred into Internet Auction.
For accounting purposes, the transaction is considered a capital
transaction rather than a business transaction. This accounting treatment is
identical to that resulting from a reverse acquisition, except that no goodwill
or other intangible asset has been recorded. The Company's financial statements
reflect the acquisition by Internet Auction of the net assets of the Company and
the recapitalization of Internet Auction's common stock based on the exchange
rate in the merger agreement.
The following is a discussion of the results of operations and
financial conditon of the Company for the year ended, and as of, December 31,
1999. These operations in the preceding fiscal year were conducted largely
through Internet Auction, Inc. as a private company. Consequently, a comparison
to the results of operations and financial condition of the Company for the year
ended, and as of, December 31, 1998 is not particularly meaningful.
Operations
For the year ended December 31, 1999 the Company experienced rapid
growth in its online traffic. To support this new level of activity, the Company
made significant investment in personnel, infrastructure and marketing programs
during the year.
For the year ended December 31, 1999, gross merchandise sales were
approximately $1,643,000 including consignment sales of approximately $790,000.
Net revenues (sales of Company-owned inventory plus commissions on consignment
items) were $1,003,200, most of which is attributable to sales of the Company's
own inventory. Consignment sales for the year ended Decmeber 31, 1999 were
approximately $790,000, or 48% of gross merchandise sales. In the 3rd quarter of
1999 the Company switched from an 80% consignment model to 20% consignment sales
and now sells 80% Company-owned product.
Costs of revenues increased to $706,488 in the year ended December 31,
1999. This increase is due to the fact that most of the revenues for 1999 were
derived from sales of the Company's own inventory rather than fee based income
from consignment sales.
14
<PAGE>
Sales, general and administrative ("SG&A") expenses for the year ended
December 31, 1999 were $2,459,743 (compared to $10,357 for 1998). This increase
in SG&A expenses include higher personnel and related costs, consulting fees
attributable to the Company's engineering and product development.
As a result of the significant SG&A expenses and the relatively brief
period of combined operations, the Company experienced a net loss of $2,183,040
for the year ended December 31, 1999 or ($.05) per share.
The Company believes that inflation has not had a material effect of
its results of operations.
Working Capital and Liquidity
Cash and cash equivalents were $221,213 at December 31, 1999.
In April 1999 the Company assigned certain options it held for
approximately $2,450,000; it is not anticipated that this will be a significant
or recurring source of capital in the future.
On March 23, 2000, the Company entered into a Securities Purchase
Agreement (the "Agreement"), whereby the Company sold an 8% convertible note in
the amount of $3,000,000, due March 31, 2002 to Augustine Fund, L.P. (the
"Buyer"). The note is convertible into common stock at a conversion price equal
to the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
March 23, 2000, or (2) seventy-five percent (75%) of the average of the closing
bid price for the common stock for the five (5) trading days immediately
preceding the conversion date. Had the Buyer converted the note on March 23,
2000, the Buyer would have received $4,000,000 in aggregate value of the
company's common stock upon the conversion of the $3,000,000 convertible note.
As a result, the intrinsic value of the beneficial conversion feature of
$1,000,000 will be allocated to debt discount and additional paid-in capital.
Since the debt is convertible at date of issuance, the debt discount will be
charged to earnings at that time.
In connection with the Agreement, the Company also issued warrants to
the Buyer and Delano Group Securities to purchase 300,000 and 100,000 shares of
common stock, respectively. The purchase price per share of common stock is
equal to one hundred and twenty percent (120%) of the lowest of the closing bid
prices for the common stock during the five (5) trading days prior to the
closing date. The warrants expire on March 31, 2005.
15
<PAGE>
In addition, the Company entered into a Registration Rights Agreement,
whereby the Company agreed to file a Registration Statement with the Securities
and Exchange Commission (SEC), within 180 days of the closing date, covering the
common stock to be issued upon the conversion of the convertible note and stock
purchase warrants.
If the Registration Statement is not declared effective by the SEC on
or before September 30, 2000, then with respect to any portion of the note not
previously converted into common stock, the applicable conversion percentage
will decrease by two percent (2%) each thirty day period until the Registration
Statement is declared effective by the SEC. If the SEC has not declared the
Registration Statement effective within one year after March 23, 2000, the
applicable conversion percentage shall be fifty percent (50%).
Also, if the Registration Statement is not filed by the filing date and
not declared effective by the SEC on or prior to September 30, 2000, the Company
shall pay cash, as liquidating damages, for such failure. The required payment
will be equal to two (2%) of the purchase price of the note and warrant for each
thirty-day period, until the breach of the Registration Rights Agreement is
cured.
Management believes that the proceeds from this Convertible Note and
cash from operations will provide sufficient liquidity and capital resources to
finance the Company's operations through the end of the current fiscal year.
Item 7. Financial Statements.
The financial statements and supplementary data required by this item
appear on Page F-1 immediately following the signature page.
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.
As disclosed in the Company's 8-K filed on April 29, 1999, on February
15, 1999, the Company's former Board of Directors approved the appointment of
Stephen P. Higgins, C.P.A. as the Company's independent certified public
accountants to provide accounting and auditing services for the Company for the
year ended December 31, 1998 and also approved termiantion of the services of
Guest & Company as the Company's independent auditors. On March 29, 2000 the
Company filed a Form 8-K disclosing that the Company's Board of Directors
approved the termination of the accouanting services provided by Stephen P.
Higgins C.P.A. on March 28, 2000 and also previously approved, on March 24,
2000, the appointment of Wolf & Company, P.C. as the Company's independent
certified accountants to provide accounting and auditing services for the year
ended December 31, 1999.
16
<PAGE>
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
The information required by Item 9 regarding the Company's executive
officers is set forth below. The information required by Item 9 concerning the
directors of the Company is incorporated by reference from the Company's
definitive information statement for its 2000 Annual Meeting of Shareholders
under the caption "Election of Directors." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
The information required by Item 9 relating to compliance with Section
16(a) of the Exchange Act is incorporated herein by reference from the Company's
definitive information statement for its 2000 Annual Meeting of Shareholders
under the caption "Compliance with Section 16(a)of the Exchange Act". The
Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
The following table sets forth certain information regarding the
executive officers of the Company.
Name Age Position Since
---- --- -------- -----
Gregory Rotman* 34 President and CEO 1999
Richard Rotman* 29 Vice President, 1999
Chief Financial Officer
and Secretary
Marc Stengel 42 Executive Vice President 1999
- ----------------------
* 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 executive officer.
Gregory P. Rotman has served as a Director and the President and CEO 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, Chief
Financial Officer 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.
17
<PAGE>
Marc Stengel has served as a Director and Executive 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, 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.
Item 10. Executive Compensation.
The information required by Item 10 is incorporated herein by reference to
the section labeled "Executive Compensation" which appears in the Registrant's
definitive information statement for its 2000 Annual Meeting of Shareholders.
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 is incorporated herein by reference to
the section labeled "Principal Shareholders and Management Shareholdings" which
appears in the Registrant's definitive information statement for its 2000 Annual
Meeting of Shareholders. The Company's proxy statement will be filed pursuant to
Rule 14a within 120 days after the close of the fiscal year for which this
report is filed.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive information statement for its 2000 Annual Meeting of Shareholders.
The Company's information statement will be filed pursuant to Rule 14a within
120 days after the close of the fiscal year for which this report is filed.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibits are numbered in accordance with Item 601 of Regulation S-B. See
"Exhibit Index" immediately following the financial statements of this Form
10-KSB, beginning on page E-1.
(b) Reports on Form 8-K.
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned hereunto duly authorized.
SALES ONLINE DIRECT INC.
Date: April 14, 2000 By: /s/ Gregory Rotman
---------------------------------------
Gregory Rotman, President and CEO
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 14, 2000 /s/ Gregory Rotman
-------------------------------------------
Gregory Rotman, President, CEO and Director
Date: April 14, 2000 /s/ Richard Rotman
-------------------------------------------
Richard Rotman, Vice President, Chief
Financial Officer, Secretary and Director
Date: April 14, 2000 /s/ Marc Stengel
-------------------------------------------
Marc Stengel, Executive Vice President and
Director
Date: April 14, 2000 /s/ Hannah Kramer
-------------------------------------------
Hannah Kramer, Director
19
<PAGE>
Financial Statements and
Report of Independent
Certified Public Accountants
Sales Online Direct, Inc.
December 31, 1999 and 1998
F-1
<PAGE>
TABLE OF CONTENTS
Sales Online Direct, Inc. Page
Independent Auditors' Report F-3
Balance Sheet F-4
Statements of Operations F-5
Statements of Changes in Stockholders' Equity F-6
Statements of Cash Flows F-7 - F-8
Notes to Financial Statements F-9 - F-19
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sales OnLine Direct, Inc.
Worcester, Massachusetts
We have audited the accompanying balance sheet of Sales OnLine Direct, Inc. as
of December 31, 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sales OnLine Direct, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for each
of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
/s/Wolf & Company, P.C.
Boston, Massachusetts
April 12, 2000
F-3
<PAGE>
SALES ONLINE DIRECT, INC.
BALANCE SHEET
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 221,213
Accounts receivable 48,682
Inventory 629,729
Prepaid expenses 72,992
Other current assets 11,236
------
Total current assets 983,852
-------
Property and equipment, net 613,365
Goodwill, net 49,765
Other assets 18,667
---------
Total assets $ 1,665,649
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 348,504
Accrued expenses 81,483
-----------
Total current liabilities 429,987
-----------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized; 46,711,140 shares issued and outstanding 46,711
Additional paid-in capital 4,010,033
Accumulated deficit (2,207,171)
Unearned compensation (613,911)
--------
Total stockholders' equity 1,235,662
---------
Total liabilities and stockholders' equity $ 1,665,649
===========
See accompanying notes to financial statements.
F-4
<PAGE>
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
1999 1998
---- ----
Revenues $ 1,003,200 $ 24,755
Cost of revenues 706,488 -
------- --------
Gross profit 296,712 24,755
Selling general and
administrative expenses 2,459,743 10,357
----------- ---------
Income (loss) from operations (2,163,031) 14,398
Other income 92,701 -
Loss on sale of securities (112,710) -
---------- ---------
Income( loss) before income taxes (2,183,040) 14,398
Provision for taxes on income - (2,160)
---------- ---------
Net income (loss) $ (2,183,040) $ 12,238
=========== =========
Earnings (loss) per share:
Basic $ (0.05) $ -
=========== =========
Weighted average shares 45,277,812 37,368,912
=========== ==========
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
Common Stock
---------------------
Additional Stock
Paid-in Accumulated Subscriptions Unearned
Shares Amount Capital Deficit Receivable Compensation Total
------ ------ ------- ------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 37,368,912 $ 37,369 $ - $(36,369) $ - $ - $ 1,000
Stock subscriptions receivable - - - - (1,000) - (1,000)
Net income - - - 12,238 - - 12,238
---------- -------- -------- ------- --------- ----------- -------
Balance, December 31, 1998 37,368,912 37,369 - (24,131) (1,000) - 12,238
Collection of stock subscriptions
receivable - - - - 1,000 - 1,000
Contribution of assets of
World Wide Collectors Digest - - 33,229 - - - 33,229
Contribution of collectibles
Inventories - - 769,764 - - - 769,764
Acquisition of Securities Resolution
Advisors, Inc. 9,342,228 9,342 (8,854) - - - 488
Proceeds from assignment of options - - 2,450,000 - - - 2,450,000
Compensatory stock options granted - - 757,848 - - (757,848) -
Amortization of stock-based compensation - - - - - 143,937 143,937
Issuance of stock options to consultant
for services - - 8,046 - - - 8,046
Net loss - - - (2,183,040) - -(2,183,040)
---------- ------- ---------- ---------- ------- ------------ --------
Balance, December 31, 1999 46,711,140 $46,711 $4,010,033$(2,207,171) $ - $ (613,911)$1,235,662
========== ====== ========= ========== ======= ============ ==========
</TABLE>
See accompanying note to financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
---- ----
Operating activities:
<S> <C> <C>
Net income (loss) $(2,183,040) $ 12,238
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 72,194 2,276
Amortization of unearned compensation 143,937 -
Amortization of Goodwill 19,140 -
Stock options issued for compensation 8,046 -
Loss on sale of securities 112,710
Changes in assets and liabilities: -
Accounts receivable (36,841) -
Inventory 171,489 -
Accounts payable 218,144 -
Accrued expenses 76,483 5,000
Income taxes payable (2,160) 1,081
Other, net (94,025) 2,160
Net cash provided by (used in) ---------- --------
operating activities (1,493,923) 22,755
---------- --------
Investing activities:
Purchase of securities (3,247,091) -
Proceeds from sale of securities 3,134,381 -
Cash received from Rotman Auction, Inc. acquisition 9,864
Cash received from Securities Resolutions Advisors, Inc. acquisition 488
Property and equipment acquisitions (633,506) (22,755)
---------- --------
Net cash used in investing activities (735,864) (22,755)
---------- --------
Financing activities:
Proceeds from assignment of common stock call options 2,450,000 -
Proceeds from stock subscriptions 1,000 -
Net cash provided by (used in) --------- --------
financing activities 2,451,000 -
--------- --------
Net increase in cash 221,213 -
Cash - beginning - -
--------- --------
Cash - ending $ 221,213 $ -
========= ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1999 and 1998
Supplemental disclosures of cash flow information:
Cash paid during the period for:
1999 1998
---- ----
Income taxes $2,432 $ --
Supplemental Schedule of Non-cash Investing and Financing Activities
1999 1998
---- ----
Contributions of inventories (Note 2) $769,764 $ --
Contribution of the net assets of World Wide Collectors Digest, Inc. were
recorded at their fair values as follows:
Due from shareholder $ 2,737 $ --
Other current assets $ 1,000 $ --
Property and equipment $ 29,877 $ --
Liabilities assumed $ (385) $ --
Paid in capital $ 33,229 $ --
Merger of Rotman Auction, Inc. accounted for utilizing
the purchase method of accounting. The assets were recorded at
their fair values as follows:
Cash received in the transaction $ 9,864 $ --
Accounts receivable $ 11,841 $ --
Merchandise inventories $ 31,454 $ --
Due from affiliate $ 10,919 $ --
Other current assets $ 7,115 $ --
Property and equipment $ 1,697 $ --
Due to Shareholder $ (11,820) $ --
Other liabilities assumed $(129,975) $ --
Goodwill $ 68,905 $ --
Common stock subscribed $ -- $ 1,000
See accompanying notes to financial statements.
F-8
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
1. ORGANIZATION
On February 25, 1999, Securities Resolution Advisors, Inc. ("SRAD")
purchased all of the outstanding common stock of Internet Auction, Inc.
("Internet Auction"). The acquisition was made pursuant to an Agreement
and Plan of Reorganization (the "Agreement") dated January 31, 1999
between SRAD and the principal shareholders ("IA Shareholders") of
Internet Auction. Pursuant to the Agreement, SRAD 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 SRAD's issued and
outstanding common stock, and the business of Internet Auction became the
business of SRAD. In accordance with the Agreement, after the transaction
described above, the IA Shareholders were appointed to SRAD's Board of
Directors and became officers of the SRAD. The previously serving
directors resigned from the Board.
SRAD subsequently changed its name to Sales OnLine Direct, Inc. (the
"Company").
For accounting purposes, the transaction described above is considered, in
substance, a capital transaction rather than a business combination. It is
equivalent to the issuance of common stock by Internet Auction for the net
assets of the Company, accompanied by a recapitalization. This accounting
treatment is identical to that resulting from a reverse acquisition,
except that no goodwill or other intangible asset had been recorded.
Accordingly, the accompanying financial statements reflect the acquisition
by Internet Auction of the net assets of the Company and the
recapitalization of Internet Auction's common stock based on the exchange
ratio in the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Prior to the transaction described above, the business conducted by
Internet Auction was through four related companies: Internet Auction,
Inc., Rotman Auction, Internet Collectibles and World Wide Collectors
Digest, Inc.("WWCD"). In anticipation of the transaction with the Company,
the companies were combined and their operations integrated as follows:
Internet Auction, Inc. - A person-to-person auction site offering sellers
a vehicle for listing items for sale and allows buyers to bid on items of
interest.
Rotman Auction - A full-service auction house located in Worcester,
Massachusetts. The Company provides a full range of services to sellers
and buyers including live online bidding, consignment services,
authentication of merchandise, digital photography as well as purchases
and sales of authentic memorabilia.
F-9
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Internet Collectibles - A wholesale and retail collectibles division
engaging in the business of buying, warehousing, distribution, marketing
and selling collectibles. Internet Collectibles maintains inventory of
memorabilia with popular and historical significance that allows customers
to directly purchase the memorabilia without the competition from bidders
in an auction format.
WWCD - An 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 create online storefronts, set
prices, and sell directly to online shoppers.
Inventory Purchase Agreements
On February 12, 1999, Internet Auction acquired collectibles, collectors
items and memorabilia from Rotman Production, a related party, with an
estimated fair value of approximately $629,000 in exchange for 236 shares
of the Internet Auction's common stock received from a stockholder of
Internet Auction. In addition, the Seller was assigned the right to
acquire 700,000 option shares of SRAD common stock from Universal at $.50
per share. See Note 4.
On February 25, 1999, Internet Auction acquired collectibles, collectors
items and memorabilia from Kim Stengel, a related party, with an estimated
value of approximately $140,000 in exchange for 236 shares of the Internet
Auction's common stock received from a stockholder of Internet Auction.
Purchase of Assets of WorldWide Collectors Digest, Inc. (WWCD)
On February 25, 1999, Internet Auction acquired the assets of WWCD, a
related party, with an estimated value of approximately $34,000 in
exchange for 3,835 shares of Internet Auction's common stock received from
a stockholder of Internet Auction.
Merger with Rotman Auction, Inc.
Effective February 25, 1999, Internet Auction merged with Rotman Auction,
Inc. ("Rotman"), a related party. Under the terms of the merger agreement,
the shareholder of Rotman received 870 shares of the Internet Auction's
common stock in exchange for the Rotman shares owned by the shareholder.
Internet Auction was the surviving corporation in the merger. The merger
was recorded using the purchase method of accounting. The operations of
Rotman are included in the financial statements from the date of merger.
In connection with the acquisition, the Company recognized goodwill in the
amount of $68,905. Amortization of goodwill for 1999 amounted to $19,140.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-10
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory consists of collectible merchandise for sale and is stated at
the lower of average cost or market on a first-in, first-out (FIFO)
method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the double declining balance method over the estimated useful life of 5
years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the estimated useful life of the asset or the life of the
related lease.
Goodwill
Goodwill is being amortized on a straight-line basis over an estimated
useful life of three years.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and from
fees and commissions on sales of merchandise under consignment type
arrangements.
For sales of merchandise owned and warehoused by the Company, the Company
is responsible for conducting the auction, billing the customer, shipping
the merchandise to the customer, processing merchandise returns and
collecting accounts receivable. The Company recognizes the gross sales
amount as revenue upon verification of the credit card transaction and
shipment of the merchandise.
For sales of merchandise under consignment-type arrangements, the Company
takes physical possession of the merchandise, but is not obligated to and
does not take title to or ownership of the merchandise. When an auction is
completed, consigned merchandise which has been sold is shipped upon
receipt of payment. The Company recognizes the net commission and service
revenues relating to the consigned merchandise upon receipt of the gross
sales proceeds. The Company then releases the net sales proceeds to the
Consignor.
Advertising Costs
Advertising costs are charged to operations when incurred.
F-11
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Deferred tax asset and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities
using the enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for
net operating loss, capital loss and tax credit carry forwards to the
extent their realization is more likely than not. The deferred tax expense
for the period represents the change in the deferred tax asset or
liability from the beginning to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the amounts reported of assets and liabilities as
of the date of the balance sheet and reported amounts of revenue and
expenses during the reporting period. Material estimates that are
particularly susceptible to significant change in the near term relate to
the inventory valuation and the deferred tax asset valuation. Although
these estimates are based on management's knowledge of current events and
actions, they may ultimately differ from actual results.
Stock Compensation Plans
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages all entities to adopt a fair
value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," whereby compensation cost
is the excess, if any, of the quoted market price of the stock at the
grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Company's stock
option plan typically have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. The Company
has elected to continue with the accounting methodology in Opinion No. 25
and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based
method of accounting had been applied. The pro forma disclosures include
the effects of all awards granted during 1999. There were no outstanding
options at December 31, 1999. (See Note 4.)
F-12
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
Earnings Per Common Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method. Stock
options have been excluded from the computation of diluted earnings per
share because they were antidilutive as a result of the Company's net
loss for the year.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued a proposed
interpretive release, Stock Compensation-Interpretation of Opinion 25
("Interpretation"). The Interpretation will provide accounting guidance on
several issues that are not specifically addressed in Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees". Of the many questions addressed in the Interpretation, the
most significant are a clarification of the definition of the term
"employee" for purposes of applying the opinion and the accounting for
options that have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at that date for repricings that
occurred after December 15, 1998. It also applies prospectively on July 1
to new awards granted after December 15, 1998 for purposes of applying the
definition of "employee".
In December 1999, the Securities and Exchange Commission (the
"Commission") published Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition", which provides guidance for applying generally
accepted principles to revenue recognition in financial statements filed
with the Commission, including income statement presentation and
disclosure. As originally issued, SAB 101 was to be applied no later than
the first quarter of the fiscal year beginning after December 15, 1999.
However, the Commission has delayed the effective date of the SAB for
companies with fiscal years beginning between December 16, 1999 and March
15, 2000. For such entities, the mandatory implementation date may now be
no later than the second quarter of the fiscal year beginning after
December 15, 1999.
The Company is in the process of reviewing the pronouncements detailed
above to determine the impact on the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
1999
----
Computer equipment and software $518,434
Office Furniture 56,075
Leasehold Improvements 54,995
Purchased software 70,000
--------
699,504
Accumulated depreciation (86,139)
--------
$613,365
========
Depreciation and amortization expense of property and equipment for the
years ended December 31, 1999 and December 31, 1998 amounted to $ 72,194
and $ 2,276, respectively.
F-13
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
PROPERTY AND EQUIPMENT (Continued)
The Company leases its technology location under an operating lease
commencing on January 1, 2000 and expiring on December 31, 2004. The
Company also leases offices and warehouse facilities for approximately
$2,500 per month on a tenant-at-will basis.
The following is a schedule of future minimum lease payments for the
operating lease in effect at December 31, 1999:
Year Amount
---- ------
2000 $ 89,936
2001 89,936
2002 89,936
2003 91,980
2004 94,024
-------
$455,812
========
Rent expense for the year ended December 31, 1999 amounted to $29,265.
4. COMMON STOCK
Call Option Agreement
In connection with the agreement described in Note 1, on February 25,
1999, SRAD entered into a Call Option Agreement ("Option Agreement") with
Universal Funding, Inc. (Universal), a shareholder of SRAD and a
beneficial owner of 3,000,000 shares of SRAD's common stock. Under the
Agreement, Universal agreed to grant certain options to SRAD to acquire
2,000,000 shares of SRAD's common stock owned by Universal. The options
consist of 1,000,000 shares at $.50 per share exercisable through February
25, 2000 and 1,000,000 shares at $.75 per share exercisable through
February 25, 2001. The exercise price was reduced to .375 per share
through April 30, 1999.
In addition, the Company assigned options to purchase 160,000 shares of
stock from Universal to Richard Singer, the former President of SRAD, for
services rendered to SRAD in connection with the acquisition of Internet
Auction, Inc. Also, the Company assigned options to purchase 700,000
shares of stock from Universal in connection with the acquisition of
certain inventories. See Note 2.
In April 1999, the Company assigned options to purchase 500,000 shares of
stock from Universal to certain individuals in exchange for $2,450,000,
which was added to the paid-in capital of the Company.
At December 31, 1999, the Company had a balance of 640,000 shares
remaining under the agreement with an exercise price of $.75 and an
expiration date of February 25, 2001.
F-14
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (continued)
Stock Options
In June 1999, the Company's Board of Directors adopted the 1999 Stock
Option Plan (the "1999 Plan") which provided for the issuance of options
to directors, officers, employees and consultants of the Company to
purchase up to 1,000,000 shares of the Company's common stock. Options
granted under the plan may be either incentive stock options ("ISO") or
nonqualified stock options ("NSO").
The 1999 Plan provides that each option be granted at a price determined
by the Board of Directors on the date such option is granted and have a
maximum option term of ten years. The options granted become exercisable
during a period of time as specified by the Board of Directors at the date
such option is granted.
In July 1999, the Company granted an option to an employee to purchase
471,000 shares of common stock at $.01 per share. The option is
exercisable over a four-year period. The Company recorded unearned
compensation of $757,848, based on the difference between the fair market
value of the common stock at the grant date and the exercise price. The
unearned compensation is being amortized over the vesting period of the
option. Amortization expense related to unearned compensation amounted to
$143,937 for the year ended December 31, 1999.
An analysis of the activity in the 1999 Plan is as follows:
Weighted
Average
Exercise
Shares Price
------ -----
Shares under option:
Outstanding at beginning of year - $ -
Granted 597,000 0.33
Exercised - -
Expired/Cancelled (18,000) 1.63
-------
Outstanding at end of year 579,000 $0.29
=======
Options exercisable at year end 94,750
Weighted average fair value of
options granted during the year $1.62 $0.01
F-15
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (continued)
Stock Options (continued)
Information pertaining to options outstanding at December 31, 1999 is as
follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$ .01 471,000 9 years $ 0.010 89,125 $0.010
.812 14,000 9 0.812 125 0.812
1.625 94,000 9 1.625 5,500 1,625
------- ------
Outstanding at end
of year 579,000 $ 0.330 94,750 $0.010
======= ======
During July 1999, the Company's Board of Directors adopted, subject to
stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan")
which provides for both incentive and non-qualified stock options, stock
appreciation rights and other awards to directors, officers and employees
of the Company to purchase or receive up to 1,000,000 shares of the
Company's stock. A committee of the Board of Directors ("Committee")
establishes the option price at the time each option is granted, which
price may, in the discretion of the Committee, be less than 100% of the
fair market value of the shares on the date of the grant. The options
granted will have a maximum term of ten years and shall be exercisable
during a period as specified by the Committee. There were no incentive
options granted under the Omnibus Plan during 1999.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized only to the extent described above.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the
Company's net income and earnings per share would have been adjusted to
the pro forma amounts indicated below:
Years Ended December 31,
------------------------
1999 1998
---- ----
Net income(loss) As reported $(2,183,040) $ 12,238
Pro forma $(2,197,613) N/A
Basic loss per share As reported $ (0.05) N/A
Pro forma $ (0.05) N/A
F-16
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (concluded)
Stock Options (concluded)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Years Ended December 31,
------------------------
1999 1998
---- ----
Expected life 4 years N/A
Risk-free interest rate 6.0% N/A
Dividend yield None N/A
Volatility 254% N/A
5. INCOME TAXES
There was no provision for income taxes for the years ended December 31,
1999 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts
computed by applying the statutory federal income tax rate of 34% and the
Company's effective tax rate is due primarily to the net operating loss
incurred by the Company and the valuation reserve against the Company's
deferred tax asset.
The tax effects of temporary differences and carryforwards that give rise
to deferred taxes are:
Federal net operating loss carryforwards $ 625,000
State net operating loss carryforwards 195,000
Stock-based compensation recognized for
financial statement purposes 60,000
------
880,000
Valuation reserve (880,000)
--------
Net deferred tax asset $ -
=========
The valuation reserve applicable to net deferred tax asset for the year
ended December 31, 1999 is due to the likelihood of the deferred tax not
expected to be utilized.
At December 31, 1999, the Company has federal and state net operating loss
carryforwards of approximately $2,200,000 available to offset future
taxable income which will expire in 2019.
F-17
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. RELATED PARTY TRANSACTION
During September 1999, the Company purchased certain computer equipment
and internet research technology and coding material from Timeline, Inc.
("Timeline") in the amount of $70,000. Timeline is a related party as it
is owned by certain officers of the Company.
7. SUBSEQUENT EVENTS
Convertible Debt Financing
On March 23, 2000, the Company entered into a Securities Purchase
Agreement (the "Agreement"), whereby the Company sold an 8% convertible
note in the amount of $3,000,000, due March 31, 2002 to Augustine Fund,
L.P. (the "Buyer").
The note is convertible into common stock at a conversion price equal to
the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior
to March 23, 2000, or (2) seventy-five percent (75%) of the average of the
closing bid price for the common stock for the five (5) trading days
immediately preceding the conversion date.
Had the Buyer converted the note on March 23, 2000, the Buyer would have
received $4,000,000 in aggregate value of the company's common stock upon
the conversion of the $3,000,000 convertible note. As a result, the
intrinsic value of the beneficial conversion feature of $ 1,000,000 will
be allocated to debt discount and additional paid-in capital. Since the
debt is convertible at date of issuance, the debt discount will be charged
to earnings at that time.
In connection with the Agreement, the Company also issued warrants to the
Buyer and Delano Group Securities to purchase 300,000 and 100,000 shares
of common stock, respectively. The purchase price per share of common
stock is equal to one hundred and twenty percent (120%) of the lowest of
the closing bid prices for the common stock during the five (5) trading
days prior to the closing date. The warrants expire on March 31, 2005.
In addition, the Company entered into a Registration Rights Agreement,
whereby the Company agreed to file a Registration Statement with the
Securities and Exchange Commission (SEC), within 180 days of the closing
date, covering the common stock to be issued upon the conversion of the
convertible note and stock purchase warrants.
F-18
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
SUBSEQUENT EVENTS (concluded)
Convertible Debt Financing (concluded)
If the Registration Statement is not declared effective by the SEC on or
before September 30, 2000, then with respect to any portion of the note
not previously converted into common stock, the applicable conversion
percentage will decrease by two percent (2%) each thirty day period until
the Registration Statement is declared effective by the SEC. If the SEC
has not declared the Registration Statement effective within one year
after March 23, 2000, the applicable conversion percentage shall be fifty
percent (50%).
Also, if the Registration Statement is not filed by the filing date and
not declared effective by the SEC on or prior to September 30, 2000, the
Company shall pay cash, as liquidating damages, for such failure. The
required payment will be equal to two (2%) of the purchase price of the
note and warrant for each thirty-day period, until the breach of the
Registration Rights Agreement is cured.
All fees and expenses related to the registration of the common stock will
be paid by the Company.
Issuance of Common Stock
On February 17, 2000, the Company issued 75,000 shares of its common stock
to Universal Funding, Inc. for payment of certain fees due in connection
with the granting of the common stock call options and temporary reduction
of the call option exercise price. In addition, the Company issued 35,000
shares of its common stock to an investment consultant for service
rendered in connection with the common stock option grant transactions.
Also, the Company issued 35,000 shares to a consultant for services
rendered in the first quarter of 2000.
The value of the common shares at the date of issuance of the shares
described above was $1.28 per share.
Assignment of Stock Options
In March 2000, the Company assigned to an investor options to purchase
42,500 shares of the Company's common stock from Universal. The net
proceeds to the Company were approximately $21,000.
Business Acquisition
On March 7, 2000, the Company acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and
reports on the best Internet collectibles Web sites in a variety of
categories. As consideration for the acquisition, the Company paid $50,000
cash and issued 200,000 shares of the Company's common stock valued at
$237,500 (based on the Company's stock price at the date of acquisition).
The acquisition will be accounted for under the purchase method of
accounting.
F-19
<PAGE>
EXHIBIT INDEX
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.)
3.1 Certificate of Incorporation, as amended *
3.2 Amended and Restated Bylaws *
10.1 Lease Agreement, dated July 26, 1999 between 100 Painters Mill,
LLC and the Company and First Amendment to Lease Agreement,
dated December 31, 1999*
10.2 Securities Purchase Agreement dated March 23, 2000 between the
Company and Augustine Fund, LP. *
10.3 Convertible Note dated March 23, 2000 issued to Augustine Fund,
LP pursuant to Securities Purchase Agreement *
10.4 Warrant dated March 23, 2000 issued to Augustine Fund,
LP pursuant to Securities Purchase Agreement.
10.5 Registration Rights Agreement dated March 23, 2000 between the
Company and Augustine Fund, LP pursuant to Securities Purchase
Agreement *
10.6 Escrow Agreement dated March 23, 2000 among the Company,
Augustine Fund, LP and H. Glenn Bagwell, Jr. pursuant to
Securities Purchase Agreement *
10.7 Warrant dated March 23, 2000 issued by the Company to Delan
Group Securities, LLC *
16.1 Letter from Guest & Company on change in certifying accountant
(incorporated by reference from Form 8-K, filed on April 29,
1999)
16.2 Letter from Stephen P. Higgins, C.P.A. on change in certifying
accountants (incorporated by reference from Form 8-K/A, filed
on March 31, 2000)
21.1 Subsidiaries of the Company (included in Item I)*
27.1 Financial Data Schedule *
99.1 Risk Factors *
- ---------------
* filed herewith
E-1
<PAGE>
CERTIFICATE OF INCORPORATION
OF
ROSE INTERNATIONAL LTD.
FIRST: The name of the corporation is:
ROSE INTERNATIONAL LTD.
SECOND: Its registered office in the State of Delaware is located at 25
Greystone Manor, Lewes, DE 19958-9776, County of Sussex. The registered agent in
charge thereof is Harvard Business Services, Inc.
THIRD: The purpose of the corporation is to engage in any lawful
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of stock which the corporation is
authorized to issue is 25,000,000 shares having a par value of $0.01 per share.
FIFTH: The business and affairs of the corporation shall be managed by
or under the direction of the board of directors, and the directors need not be
elected by ballot unless required by the bylaws of the corporation.
SIXTH: The names and addresses of the persons who are to be directors
of the corporation until the first meeting of stockholders or until their
successors are elected:
G. DAVID GORDON /JOHN WILSON / W. L. MORRIS
2424 WEST 21st ST - SUITE 210 / TULSA, OK 74114
SEVENTH: In furtherance and not in limitation of the powers conferred
by the laws of Delaware, the board of directors is authorized to amend or repeal
the bylaws.
EIGHTH: The corporation reserves the right to amend or repeal any
provision in this Certificate of incorporation in the manner prescribed by the
laws of Delaware.
NINTH: The incorporator is Harvard Business Services, Inc., whose
mailing address is 25 Greystone Manor, Lewes, DE 19958-9776. The powers of the
incorporator are to terminate upon the filing of this certificate of
incorporation.
TENTH: To the fullest extent permitted by the Delaware General
Corporation Law a director of this corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
ELEVENTH: This company will acquire the assets, liabilities and
previous shareholders subject to Directors approval of the Corporation currently
incorporated in Utah with the same name filed on June 22, 1995 under file number
180107.
I, Richard H. Bell, for the purpose of forming a corporation under the
laws of the State of Delaware do make and file this certificate, and do certify
that the facts herein stated are true; and have accordingly signed below, this
9th day of August, 1995.
Signed and Attested to by:/s/ Richard H. Bell
---------------------------------------------
Richard H. Bell, President & Secretary
HARVARD BUSINESS SERVICES, INC.
<PAGE>
CERTIFICATE OF MERGER
The following information is being provided in accordance with Section 252(c) of
the State of Delaware General Corporation Law ("DGCL"):
(1) Name and state of incorporation or jurisdiction of each of the constituent
corporations:
(a) Rose International, Inc., a Utah corporation
(b) Rose International Ltd., a Delaware corporation
(2) An agreement of merger his been approved, adopted, certified, executed and
acknowledged by each of Rose International, Inc. and Rose International
Ltd. in accordance with subsection 252(c) of the DGCL.
(3) The name of the surviving corporation: Rose International Ltd.
(4) The Certificate of Incorporation of the surviving corporation, Rose
International Ltd., shall be its Certificate of Incorporation.
(5) This subsection is not applicable since this is a merger.
(6) The executed Agreement of Merger is on file at the principal place of
business of Rose International Ltd. at 601 ONEOK Plaza, 100 West Fifth
Street, Tulsa, Oklahoma 74103.
(7) A copy of the Agreement of Merger will be furnished by Rose International
Ltd., upon written request, without cost, to any stockholder of either
Rose International Ltd. or Rose International, Inc.
(8) The authorized capital stock of Rose International, Inc., a Utah
corporation: 100,000,000 shares of common stock, par value of $.00001 per
share.
IN WITNESS WHEREOF, said corporation has caused this
Certificate to be executed by its President and attested by its Assistant
Secretary, this 29th day of December, 1995.
ROSE INTERNATIONAL, LTD.
By: /s/ G. David Gordon
-------------------------------------
G. David Gordon, President
ATTEST:
/s/ Susan Willis
- ------------------------------
Assistant Secretary
<PAGE>
STATE OF DELAWARE
CERTIFICATE OF RENEWAL
AND REVIVAL OF CHARTER
ROSE INTERNATIONAL LTD., a corporation organized under the laws of Delaware, the
charter of which was forfeited for failure to obtain a registered agent, now
desires to procure a restoration, renewal and revival of its charter, and hereby
certifies as follows:
FIRST: The name of the corporation is ROSE INTERNATIONAL LTD.
SECOND: Its registered office is the State of Delaware located at 25 Greystone
Manor, Lewes, Delaware, 19958-9776, County of Sussex. The name and address of
the registered agent is Harvard Business Services, Inc., 25 Greystone Manor,
Lewes, Delaware, 19958-9778, County of Sussex.
THIRD: The date of filing of the original Certificate of Incorporation is
Delaware was August 9, 1995.
FOURTH: The date when restoration, renewal and revival of the charter of this
company is to commence is the twenty ninth day October of 1997, same being prior
to the date of the expiration of the charter. This renewal and revival of the
charter of this corporation is to be perpetual.
FIFTH: This corporation was duly organized and carried on the business
authorized by its charter until the thirtieth day of October of 1997 A.D., at
which time its charter became inoperative and forfeited for failure to obtain a
registered agent and this certificate for renewal and revival is filed by
authority of the duly elected directors of the corporation in accordance with
the laws of the State of Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section 312 of
the General Corporation Law of the State of Delaware, as amended, providing for
the renewal, extension and restoration of characters, the last and acting
authorized officer hereunto set his hand to this certificate this 4th day of
June, 1998.
By: /s/ Richard Singer
------------------------------------
Name: Richard Singer
----------------------------------
Title: President
---------------------------------
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ROSE INTERNATIONAL LTD.
Rose International, Ltd., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, at a
meeting duly held, adopted a resolution proposing and declaring advisable the
following amendment to the Certificate of Incorporation of said corporation.
RESOLVED, that the Certificate of Incorporation of Rose
International, Ltd., be amended by changing the FIRST Article thereof so that,
as amended, said Article shall be and read as follows:
"FIRST: The name of the corporation (hereinafter called the
"Corporation") is Securities Resolution Advisors, Inc."
SECOND: That in lieu of a meeting and vote of stockholders
have given written consent to said amendment in accordance with the provisions
of section 228 of the General Corporation Law of the State of Delaware and
written notice of the adoption of the amendment has been given as provided in
section 228 of the General Corporation Law of the State of Delaware to every
stockholder entitled to such notice.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the applicable provisions of sections 242 and 228 of the General
Corporation Law of the State of Delaware.
FOURTH: That this Certification of Amendment of the
Certificate of Incorporation shall be
effective on the date of filing.
IN WITNESS WHEREOF, and Rose International Ltd. has caused
this certificate to be signed by Richard Singer, its President this 30th day of
June, 1998.
ROSE INTERNATIONAL LTD.
/s/ Richard Singer, II
------------------------------------------
Richard Singer, II, President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
SECURITIES RESOLUTION ADVISORS, INC. a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of SECURITIES RESOLUTION
ADVISORS, INC. resolution were duly adopted setting forth a proposed amendment
of the Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the proposed
amendment is a follows:
RESOLVED, that the Certificate of Incorporation of this corporation is amended
by changing the Article thereof numbered "The FOURTH" so that, as amended said
Article shall be and read as follows:
"The amount of total authorized capital stock of the corporation shall
be divided into 100,000,00 shares of common stock having a par value of $.001
each."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said SECURITIES RESOLUTION ADVISORS, INC. has caused this
certificate to be signed by an authorized officer, this 22nd day of February,
1999.
BY:/s/ Richard Singer Signature
---------------------------------
Name: Richard Singer please print
------------------------------
Title:President please print
------------------------------
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SECURITIES RESOLUTION ADVISORS, INC.
SECURITIES RESOLUTION ADVISORS, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware.
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of SECURITIES
RESOLUTION ADVISORS, INC. resolutions were duly adopted setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered "FIRST" so that, as amended
said Article shall be and read as follows:
FIRST: The name of the corporation is Sales Online Direct, Inc.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said SECURITIES RESOLUTION ADVISORS, INC. has
caused this certificate to be signed by its Authorized Officer this 16th day of
March, 1999.
BY: /s/ Richard Rotman Signature
--------------------------------
Name: Richard Rotman please print
------------------------------
Title: Treasurer please print
-----------------------------
BYLAWS OF
SALES ONLINE DIRECT, INC.
(hereinafter called the "Corporation")
(AS AMENDED AND RESTATED THROUGH AUGUST 19, 1999)
ARTICLE I
OFFICES
Section 1. Office. The registered office of the Corporation
shall be located in the Town of Lewes, State of Delaware. The principal office
of the Corporation is hereby fixed and located at 4 Brussels Street, Worcester,
Massachussets 01610.
Section 2. Additional Offices. The Corporation may also have
offices and places of business at such other places both within and without the
State of Delaware as the Board of Directors may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. Time and Place. The annual meeting of the
shareholders for the election of directors and all special meetings of
shareholders for that or for any other purpose may be held at such time and
place, within or without the State of Massachusetts, as may be fixed from time
to time by the Board of Directors and as shall be stated in the notice of the
meeting, or in a duly executed waiver of notice thereof.
SECTION 2. Annual Meeting. Annual meetings of shareholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meeting the shareholders shall elect a Board of Directors, and transact such
other business as may properly be brought before the meeting.
SECTION 3. Notice of Annual Meeting. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given
not less than 10 nor more than 60 days before the date of the meeting, to each
shareholder of record entitled to vote at such meeting.
SECTION 4. Special Meetings. Special meetings of the
shareholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the Chairman of
the Board or the President, and shall be called by the Chairman of the Board,
President or the Secretary at the request in writing of a majority of the Board
of Directors, or at the request in writing of shareholders owning at least a
majority in amount of shares of the Corporation issued and outstanding and
entitled to vote thereat. Such request shall state the purpose or purposes of
the proposed meeting. The business transacted at any special meeting of
shareholders shall be limited to the purposes stated in the notice.
<PAGE>
SECTION 5. Notice of Special Meeting. Written notice of a
special meeting of shareholders, stating the place, date and hour of the
meeting, the purpose or purposes for which the meeting is called, unless
otherwise required by law, shall be given not less than 10 nor more than 60 days
before the date of the meeting to each shareholder of record entitled to vote at
such meeting.
SECTION 6. Voting List. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of shareholders, a complete list of the shareholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each shareholder and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any shareholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any shareholder
who is present.
SECTION 7. Quorum. Except as otherwise provided by law, the
Certificate of Incorporation or these By-laws, the holders of a majority of the
shares of the Corporation issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be necessary to and shall
constitute a quorum for the transaction of business at all meetings of the
shareholders. If, however, such quorum shall not be present or represented at
any meeting of the shareholders, the shareholders entitled to vote thereat
present in person or represented by proxy shall have the power to adjourn the
meeting from time to time until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder of record entitled
to vote at the meeting.
SECTION 8. Voting. Except as otherwise provided by law or the
Certificate of Incorporation, each shareholder of record shall be entitled to
one vote for every share of stock standing in his name on the books of the
Corporation. All elections for directors shall be decided by plurality vote; all
other questions shall be decided by majority vote except as otherwise provided
by the Certificate of Incorporation or the laws of the State of Delaware.
SECTION 9. Proxies. Unless otherwise provided in the
Certificate of Incorporation, every shareholder having the right to vote shall
be entitled to vote in person or by proxy. Every proxy must be executed in
writing by the shareholder or by his attorney-in-fact. No proxy shall be valid
after the expiration of three years from the date thereof unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
shareholder executing it, except in those cases where an irrevocable proxy
permitted by law is given.
SECTION 10. Nature of Business at Meetings of Shareholders. No
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business may be transacted at an annual meeting of shareholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any shareholder of the Corporation who is entitled to vote at
such annual meeting and who complies with the notice procedures set forth in
this Section 10.
For business to be properly brought before an annual meeting by a
shareholder, such shareholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be made by written request to the Secretary of the Corporation to
be received not less than ninety (90) days nor more than one hundred twenty
(120) days prior to the anniversary date of the immediately preceding annual
meeting of shareholders; provided, however, that in the event that the annual
meeting is called for a date that is not within thirty (30) days before or after
such anniversary date, notice by the shareholder in order to be timely must be
so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and in the case of a special meeting of shareholders
called for the purpose of electing directors, not later than the close of
business on the tenth (10th) day following the day on which notice of the date
of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the
Secretary must set forth as to each matter such shareholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of such shareholder,
(iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such shareholder, (iv)
a description of all arrangements or understandings between such shareholder and
any other person or persons (including their names) in connection with the
proposal of such business by such shareholder and any material interest of such
shareholder in such business and (v) a representation that such shareholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting.
No business shall be conducted at the annual meeting of
shareholders except business brought before the annual meeting in accordance
with the procedures set forth in this Section 10; provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 10 shall be deemed to preclude
discussion by any shareholder of any such business. If the Chairman of an annual
meeting determines that business was not properly brought before the annual
meeting in accordance with the foregoing procedures, the Chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
SECTION 11. Action Without Meeting. Unless otherwise provided
by the Certificate of Incorporation, any action required to be taken at any
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annual or special meeting of shareholders, or any action which may be taken at
any annual or special meeting, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those shareholders who
have not consented in writing.
SECTION 12. Inspectors. The Board of Directors in advance of
any shareholders' meeting may appoint one or more inspectors to act at the
meeting or any adjournment thereof. If inspectors are not so appointed, the
person presiding at a shareholders' meeting may, and on the request of any
shareholder entitled to vote thereat, shall appoint one or more inspectors. In
case any person appointed as inspector fails to appear or act, the vacancy may
be filled by the Board in advance of the meeting or at the meeting by the person
presiding thereat. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath to execute faithfully the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The duties of such inspector(s) shall include: determining the
number of shares outstanding and the voting power of each; the shares
represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders. In the event of any dispute between
or among the inspectors, the determination of the majority of the inspectors
shall be binding. On request of the Chairman of the meeting, the inspectors
shall make a report in writing of any challenge, request or matter determined by
them and shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as an inspector of an election of
directors. Inspectors need not be shareholders.
ARTICLE III
DIRECTORS AND COMMITTEES
SECTION 1. General. The business of the Corporation shall be
managed by or under the direction of its Board of Directors (the "Board") which
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the certificate of incorporation or by these
bylaws directed or required to be exercised or done by the shareholders.
SECTION 2. Number. The number of directors that shall
constitute the entire Board shall be not less than three nor more than twelve as
shall be fixed from time to time by the Board or by vote of the shareholders of
the Corporation and shall be subject to increase by resolution of the Board or
by vote of the shareholders of the Corporation. Directors need not be
shareholders of the Corporation or residents of the State of Delaware. Until the
first annual meeting of shareholders or until successors are duly elected and
qualify, the Board shall consist of the persons named as such in the certificate
of incorporation.
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SECTION 3. Election; Tenure. Directors shall be elected at the
annual meeting of the shareholders, except as provided in Section 4 of this
Article III; and each director shall be elected to serve for a term of one year
and until his successor has been elected and has qualified.
SECTION 4. Vacancies. Newly created directorships resulting
from an increase in the Board and all vacancies occurring in the Board may be
filled by a majority of the directors then in office though less than a quorum
of the Board. A director elected to fill a vacancy shall be elected for the
unexpired portion of the term of his predecessor in office. A director elected
to fill a newly created directorship shall serve until the next succeeding
annual meeting of shareholders and until his successor shall have been elected
and qualified.
SECTION 5. Nomination of Directors. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors of the Corporation. Nominations of persons for election to
the Board of Directors may be made at any annual meeting of shareholders, or at
any special meeting of shareholders called for the purpose of electing
directors, (i) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (ii) by any shareholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 5. Such nominations, other than
those made by or at the direction of the Board, shall be made by written request
to the Secretary of the Corporation to be received not less than ninety (90)
days nor more than one hundred twenty (120) days prior to the anniversary date
of the immediately preceding annual meeting of shareholders; provided, however,
that in the event that the annual meeting is called for a date that is not
within thirty (30) days before or after such anniversary date, notice by the
shareholder in order to be timely must be so received not later than the close
of business on the tenth (10th) day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure of the date
of the annual meeting was made, whichever first occurs; and in the case of a
special meeting of shareholders called for the purpose of electing directors,
not later than the close of business on the tenth (10th) day following the day
on which notice of the date of the special meeting was mailed or public
disclosure of the date of the special meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the
Secretary must set forth (i) as to each person whom the shareholder proposes to
nominate for election as a director (A) the name, age, business address and
residence address of the person; (B) the principal occupation or employment of
the person; (C) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person; and (D) any
other information required to be disclosed in solicitation of proxies for
election of directors, or is otherwise required, in each case pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder; and (ii) as to the
shareholder giving the notice (A) the name and record address of such
shareholder, (B) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such shareholder,
and (C) any other information relating to such shareholder that would be
required to be disclosed in a proxy statement or other filings required to be
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made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 5. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
SECTION 6. Resignation and Removal of Directors. Any director
may resign at any time by giving notice to the Corporation. Any such resignation
shall take effect at the time specified therein or, if no time is so specified,
upon its receipt by the Corporation. Any director of the Corporation may be
removed either with or without cause at any time by the vote of the holders of a
majority of the stock entitled to vote at an election of directors.
SECTION 7. Books. The Board may keep the books of the
Corporation, except such as are required by law to be kept within the State of
Delaware, outside the State of Delaware at such place or places as they may from
time to time determine.
SECTION 8. Compensation. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, the Board shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board and may be paid a
fixed sum for attendance at each meeting of the Board or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
SECTION 9. Committees. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole board, designate one
or more committees, each committee to consist of two or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of any member
or such committee or committees, the member or members thereof present at any
such meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these By-Laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no such committee shall have
the power of authority in reference to amending the Certificate of
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Incorporation, adopting an agreement of merger or consolidation, recommending to
the shareholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and unless the resolution, these By-Laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 1. Place. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
SECTION 2. First Meeting. The first meeting of each newly
elected Board shall be held immediately following the annual meeting of
shareholders at which such Board is elected, and no notice of such meeting to
the newly elected directors shall be necessary in order legally to constitute
the meeting, provided a quorum shall be present.
SECTION 3. Regular Meetings. Regular meetings of the Board
may be held with or without notice, and at such time and at such place as shall
from time to time be determined by the Board.
SECTION 4. Special Meetings. Special meetings of the Board may
be called by the Chairman of the Board, or if there be none, the President, on
24 hours' notice to each director, either personally or by mail, or by telegram
or by facsimile; special meetings shall be called by the Chairman of the Board
or Secretary in like manner and on like notice on the written request of at
least two of the directors then in office.
SECTION 5. Quorum. At all meetings of the Board or any
committee thereof, a majority of the entire Board or committee shall constitute
a quorum for the transaction of business, and the vote of a majority of the
directors present at the time of the vote if a quorum is present shall be the
act of the Board or committee, except as otherwise specifically provided by law.
If a quorum shall not be present at any meeting of the Board or any committee
thereof, the directors present thereat may adjourn the meeting from time to time
until a quorum shall be present, and no further notice thereof need be given
other than by announcement at the meeting which shall so be adjourned.
SECTION 6. Use of Conference Telephone. Any one or more
members of the Board or any committee thereof may participate in any meeting of
such Board or committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
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SECTION 7. Consents in Lieu of Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
ARTICLE V
OFFICERS
SECTION 1. Executive Offices. The officers of the Corporation
shall be a President, a Vice President, a Secretary and a Treasurer, all of whom
shall be elected by the Board of Directors and who shall hold office until their
successors are duly elected and qualified, , or until their earlier resignation
or removal. The Board may also elect a Chairman of the Board of Directors and
one or more additional Vice Presidents, Assistant Secretaries, and Assistant
Treasurers as it shall deem proper. Any two or more offices may be held by the
same person except as provided by statute, the Certificate of Incorporation or
these ByLaws.
SECTION 2. Other Officers and Agents. The Board of Directors
may appoint such other officers and agents as it may deem advisable, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
SECTION 3. Chairman of the Board. The Chairman of the Board,
if there be one, shall preside at all meetings of the directors and meeting of
the shareholders, and he shall have and shall have and perform such other duties
as from time to time may be assigned to him by the Board of Directors.
SECTION 4. The President. The President shall be the chief
executive officer of the Corporation shall have general and active management
and control of the business and affairs of the Corporation subject to the
control of the Board and shall see that all orders and resolutions of the Board
and the Shareholders are carried into effect. In the absence or disability of
the Chairman of the Board, the President shall perform the duties and exercise
the powers of the Chairman of the Board. Except as the Board shall authorize the
execution thereof in some other manner, he shall execute bonds, mortgages and
other contracts in behalf of the Corporation, and shall cause the seal to be
affixed to any instrument requiring it and when so affixed the seal shall be
attested by the signature of the Secretary or the Treasurer or Assistant
Secretary or an Assistant Treasurer. The President shall also perform such other
duties and may exercise such other powers as may from time to time be assigned
to such officer by the Board.
SECTION 5. Vice Presidents. The Vice President or, if there be
more than one, the Executive Vice President and then the Vice Presidents in the
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order of their seniority or in any other order determined by the Board, shall,
in the absence or disability of the President, perform the duties and exercise
the powers of the President, and shall generally assist the President and
perform such other duties as the Board may prescribe from time to time.
SECTION 6. The Secretary. The Secretary shall attend all
meetings of the Board and all meetings of the shareholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose and
shall perform like duties for the standing committees when required. He shall
give, or cause to be given, notice of all meetings of the shareholders and
special meetings of the Board, and shall perform such other duties as may be
prescribed by the Board or the President, under whose supervision he shall act.
He shall keep in safe custody the seal of the Corporation and when authorized
affix the same to any instrument requiring it, any when so affixed it shall be
attested by his signature or by the signature of the Treasurer or an Assistant
Secretary or Assistant Treasurer. He shall keep in safe custody the certificate
books and shareholders' records and such other books and records as the Board
may direct and shall perform all other duties incident to the office of
Secretary.
SECTION 7. The Assistant Secretary. The Assistant Secretary,
or if there be more than one, the Assistant Secretaries in the order determined
by the Board (or if there be no such determination, then in the order of their
election) shall, in the absence of the secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
SECTION 8. The Treasurer. The Treasurer shall have the care
and custody of the corporate funds and other valuable effects, including
securities, and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the President and
directors, whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board, the Treasurer shall give the Corporation a bond for such term, in such
sum and with such surety or sureties as shall be satisfactory to the Board for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
SECTION 9. Assistant Treasurer. The Assistant Treasurer, or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
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ARTICLE VI
SHARE CERTIFICATES
SECTION 1. Form; Signature. The certificates for shares of the
Corporation shall be in such form as shall be determined by the Board and shall
be numbered consecutively and entered in the books of the Corporation as they
are issued. Each certificate shall exhibit the registered holder's name and the
number and class of shares, and shall be signed by the Chairman, if elected,
President and the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, and shall bear the seal of the Corporation, or a facsimile
thereof. Where any such certificate is countersigned by a transfer agent, or
registered by a registrar, the signature of any such officer may be a facsimile
signature. In case any officer who signed, or whose facsimile signature or
signatures were placed on any such certificate shall have ceased to be such
officer before such certificate is issued, it may nevertheless be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
SECTION 2. Uncertificated Shares. The Corporation may issue
stock in the form of uncertificated shares. Within a reasonable time after the
issuance of uncertificated stock, the Corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a)
of the General Corporation Law of Delaware or a statement that the Corporation
will furnish without charge to each shareholder who so requests the powers,
designations, preferences and relative participating, option or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preference and/or rights.
SECTION 3. Series of Stock. If the Corporation shall be
authorized to issue more than one class of stock or more than one series of any
class, the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the face or back of the
certificate, provided that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, a statement
that the Corporation will furnish without charge to each shareholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
SECTION 4. Lost Certificates. The Board may direct a new share
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost or destroyed. When authorizing such issue of a new
certificate or certificates, the Board may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates or his legal representative, to give the Corporation
a bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost or destroyed.
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SECTION 5. Transfer of Shares. Upon surrender to the
Corporation or any transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation or such transfer
agent to issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books. Upon receipt of proper
transfer instructions from the registered owner of uncertificated shares such
uncertificated shares shall be cancelled and issuance of new equivalent
uncertificated shares or certificated shares shall be made to the person
entitled thereto and the transaction shall be recorded upon the books of the
Corporation.
SECTION 6. Registered Shareholders. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends or other distributions, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or legal claim to or
interest in such share or shares on the part of any other person.
SECTION 7. Record Date. In order that the corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any date, which shall not be more than sixty nor less than
ten days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjournment meeting.
ARTICLE VII
INDEMNIFICATION
SECTION 1. Indemnification. The Ccorporation shall indemnify,
to the full extent that it shall have power under applicable law to do so and in
a manner permitted by such law, any person made or threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter, a "Proceeding"),
by reason of the fact that such person is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust,
or other enterprise. The Corporation may indemnify, to the full extent that it
shall have power under applicable law to do so and in a manner permitted by such
law, any person made or threatened to be made party to any Proceeding, by reason
of the fact that such person is or was an employee or agent of the Corporation,
or is or was serving at the request of the Corporation as an employee or agent
of another corporation, partnership, joint venture, trust, or other enterprise.
SECTION 2. Advancement of Expenses. With respect to any person
made or threatened to be made a party to any threatened, pending, or completed
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Proceeding, by reason of the fact that such person is or was a director or
officer of the Corporation, the Corporation shall pay the expenses (including
attorneys' fees) incurred by such person in defending any such Proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that the payment of expenses (including attorneys' fees)
incurred by such person in advance of the final disposition of such Proceeding
shall be made only upon receipt of an undertaking (hereinafter an "undertaking")
by such person to repay all amounts advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such person is not entitled to
be indemnified for such expenses under this Article VII or otherwise; and
further provided that with respect to a Proceeding initiated against the
Corporation by a director or officer of the Corporation (including a person
serving at the request of the Corporation as a director or officer shall be
entitled under this Section to the payment of expenses (including attorneys'
fees) incurred by such person in defending any counterclaim, cross-claim,
affirmative defense, or like claim of the Corporation in connection with such
Proceeding in advance of the final disposition of such proceeding only if such
proceeding was authorized by the Board of Directors of the Corporation. With
respect to any person made or threatened to be made a party to any Proceeding,
by reason of the fact that such person is or was an employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, the Corporation may, in its discretion and
upon such terms and conditions, if any, as the Corporation deems appropriate,
pay the expense (including attorneys' fees) incurred by such person in defending
any such Proceeding in advance of its final disposition.
SECTION 3. Claims. With respect to any person made or
threatened to be made a party to any Proceeding, by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, or other enterprise, the rights
to indemnification and to the advancement of expenses conferred in Sections 1
and 2 of this Article VII shall be contract rights. If a claim under Section 1
or 2 of this Article VII with respect to such rights is not paid in full by the
Corporation within sixty days after a written demand has been received by the
Corporation, except in the case of a claim for an advancement of expenses by an
officer or director of the Corporation, in which case the applicable period
shall be twenty days, the person seeking to enforce a right to indemnification
or an advancement of expenses hereunder may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
person seeking to enforce a right to indemnification or an advancement of
expenses hereunder or the person from whom the Corporation seeks to recover an
advancement of expenses shall also be entitled to be paid the expenses
(including attorneys' fees) of prosecuting or defending such suit. In any suit
brought by a person seeking to enforce a right to indemnification hereunder (but
not in a suit brought by a person seeking to enforce a right to an advancement
of expenses hereunder) it shall be a defense that the person seeking to enforce
a right to indemnification has not met any applicable standard for
indemnification under applicable law. In any suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses upon a final adjudication
that the person from whom the Corporation seeks to recover an advancement of
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expenses has not met any applicable standard for indemnification under
applicable law. With respect to any suit brought by a person seeking to enforce
a right to indemnification hereunder (including any suit seeking to enforce a
right to the advancement of expenses hereunder) or any suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, neither the failure of the Corporation to have made a determination
prior to commencement of such suit that indemnification of such person is proper
in the circumstances because such person has met the applicable standards of
conduct under applicable law, nor an actual determination by the Corporation
that such person has not met such applicable standards of conduct, shall create
a presumption that such person has not met the applicable standards of conduct
or, in a case brought by such person seeking to enforce a right to
indemnification or to an advancement of expenses or the person from whom the
Corporation seeks to recover an advancement of expenses is not entitled to be
indemnified, or to such an advancement of expenses, under this Article VII or
otherwise shall be on the Corporation.
SECTION 4. Non-Exclusive Rights. The indemnification and
advancement of expenses provided in this Article VII shall not be deemed
exclusive of any other rights to which any person indemnified may be entitled
under any bylaw, agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be such director, officer, employee, or agent and shall inure
to the benefit of the heirs, executors, and administrators of such person.
SECTION 5. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Article VIII or otherwise.
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ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Dividends. Subject to any applicable provisions of
the Certificate of Incorporation, dividends upon the outstanding shares of the
Corporation may be declared by the Board at any regular or special meeting,
pursuant to the provisions of the General Corporation Law of Delaware, and may
be paid in cash, in property or in shares of the Corporation.
SECTION 2. Reserves. Before payment of any dividend, there may
be set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board from time to time, in its absolute discretion, thinks
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purposes as the Board shall think conducive to the interest of
the Corporation, and the Board may modify or abolish any such reserve in the
manner in which it was created.
SECTION 3. Annual Statement. The board of directors shall
present at each annual meeting, and at any special meeting of the shareholders
when called for by vote of the shareholders, a full and clear statement of the
business and condition of the Corporation.
SECTION 4. Check; Other Instruments. All checks or demands for
money and notes or other instrument evidencing indebtedness or obligations of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board may from time to time designate.
SECTION 5. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of
the Board.
SECTION 6. Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
SECTION 7. Notice and Waiver of Notice. Notices to directors
and shareholders shall be in writing, stating the place, day and hour of the
meeting and, in the case of a special meeting, the purposes or purposes for
which the meeting is called, and may be given personally, by mail, or by
transmitting such notice with confirmed delivery (including, by telex, cable,
facsimile, or other form of recorded communication) to his residence or usual
place of business. Notice by mail shall be deemed to be given at the time when
the same shall be deposited in the United States mail, postage prepaid,
addressed to directors or shareholders at their addresses appearing on the
records of the Corporation.
Whenever a notice is required to be given by any statute, the
Certificate of Incorporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to such notice. Attendance
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by any director at a meeting of the Board or any committee, for which notice is
required, or attendance by any shareholder at a meeting of shareholders, in
person or by proxy, shall constitute a waiver of notice by such director or
shareholder.
ARTICLE IX
AMENDMENTS
SECTION 1. Power to Amend. These By-Laws may be altered,
amended or repealed or new By-Laws may be adopted by the shareholders or by the
Board of Directors, provided however, that notice of the proposed alteration or
repeal of By-Law or By-Laws to be made be contained in the notice of such
meeting of shareholders or Board of Directors, as the case may be. All such
amendments must be approved by either a majority of the shares issued and
outstanding and entitled to vote thereat, or by the affirmative vote of a
majority of the Board of Directors.
LEASE AGREEMENT
This LEASE, is made July 26, 1999 by and between 100 PAINTERS MILL, LLC,
("Landlord"), a Maryland limited liability company and SALES ONLINE DIRECT, INC.
("Tenant"); a Maryland corporation.
WITNESSETH:
That in consideration of the mutual promises herein contained, Landlord
hereby leases to Tenant, and Tenant hereby leases from Landlord, the space
within the building (the "Building") located at 100 Painters Mill Road, Owings
Mills, Maryland 21117 and known as Suite 400 containing an agreed upon amount of
4,088 rentable square feet, said space being shaded on Exhibit "A" attached
hereto (the "Premises") for the term of five (5) years (the "Term") beginning on
the Lease Commencement Date as hereinafter defined.
The Rent Commencement Date, whenever used herein, shall be the earlier to
occur of the following: (a) the date when the Premises are ready for occupancy;
or (b) the date when Tenant shall take possession of or occupy the Premises. The
Premises shall be deemed ready for occupancy when the work to be done by
Landlord pursuant to Exhibit B attached hereto is substantially completed or
would have been except for delay due to Tenant as such date is determined by
Landlord in good faith. The Lease Commencement Date, whenever used herein, shall
be the Rent Commencement Date if said date is the first of a month, and, if said
date is not the first of a month, the next succeeding first of the month.
1. Rent:
The annual base rental ("Base Rent") for the first year of the
Term shall be Eighty-Nine Thousand Nine Hundred Thirty-Six Dollars and Four
Cents ($89,936.04), which Tenant shall pay in advance in equal monthly
installments of Seven Thousand Four Hundred Ninety-Four Dollars and Sixty-Seven
Cents ($7,494.67), the first installment of which (to be pro rated on a per day
basis if the Rent Commencement Date is other than the first day of a calendar
month) is due and payable on the Rent Commencement Date, with subsequent
installments due and payable on the first day of each calendar month thereafter
until the Base Rent provided for is paid. In the event the Rent Commencement
Date is not the first day of a calendar month, Tenant shall pay, in addition to
all other sums specified, ($241.76) for each day from the Rent Commencement Date
to the first day of the next calendar month which is the Lease Commencement
Date. Tenant shall pay, concurrently with the signing hereof, the sum of Seven
Thousand Four Hundred Ninety-Four Dollars and Sixty-Seven Cents ($7,494.67),
which shall be credited to the first month's rent under this Lease.
The Base Rent in each subsequent year of this Lease shall be as
follows:
Year Annual Rent Monthly Rent
---- ----------- ------------
2 $89,936.04 $ 7,494.67
3 $89,936.04 $ 7,494.67
4 $91,980.00 $ 7,665.00
5 $94,024.00 $ 7,835.33
2. Payment, Late Charge, Time of Essence:
Tenant shall pay the rent as herein provided without deduction
or set off whatsoever, and without any obligation on the Landlord to make demand
for it. To any installment of rent accruing hereunder and any other sum payable
hereunder, if not paid within five (5) days of when due, shall be added a late
charge of five (5%) percent of the amount overdue for each month the payment is
late. Time is of the essence in this Lease. Payments shall be made to Landlord
at the address set forth herein on the notice address.
3. Pass-Throughs:
A. Real Estate Taxes:
Commencing after the end of the tax/fiscal year in which the
Commencement Date falls (or the first year the "Building" is assessed as a
completed shell, whichever is later), Tenant shall pay to Landlord in each year
of the Term Tenant's proportionate share (the "Tenant's Proportionate Share") of
the amount, if any, by which the Real Estate Taxes (defined below) applicable to
the Property in each such year exceeds the Base Real Estate Taxes (defined
below). For these purposes, Tenant's Proportionate Share shall be 3.67%, which
is the percentage reached by dividing the number of rentable square feet of the
Premises by 111,316 which is the total number of rentable square feet in the
Building. The term "Real Estate Taxes" shall mean any and all real property
taxes, assessments, sewer rates, ad valorem charges, rents and charges, front
foot benefit charges, all other governmental impositions in the nature of any of
the foregoing, and all costs and expenses (including reasonable attorneys' fees
and costs of court or other proceedings) incurred in contesting any property tax
assessment or any other such governmental impositions with respect to the
Property. The "Base Real Estate Taxes" shall be the Real Estate Taxes imposed in
connection with the Property and applicable during the tax/fiscal year in which
the Commencement Date occurs. Tenant shall not be entitled to any credit or
rebate in the event Real Estate Taxes during any one year in the Term are lower
than the Base Real Estate Taxes. Notwithstanding anything herein to the
contrary, in calculating the Tenant's Proportionate Share for any year, Landlord
shall have the right to include in "Real Estate Taxes" all of the same taxes and
assessments that are imposed on other real property which is adjacent to the
Property or part of the same complex, provided that for such calculations the
denominator used in determining the Tenant's Proportionate Share shall also
include the rentable square footage of all buildings on such adjacent property.
B. Operating Expenses:
Commencing after the calendar year 2000, Tenant shall pay to
Landlord in each year of the Term Tenant's Proportionate Share of the amount by
which the Operating Expenses (defined below) for such year exceed the Base
Operating Expenses (defined below). For these Purposes, Tenant's Proportionate
share Shall be 3.67%, which is the percentage reached by dividing the number of
rentable square feet of the Premises by 111,316, which is the total number of
rentable square feet in the Building. " Operating Expenses" shall mean all
expenses, costs and disbursements of every kind and nature incurred in
connection with the ownership, management maintenance, repair and operation of
the Property, including but not limited to the following: (1) cost of wages and
salaries of all employees engaged in the operation and maintenance of the
Building and surrounding grounds and common area, including but not limited to
payroll taxes, insurance and benefits; (2) cost of all supplies and materials
used in the operation, maintenance and repair of the Building and all other
portions of the Property; (3) cost of all utilities (including surcharges),
including but not limited to water , sewer, electricity and gas for both the
rentable space and the common areas of the Building; (4) costs incurred under
all maintenance and service agreements for the Building, including but not
limited to access control, energy management services, window cleaning, elevator
maintenance, janitorial service and landscaping; (5) cost of insurance relating
to the Property, including but not limited to the cost of casualty and liability
insurance; (6) cost of repairs and general maintenance to the Building and the
Property; (7) property management fees and expenses including, without
limitation, computer expenses; (8) cost of audit and accounting services; (9)
the costs of any repairs, replacements or capital improvements required or made
necessary by law or changes in law; (10) cost of any capital improvements made
to the Building that, in Landlord's reasonable judgment, will reduce other
operating expenses or increase energy efficiency, provided such costs are
amortized in accordance with generally accepted accounting principles ("GAAP")"
at such rates as may have been paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements, or if no such funds were
borrowed, at such reasonable rates as are not in conflict with GAAP, (11) cost
of any licenses or permits required by any public authority, (12) snow removal
from the common areas of the Property, and (13) all costs, charges and expenses
incurred by Landlord in connection with any charge of any company providing
electric, telephone or gas services to the Building or the Property including,
without limitation, maintenance, repairs, installation and service costs
associated therewith. The "Base Operating Expenses" shall be the Operating
Expenses applicable during the calendar year in which the Commencement Date
occurs. Tenant shall not be entitled to any credit or rebate in the event
Operating Expenses in any one year during the Term are lower than the Base
Operating Expenses. Notwithstanding anything herein to the contrary, in
calculating the Tenant's Proportionate Share for any year, Landlord shall have
the right to include in "Operating Expenses" all of the same operating expenses
as are described above that are incurred in connection with other real property
which is adjacent to the Property or part of the same complex, provided that for
such calculations the denominator used in determining the Tenant'
C. When Due and Payable
(1) All rental and other monetary obligations of Tenant set
forth in the forgoing provisions and elsewhere in this Lease (whether or not
characterized as rent), except for Base Rent, shall be referred to hereinafter
as "Additional Rent". All Base Rent and Additional Rent are sometimes
hereinafter together referred to as "Rent".
(2) The Base Rent for each year (or part thereof) during the
Term shall be due and payable in twelve (12) consecutive, equal monthly
installments, in advance, on the first day of each calendar month during the
Term, provided that the installment of Rent for the first full calendar month of
the Term shall be due upon execution of this Lease. All payments shall be sent
to the notice address shown in this Lease, or to such other address as Landlord
may designate in writing.
(3) Tenant shall pay all Additional Rent within thirty (30)
days after being billed therefor by Landlord. However, Landlord may, at its
discretion, (a) make from time to time during the Term a reasonable estimate of
the Additional Rent which may become due for any year , (b) require the Tenant
to pay to the Landlord such Additional Rent in equal monthly installments at the
time and in the manner that the Tenant is required hereunder to pay monthly
installments of Base Rent, and (c) at the Landlord's reasonable discretion,
increase or decrease from time to time during such year the amount initially
estimated for such year, all by giving the Tenant written notice thereof. In
such event, Landlord shall cause the actual amount of such Additional Rent to be
calculated, and Tenant or Landlord shall within thirty (30) days pay to the
other the amount of any deficiency or overpayment, whichever the case may be.
(4) Landlord shall have the right to apply any payment of
Rent by Tenant to any amounts outstanding, in any order, in Landlord's sole
discretion. Acceptance by Landlord of any partial payment of Rent shall not be
deemed a waiver or satisfaction of the Tenant's obligation to pay al remaining
amounts of Rent hereunder, which amounts shall remain due in their entirety
according to the terms of this Lease.
D. Proration:
All items of Rent shall be prorated, based on actual days
elapsed, for any month during the Term which is not a full calendar month or in
which two different rental rates are applicable. Appropriate prorations shall
also be made in determining the Tenant's proportionate share of increases in
Real Estate Taxes to the extent the tax/fiscal year is not a calendar year. If
only part of any calendar year falls within the Term, the amount computed as
Additional Rent for such calendar year under the foregoing provisions of this
section shall be appropriately prorated, but the expiration of the Term before
the end of a calendar year shall not limit the Tenant's obligation hereunder to
pay the prorated portion of Additional Rent applicable to that portion of such
calendar year falling within the Term.
4. Care of Premises:
A. Ordinary Services:
During the hours of 8:00 AM to 6:00 PM Monday through Friday
and 8:00 AM to 1:00 PM on Saturdays (except federal holidays) in the appropriate
seasons of the year, Landlord shall provide heating and air-conditioning to the
Premises for the comfortable use and occupancy of the Premises. In addition,
Landlord shall provide (a) electricity, gas and water suitable for the use of
the Premises in accordance with the provisions of Section 6 herein, (b)
automatic elevator service within the Building and (c) janitorial service and
trash removal service (Monday-Friday only). All such services shall be included
in the Operating Expenses of the Building. B. Extraordinary Services: Landlord
shall not be obligated to provide to or for the benefit of the Premises any of
the services referred to in the provisions of Section 4.A above other than
during the hours referred to therein. If Tenant requests such services to be
continued during extended hours, Tenant shall pay to the Landlord as Additional
Rent the amount for time to time charged by Landlord for such extended service,
such amount to be calculated by Landlord based upon the costs incurred or to be
incurred by Landlord to provide such services during extended hours and the
number of tenants sharing such services at the time requested. C. Excessive Use.
Tenant shall not, without first obtaining Landlord's written consent thereto,
install within the Premises any electrical machinery, appliances or equipment
(including, by way of example rather than of limitation, any electrical heating,
cooking, water-heating or refrigeration equipment, kitchen equipment,
photocopying equipment, electronic data processing machinery, reproduction
equipment or punch-card machinery) which uses electrical current in excess of
that which is standard for the Building, and Tenant shall pay as Additional Rent
the additional expense incurred by the Landlord as a result of any of the
foregoing, including that resulting from any installation of such equipment. In
the event Landlord determines Tenant is consuming a disproportionate amount of
electricity or other utilities in proportion to other tenants, and regardless of
whether such determination is reached by surveys, submetering, or other methods,
Landlord may, at its option, either (a) install at Tenant's expense a submeter
gauging consumption of the respective utility at the Premises, in which case
Tenant shall arrange to pay the cost of such utility consumption directly to the
supplier, or (b) require that Tenant pay Landlord monthly, as Additional Rent,
the cost of such additional electricity or other utilities, which cost shall be
estimated on a monthly basis by the Landlord using its reasonable discretion.
Notwithstanding the above, Landlord agrees that 30+/- personal computers will
not be considered as excessive use. D. Maintenance by Tenant: Tenant shall at
all times maintain the interior of the Premises in good, clean, and safe repair
and condition, ordinary wear and tear, damage by fire and other casualty
excepted.
E. Maintenance by Landlord:
Landlord shall furnish, supply and maintain in good order
and repair (a) the roof and other structural portions of the exterior of the
Building, (b) all hallways, stairways, lobbies, elevators, heating and
air-conditioning facilities and restroom facilities within the Building, (c) all
standard interior light fixtures and bulbs, including that within the Premises,
and (d) all other common areas of the Property.
F. Interruption:
Landlord shall have no liability to Tenant on account of any
failure, modification or interruption of electricity, water or other utility or
HVAC or other service, but, in the event of interruption, Landlord shall take
reasonable steps to provide for the resumption of such service to the extent the
same is within Landlord's control. There shall be no allowance to Tenant for any
diminution of rental value of the Premises; and
Landlord shall be under no liability to Tenant for any
discontinuance of heat, air conditioning, and hot water unless directly due to
Landlord's negligence and not covered by insurance carried or otherwise required
to be carried by Tenant under this Lease. Landlord shall not be liable for any
loss or damage to the Tenant caused by rain, snow, water or storms that may leak
into or flow from any part of the premises through any defects in the roof or
plumbing or from any other source unless directly due to Landlord's negligence
and not covered by insurance carried or otherwise required to be carried by
Tenant under this Lease.
There shall be no allowance to Tenant for any diminution of
rental value and no liability on the part of the Landlord by reason of
inconvenience, annoyance or injury to business arising from the making by
Landlord, Tenant or others of any repairs in or to the Building or the Premises,
or in or to the fixtures, appurtenances or equipment thereof.
5. Utilities:
Landlord shall, at its own cost and expense, pay all charges
when due for water gas, electricity, heat, sewer rentals or charges and any
other utility charges incurred in the use of the Premises. At Landlords' option,
Landlord may, at Landlord's cost and expense, install separate water sub-meters
and HVAC after hours monitoring meters for each Tenant. Landlord shall have the
right at anytime and from time to time during the Term to contract for electric,
gas and telephone service from any company providing said services.
6. Use and Occupancy:
The Premises shall be used by Tenant only for the purpose of
general corporate offices and for no other purpose without Landlord's prior
written consent. Tenant shall comply with all applicable laws and other legal or
governmental requirements in connection with its use and occupancy of the
Premises; and Tenant shall not use the Premises for any unlawful purpose; nor
shall Tenant conduct or permit to be conducted on the Premises any activity in
violation of any law of the City and/or County in which the Premises are located
or State or Federal law, ordinance or regulation.
7. Permitted Name:
Tenant shall conduct business on the Premises only in the
name of Tenant and under no other name or trade name unless and until the use of
some other name is first approved in writing by Landlord, which approval shall
not be unreasonably withheld or delayed. No change in name shall constitute an
assignment of the obligations of Tenant hereunder.
8. Access by Landlord:
Landlord shall retain duplicate keys to all of the doors of
the Premises, and Landlord or its agents shall have access to the Premises at
all reasonable hours in order to inspect same, to clean or to make necessary
repairs, additions or changes to the services in the Building or tenant
improvements within the Premises or the Building with reasonable prior notice to
Tenant unless a bona fide emergency situation exists, at which time no prior
notice is required. Landlord shall have the right to show the Premises to
prospective tenants at any time during the final six (6) months of the Term or
any extension or renewal thereof, providing it provides Tenant with reasonable
prior notice and it does not unduly interfere with Tenant's use of the Premises.
9. Subordination:
This Lease shall be subject to and subordinate at all times
to the lien of any mortgage and/or deed of trust now or hereafter entered into
by Landlord and affecting the Property and to all advances made or hereafter to
be made thereunder; and to any extensions, modifications, or amendments thereof.
This subordination provision shall be self-operative and no further instrument
of subordination shall be required. If the secured party under any such mortgage
or deed of trust or any other person shall succeed to all or part of Landlord's
interest in the Premises, whether by purchase, foreclosure, deed in lieu of
foreclosure, power of sale, termination of lease, or otherwise, Tenant shall,
upon request, attorn to such successor-in-interest upon not less than five (5)
days' prior notice. Tenant shall execute any instruments, in form of substance
acceptable to such secured party or purchaser of the Property, confirming the
subordination of this Lease and the attornment obligation of Tenant hereunder.
Landlord will provide Tenant with a Subordination, Attornment and
Non-Disturbance Agreement on the form attached hereto as Exhibit C.
10. Assignment or Subletting:
Tenant shall not assign, mortgage or encumber this Lease,
nor sublet the Premises or any part thereof without Landlord's prior written
consent which consent shall not be unreasonably withheld. Any consent by
Landlord to any assignment or sublet shall not be deemed as a waiver of
Landlord's right to consent to any future assignment or sublet. In the event of
the insolvency or bankruptcy of Tenant, this Lease shall, at the option of
Landlord, terminate forthwith, and this Lease shall not, by operation of law or
otherwise, be considered a part of Tenant's estate.
11. Alterations:
Tenant shall not make or permit any alterations, additions
or improvements to the Premises without the prior written consent of the
Landlord, which consent shall not be unreasonably withheld, and all additions
and improvements made by Tenant, except only moveable office furniture and
equipment, shall become the property of the Landlord at the termination of this
Lease or the vacating of Premises. Landlord, in its sole discretion, can
prohibit Tenant or its agent from making any penetrations of the floor or
ceiling concrete slabs. At Landlord's request, at the end of the Term or renewal
term if applicable, Tenant shall restore any changes in the Premises which are
inconsistent with the standard features of the Building or which were otherwise
made without the written consent of Landlord.
12. Increased Fire Insurance Rate:
Tenant shall not do, permit to be done or keep or permit to
be kept anything in, upon or about the Premises which will contravene Landlord's
policies insuring against loss or damage by fire or other hazards, including but
not limited to public liability or which will prevent Landlord from procuring
such policies in companies acceptable to Landlord. If anything is done, omitted
to be done or allowed to be done by Tenant or kept or allowed by Tenant to be
kept in, upon or about the Premises that shall cause the rate of fire or other
insurance on the Premises or other property of Landlord in companies acceptable
to Landlord to be increased beyond the minimum rate from time to time applicable
to the Premises for use for the purposes permitted under this Lease, Tenant
shall pay the amount of such increase promptly upon Landlord's demand as
Additional Rent. Landlord represents that the use as set forth in Section 6
hereof does not violate Landlord's insurance policy.
13. Common Facilities:
Landlord hereby grants to the Tenant a non-exclusive license
to use (a) all elevators, stairways, lobbies, hallways and other common areas of
the Building, and (b) all portions of the grounds on which the Building is
located which are manifestly designed and intended for common use by the
occupants of the Building, all for pedestrian ingress and egress to and from
the, Premises. Such license shall be exercised in common with the Landlord and
other tenants and their respective employees and invitees and in accordance with
the Rules and Regulations promulgated from time to time pursuant to the
provisions of Section 19 herein. The common areas and facilities which may be
furnished by Landlord in or near the Building for any or all of the common
general common use of tenants, their officers, agents, employees and customers,
including, without limitation, all parking areas, access roads, employee parking
areas, driveways, loading docks and areas, delivery passages, sidewalks, malls,
courts and ramps, landscaped and planted area, retaining walls, stairways, bus
stops, lighting facilities, comfort stations, elevators and other areas and
improvements, shall at all times be subject to the exclusive control and
management of Landlord. Landlord reserves the right, in its sole discretion, to
change, rearrange, alter, modify, reduce or supplement any or all of the common
areas or facilities and to make alterations or additions to and to build
additional levels on or to the Building so long as Tenant's reasonable access to
and use of the Premises is not materially adversely affected.
14. Signs:
Tenant shall not display any sign, picture, advertisement,
awning, merchandise, or notice on the outside or roof of the Building or on the
exterior of the Premises unless approved by the Landlord in writing. Tenant
shall be entitled to an identification sign at the entrance to the Premises and
on the lobby directories which sign shall be in conformity, as to size, style
and location, with the standard signage scheme established by Landlord for the
Building. Tenant shall, within a reasonable time, submit to Landlord for
Landlord's approval, the requested words for said sign. Tenant shall have no
right to change the style or size of the sign or lettering thereon, if same
conform with the standard scheme for the Building, but Tenant may change or
correct the spelling of the names to be displayed thereon. Tenant's log may go
on door plaque outside suite in accordance with building standard signage
regulations.
15. Display:
Tenant shall not display any merchandise, place vending
machines or show cases or other obstructions on the outside of the Building, or
the Premises, or in any lobby or passageway adjoining the same.
16. Damage to Premises:
If the Premises are partially damaged by fire or other
casualty, Landlord shall make repairs as promptly as commercially feasible. If
the damage renders the Premises wholly unfit for occupancy, the Rent shall abate
until the Premises are repaired by Landlord or Landlord elects to terminate this
Lease. In the event of total or substantial destruction of the Building, or if
in the judgment of the Landlord the damage to the Demised Premises cannot be
repaired within one hundred twenty (120) days, after the date of the Damage or
the proceeds of insurance are not sufficient or are not made available to
Landlord by its mortgagee to repair the Premises to their former condition, and
if Landlord shall decide not to restore or repair the same, or shall decide to
demolish the Building, then Landlord or Tenant may, within sixty (60) days after
such fire or other casualty, by notification to the other party, terminate this
Lease. In the event the Premises are only partially damaged and fit for
occupancy, Tenant shall continue to pay Rent, which Rent shall be adjusted
proportionately based upon the area of the Premises which can continue to be
occupied and used by Tenant. In no event shall Landlord be liable for any loss
or damage sustained by Tenant by reason of fire or other accidental casualty.
17. Waiver or Breach:
No waiver of any breach of the covenants, provisions or
conditions contained in this Lease shall be construed as a waiver of the
covenant itself or any subsequent breach itself. If any breach shall occur and
afterwards be compromised, settled or adjusted, this Lease shall continue in
full force and effect as if no breach had occurred.
18. Rules and Regulations:
Tenant shall comply with all rules and regulations ("Rules
of Regulations") of the Building which Rules and Regulations are attached hereto
as Exhibit "C" and are hereby made a part of this Lease. Any material violation
of the Rules and Regulations shall be a default under this Lease subject to
Section 26 hereof. Landlord shall have the right to make additions and
amendments to the Rules and Regulations, which shall be as binding on Tenant as
if set forth herein, provided such additions and amendments do not materially
and adversely affect the Tenant's use of the Premises, are not inconsistent with
the terms of this Lease, Tenant receives written notification of such changes,
and the Rules and Regulations are uniformly applied to all tenants of the
Building.
19. Insurance:
(a) Tenant shall procure and maintain in force public
liability and property damage insurance (including insurance against assumed or
contractual liability under this Lease) in a company or companies acceptable to
Landlord for the Premises and the business of Tenant conducted at the Premises
which policies shall be written to protect the Tenant and Landlord in the amount
of One Million Dollars ($1,000,000) combined single limit per occurrence with at
least an aggregate of Two Million Dollars ($2,000,000) excess coverage and with
coverage in the amount of not less than Fifty Thousand Dollars ($50,000)
property damage or destruction. Tenant shall also procure and maintain in force
all risk property damage insurance with respect to any property of Tenant
installed in or kept upon the Premises. Tenant shall furnish to Landlord
certificates of the issuance and maintenance of such policies of insurance, all
of which shall name Landlord as on additional insured and shall be paid for by
the Tenant.
(b) Landlord and Tenant shall cause the insurance policy
carried by each such party insuring the Premises and/or its fixtures and
contents against loss by fire or other casualties to be written in a manner so
as to provide that the insurance company waives all right of recovery by way of
subrogation against Landlord or Tenant in connection with any loss or damage
covered by any such policies. Neither Landlord nor Tenant shall be liable to the
other or to any insurance company (by way of subrogation or otherwise) for loss
or damage caused by fire or any other risk included in the coverage of the
standard all risk fire and extended available coverage insurance in Maryland
(provided that such insurance was obtainable with waiver of subrogation in
advance of loss at the time of such loss or damage), notwithstanding that such
loss or damage is caused by or occurs through or as result of any acts or
omissions (negligent or otherwise) of a party hereto, or its agents, servants or
employees or any other cause which would result in liability under this Lease or
by operation of law. If the release of either Landlord or Tenant, as set forth
in the second sentence of this Paragraph, shall contravene any law with respect
to exculpatory agreements, the liability of the party in question shall be
deemed secondary to the liability of the other party's insurer.
20. Indemnity:
Tenant shall defend, indemnify and save harmless Landlord from
and against any and all claims, actions, damages, losses, liabilities, costs and
expenses (including reasonable attorneys' fees) in connection with loss of life,
personal injury and/or damage to property (including environmental and hazardous
waste damages) arising from or out of any occurrence in, upon or at the
Premises, the Building and/or the Property or the occupancy or use by Tenant of
the Premises, the Building and/or the Property or any part hereof, or occasioned
wholly or in part, by any act or omission or negligence of Tenant, its agents,
contractors, employees, servants, lessees or invitees or the failure of Tenant,
its agents, contractors, employees, or servants to perform or observe any
provision of this Lease. In case Landlord shall, without fault on its part, be
made a party to any litigation commenced by or against Tenant, then Tenant shall
protect and hold Landlord harmless and shall pay all costs, expenses and
reasonable attorneys' fees incurred by Landlord in connection with such
litigation.
Landlord shall defend, indemnify and save harmless Tenant from
and against any and all claims, actions, damages, losses, liabilities, costs and
expenses (including reasonable attorneys' fees and cost of litigation) in
connection with loss of life, personal injury and/or damage to property
(including environmental and hazardous waste damages) part hereof, or occasioned
wholly in part, by any act or omission of Landlord, its agents, contractors, or
employees or servants. In case Tenant shall, without fault on its part, be made
a party to any litigation commenced by or against Landlord, then Landlord shall
protect and hold Tenant harmless and shall pay all costs, expenses and
reasonable attorneys' fees incurred by Tenant in connection with such
litigation.
21. Condemnation:
In the event the whole or any part of the Premises shall be
taken under the power of eminent domain, or sold under threat thereof, or taken
in any manner for public use, the Landlord, at its option, may terminate this
Lease, which Lease shall then terminate on the effective date of the
condemnation or sale. The compensation awarded or paid for such taking, both as
to Landlord's reversionary interest and Tenant's interest under this Lease, is
hereby assigned by Tenant to Landlord and shall belong to and be the sole
property of Landlord. Tenant shall have no claim against the Landlord or be
entitled to any award or damages other than an abatement of the Rent beyond the
period of termination date of this Lease and any compensation paid by the
condemning authority directly to Tenant for moving expenses and/or cost of
removal of stock and/or trade fixtures, if allowable by the condemning
authority.
<PAGE>
22. Additional Rent and Attorney's Fees:
Whenever, under the terms of this Lease, any sum of money is
required to be paid by Tenant in addition to the Rent herein reserved, whether
or not such sum is herein designated as "Additional Rent", or provision is made
for the collection of such sum as "Additional Rent", said sum shall,
nevertheless, at Landlord's option, if not paid when due, be deemed Additional
Rent, and shall be collectable as such. In the event of employment of an
attorney by Landlord because of the default or failure to perform by Tenant of
any term or provision of this Lease, Tenant shall pay Landlord upon demand all
reasonable attorney's fees incurred by Landlord in connection therewith.
23. Covenant to Surrender:
This Lease and the tenancy hereby created shall cease and
terminate at the end of the original Term hereof, without the necessity of any
notice of termination from either Landlord or Tenant, and Tenant hereby waives
any notice of termination or to surrender the Premises and Tenant agrees that
Landlord shall be entitled to the benefit of all laws respecting summary
recovery of possession of premises from a tenant holding over to the same extent
as if statutory notice was given, provided, however, that this Lease and the
tenancy hereby created shall not so cease and terminate at the end of the
original Term if Tenant shall have been granted an option or options to renew
and shall have exercised said option or options in accordance with the terms
thereof and shall be entitled to remain in possession under said option and/or
options. In said event, this Lease and the tenancy hereby created shall cease
and terminate at the end of the last option period exercised under the terms of
this Lease without the necessity of any notice of termination or to surrender
from either Landlord or Tenant, and Tenant hereby waives notice of termination
and to surrender and agrees that Landlord shall be entitled to the benefit of
all laws respecting summary recovery of possession of premises from the tenant
holding over to the same extent as if statutory notice were given. If Tenant
shall occupy the Premises after such expiration or termination, Tenant shall, at
the sole option of Landlord, hold the Premises as a tenant from month to month,
subject to all the other terms and conditions of this Lease, at an amount equal
to one and one half (1 1/2)times the highest monthly Base Rent reserved in this
Lease.
24. Quite Enjoyment:
Landlord covenants that, upon the payment of the Rent herein
provided, and the performance by Tenant of all covenants herein, Tenant shall
have and hold the Premises, free from any interference from the Landlord,
subject to the terms and conditions hereof and except as otherwise provided for
herein.
25. Tenant Default:
(a) Upon any default by Tenant in payment of Rent to
Landlord as provided in this Lease and such default continues for more than five
(5) days after written notice thereof is provided to Tenant, or if the Premises
shall be abandoned, Landlord shall have the right to enter the Premises and
distrain for any amount of Rent that may be due under this Lease, either by
force or otherwise, without being liable to any prosecution therefor, and to
apply any proceeds to the payment of the Rent due or to be due, Tenant remaining
liable for any deficiency.
(b) Upon any default by Tenant of any provision or covenant
of this Lease other than the payment of Rent, the Landlord shall have the right,
after not less than thirty (30) days prior written notice to the Tenant, to cure
such default on behalf of Tenant, at the risk and expense of Tenant, and to
render a bill for the cost thereof to Tenant, which shall be payable as Rent.
Upon failure of the Tenant to pay such bill within ten (10) days after sending
such bill to Tenant at the Premises, Landlord shall have the same rights and
remedies against Tenant (and the Premises) as it has in the event of nonpayment
of Rent.
(c) After (i) the default by Tenant in the payment of Rent
and the applicable notice to Tenant provided for herein, or (ii) the default by
Tenant of any of the other covenants or provisions on the part of Tenant to be
performed this Lease and the applicable notice to Tenant provided for herein,
then Landlord shall have the right, with or without terminating this Lease, to
re-enter and take possession of the Premises without formal notice if the
default has not been corrected within said applicable time period (provided that
if Tenant has commenced to cure any defaults (other than the failure to pay
Rent) within said applicable time period and thereafter proceeds, with due
diligence to complete same, it shall not constitute a default), and it is
further agreed that, notwithstanding such reentry, Tenant shall remain liable
for all Rent and other damages and losses as of the date of re -entry, and shall
further be liable, at the option of the Landlord, for the amount of Rent
reserved under the Lease for the balance of the term, less any amount of rent
received by the Landlord during such period from others to whom the Premises may
be rented on such terms and conditions and at such rentals as Landlord, in its
sole discretion, shall deem proper, all of which shall be at the risk and
expense of the Tenant. In addition, Landlord, at its option, shall have the
right to repossess the Premises and terminate this Lease.
(d) In the event Landlord terminates this Lease, the
Landlord may, without further notice, re-enter the Leased Premises and
dispossess Tenant, or other occupants of the Premises, and remove their effects
and hold the Premises as if this Lease has not been made. Landlord shall also be
entitled to the benefit of all provisions of law respecting the summary eviction
of tenants in default or tenants holding over, or respecting proceeding in
forcible entry and detainer in the County in which the Premises are located, or
that may hereafter be enacted.
(e) Any remedy of Landlord stated in this Lease shall be in
addition to any and all other remedies which Landlord may be entitled by statute
or at Law or in equity. The exercise of any one or more of said rights or
remedies by Landlord shall not be construed as a waiver of any other rights or
remedies, it being understood that all of said rights and remedies shall be
cumulative and may be exercised simultaneously.
(f) Upon a default by Tenant under this Lease which is not
cured within the applicable time period after notice to Tenant of such default,
Tenant hereby waives all statutory, legal and/or equitable rights to redeem the
Premises or to redeem its interest under this Lease.
26. Notice:
All notices from Tenant to Landlord shall be sent by
Registered or Certified Mail, Return Receipt Requested, Hand Delivery or
nationally recognized overnight delivery service and addressed to Landlord at
P.O. Box 548, l00 Painters Mill Road, Suite 900, Owings Mills, Maryland 21117.
After the Commencement Date, all notices from Landlord to Tenant shall be sent
by Registered or Certified Mail, Return Receipt Requested, Hand Delivery, or by
nationally recognized overnight Delivery Service and addressed to Tenant at the
Premises. Either party may from time to time, designate, in writing and in the
manner herein provided, a substitute address, and thereafter all notices shall
be sent to such substitute address.
27. INTENTIONALLY DELETED
28. Representations:
Landlord or Landlord's agents have made no representations or
promises with respect to the Building or Premises except as herein expressly set
forth.
29. Trial by Jury:
Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other on any matters whatsoever arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises, any claim of injury or damage, and/or any remedy. Tenant shall not
interpose any counterclaim in any action or proceeding by Landlord against
Tenant arising out of or in connection with this Lease.
30. Parking:
During the Term of this Lease, employees and customers of
Tenant will be entitled to the non-exclusive use, free of charge but in common
with others, of the driveways, footways, and parking areas provided that such
use shall be subject to such Rules and Regulations as Landlord may, from time to
time, prescribe governing the same; and provided, further, that Landlord shall
at all times have full and exclusive control, management and direction of said
driveways, footways and parking areas. Landlord shall have the right to police
the same; to restrict parking by Tenant, their agents and employees; to
designate employee parking areas; to establish and enforce parking charges (by
meters or otherwise) with appropriate provisions for free parking ticket
validation by tenants; to close temporarily all or any portion of the parking
areas or facilities as may be required for proper maintenance and/or repairs; to
discourage non-customer parking; and to do and perform such other acts in and to
such areas in the use of its business judgment, the Landlord shall determine to
be advisable in order to improve or make more convenient use thereof by Tenant,
its officers, agents, employees and customers. Landlord may, from time to time,
change the location, layout and arrangement of the parking areas, driveways and
footways and reduce the same by erecting therein store buildings and other
structure or improvements of any kind.
31. Gender:
Reference to masculine, feminine or neuter shall include
proper gender as the case may be. If more than one Tenant is named herein, the
obligations of the person so named shall be joint and several.
32. Construction of Premises:
To the extent reasonably feasible, Landlord shall make
available to Tenant the benefits of all warranties and guarantees obtained from
contractors, subcontractors, suppliers and manufacturers in connection with the
work performed by Landlord to the Premises and described on Exhibit "B" hereto.
33. Access by Tenant:
Prior to the Commencement Date and provided all insurance
required under Paragraph 20 has been furnished to Landlord, Landlord shall allow
the Tenant and their agents or employees to enter upon the Premises for the
purpose of erecting fixtures and improvements not provided by the Landlord.
Tenant and its agents or employees shall perform their work at such times and in
a manner which will not interfere with the work being performed by Landlord. All
work performed by Tenant or on its behalf shall be done in a good and
workmanlike manner. The entry upon the Premises by Tenant or its agents or
employees pursuant to this Paragraph shall not be deemed to be occupancy of the
Premises for the purpose of Paragraph 1 hereof.
34. Estoppel Certificates:
Tenant agrees that at any time, and from time to time, upon
not less than five (5) days prior notice by Landlord, it will execute,
acknowledge, and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified, and
stating the modifications) and the dates to which the rent and other charges
have been paid in advance, if any, and stating whether or not, to the best
knowledge of the signer of such certificate, Landlord is in default in the
performance of any covenant, agreement or condition contained in this Lease and,
if so, specifying each such default of which the signer may have knowledge, it
being intended that any such statement delivered hereunder may be relied upon by
any third party not a party to this Lease.
35. Landlord's Liability:
Landlord is a Maryland limited liability company, and Tenant
agrees that in the event of the entry of any judgment against Landlord, as it is
now or may hereafter be constituted, arising out of or in connection with this
Lease, neither Landlord, nor any member, principal, officer, or employee of
Landlord, shall have any personal liability whatsoever therefor and Tenant shall
look solely to Landlord's interest in the Property to satisfy or pay such
judgment and Tenant shall have no right to recover against any member,
principal, officer or employee of Landlord or against any of Landlord's other
assets.
36. Relocation: INTENTIONALLY DELETED
37. Possession:
The parties hereto anticipate that the Premises will be
ready for occupancy on or about the first day of October, 1999. In the event the
Premises are not ready for occupancy on the date stipulated, the Lease shall
nevertheless continue in full force and effect and Tenant shall have no right to
rescind, cancel or terminate the same, nor shall the Landlord be liable for
damages, if any, sustained by Tenant's inability to obtain possession on such
date, except that the Commencement Date shall be moved forward to the date on
which possession is made available.
38. Landlord's Work
Landlord agrees, at its cost and expense, to do the following
work within the Premises prior to the Commencement Date:
1. Build-out the Premises in accordance with the plans and
workletter attached hereto as Exhibit B.
39. Environmental, Covenants:
A. Prohibitions:
Tenant, its employees, licensees, invitees, agents and
contractors shall not use, manufacture, release, store or dispose of on, under
or about the Premises any explosives, flammable substances, radioactive
materials, asbestos in any form, paint containing lead, materials containing
urea formaldehyde, polychlorinated biphenyls, or any other hazardous, toxic or
dangerous substances, wastes or materials, whether having such characteristics
in fact or defined as such under federal, state or local laws or regulations and
any amendments thereto (all such materials and substances being hereinafter
referred to as "Hazardous Materials") provided that Tenant may store products
which are of a type customarily found in offices (such as toner for copiers and
the like) in a careful, safe and lawful manner and without contaminating the
Premises, the Building, the Property or the environment.
B. Inspection:
Landlord, in addition to its other rights under this Lease,
may enter upon the Premises at any time for the purposes of inspecting to
determine whether the Premises, the Building, the Property or the environment
have become contaminated with Hazardous Materials. In the event Landlord
discovers the existence of any such Hazardous Materials due to fault or other
act of Tenant or its agents, employees, invitees or licensees, Tenant shall
reimburse Landlord upon demand for the costs of such inspection, sampling and
analysis.
C. Indemnification:
Without limiting the above, Tenant shall indemnify and hold
harmless Landlord from and against any and all claims, losses, liabilities,
damages, costs and expenses, including without limitation attorneys' fees and
the coats of any required or necessary repair, cleanup or detoxification,
arising out of or in any way connected with the existence, use, manufacture,
storage or disposal of Hazardous Materials by Tenant or its employees, agent,
invitees, licensees or contractors on, under or about the Premises, the Building
or the Property. The indemnity obligations of Tenant under this clause shall
survive any termination of this Lease.
40. Broker Commissions:
Each party hereto hereby represents and warrants to the
other that in connection with the leasing of the Premises hereunder, the party
so representing and warranting has not dealt with any real estate broker, agent
or finder, except for W.C. Pinkard & Co., Inc. d/b/a Colliers Pinkard (the
"Broker"). Each party hereto shall indemnify the other against any inaccuracy in
such party's representation. Landlord hereby agrees that it shall pay a
commission to the Broker according to a separate agreement. The parties
acknowledge and agree that the broker shall be a third party beneficiary of the
foregoing covenants.
41. Option to Renew:
If Tenant shall not be in default in the payment of Rent or in
material default in the performance of any of the other covenants, conditions
and agreements of this Lease, Tenant shall have the right, at its election, to
renew this Lease for a further term of five (5) years by signifying its
intention to renew, in writing, to the Landlord no later than six (6) months
preceding the termination date of the original Term of this Lease, time being of
the essence. This renewal term shall be upon the same terms, covenants and
conditions as are set forth herein for the original term, except that the annual
Base Rent (as set forth in Paragraph 1 of this Lease) for the renewal term shall
be as follows:
Lease Year Base Rent Monthly Rent
---------- --------- ------------
6 $ 96,068.04 $ 8,005.62
7 $ 98,112.00 $ 8,176.00
8 $100,155.96 $ 8,346.33
9 $102,200.04 $ 8,516.67
10 $104,244.00 $ 8,687.00
42. Right of First Offer for Expansion:
Tenant shall have a right of first offer to lease the
adjacent space located on the fourth (4th) floor of the Building and also shown
on Exhibit A hereto (the "Expansion Space"), subject to the following terms:
A. Landlord shall notify Tenant with a written notice at the
time all of such Expansion Space becomes available for lease. Such notice shall
include (1) the Base Rent to apply to the Expansion Space, which Base Rent shall
be at a per square foot rate which is equal to the greater of the market rate in
effect for comparable space in the area of the Premises at the time or the rate
of Base Rent which is then in effect under the Lease, (2) the date on which the
Tenant may occupy such space, and (3) any other material terms upon which the
Landlord is offering such space to the Tenant. In order to exercise this right
of first offer, Tenant must give Landlord written notice of the exercise and
acceptance of such terms in Landlord's notice within three (3) days after
receiving the notice. The foregoing right of first offer shall not apply if a
part, but not all, of the Expansion Space becomes available.
B. If Tenant timely accepts the Landlord's offer in
accordance with A above, then Tenant's leasing of the Expansion Space shall be
subject to and upon all other terms of this Lease for the remainder of the Term,
except that Tenant's Proportionate Share of increases in Real Estate Taxes and
Operating Expenses shall be increased proportionately to reflect the addition of
the Expansion Space to the Premises.
C. Tenant shall lease the Expansion Space under the Lease
(as so amended) as-is without warranty of condition for the period from the
effective date of availability of such space set forth in Landlord's notice
through the expiration of the Term of the Lease.
D. If Tenant fails to give notice accepting the Landlord's
offer by the time required above, or if at the time Tenant accepts such offer or
at the time Tenant's lease of the Expansion Space becomes effective Tenant is in
default of any term of this Lease, or if this Lease is assigned by Tenant or the
Premises are sublet in whole or in part, then Tenant's right of first offer
provided in this section shall be automatically terminated and of no further
force or effect, and Landlord shall have the right to lease the Expansion Space
to any parties and upon any terms it deems acceptable.
43. Miscellaneous:
A. This Lease and the covenants, terms and conditions
contained herein shall inure to the benefit of and be binding on Landlord,
provided that if Landlord sells or otherwise transfers title to building or Real
Property, Landlord shall be relieved of all covenants and obligations hereunder
upon completion of such sale or transfer, and it shall be considered that the
transferee has assumed and agreed to carry out all of the obligations of the
Landlord hereunder. This Lease and the covenants, terms and conditions contained
herein shall be binding on and inure to the benefit of the Tenant, its personal
representatives, successors, and, except as otherwise provided in this Lease,
its assigns.
B. If any provision of this Lease, or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease or the application of such provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each such remaining provision
shall be valid and enforceable to the fullest extent permitted by law.
C. This Lease shall be enforced, governed by and construed
in all respects in accordance with the laws of the State of Maryland, without
regard to principles of conflicts of laws. This Lease shall become effective on
and only on its execution and delivery by each party hereto.
D. Upon request from Landlord no more than once in a lease
year, Tenant shall furnish to Landlord Tenant's most recent annual financial
statement containing a balance sheet, profit and loss statement, and statement
of charges in condition, prepared and certified by an independent certified
public accountant or by Tenant's chief financial officer.
E. Submission of this Lease for examination does not
constitute a reservation of or option for the Premises; and this Lease shall
become effective only upon its execution and delivery by both Landlord and
Tenant.
F. Tenant represents and warrants that it is a duly
organized, it is qualified to do business in Maryland, it is in good standing
under the laws of the state of its organization and the laws of Maryland, it has
the power and authority to enter into this Lease, and that all action requisite
to authorize Tenant to enter into this Lease has been duly taken.
G. This Lease, together with its exhibits, contains all
agreements of Landlord and Tenant and supersedes any previous negotiations.
There have been no representations made by the Landlord or understandings made
between the parties other than those set forth in this Lease and its exhibits.
This Lease may not be modified except by a written instrument duly executed by
Landlord and Tenant.
H. Time is of the essence with respect to the provisions of
this Lease.
IN WITNESS WHEREOF, the parties hereto, by the properly authorized
persons have duly executed this Lease under seal the day and year first above
written.
WITNESS: 100 PAINTERS MILL, LLC
____________________________ BY: /s/ Arthur H. Adler (SEAL)
------------------------------------
Arthur H. Adler
WITNESS: SALES ON LINE DIRECT, INC.
____________________________ BY: /s/ Marc Stengal (SEAL)
------------------------------------
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
THIS AGREEMENT, MADE THIS 31 day of December 1999 by and between 100
PAINTERS MILL, LLC and SALES ONLINE DIRECT, INC.;
WHEREAS, the parties hereto are parties to a certain Lease Agreement
dated July 26, 1999 for the premises described as 100 Painters Mill Road; suite
400; Owings Mills, MD 21117;
WHEREAS, the actual Commencement Date and Occupancy Date in said Lease
were not fixed therein or differs from as stated in said Lease; and
NOW, THEREFORE, for good and valuable consideration to each in hand
paid by the other, receipt whereof is hereby acknowledged, and for the promises
and covenants contained herein and in said Lease, the parties hereto do covenant
and agree as follows:
(1) The Occupancy date for the premises under said Lease Agreement is
November 1, 1999
(2) The Rent Commencement Date for the premises under said Lease
Agreement is January 1, 2000
(3) The Lease term for the premises under said Lease Agreement shall
run from January 1, 2000 to December 31, 2004
(4) The "Term" shall be amended to be five (5) years and two (2) months
beginning on the occupancy date
(5) Provided Tenant is not in default under the terms of this Lease,
Landlord shall abate base rent only for the first two (2) months
Other than as set forth hereunder, there is no other change in the
Lease and said Lease remains in full force and effect except as modified herein.
WITNESS: 100 PAINTERS MILL, LLC
/s/ Elena Roberts By: /s/ Arthur Adler
- ------------------------------ ---------------------------------------
Arthur Adler
WITNESS: SALES ONLINE DIRECT, INC.
/s/ By: /s/ Marc Stengel
- ------------------------------ ---------------------------------------
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made as of
March 23, 2000, by and between Sales Online Direct, Inc., a corporation
organized under the laws of the State of Delaware, U.S.A., with headquarters
located at 4 Brussels Street, Worcester, Massachusetts 01610 (the "Company") and
Augustine Fund, L.P., an Illinois limited partnership with its headquarters
located at 141 West Jackson Boulevard, Suite 2181, Chicago, Illinois 60604 (the
"Buyer").
RECITALS
A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act") and Section 4(2) under the 1933 Act;
B. The Buyer desires to purchase from the Company, and the Company
desires to sell to the Buyer, for the amounts and upon the terms and conditions
stated in this Agreement, in a closing (the "Closing") as herein described,
certain of the Company's convertible notes as listed and described in Recital
B(i) immediately below, and certain warrants as listed and described in Recital
B(ii) below.
(i) The Company's Series A Eight Percent (8%) Convertible Note, the form
of which is attached hereto as Exhibit A (the "Notes"), which may be
converted into common stock of the Company, $.001 par value per
share ("Common Stock"), upon the terms and conditions hereof and
upon the terms and conditions of the Notes. The purchase price for
the Notes sold pursuant to this Agreement shall be as stated in
Section 1(a) below. The total aggregate face amount of the Notes to
be issued and sold by the Company at the Closing is Three Million
and no/100 United States Dollars ($3,000,000.00), all in accordance
with the terms of this Agreement and of the Notes.
(ii) As additional consideration for Buyer's purchase of the Notes, a
warrant (the "Warrants") to purchase 300,000 shares of Common Stock
at a purchase price per share equal to one hundred twenty percent
(120%) of the lowest of the closing bid prices for the Common Stock
during the five (5) trading days prior to the Closing Date (defined
below), which Warrants must be exercised, if at all, on or before
March 31, 2005. The Warrants shall be substantially in the form
attached hereto as Exhibit B.
The Common Stock into which the Notes may (in accordance with their
terms) be convertible shall be collectively referred to herein as the
"Conversion Shares." Certain shares of Common Stock may (at the Company's option
as described in the Notes) be issued to the Buyer in payment of interest (the
"Interest Shares"). The Common Stock received upon exercise of the Warrants
shall be referred to as the "Warrant Shares." The Notes, the Conversion Shares,
<PAGE>
the Interest Shares (if any), the Warrants and the Warrant Shares may be
collectively referred to herein as the "Securities."
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
(the "Registration Rights Agreement") substantially in the form of Exhibit C
attached hereto pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties, the Company and the Buyer hereby
agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
a. Purchase. The Buyer hereby agrees to purchase from the Company, and
the Company agrees to sell to the Buyer, $3,000,000.00 in aggregate principal
amount of Notes at the Closing. The purchase price (the "Purchase Price") for
the Notes purchased at the Closing shall be $3,000,000.00.
b. The Closing. The date of the Closing (the "Closing Date") shall be
March 24, 2000. The Purchase Price for the Notes being purchased at the Closing
shall be delivered to the Escrow Agent (as defined in the Escrow Agreement
substantially in the form of Exhibit D attached hereto (the "Escrow Agreement"))
on behalf of the Company on or before the Closing Date. On or before the Closing
Date, the Company shall deliver the original Notes and Warrants (or a facsimile
of the signature pages thereof, with the originals to follow via express courier
within one (1) business day) being purchased at the Closing, duly issued,
authorized and executed by the authorized officers on behalf of the Company, to
the Escrow Agent (as defined in the Escrow Agreement) on behalf of the Buyer.
c. Form of Payment. The Buyer shall pay the Purchase Price for the
Securities purchased at the Closing by wire transfer of immediately available
funds in United States Dollars, to be deposited into the Escrow Account as
defined in the Escrow Agreement, against delivery to the Escrow Agent of duly
executed Notes and Warrants being purchased by the Buyer hereunder at such
Closing. The Escrow Agent shall be responsible for delivery of the Purchase
Price to the Company and the Notes and Warrants to the Buyer in accordance with
the terms of the Escrow Agreement and with the instructions of the said parties.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
The Buyer understands, agrees with, and represents and warrants to the
Company with respect to its purchase hereunder, that:
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a. Investment Purposes; Compliance With 1933 Act. The Buyer is
purchasing the Securities for its own account for investment only and not with a
view towards, or in connection with, the public sale or distribution thereof,
except pursuant to sales registered under or exempt from the 1933 Act and
applicable state securities laws. The Buyer is not purchasing the Securities for
the purpose of covering short sale positions in the Common Stock established on
or prior to the Closing Date. The Buyer agrees to offer, sell or otherwise
transfer the Securities only (i) in accordance with the terms of this Agreement,
the Notes and the Warrants, as applicable, and (ii) pursuant to registration
under the 1933 Act or to an exemption from registration under the 1933 Act and
any other applicable securities laws. The Buyer does not by its representations
contained in this Section 2(a) agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time pursuant to a registration statement or in accordance with an exemption
from registration under the 1933 Act, in all cases in accordance with applicable
state and federal securities laws. The Buyer understands that it shall be a
condition to the issuance of the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) that the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) be and are subject to the representations set forth in
this Section 2(a).
b. Accredited Investor Status. The Buyer is an "accredited investor" as
that term is defined in Rule 501 (a) of Regulation D. The Buyer has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of an investment made pursuant to this
Agreement. The Buyer is aware that it may be required to bear the economic risk
of an investment made pursuant to this Agreement for an indefinite period of
time, and is able to bear such risk for an indefinite period.
c. Reliance on Exemptions. The Buyer understands the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of the applicable United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties,
acknowledgments, understandings, agreements and covenants of the Buyer set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities that have
been requested by the Buyer. The Buyer and its advisors, if any, have been
afforded the opportunity to ask all such questions of the Company as they have
in their discretion deemed advisable. The Buyer understands that its investment
in the Securities involves a high degree of risk. The Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to the investment made pursuant to
this Agreement.
e. No Government Review. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
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approved or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. The Buyer understands that: (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the 1933 Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless either (a)
subsequently registered thereunder or (b) the Buyer shall have delivered to the
Company an opinion by counsel reasonably satisfactory to the Company, in form,
scope and substance reasonably satisfactory to the Company, to the effect that
the securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, (ii) any sale of
such securities made in reliance on Rule 144 as amended (or any applicable rule
which operates to replace said Rule), promulgated under the 1933 Act ("Rule
144") may be made only in accordance with the terms of Rule 144 and further, if
Rule 144 is not applicable, any resale of such securities under circumstances in
which the seller (or the person though whom the sale is made) may be deemed to
be an underwriter (as that term is defined in the 1933 Act) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder and applicable state securities laws, and
(iii) neither the Company nor any other person is under any obligation to
register such securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder (in each case,
other than pursuant to this Agreement or the Registration Rights Agreement).
g. Legend. The Buyer understands that the Notes, the Warrants, and
until such time as the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) (collectively, the "Registrable Securities"), have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Registrable Securities will
bear a restrictive legend (the "Legend") in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
The Legend shall be removed and the Company will issue certificates
without the Legend to the holder of the applicable Notes or any Registrable
Securities upon which the Legend is stamped, in accordance with Section 5(b).
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h. Authorization; Enforcement. This Agreement, the Registration Rights
Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered by the Buyer and are each and collectively valid and
binding agreements of the Buyer enforceable in accordance with their terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally.
i. No Brokers. The Buyer has taken no action that would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments relating to this Agreement and the transactions contemplated hereby,
other than with respect to its dealings with Delano Group Securities. The
Company and the Buyer both acknowledge that no other broker or finder was
involved with respect to the transactions contemplated hereby, other than Delano
Group Securities.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company understands, agrees with, and represents and warrants to
the Buyer that:
a. Organization and Qualification. The Company is a corporation duly
organized and existing, and by March 31, 2000, will be in good standing under
the laws of the jurisdiction in which it is incorporated, except as would not
have a Material Adverse Effect (as defined below), and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of the
business conducted by it makes such qualification necessary and where the
failure so to qualify would have a Material Adverse Effect. "Material Adverse
Effect" means any material adverse effect on the operations, properties or
financial condition of the Company taken as a whole. The Common Stock is
eligible to trade and is listed for trading on the OTC Bulletin Board Market.
The Company has received no notice, either written or oral, with respect to the
continued eligibility of the Common Stock for such listing, and the Company has
maintained all requirements for the continuation of such listing, and the
Company does not reasonably anticipate that the Common Stock will be delisted
from the OTC Bulletin Board Market in the foreseeable future. The Company has
complied or will timely comply with all requirements of the National Association
of Securities Dealers and the OTC Bulletin Board Market with respect to the
issuance of the Securities.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Escrow Agreement, to issue and sell the
Notes and the Registrable Securities in accordance with the terms hereof, and to
perform its obligations under the Notes in accordance with the requirements of
the same, (ii) the execution, delivery and performance of this Agreement, the
Notes, the Warrants, the Registration Rights Agreement and the Escrow Agreement
by the Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or its stockholders is required, (iii) this Agreement, the Registration Rights
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<PAGE>
Agreement, the Escrow Agreement and, on the Closing Date, the Notes and Warrants
sold at the Closing, have been duly and validly authorized, executed and
delivered by the Company, and (iv) this Agreement, the Notes (when issued), the
Warrants (when issued), the Registration Rights Agreement and the Escrow
Agreement constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting, generally, the enforcement of creditors' rights and remedies or by
other equitable principles of general application. The Company (and its legal
counsel) has examined this Agreement and is satisfied in its sole discretion
that this Agreement and the accompanying Exhibits, Schedules and the Addenda, if
any, are in accordance with Regulation D and the 1933 Act and are effective to
accomplish the purposes set forth herein and therein.
c. Capitalization. As of March 1, 2000, the authorized Common Stock
consisted of 100,000,000 shares of Common Stock of which 46,711,140 shares were
issued and outstanding. There are no shares of preferred stock authorized. All
of such outstanding shares have been validly issued and are fully paid and
nonassessable. No shares of Common Stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances. Except for the
above-referenced preferred stock and as disclosed in Schedule 3(c) (attached if
applicable), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its subsidiaries, (ii) there are no outstanding debt securities, and
(iii) there are no agreements or arrangements under which the Company or any of
its subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except as provided herein, in Schedule 3(g) or in
the Registration Rights Agreement). If requested by the Buyer, the Company has
furnished to the Buyer, and the Buyer acknowledges receipt of same by its
signature hereafter, true and correct copies of the Company's Articles of
Incorporation, as amended, as in effect on the date hereof ("Articles of
Incorporation"), and the Company's Bylaws, as in effect on the date hereof (the
"Bylaws").
d. Issuance of Securities. The Registrable Securities are all duly
authorized and reserved for issuance, and in all cases upon issuance shall be
validly issued, fully paid and non-assessable, free from all taxes, liens and
charges with respect to the issue thereof, and will not be subject to preemptive
rights or other similar rights of stockholders of the Company.
e. Acknowledgment Regarding Buyer's Purchase of the Securities. The
Company acknowledges and agrees that the Buyer is not acting as financial
advisor to or fiduciary of the Company (or in any similar capacity with respect
to this Agreement or the transactions contemplated hereby), that this Agreement
and the transactions contemplated hereby, and the relationship between the Buyer
and the Company, are and will be considered "arms-length" notwithstanding any
other or prior agreements or nexus between the Buyer and the Company, whether or
not disclosed, and that any statement made by the Buyer, or any of its
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<PAGE>
representatives or agents, in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation, is merely
incidental to the Buyer's purchase of the Securities and has not been relied
upon in any way by the Company, its officers or directors. The Company further
represents to the Buyer that the Company's decision to enter into this Agreement
and the transactions contemplated hereby have been based solely upon an
independent evaluation by the Company, its officers and directors.
f. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances which would prevent the parties hereto from
consummating the transactions contemplated hereby pursuant to an exemption from
registration under the 1933 Act and specifically in accordance with the
provisions of Regulation D. The transactions contemplated hereby are exempt from
the registration requirements of the 1933 Act, assuming the accuracy of the
representations and warranties contained herein of the Buyer.
g. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Articles of
Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Except as set forth in Schedule 3(g)
(attached if applicable), neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or other organizational documents,
and neither the Company nor any of its/subsidiaries is in default (and no event
has occurred which, with notice or lapse of time or both, would put the Company
or any of its subsidiaries in default) under, nor has there occurred any event
giving others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, except
for possible defaults or rights as would not, in the aggregate or individually,
have a Material Adverse Effect. The business of the Company and its subsidiaries
is not being conducted, and shall not be conducted so long as the Buyer owns any
of the Securities, in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations which neither singly or in
the aggregate would have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws (any of which exceptions are set forth in
Schedule 3(g)), the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement, the Notes, the Warrants, the Registration Rights Agreement
or the Escrow Agreement in accordance with the terms hereof and thereof, or to
perform its obligations with respect to the Notes exactly as described in the
Notes (once issued), and with respect to the Warrants exactly as described in
the Warrants (once issued).
h. SEC Documents; Financial Statements. Except as disclosed on
Schedule 3(h) hereof, since at least August 16, 1999, the Company has timely
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the SEC pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits)
incorporated by reference therein, being hereinafter referred to as the "SEC
Documents"). The Company has delivered to the Buyer as requested by the Buyer
true and complete copies of the SEC Documents, except for such exhibits,
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schedules and incorporated documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyer (including the information referred to in Section 2(d) of this
Agreement) contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.
Except as set forth in the financial statements of the Company included in the
SEC Documents, the Company has no liabilities, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business subsequent to
the date of such financial statements and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in such financial
statements, in each case of clause (i) and (ii) next above which, individually
or in the aggregate, are not material to the financial condition, business,
operations, properties, operating results or prospects of the Company. The SEC
Documents contain a complete and accurate list of all written and oral
contracts, agreements, leases or other instruments to which the Company or any
subsidiary is a party or by which the Company or any subsidiary is subject which
are required by the rules and regulations promulgated by the SEC to be so listed
(each a "Contract"). None of the Company, its subsidiaries or, to the best of
the Company's knowledge, any of the other parties thereto, is in breach or
violation of any Contract, which breach or violation would, or with the lapse of
time, the giving of notice, or both, have a Material Adverse Effect.
i. Absence of Certain Changes. Except as disclosed in the SEC
Documents, since at least March 1, 1999, there has been no material adverse
change and no material adverse development in the business, properties,
operation, financial condition, results of operations or prospects of the
Company. The Company has not taken any steps, and does not currently have any
reasonable expectation of taking any steps, to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge that its creditors intend
to initiate involuntary bankruptcy proceedings. The Company shall, at least
until Buyer no longer holds any of the Securities, maintain its corporate
existence in good standing and shall pay all taxes when due except for taxes it
reasonably disputes.
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j. Absence of Litigation. Except as set forth in Schedule 3(j)
(attached if applicable), there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, wherein
an unfavorable decision, ruling or finding would have a Material Adverse Effect
or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of the documents contemplated herein.
k. Foreign Corrupt Practices. Neither the Company nor any of its
subsidiaries, nor any officer, director or other person acting on behalf of the
Company or any subsidiary has, in the course of his actions for or on behalf of
the Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity, made any
direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made
any bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to any foreign or domestic government official or employee.
l. Brokers; No General Solicitation. The Company has taken no action
that would give rise to any claim by any person for brokerage commissions,
finder's fees or similar payments relating to this Agreement and the
transactions contemplated hereby, other than to Delano Group Securities. The
Company and the Buyer both acknowledge that no other broker or finder was
involved with respect to the transactions contemplated hereby, other than Delano
Group Securities. Neither the Company nor any distributor participating on the
Company's behalf in the transactions contemplated hereby nor any person acting
for the Company, or any such distributor, has conducted any "general
solicitation," as described in Rule 502(c) under Regulation D, with respect to
the Securities being offered hereby. The Company has agreed to compensate Delano
Group Securities in accordance with their separate written agreement; the Escrow
Agent shall pay to Delano Group Securities the agreed upon compensation out of
Escrow from the Purchase Price at the Closing.
m. Acknowledgment of Dilution. The number of Conversion Shares issuable
upon conversion of the Notes may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the securities being sold hereunder
and recognize they have a potential dilutive effect. The board of directors of
the Company has concluded in its good faith business judgment that such issuance
is in the best interests of the Company. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Notes is binding
upon it and enforceable regardless of the dilution that such issuance may have
on the ownership interests of other stockholders.
n. Eligibility to File Registration Statement. The Company is currently
eligible to file a registration statement with the SEC on Form SB-2 under the
1933 Act.
o. (Intentionally Omitted.)
p. Non-Disclosure of Non-Public Information. The Company shall in no
event disclose non-public information to the Buyer, advisors to or
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representatives of the Buyer unless prior to such disclosure of information the
Company marks such information as "non-public information - confidential" and
provides the Buyer, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review. The Company
may, as a condition to disclosing any non-public information hereunder, require
the Buyer, its advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Buyer.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Securities Laws. The Company agrees to timely file a Form D (or
equivalent form required by applicable state law) with respect to the Securities
if and as required under Regulation D and applicable state securities laws and
to provide a copy thereof to the Buyer promptly after such filing. The Company
shall, in a timely fashion, take such action as is necessary to sell the
Securities being sold to the Buyer under applicable securities laws of the
United States and the relevant state(s), and shall if specifically so requested
provide evidence of any such action so taken to the Buyer.
c. Reporting Status. So long as the Buyer beneficially owns any of the
Securities, the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations hereunder would permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale of
the Securities for general working capital purposes.
e. Financial Information. Until such time as the Buyer no longer
beneficially owns Notes, Warrants, Conversion Shares or Warrant Shares, the
Company agrees to send the following reports to the Buyer: (i) after filing with
the SEC, a copy of each of its Annual Reports, its quarterly Reports, and any
reports filed on Form 8-K; and (ii) as soon as practicable after release
thereof, copies of all press releases issued by the Company or any of its
subsidiaries.
f. Reservation of Shares. The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the issuance of all of the Conversion
Shares, the Warrant Shares and the Interest Shares (if any). Prior to complete
conversion of the Notes and exercise of the Warrants, the Company shall not
reduce the number of shares of Common Stock reserved for issuance hereunder
without the written consent of the Buyer except for a reduction proportionate to
a reverse stock split effected for a business purpose other than affecting the
requirements of this Section, which reverse stock split affects all shares of
Common Stock equally.
g. Listing. Upon the Closing, the Company shall promptly secure the
listing of the Common Stock underlying the Notes and the Warrants upon each
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national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of shares of Registrable Securities from time to time
issued under the terms of this Agreement and the Registration Rights Agreement.
The Company shall at all times comply in all respects with the Company's
reporting, filing and other obligations under the by-laws or rules of the
National Association of Securities Dealers and the OTC Bulletin Board Market (or
such other national securities exchange or market on which the Common Stock may
then be listed, as applicable).
h. Prospectus Delivery Requirement; Escrow of Common Stock. The Buyer
understands that the 1933 Act requires delivery of a prospectus relating to the
Common Stock in connection with any sale thereof pursuant to a registration
statement under the 1933 Act covering any resale by the Buyer of the Common
Stock being sold, and the Buyer shall comply with any applicable prospectus
delivery requirements of the 1933 Act in connection with any such sale. The
Company shall have the unequivocal right to rely upon the Buyer's representation
and covenant to deliver a prospectus as required by applicable law or regulation
contained in this Section 4(h), and thus, with respect to any resales by the
Buyer pursuant to a registration statement of Conversion Shares, Interest Shares
or Warrant Shares, such Common Stock shall contain a restrictive legend only if
and to the extent required by law. The Buyer will indemnify and hold harmless
the Company and its transfer agent for any loss, cost or expense (including
reasonable attorney's fees) incurred by such parties as a result of improper
actions taken by the Buyer in response to the Company's and the transfer agent's
compliance with the provisions of this Section 4(h), including without
limitation the sales of such Common Stock without delivery of a prospectus as
required by applicable law or regulation. Subject only to the approval of
Company counsel, which shall not be unreasonably withheld, the Company agrees
that, upon the earlier of (x) the effective date of the Registration Statement
or (y) the date which is twelve (12) months after the Closing Date, and from
time to time thereafter as reasonably requested by the Buyer, the Company shall
deliver or cause the Company's transfer agent to deliver to the Escrow Agent one
or more stock certificates representing the number of shares of registered
Common Stock into which the Notes and the Warrants might then reasonably be
convertible or exercisable (as applicable) (collectively, the "Escrow Shares").
Such certificate(s) shall not contain a restrictive legend of any kind, unless
and only to the extent required by law. The Escrow Agent shall hold the Escrow
Shares in trust, in certificate form or in a brokerage account as deemed
appropriate by the Escrow Agent. Upon a full or partial conversion of Notes or
exercise of the Warrants, the Buyer shall deliver a copy of its conversion
notice to the Escrow Agent, and to the extent that the Escrow Agent has
sufficient Escrow Shares, the Escrow Agent shall release Escrow Shares to the
Buyer to satisfy such conversion or exercise. The Escrow Agreement describes in
detail the duties of the Escrow Agent with respect to the provisions of this
Section 4(h).
i. Intentional Acts or Omissions. Neither party shall intentionally
perform any act that if performed, or omit to perform any act which if omitted
to be performed, would prevent or excuse the performance of this Agreement or
any of the transactions contemplated hereby.
j. No Shorting. As a material inducement for the Company to enter into
this Agreement, the Buyer represents that it has not as of the date hereof, and
covenants on behalf of itself and its affiliates that neither Buyer nor any
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affiliate of Buyer will at any time in which the Buyer or any affiliate of the
Buyer beneficially owns any of the Securities, engage in any short sales of, or
hedging or arbitrage transactions with respect to, the Common Stock, or buy
"put" options or similar instruments with respect to the Common Stock. The
Company acknowledges that a sale of Conversion Shares or Warrant Shares on the
date a conversion of the Notes or exercise of the Warrants, as applicable, is
made, even if such sale is made prior to delivery of the notice of conversion
with respect to such Conversion Shares (or exercise notice with respect to such
Warrant Shares), is not a "short sale" for purposes of this Section 4(j).
k. Trading Restrictions. The Buyer covenants that upon conversion of
the Notes, unless the Company agrees otherwise in advance, the Buyer will not
sell more Conversion Shares in any one trading day than the greater of (x) ten
percent (10%) of the current trading day's total share volume or (y) ten percent
(10%) of the previous trading day's total share volume. In addition, unless the
Company agrees otherwise in advance, the Buyer may only sell Conversion Shares
between the hours of 10:00 A.M. and 3:30 P.M. Eastern Standard Time. The Company
agrees that minor violations of this Section 4(k) in isolated instances shall
not be deemed to constitute a breach of this Section 4(k).
l. Restriction on Below Market Issuance of Securities. Until the date
that is twelve (12) months from the Closing Date or the date that all of the
Notes have been paid or converted in full, whichever is earlier, if the Company
proposes to issue or agree to issue any equity securities of the Company (or any
security convertible into or exercisable or exchangeable, directly or
indirectly, for equity securities of the Company) or debt securities of the
Company at a price (or provide for a conversion, exercise or exchange price)
which may be less than the current market price for the Common Stock on the date
of issuance (in the case of Common Stock) or the date of conversion, exercise or
exchange (in the case of securities convertible into or exercisable or
exchangeable, directly or indirectly, for Common Stock), the Company shall first
offer to the Buyer to purchase such securities on the same terms and conditions
as proposed by the Company (the "First Offer"). The Buyer shall have ten (10)
days to advise the Company in writing that it accepts the First Offer. If the
Buyer does not so advise the Company, the Company shall be free, for a period of
sixty (60) days, to issue such securities as proposed to such other party, after
which sixty (60) day period the restrictions contained in this Section 4(l)
shall apply as if the First Offer had not been made to the Buyer. The preceding
sentence shall not apply to any securities issued by the Company (i) to the
Buyer pursuant to the transactions contemplated in this Agreement, (ii) pursuant
to any employee stock option plan or employee stock purchase plan of the Company
established during the term of this restriction for a legitimate business
purpose and not to avoid the restrictions imposed in this Section 4(l), (iii) as
all or a portion of the compensation paid or to be paid to any current or future
officer, director, employee or agent of the Company (iv) pursuant to any
existing security, option, warrant, scrip, call or commitment or right in each
case as disclosed on Schedule 3(c) hereof; (v) for the purposes of effecting an
acquisition or merger that the Company's Board of Directors has in good faith
determined is in the best interests of the Company, or (vi) with the consent of
the Buyer, not to be unreasonably withheld (collectively, the "Exceptions").
5. LEGEND AND TRANSFER INSTRUCTIONS.
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a. Transfer Agent Instructions. The Company shall instruct its transfer
agent to issue certificates, registered in the name of the Buyer or its
permitted nominee, for the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) in accordance with the terms of the applicable Notes
and Warrants and in such amounts as specified from time to time by the Buyer to
the Company, upon conversion of the Notes or exercise of the Warrants (as
applicable). All such certificates shall bear the restrictive legend specified
in Section 2(g) of this Agreement only to the extent required by applicable law
and as specified in this Agreement and the Exhibits and Addenda hereto. The
Company warrants that no instruction other than such instructions referred to in
this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof in the case of the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) prior to the registration of same under the 1933 Act, will be
given by the Company to its transfer agent and that the Conversion Shares, the
Warrant Shares and the Interest Shares (if any) shall otherwise be freely
transferable on the books and records of the Company as and to the extent
permitted by applicable law and provided by this Agreement, the Warrants and the
Registration Rights Agreement. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Conversion Shares, the Warrant Shares and/or the
Interest Shares (if any). If the Buyer complies with Section 2(f) and Section
4(k) of this Agreement with respect to any transfer of Securities, the Company
shall permit the said transfer, and if applicable promptly (and in all events
within two (2) trading days) instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by the Buyer.
b. Removal of Legends. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (x)
the sale of such Security is registered under the 1933 Act, or (y) such holder
provides the Company with an opinion by counsel reasonably satisfactory to the
Company, that is in form, substance and scope reasonably satisfactory to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act. The Buyer agrees that its sale of
all Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
shall be made only pursuant to an effective registration statement (and to
deliver a prospectus in connection with such sale) or in compliance with an
exemption from the registration requirements of the 1933 Act. In the event the
Legend is removed from any Security or any Security is issued without the Legend
and thereafter the effectiveness of a registration statement covering the sales
of such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to the holder of such Security, the Company shall be
entitled to require that the Legend be placed upon any such Security which
cannot then be sold pursuant to an effective registration statement or an
available exemption from registration or with respect to which the opinion
referred to in clause (y) next above has not been rendered, which Legend shall
be removed when such Security may be sold pursuant to an effective registration
statement or an available exemption from registration (or such holder provides
the opinion with respect thereto described in clause (y) next above.
c. Conversion of Notes. Except as provided in Section 5 of the Notes,
the Buyer shall have the right to convert the Notes sold hereunder by delivering
via facsimile an executed and completed Notice of Conversion (as defined in the
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Notes) to the Company and delivering within two (2) business days thereafter the
original Notice of Conversion and the original Note being converted (but only at
such time as it is converted in full into Common Stock) by express courier to
the Company. Each date on which a Notice of Conversion is faxed to the Company
in accordance with the provisions hereof shall be deemed a "Conversion Date."
The Company will transmit the certificates representing the shares of Common
Stock issuable upon conversion of any Notes (along with a replacement Note
representing the amount of principal of said Note not so converted, if
applicable) to the Buyer via express courier, within five (5) business days
after the relevant Conversion Date (with respect to each conversion, the
"Deadline"). Time is of the essence with respect to the requirements of the
immediately preceding sentence.
d. Injunctive Relief for Breach. The Company acknowledges that a breach
of its obligations under Sections 5(a), 5(b) and 5(c) above will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly the Company agrees that the remedy
at law for a breach of its obligations under such Sections would be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of such Sections, the Buyer shall be entitled, in addition to all
other remedies at law or in equity, to an injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
e. Liquidated Damages for Non-Delivery of Certificates. In addition to
the provisions of Section 5(d) above, the Company understands and agrees that a
delay in the issuance of the Certificates beyond the Deadline will result in
substantial economic loss and other damages to the Buyer. As partial
compensation to the Buyer for such loss, the Company agrees to pay liquidated
damages (and which the Company acknowledges is not a penalty) to the Buyer for
issuance and delivery of the Certificates after the Deadline, in accordance with
the following schedule (where "No. Business Days Late" is defined as the number
of business days beyond five (5) business days from the date of delivery by the
Buyer to the Company of a facsimile Notice of Conversion (or, if later, from the
date on which all other necessary documentation duly executed and in proper form
required for conversion of Notes as described in this Agreement, including the
original Notice of Conversion, all in accordance with this Agreement only if
such necessary documentation has not been delivered to the Company within the
two (2) business day period after the facsimile delivery to the Company of the
Notice of Conversion required in this Agreement)):
No. Business Days Late Liquidated Damages
---------------------- ------------------
(in US$)
1 $900
2 $1,200
3 $1,500
4 $1,800
5 $2,100
6 $2,400
7 $2,700
8 $3,000
9 $3,000
10 $4,500
11+ $4,500 + $1,000 for
each Business Day Late
beyond 11 days
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<PAGE>
The Company shall pay the Buyer any liquidated damages incurred as
called for under this Section 5(e) by certified or cashier's check upon the
earlier of (i) issuance of the relevant Certificate(s) to the Buyer or (ii) each
monthly anniversary of the receipt by the Company of the Buyer's Notice of
Conversion. Nothing herein shall limit the Buyer's right to pursue actual
damages for the Company's failure to issue and deliver all Certificates to the
Buyer in accordance with the terms of this Agreement or for breach by the
Company of this Agreement. Notwithstanding anything in this Section 5(e) to the
contrary, the Company shall not be responsible for liquidated damages as
described in this Section 5(e) if a delay past a Deadline in delivery of Common
Stock to the Buyer upon a conversion or exercise is solely due to the action (or
omission to act) of the Escrow Agent (that is, if the Escrow Agent has in its
possession a sufficient number of non-legended Escrow Shares to effect a
conversion of Notes, and there is no Company-caused delay involved in delivery
by the Escrow Agent of the requisite number of Escrow Shares upon such
conversion or exercise).
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to sell Notes and Warrants at
the Closing is subject to the satisfaction, on or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion:
a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, and the parties shall have delivered
the respective documents or signature pages thereof (via facsimile or otherwise
as permitted in the Escrow Agreement) to the Escrow Agent.
b. The Buyer shall have delivered to the Escrow Agent on behalf of the
Company the Purchase Price for the Notes and Warrants purchased at the Closing,
by wire transfer of immediately available funds pursuant to the wiring
instructions provided by the Escrow Agent.
c. The representations and warranties of the Buyer shall be true and
correct in all material respects as of the date made and as of the Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
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<PAGE>
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
e. The Company's Board of Directors shall have approved this Agreement
and the related documentation referred to herein.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of the Buyer to purchase Notes and Warrants is subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions, provided that these conditions are for the sole benefit of the Buyer
and may be waived by the Buyer at any time in its sole discretion:
a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, the parties shall have delivered the
respective documents or signature pages thereof (via facsimile or otherwise as
permitted in the Escrow Agreement) to the Escrow Agent on behalf of each other.
b. The representations and warranties of the Company shall be true and
correct in all material respects as of the date made and as of Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. The Buyer may require a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by the Buyer.
c. With respect to the Closing, the Company shall have issued and have
duly executed by the authorized officers of the Company, and delivered to the
Escrow Agent on behalf of the Buyer, the Note and Warrant being sold at the
Closing (via facsimile or otherwise as required by the Escrow Agreement,
provided that any permitted facsimile of such documents shall be followed with
physical delivery to the Escrow Agent of the original instrument or security
within one (1) business day after facsimile of same to the Escrow Agent).
d. The Common Stock shall be authorized for quotation on the OTC
Bulletin Board Market (or another national securities exchange or market) and
trading in the Common Stock on such market shall not have been suspended by the
SEC or other relevant regulatory agency.
e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
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<PAGE>
f. The Escrow Agent shall have received on behalf of the Buyer the
opinion of Company counsel, dated as of the Closing Date, substantially in the
form attached hereto as Exhibit E.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Delaware without regard to the
principles of conflict of laws. In the event of any litigation regarding the
interpretation or application of this Agreement, the parties irrevocably consent
to jurisdiction in any of the state or federal courts located in the City of
Chicago, State of Illinois and waive their rights to object to venue in any such
court, regardless of the convenience or inconvenience thereof to any party.
Service of process in any civil action relating to or arising out of this
Agreement (including also all Exhibits or Addenda hereto) or the transaction(s)
contemplated herein may be accomplished in any manner provided by law. The
parties hereto agree that a final, non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and signature pages from such counterparts have been delivered to the
Escrow Agent on behalf of the other party. In the event any signature page is
delivered by facsimile transmission (which the parties agree is an acceptable
form of delivery), the party using such means of delivery shall cause three (3)
additional originally executed signature pages to be physically delivered to the
Escrow Agent on behalf of the other party within one (1) business day of the
execution and delivery hereof.
c. Headings; Gender, Etc. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of this Agreement. As used herein, the masculine shall refer to
the feminine and neuter, the feminine to the masculine and neuter, and the
neuter to the masculine and feminine, as the context may require. As used
herein, unless the context clearly requires otherwise, the words "herein,"
"hereunder" and "hereby," shall refer to this entire Agreement and not only to
the Section or paragraph in which such word appears. If any date specified
herein falls upon a Saturday, Sunday or public or legal holidays, the date shall
be construed to mean the next business day following such Saturday, Sunday or
public or legal holiday. For purposes of this Agreement, a "business day" is any
day other than a Saturday, Sunday or public or legal holiday.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
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<PAGE>
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by U. S. Mail or delivered personally or
by courier or via facsimile (if via facsimile, to be followed within three (3)
business days by an original of the notice document via U.S. Mail or courier)
and shall be effective five (5) days after being placed in the mail, if mailed,
certified or registered, return receipt requested, or upon receipt, if delivered
personally or by courier or by facsimile, in each case properly addressed to the
party to receive the same. The addresses for such communications shall be:
If to the Company: Sales Online Direct, Inc.
4 Brussels Street
Worcester, Massachusetts 01610
Telephone: 781.821.0199 or 508.791.6710
Facsimile: 508.797.5398 and 305.489.6114
Attention: Mr. Greg Rotman, Chief Executive Officer
If to the Buyer, at the address on the signature page of this Agreement. Each
party shall provide written notice to the other party of any change in address.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
Neither the Company nor the Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
the Buyer shall be an accredited investor (as defined in Regulation D), in the
written opinion of counsel who is reasonably satisfactory to the Company and in
form, substance and scope reasonably satisfactory to the Company.
Notwithstanding the foregoing, if applicable, any of the entities constituting
the Buyer (if greater than one (1) entity) may assign its rights hereunder to
any of its "affiliates," as that term is defined under the 1934 Act, without the
consent of the Company; provided, however, that any such assignment shall not
release such assigning entity from its obligations hereunder unless such
obligations are assumed by such affiliate and the Company has prior to such
assignment and assumption consented in writing to the same; and no such
assignment shall be made unless it is made in accordance with any applicable
securities laws of any applicable jurisdiction. Any request for an assignment
made hereunder by the Buyer shall be accompanied by a legal opinion in form,
substance and scope reasonably satisfactory to the Company, that such assignment
is proper under applicable law. Notwithstanding anything herein to the contrary,
Buyer may pledge the Securities as collateral for a bona fide loan pursuant to a
security agreement with a third party lender, and such pledge shall not be
considered an assignment in violation of this Agreement so long as it is made in
compliance with all applicable law.
h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
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<PAGE>
i. Survival. Unless this Agreement is terminated under Section 8(1),
the representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
8 shall survive the Closing of the purchase and sale of Securities purchased and
sold hereby.
j. Publicity. The Company and the Buyer shall have the right to review
before issuance by the other, any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without prior consultation with or approval of
the Buyer, to make any press release or other public disclosure with respect to
such transactions as is required by applicable law and regulations.
k. Further Assurance. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred
on or before ten (10) business days from the date hereof, this Agreement shall
terminate at the close of business on such date. Neither party may unilaterally
terminate this Agreement after the Closing for any reason other than a material
breach of this Agreement by the non- breaching party. Such termination shall not
be the sole remedy for a breach of this Agreement by the non-breaching party,
and each party shall retain all of its rights hereunder at law or in equity.
Notwithstanding anything herein to the contrary, a party whose breach of a
covenant or representation and warranty or failure to satisfy a condition
prevented the Closing shall not be entitled to terminate this Agreement.
m. Remedies. No provision of this Agreement providing for any specific
remedy to a party shall be construed to limit such party to the specific remedy
described, and any other remedy that would otherwise be available to such party
at law or in equity shall be so available. Nothing in this Agreement shall limit
any rights a party may have with any applicable federal or state securities laws
with respect to the transactions contemplated hereby.
IN WITNESS WHEREOF, the Buyer and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
[SIGNATURE PAGE FOLLOWS]
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List of Exhibits
Exhibit A Form of Note
Exhibit B Warrant to Purchase Common Stock
Exhibit C Registration Rights Agreement
Exhibit D Escrow Agreement
Exhibit E Opinion of Counsel for the Company
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<PAGE>
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED
AS OF MARCH 23, 2000]
COMPANY:
SALES ONLINE DIRECT, INC.
By:/S/ Greg Rotman
--------------------------------
Mr. Greg Rotman, Chief Executive Officer
BUYER:
AUGUSTINE FUND, L.P.
By: Augustine Capital Management, L.L.C., its General
Partner
By: /S/ Thomas F. Duszyriski
------------------------------
Mr. Thomas F. Duszynski, Member
BUYER'S ADDRESS:
141 West Jackson Blvd.
Suite 2182
Chicago, Illinois 60604
Telephone: 312.427.5457
Telecopier: 312.427.5396
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<PAGE>
SECURITIES PURCHASE AGREEMENT
Schedule 3(c)
Outstanding Options to Purchase Common Stock:
Outstanding Warrants to Purchase Common Stock:
Other Stock Purchase Rights
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<PAGE>
SECURITIES PURCHASE AGREEMENT
Schedule 3(g)
Registration of all the Registrable Securities under the Securities Act
of 1933, as amended, requires the filing of a registration statement with the
Securities and Exchange Commission and a declaration of effectiveness of the
registration statement by the Securities and Exchange Commission.
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<PAGE>
EXHIBIT A (Form of Note)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
DATE: MARCH 23, 2000
NOTE # 01
U.S.$3,000,000.00
SALES ONLINE DIRECT, INC.
SERIES A EIGHT PERCENT (8%) CONVERTIBLE PROMISSORY NOTE
DUE MARCH 31, 2002
THIS NOTE is one of a duly authorized issue of Notes (a "Note" or the
"Notes") of Sales Online Direct, Inc., a corporation duly organized and validly
existing under the laws of the State of Delaware, U.S.A. (the "Company")
designated as its Series A Eight Percent (8%) Convertible Notes Due March 31,
2002, in an aggregate principal face value for all Notes of this series of Three
Million and no/100 United States Dollars (US$3,000,000.00).
FOR VALUE RECEIVED, the Company promises to pay to AUGUSTINE FUND,
L.P., the registered holder hereof and its successors and assigns (the
"Holder"), the principal sum of Three Million and no/100 United States Dollars
($3,000,000.00) on March 31, 2002 (the "Maturity Date"), and to pay interest on
the principal sum outstanding, at the rate of eight percent (8%) per annum due
and payable in quarterly installments in arrears, on June 30, September 30,
December 31 and March 31 of each year during the term of this Note, with the
first such payment to be made on September 30, 2000. Accrual of interest on the
outstanding principal amount, payable in cash or Common Stock (defined
hereinafter) at the Company's option, shall commence on the date hereof and
shall continue until payment in full of the outstanding principal amount has
been made or duly provided for. The interest so payable will be paid to the
person in whose name this Note (or one or more predecessor Notes) is registered
<PAGE>
on the records of the Company regarding registration and transfers of the Note
(the "Note Register"); provided, however, that the Company's obligation to a
transferee of this Note arises only if such transfer, sale or other disposition
is made in accordance with the terms and conditions of that Securities Purchase
Agreement of even date herewith between the Company and Augustine Fund, L.P.
(the "Securities Purchase Agreement").
The principal of, and interest on, this Note are payable in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing on
the Note Register of the Company as designated in writing by the Holder hereof
from time to time. The Company will pay the outstanding principal of and any and
all accrued and unpaid interest due upon this Note on the Maturity Date, less
any amounts required by law to be deducted or withheld, to the record Holder of
this Note as of the fifth business day (as defined in the Securities Purchase
Agreement) prior to the Maturity Date and addressed to such Holder at the last
address appearing on the Note Register. The forwarding of such funds shall
constitute a payment of outstanding principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Note to
the extent of the sum represented by such payment plus any amounts so deducted
or withheld. Except as herein provided, this Note may not be prepaid without the
prior written consent of the Holder. Interest may at the Company's option be
paid in Common Stock, with the number of shares of Common Stock to be delivered
in payment of such interest determined by taking the dollar amount of interest
being paid divided by the applicable Conversion Price (defined below).
This Note is subject to the following additional provisions:
1. Withholding. The Company shall be entitled to withhold from all
payments of principal or interest pursuant to this Note any amounts required to
be withheld under the applicable provisions of the United States income tax or
other applicable laws at the time of such payments.
2. Transfer/Exchange of Note; Registered Holder; Opinion of Counsel;
Legend. This Note has been issued subject to investment representations of the
original purchaser hereof and may be transferred or exchanged only in compliance
with the Securities Act of 1933, as amended (the "1933 Act") and applicable
state securities laws. Prior to due presentment for transfer of this Note, the
Company and any agent of the Company may treat the person in whose name this
Note is duly registered on the Company's Note Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Note be overdue, and neither the Company nor any such agent
shall be affected or bound by notice to the contrary.
The Holder understands and acknowledges by its acceptance hereof that
(i) except as provided in the Securities Purchase Agreement and in that
Registration Rights Agreement attached as Exhibit C to the Securities Purchase
Agreement (the "Registration Rights Agreement"), both such documents
incorporated herein by reference, this Note and the shares of common stock in
the Company issuable upon conversion thereof as herein provided ("Conversion
Shares"), and any shares of Common Stock payable as interest hereunder have not
2
<PAGE>
been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (a)
subsequently registered thereunder, or (b) the Holder shall have delivered to
the Company an opinion of counsel, reasonably satisfactory in form, substance
and scope to the Company, to the effect that the securities to be sold, assigned
or transferred may be sold, assigned or transferred pursuant to an exemption
from such registration; (ii) any sale of such securities made in reliance on
Rule 144 promulgated under the 1933 Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other regulation
and/or exemption under the 1933 Act or the rules and regulations of the United
States Securities and Exchange Commission (the "SEC") thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such securities under the 1933 Act or any state securities laws (other than
pursuant to the terms of the Securities Purchase Agreement and the Registration
Rights Agreement) or to comply with the terms and conditions of any exemption
thereunder.
Any Conversion Shares issued upon conversion of this Note, , and if
applicable, any Common Stock issued in payment of interest as herein provided,
shall, if and only to the extent required by law, bear legends in similar form
to the legends set forth on the first page of this Note.
3. Conversion of Note into Common Stock.
The Holder of this Note is entitled, at its option, at any time
commencing on the date first written at the top of this Note, to convert all or
a portion of the original principal face amount of this Note into shares of
common stock in the Company, $.001 par value per share (defined herein as
"Common Stock"), at a conversion price (the "Conversion Price") for each share
of Common Stock equal to the lesser of (x) one hundred ten percent (110%) of the
lowest of the closing bid prices for the Common Stock for the five (5) trading
days prior to the date of this Note (the "Fixed Price"), or (y) a percentage
(the "Applicable Percentage") of the average of the closing bid prices for the
Common Stock for the five (5) trading days immediately preceding the Conversion
Date (as hereinafter defined), as reported on the National Association of
Securities Dealers OTC Bulletin Board Market (or on such other national
securities exchange or market as the Common Stock may trade at such time).
Except as stated in the next sentence, the Applicable Percentage shall be equal
to 75%. Notwithstanding anything herein to the contrary, if the Registration
Statement is not declared effective by the SEC on or before the Effectiveness
Date (as defined in the Registration Rights Agreement) (or does not remain
effective on the date of conversion if such date is after the Effectiveness
Date), then with respect to any portion of the Note not previously converted
into Common Stock, the Applicable Percentage shall decrease by two percent (2%)
for each thirty (30) day period (pro-rated for partial periods and rounded to
the nearest half-month) beginning on the date after the Effectiveness Date and
ending on the date the Registration Statement is declared effective by the SEC;
and if the Registration Statement has not been declared effective by the SEC
within one (1) year after the date of this Note (or does not remain effective
until the Holder has converted this Note in full into non-restricted Common
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<PAGE>
Stock), the Applicable Percentage shall from the date which is one (1) year
after the date of this Note be fifty percent (50%). As an example, and not by
way of limitation, if the Registration Statement is declared effective by the
SEC thirty days after the Effectiveness Date, then the Applicable Percentage
will be equal to seventy-three percent (73%) [75% less {2% X 1 month}].
Any conversion of this Note shall be achieved by submitting to the
Company the fully completed form of conversion notice attached hereto as Exhibit
I (a "Notice of Conversion"), executed by the Holder of this Note evidencing
such Holder's intention to convert this Note or the specified portion (as herein
provided) hereof. A Notice of Conversion may be submitted via facsimile to the
Company at the telecopier number for the Company provided in the Securities
Purchase Agreement (or at such other number as requested in advance of such
conversion in writing by the Company), and if so submitted the original Notice
of Conversion shall be delivered to the Company within two (2) business days
thereafter. The Company and the Holder shall each keep records with respect to
the portion of this Note then being converted and all portions previously
converted; upon receipt by the Holder of the requisite Conversion Shares, the
outstanding principal amount of the Note shall be reduced by the amount
specified in the Notice of Conversion resulting in such Conversion Shares. The
Company may from time to time, but is not required to, instruct the Holder and
the Holder shall surrender this Note along with the Notice of Conversion for the
purposes of making a notation thereon as to the amount of principal being
converted, or of canceling this Note and issuing a new Note in the same form
with the principal amount of such Note reduced by the amount converted. Such new
or notated Note shall be delivered to the Holder within five (5) business days
after such Holder's surrender to the Company. No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded to the nearest whole share. Accrued interest on
the converted portion of the Note shall be payable upon conversion thereof, in
cash or Common Stock at the Conversion Price, at the Company's option. The date
on which a notice of conversion is given (a "Conversion Date") shall be deemed
to be either the date on which the Company receives from the Holder an original
Notice of Conversion duly executed, or, if earlier, the date set forth in such
Notice of Conversion if the original Notice of Conversion is received by the
Company within two (2) business days thereafter.
In all cases, the Company shall deliver the Conversion Shares to the
Holder within five (5) business days after the Conversion Date with respect to
such Conversion Shares being delivered, and at the address specified in the
Notice of Conversion.
Subject to the provisions of Paragraph 4(b) hereof, at the Maturity
Date, the remaining portion of this Note which remains unconverted, if any, plus
accrued interest shall be automatically converted into shares of Common Stock as
of the Maturity Date, as if the Holder had converted the remaining portion of
this Note according to the provisions of this Section 3, with the Conversion
Date being equivalent in such event to the Maturity Date, as if the Holder had
provided the Company with a Notice of Conversion with respect to the outstanding
principal amount of this Note on the Maturity Date. Other than a conversion made
on the Maturity Date in accordance with this paragraph, conversions of this Note
must be effected in increments of at least Ten Thousand U.S. Dollars ($10,000)
of principal amount of this Note (or such lesser outstanding principal amount of
this Note).
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<PAGE>
4. Limitation on Number of Conversion Shares. (a) Notwithstanding any
other provision herein, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of this Note if the issuance of such shares of
Common Stock would exceed that number of shares of Common Stock which the
Company may issue upon conversion of the Note (the "Exchange Cap") without
breaching the Company's obligations under the rules and regulations of The
Nasdaq Stock Market, Inc., to the extent that the same apply to the Company,
except that such limitation shall not apply in the event that the Company (a)
obtains the approval of its stockholders as required by applicable rules of The
Nasdaq Sock Market, Inc., for issuances of Common Stock in excess of such amount
or (b) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holder of this Note; provided, however, that notwithstanding anything herein to
the contrary, the Company will issue such number of shares of Common Stock
issuable upon conversion of this Note at the then current Conversion Price up to
the Exchange Cap. The Company hereby agrees that, should shareholder approval
become necessary to issue additional shares upon conversion of this Note, then
the Company shall use its best efforts to obtain such approval within one
hundred twenty (120) days after such necessity arises. Should the Company not
obtain shareholder approval within such one hundred twenty (120) day period,
then within five (5) business days thereafter the Company shall redeem this Note
by paying to the Holder a sum equal to one hundred twenty five percent (125%) of
the then outstanding principal amount of this Note, payable utilizing
immediately available funds, in accordance with the payment instructions of the
Holder. The provisions of this Section 5(a) will apply only in the event the
Company becomes listed for trading on the NASDAQ stock market (either Small Cap
or National Market).
(b) Conversion Restrictions. Notwithstanding anything to the contrary
set forth herein or in the Securities Purchase Agreement, in no event shall any
holder of this Note be entitled to convert this Note in excess of such portion
of the principal of the Note that, upon giving effect to such conversion, would
cause the aggregate number of shares of Common Stock beneficially owned by such
converting holder and its affiliates to exceed 4.99% of the outstanding shares
of the Common Stock following such conversion. For of this Section 4(b),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. The limitations imposed by this
Section 4(b) on conversion of this Note shall no longer apply, and the holder of
this Note may convert all or any portion of this Note, irrespective of the
resulting beneficial ownership of the Company's Common Stock, should any of the
following events occur: (I) The Company shall either: (i) become insolvent; (ii)
admit in writing its inability to pay its debts generally or as they become due;
(iii) make an assignment for the benefit of creditors or commence proceedings
for its dissolution; or (iv) apply for, or consent to the appointment of, a
trustee, liquidator, or receiver for its or for a substantial part of its
property or business; or (II) A trustee, liquidator or receiver shall be
appointed for the Company or for a substantial part of its property or business
without the Company's consent and such appointment is not discharged within
sixty (60) days after such appointment; or (III) Any governmental agency or any
court of competent jurisdiction at the instance of any governmental agency shall
assume custody or control of the whole or any substantial portion of the
properties or assets of the Company and shall not be dismissed within sixty (60)
days thereafter; or (IV) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within sixty days after
such institution or the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit the material
allegations of, or default in answering a petition filed in, any such
proceeding.
5
<PAGE>
5. Obligations of the Company Herein are Unconditional. No provision of
this Note shall alter or impair the obligation of the Company, which obligation
is absolute and unconditional, to repay the principal amount of this Note at the
time, place and rate herein stated. This Note and all other Notes now or
hereafter issued in replacement of this Note on the same or similar terms are
direct obligations of the Company. This Note ranks at least equally with all
other Notes now or hereafter issued under the terms set forth herein. The
Conversion Price and number of shares of Common Stock issuable upon conversion
shall be subject to adjustment from time to time as provided in Section 6 below.
6. Adjustments.
(a) In the event the Company should at any time or from time to time,
after the date of this Note, fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock (equal to at least ten percent
(10%) or more of the Company's then issued and outstanding shares of Common
Stock) or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), then unless the Conversion Price is otherwise automatically adjusted
in accordance with the terms of this Note, the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of this Note shall be increased in proportion to such increase in the
aggregate number of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the date of this Note is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price shall be appropriately increased so that the number of shares
of Common Stock issuable upon conversion of this Note shall be decreased in
proportion to such decrease in outstanding shares.
(c) In the event the Company, at any time while all or any portion of
this Note is outstanding, shall be consolidated with or merged into any other
corporation or corporations or shall sell or lease all or substantially all of
its property and business as an entirety, then lawful provisions shall be made
as part of the terms of such consolidation, merger, sale or lease so that the
holder of this Note may thereafter receive in lieu of such Common Stock
otherwise issuable to such holder upon conversion of this Note, but at the
conversion rate which would otherwise be in effect at the time of conversion, as
hereinbefore provided, the same kind and amount of securities or assets as may
be issuable, distributable or payable upon such consolidation, merger, sale or
lease with respect to Common Stock of the Company.
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<PAGE>
7. Reservation of Shares. The Company shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of this Note, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the outstanding principal amount, and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of this Note, in addition to such other remedies as
shall be available to Holder, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase the number of
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes, including without limitation, using its best
efforts to obtain the requisite stockholder approval necessary to increase the
number of authorized shares of the Company's Common Stock.
8. Note Holder Not Deemed a Stockholder. No Holder, as such, of this
Note shall be entitled (prior to conversion of this Note into Common Stock, and
only then to the extent of such conversion) to vote or receive dividends or be
deemed the holder of shares of the Company for any purpose, nor shall anything
contained in this Note be construed to confer upon the Holder hereof, as such,
any of the rights of a stockholder of the Company or any right to vote, give or
withhold consent to any corporate action (whether any reorganization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the holder of this Note of the
Conversion Shares which he or she is then entitled to receive upon the due
conversion of all or a portion of this Note. Notwithstanding the foregoing, the
Company will provide the Holder with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
9. No Limitation on Corporate Action. No provisions of this Note and no
right or option granted or conferred hereunder shall in any way limit, affect or
abridge the exercise by the Company of any of its corporate rights or powers to
recapitalize, amend its Certificate of Incorporation, reorganize, consolidate or
merge with or into another corporation, or to transfer all or any part of its
property or assets, or the exercise of any other of its corporate rights and
powers.
10. Representations of Holder.Upon conversion of all or a portion of
this Note, the Holder shall confirm in writing, in a form reasonably
satisfactory to the Company, that the Conversion Shares so purchased are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and that such Holder is an Accredited Investor (as defined in Rule 501(a)
of Regulation D promulgated under the 1933 Act). The Company acknowledges that
Holder's duly executed certification on the Notice of Conversion is satisfactory
confirmation of the facts set forth in the immediately preceding sentence. If
such Holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such Holder's conversion of all or a
portion of the Note that the Company receive such other representations as the
Company considers reasonably necessary to assure the Company that the issuance
of its securities upon conversion of the Note shall not violate any United
States or state securities laws.
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<PAGE>
11. Waiver of Demand, Presentment, Etc. The Company hereby expressly
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereunder, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
12. Attorney's Fees. The Company agrees to pay all costs and expenses,
including without limitation reasonable attorney's fees, which may be incurred
by the Holder in collecting any amount due under this Note or in enforcing any
of Holder's conversion rights as described herein.
13. Default. If one or more of the following described "Events of
Default" shall occur:
(a) The Company shall continue in default in the payment of principal or
interest on this Note for a period of ten (10) days after a notice of
default is received by the Company with respect to any such payment,
or the Company shall not timely honor any Notice of Conversion as
specified herein and in the Securities Purchase Agreement; or
(b) Any of the representations or warranties made by the Company herein,
in the Securities Purchase Agreement, the Registration Rights
Agreement, or in any certificate or financial or other written
statement heretofore or hereafter furnished by or on behalf of the
Company in connection with the execution and delivery of this Note or
the Securities Purchase Agreement or the Registration Rights Agreement
shall be false or misleading in any material respect at the time made
and the Holder shall have provided seven (7) days prior written notice
to the Company of the alleged misrepresentation or breach of warranty
and the same shall continue uncured for a period of seven (7) days
after such written notice from the Holder; or
(c) The Company shall fail to perform or observe, in any material respect,
any other covenant, term, provision, condition, agreement or
obligation of the Company under this Note or the Securities Purchase
Agreement and such failure shall continue uncured for a period of
seven (7) days after written notice from the Holder of such failure;
or
(d) The Company shall either: (i) become insolvent; (ii) admit in writing
its inability to pay its debts generally or as they become due; (iii)
make an assignment for the benefit of creditors or commence
proceedings for its dissolution; or (iv) apply for, or consent to the
appointment of, a trustee, liquidator, or receiver for its or for a
substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the Company
or for a substantial part of its property or business without the
Company's consent and such appointment is not discharged within sixty
(60) days after such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty (60) days
thereafter; or
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<PAGE>
(g) Any money judgment, writ or Note of attachment, or similar process in
excess of Five Hundred Thousand United States Dollars (US$500,000.00)
in the aggregate shall be entered or filed against the Company or any
of its properties or assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of fifteen (15) days or in any event
later than five (5) days prior to the date of any proposed sale
thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed within
sixty days after such institution or the Company shall by any action
or answer approve of, consent to, or acquiesce in any such proceedings
or admit the material allegations of, or default in answering a
petition filed in, any such proceeding; or
(i) The Company shall have its Common Stock delisted from the OTC Bulletin
Board Market or suspended from trading thereon, and shall not have its
Common Stock relisted on the same or another national securities
exchange (other than the National Quotation Bureau, Inc., "pink
sheets" market), or have such suspension lifted, as the case may be,
within ninety days after such delisting or suspension; or
(j) The Company shall have received a notice of default on the payment of
any debt(s) aggregating in excess of Five Hundred Thousand United
States Dollars (US$500,000.00) beyond any applicable grace period;
then, or at any time thereafter, and in any and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
in one instance shall not be deemed to be a waiver in another instance or for
any other prior or subsequent Event of Default) at the option of the Holder and
in the Holder's sole discretion, the Holder may immediately accelerate the
maturity hereof, whereupon all principal and interest hereunder shall be
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived by the Company, anything
herein or in any Note or other instrument contained to the contrary
notwithstanding, and the Holder may immediately, and upon the expiration of any
period of grace, enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law or equity.
14. Note a General Unsecured Obligation of the Company. This Note
represents a general unsecured obligation of the Company. No recourse shall be
had for the payment of the principal of, or the interest on, this Note, or for
any claim based thereon, or otherwise in respect hereof, against any
incorporator, shareholder, officer, director, or agent of the Company or any
successor corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
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15. Enforceability. In case any provision of this Note is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Note will not in any way be
affected or impaired thereby.
16. Entire Agreement. This Note and Exhibit I attached hereto, the
Securities Purchase Agreement and the Exhibits attached thereto and the
Registration Rights Agreement and the Exhibits attached thereto (if any)
constitute the full and entire understanding between the Company and the Holder
with respect to the subject matter hereof and thereof. Neither this Note nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
17. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the state of Delaware without giving effect to
applicable principles of conflict of law.
18. Headings. Headings in this Note are for convenience only, and shall
not be used in the construction of this Note.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized, all as of the date first
hereinabove written.
SALES ONLINE DIRECT, INC.
By: /s/ Greg Rotman
--------------------------------------
Mr. Greg Rotman, CEO
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EXHIBIT I
NOTICE OF CONVERSION
(To Be Executed by the Registered Holder in Order to Convert the Note)
The Undersigned hereby irrevocably elects to convert $_____________
of the Eight ercent (8%) Convertible Note Due March 31, 2002, No. 01, into
shares of Common tock of Sales Online Direct, Inc. (the "Company"), according
to the terms and conditions set forth in such Note, as of the date written
below. If securities are to be issued to a person other than the Undersigned,
the Undersigned agrees to pay all applicable transfer taxes with respect
thereto.
The Undersigned represents that it, as of this date, is an "accredited
investor" as such term is defined in Rule 501(a) of Regulation D promulgated by
the SEC under the 1933 Act.
The Undersigned also represents that the Conversion Shares are being
acquired for the Holder's own account and not as a nominee for any other party.
The Undersigned represents and warrants that all offers and sales by the
Undersigned of the Conversion Shares shall be made pursuant to registration of
the same under the 1933 Act, or pursuant to an exemption from registration under
the 1933 Act. The Undersigned acknowledges that the Conversion Shares shall if
(and only if) required by law contain the legend contained on page 1 of the
Note.
Conversion Date:* _____________________
Applicable Conversion Price: ______________________________
Holder (Print True Legal Name): ______________________________________
________________________________________________________
(Signature of Duly Authorized Representative of Holder)
Address of Holder: ___________________________
___________________________
___________________________
* This original Notice of Conversion must be received by the Company by the
second business day following the Conversion Date.
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EXHIBIT B (FORM OF WARRANT)
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF
ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND
UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
SALES ONLINE DIRECT, INC.
Date of Issuance: March 23, 2000
No.: 01 Number of Shares: 300,000
Expires March 31, 2005
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, Sales Online Direct, Inc., a Delaware corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that Augustine Fund,
L.P., or its permitted and registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to 300,000 shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer ("Warrant
Stock"), at an exercise price per share equal to the Warrant Price then in
effect, subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. Capitalized terms used in this Warrant and not otherwise
defined herein shall have the respective meanings specified in Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the date of issuance of this Warrant and
shall expire at 5:00 p.m., central time, on March 31, 2005 (such period being
the "Term").
2. Method of Exercise Payment: Issuance of New Warrant: Transfer and
Exchange.
(a) Time of Exercise. The purchase rights represented by this Warrant may
be exercised in whole or in part at any time and from time to time beginning on
the date which is ninety (90) days after the first day of the Term.
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(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder's election (i) by certified or official bank
check or (ii) by surrender to the Issuer for cancellation of a portion of this
Warrant representing that number of unissued shares of Warrant Stock which is
equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Warrant Price by the number of shares of Warrant Stock being
purchased upon such exercise by (B) the difference obtained by subtracting the
Warrant Price from the Per Share Market Value as of the date of such exercise,
or (iii) by a combination of the foregoing methods of payment selected by the
Holder of this Warrant. In any case where the consideration payable upon such
exercise is being paid in whole or in part pursuant to the provisions of clause
(ii) of this subsection (b), such exercise shall be accompanied by written
notice from the Holder of this Warrant specifying the manner of payment thereof
and containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares to be issued after giving effect to such surrender.
(c) Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been canceled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
(d) Transferability of Warrant. This Warrant may be transferred by a
Purchaser only in accordance with the terms of the Purchase Agreement and in
compliance with applicable law.
(e) Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant or the shares of Warrant Stock to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment, and that the Holder will
not offer, sell or otherwise dispose of this Warrant or any shares of
Warrant Stock to be issued upon exercise hereof except pursuant to an
effective registration statement, or an exemption from registration,
under the Securities Act and any applicable state securities laws. The
Holder agrees to abide by the trading limitations imposed by Section 4(k)
of the Purchase Agreement with respect to any sales of Warrant Stock.
(ii) Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon exercise
hereof shall be stamped or imprinted with a legend in substantially the
following form:
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THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER
THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES
LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF ITS
COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.
(iii) The restrictions imposed by this subsection (e) upon the
transfer of this Warrant or the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities shall have
been resold pursuant to being effectively registered under the Securities
Act, (B) upon the Issuer's receipt of an opinion of counsel, in form and
substance reasonably satisfactory to the Issuer, addressed to the Issuer to
the effect that such restrictions are no longer required to ensure
compliance with the Securities Act and state securities laws or (C) upon
the Issuer's receipt of other evidence reasonably satisfactory to the
Issuer that such registration and qualification under state securities laws
is not required. Whenever such restrictions shall cease and terminate as to
any such securities, the Holder thereof shall be entitled to receive from
the Issuer (or its transfer agent and registrar), without expense (other
than applicable transfer taxes, if any), new Warrants (or, in the case of
shares of Warrant Stock, new stock certificates) of like tenor not bearing
the applicable legend required by paragraph (ii) above relating to the
Securities Act and state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the Holder hereof,
acknowledge in writing the extent, if any, of its continuing obligation to
afford to such Holder all rights to which such Holder shall continue to be
entitled after such exercise in accordance with the terms of this Warrant,
provided that if any such Holder shall fail to make any such request, the
failure shall not affect the continuing obligation of the Issuer to afford such
rights to such Holder.
3. Stock Fully Paid: Reservation and Listing of Shares: Covenants.
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees
that all shares of Warrant Stock which may be issued upon the exercise of this
Warrant or otherwise hereunder will, upon issuance and payment of the Warrant
Price for such shares of Warrant Stock, be duly authorized, validly issued,
fully paid and non-assessable and free from all taxes, liens and charges created
by or through Issuer. The Issuer further covenants and agrees that during the
period within which this Warrant may be exercised, the Issuer will at all times
have authorized and reserved for the purpose of the issue upon exercise of this
Warrant a sufficient number of shares of Common Stock to provide for the
exercise of this Warrant.
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(b) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) use its best efforts to not permit the par
value, if any, of its Common Stock to exceed the then effective Warrant Price,
(ii) not amend or modify any provision of the Certificate of Incorporation or
by-laws of the Issuer in any manner that would adversely affect in any way the
powers, preferences or relative participating, optional or other special rights
of the Common Stock or which would adversely affect the rights of the Holders of
the Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(e) Rights and Obligations under the Registration Rights Agreement. The
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith between the
Issuer and the Holders listed on the signature pages thereof (as amended from
time to time, the "Registration Rights Agreement"). The Issuer shall keep or
cause to be kept a copy of the Registration Rights Agreement, and any amendments
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thereto, at its chief executive office and shall furnish, without charge, copies
thereof to the Holder upon reasonable request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale. (i) In case the Issuer after the Original Issue Date shall do
any of the following (each, a "Triggering Event"): (a) consolidate with or merge
into any other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the continuing
or surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the extent this Warrant
is not exercised prior to such Triggering Event, to receive at the Warrant Price
in effect at the time immediately prior to the consummation of such Triggering
Event in lieu of the Common Stock issuable upon such exercise of this Warrant
prior to such Triggering Event, the Securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event
if such Holder had exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for in Section 4
hereof or (y) to sell this Warrant (or, at such Holder's election, a portion
hereof) concurrently with the Triggering Event to the Person continuing after or
surviving such Triggering Event, or to the Issuer (if Issuer is the continuing
or surviving Person) at a sales price equal to the amount of cash, property
and/or Securities to which a holder of the number of shares of Common Stock
which would otherwise have been delivered upon the exercise of this Warrant
would have been entitled upon the effective date or closing of any such
Triggering Event (the "Event Consideration"), less the amount or portion of such
Event Consideration having a fair value equal to the aggregate Warrant Price
applicable to this Warrant or the portion hereof so sold.
(ii) Notwithstanding anything contained in this Warrant to the contrary,
the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this subsection
(a), such Holder shall be entitled to receive, and such Person shall have
similarly delivered to such Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to such Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this subsection (a))
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shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
(b) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of Holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of Holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other distribution
to its stockholders (without consideration therefor) of, shares of Common
Stock, the Warrant Price shall be adjusted, as at the date the Issuer shall
take a record of the Holders of the Issuer's Capital Stock for the purpose
of receiving such dividend or other distribution (or if no such record is
taken, as at the date of such payment or other distribution), to that price
determined by multiplying the Warrant Price in effect immediately prior to
such record date (or if no such record is taken, then immediately prior to
such payment or other distribution), by a fraction (1) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (2) the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the event that the
Issuer paid cash for fractional shares, the number of additional shares
which would have been outstanding had the Issuer issued fractional shares
in connection with said dividends); or
(ii) Other Actions. In the event that the Company shall offer options
or rights to subscribe for shares of Common Stock, or issue any Common
Stock Equivalents, to all of its holders of Common Stock, then on the
record date for such payment, distribution or offer or, in the absence of a
record date, on the date of such payment, distribution or offer, the Holder
shall receive what the Holder would have received had it exercised this
Warrant in full immediately prior to the record date of such payment,
distribution or offer or, in the absence of a record date, immediately
prior to the date of such payment, distribution or offer.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at
any time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than as provided in the foregoing subsections (a)
through (c) of this Section 4 or with respect to Interest Shares as defined in
the Purchase Agreement), at a price per share less than Per Share Market Value
then in effect or without consideration, then the Warrant Price upon each such
issuance shall be adjusted to that price (rounded to the nearest cent)
determined by multiplying the Warrant Price then in effect by a fraction:
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(i) the numerator of which shall be equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (B) the number of
shares of Common Stock (rounded to the nearest whole share) which the
aggregate consideration for the total number of such Additional Shares of
Common Stock so issued would purchase at a price per share equal to the Per
Share Market Value then in effect, and
(ii) the denominator of which shall be equal to the number of
shares of Common Stock outstanding immediately after the issuance of such
Additional Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this Section 4 or (y) no adjustment was required pursuant to
subsection (e) of this Section 4. The provisions of this subsection (d) shall
not apply in the event securities are issued (I) to the Holder as a result of
the Holder's acceptance of the First Offer (as defined in Section 4(l) of the
Purchase Agreement) or (II) to a third party pursuant to an Exception (as
defined in Section 4(l) of the Purchase Agreement). No adjustment of the Warrant
Price shall be made under this subsection (d) in an amount less than $.01 per
share, but any such lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment, if any, which
together with any adjustments so carried forward shall amount to $.01 per share
or more, provided that upon any adjustment of the Warrant Price as a result of
any dividend or distribution payable in Common Stock or Convertible Securities
or the reclassification, subdivision or combination of Common Stock into a
greater or smaller number of shares, the foregoing figure of $.01 per share (or
such figure as last adjusted) shall be adjusted (to the nearest one-half cent)
in proportion to the adjustment in the Warrant Price.
(e) Other Provisions Applicable to Adjustments Under this Section 4. The
following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received by the
Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall be
issued for a cash consideration, the consideration received by the Issuer
therefor, or if such Additional Shares of Common Stock or Common Stock
Equivalents are offered by the Issuer for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Common Stock
Equivalents are sold to underwriters or dealers for public offering without
a subscription offering, the public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or incurred by the Issuer for or in
connection with the underwriting thereof or otherwise in connection with
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the issue thereof; to the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise expressly
provided, the fair market value of such consideration at the time of such
issuance as determined in good faith by the Board. The consideration for
any Additional Shares of Common Stock issuable pursuant to any Common Stock
Equivalents shall be the consideration received by the Issuer for issuing
such Common Stock Equivalents, plus the additional consideration payable to
the Issuer upon the exercise, conversion or exchange of such Common Stock
Equivalents. In case of the issuance at any time of any Additional Shares
of Common Stock or Common Stock Equivalents in payment or satisfaction of
any dividend upon any class of Capital Stock of the Issuer other than
Common Stock, the Issuer shall be deemed to have received for such
Additional Shares of Common Stock or Common Stock Equivalents a
consideration equal to the amount of such dividend so paid or satisfied. In
any case in which the consideration to be received or paid shall be other
than cash, the Board shall notify the Holder of this Warrant of its
determination of the fair market value of such consideration prior to
payment or accepting receipt thereof. If, within thirty days after receipt
of said notice, the Majority Holders shall notify the Board in writing of
their objection to such determination, a determination of the fair market
value of such consideration shall be made by an Independent Appraiser
selected by the Majority Holders with the approval of the Board (which
approval shall not be unreasonably withheld), whose fees and expenses shall
be paid by the Issuer.
(ii) Outstanding Common Stock. The number of shares of Common Stock at
any time outstanding shall (A) not include any shares thereof then directly
or indirectly owned or held by or for the account of the Issuer or any of
its Subsidiaries, and (B) be deemed to include all shares of Common Stock
then issuable upon conversion, exercise or exchange of any then outstanding
Common Stock Equivalents or any other evidences of Indebtedness (including,
without limitation, the Notes), shares of Capital Stock or other Securities
which are or may be at any time convertible into or exchangeable for shares
of Common Stock or Other Common Stock.
(h) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (g) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(i) Adjustment of Warrant Share Number. Upon each adjustment in the Warrant
Price pursuant to any of the foregoing provisions of this Section 4, the Warrant
Share Number shall be adjusted, to the nearest whole share, to the product
obtained by multiplying the Warrant Share Number immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately before giving effect to such adjustment and the
denominator of which shall be the Warrant Price immediately after giving effect
to such adjustment.
(j) Form of Warrant after Adjustments. The form of this Warrant need not be
changed because of any adjustments in the Warrant Price or the number and kind
of Securities purchasable upon the exercise of this Warrant.
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5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" selected by the Holder,
provided that the Issuer shall have ten days after receipt of notice from such
Holder of its selection of such firm to object thereto, in which case such
Holder shall select another such firm and the Issuer shall have no such right of
objection. The firm selected by the Holder of this Warrant as provided in the
preceding sentence shall be instructed to deliver a written opinion as to such
matters to the Issuer and such Holder within thirty days after submission to it
of such dispute. Such opinion shall be final and binding on the parties hereto.
The fees and expenses of such accounting firm shall be paid by the Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be issued
in connection with an exercise hereof; rather the number of shares of Warrant
Stock shall be rounded up or down to the nearest whole share.
7. Definitions. For the purposes of this Warrant, the following terms have
the following meanings:
"Additional Shares of Common Stock" means all shares of Common
Stock issued by the Issuer after the Original Issue Date, and all shares
of Other Common, if any, issued by the Issuer after the Original Issue
Date, except any shares of Common Stock presently outstanding, any shares
of Common Stock issued upon the exercise of any existing or future stock
options or grants issued to any directors, officers, employees or
consultants of the Issuer under any employee incentive stock option
and/or any stock option plan approved by the Board, the Warrant Stock and
the Conversion Shares.
"Board" shall mean the Board of Directors of the Issuer.
"Capital Stock" means and includes (i) any and all shares,
interests, participations or other equivalents of or interests in
(however designated) corporate stock, including, without limitation,
shares of preferred or preference stock, (ii) all partnership interests
(whether general or limited) in any Person which is a partnership, (iii)
all membership interests or limited liability company interests in any
limited liability company, and (iv) all equity or ownership interests in
any Person of any other type.
"Certificate of Incorporation" means the Certificate of
Incorporation of the Issuer as in effect on the Original Issue Date, and
as hereafter from time to time amended, modified, supplemented or
restated in accordance with the terms hereof and thereof and pursuant to
applicable law.
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"Common Stock" means the Common Stock, $.001 par value, of the
Issuer and any other Capital Stock into which such stock may hereafter be
changed.
"Common Stock Equivalent" means any Convertible Security or
warrant, option or other right to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares
of Capital Stock or other Securities that are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock.
The term "Convertible Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or
self-regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and
whether domestic or foreign.
"Holders" mean the Persons who shall from time to time own any
Warrant. The term "Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Issuer) that is regularly
engaged in the business of appraising the Capital Stock or assets of
corporations or other entities as going concerns, and which is not
affiliated with either the Issuer or the Holder of any Warrant.
"Issuer" means Sales Online Direct, Inc., a Delaware corporation,
and its successors.
"Majority Holders" means at any time the Holders of Warrants
exercisable for a majority of the shares of Warrant Stock issuable under
the Warrants at the time outstanding.
"Notes" means the Series A 8% Convertible Notes issued and sold
pursuant to the Purchase Agreement.
"Conversion Shares" means Common Stock issuable upon the
conversion of any Notes.
"Original Issue Date" means the date first written at the top of
this Warrant.
"Other Common" means any other Capital Stock of the Issuer of any
class which shall be authorized at any time after the date of this
Warrant (other than Common Stock) and which shall have the right to
participate in the distribution of earnings and assets of the Issuer
without limitation as to amount.
"OTC Bulletin Board" means the over-the-counter electronic
bulletin board.
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"Person" means an individual, corporation, limited liability
company, partnership, joint stock company, trust, unincorporated
organization, joint venture, Governmental Authority or other entity of
whatever nature.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the OTC
Bulletin Board or other registered national stock exchange on which the
Common Stock is then listed or if there is no such price on such date,
then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not
listed then on the OTC Bulletin Board or any registered national stock
exchange, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the OTC Bulletin Board or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business
on such date, or (c) if the Common Stock is not then reported by the OTC
Bulletin Board or the National Quotation Bureau Incorporated (or similar
organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the holder, or (d) if the Common
Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Independent Appraiser selected in good
faith by the Majority Holders; provided, however, that the Issuer, after
receipt of the determination by such Independent Appraiser, shall have
the right to select an additional Independent Appraiser, in which case,
the fair market value shall be equal to the average of the determinations
by each such Independent Appraiser; and provided, further that all
determinations of the Per Share Market Value shall be appropriately
adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value
by an Independent Appraiser shall be based upon the fair market value of
the Issuer determined on a going concern basis as between a willing buyer
and a willing seller and taking into account all relevant factors
determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no
consideration shall be given to any restrictions on transfer of the
Common Stock imposed by agreement or by federal or state securities laws,
or to the existence or absence of, or any limitations on, voting rights.
"Purchase Agreement" means the Securities Purchase Agreement dated
as of March 23, 2000, among the Issuer and the investors a party thereto.
"Registration Rights Agreement" has the meaning specified in
Section 3(e) hereof.
"Securities" means any debt or equity securities of the Issuer,
whether now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or
other right to purchase or acquire any Security. "Security" means one of
the Securities.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar federal statute then in effect.
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<PAGE>
"Subsidiary" means any corporation at least 50% of whose
outstanding Voting Stock shall at the time be owned directly or
indirectly by the Issuer or by one or more of its Subsidiaries, or by the
Issuer and one or more of its Subsidiaries.
"Trading Day" means (a) a day on which the Common Stock is traded
on the over the counter market as reported by the OTC Bulletin Board, or
(b) if the Common Stock is not listed on the OTC Bulletin Board, a day on
which the Common Stock is traded on any other registered national stock
exchange, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter
market as reported by the National Quotation Bureau Incorporated (or any
similar organization or agency succeeding its functions of reporting
prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government
action to close.
"Term" has the meaning specified in Section 1 hereof.
"Voting Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however
designated) having ordinary voting power for the election of a majority
of the members of the Board of Directors (or other governing body) of
such corporation, other than Capital Stock having such power only by
reason of the happening of a contingency.
"Warrants" means the Warrants issued and sold pursuant to the
Purchase Agreement, including, without limitation, this Warrant, and any
other warrants of like tenor issued in substitution or exchange for any
thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof
or of any of such other Warrants.
"Warrant Price" means initially 120% of the lowest closing bid
price of the Common Stock for the five (5) the trading days immediately
preceding the Closing Date (as such term is defined in the Purchase
Agreement), as such price may be adjusted from time to time as shall
result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of
shares of Warrant Stock which may at such time be purchased upon exercise
of this Warrant, after giving effect to all prior adjustments and
increases to such number made or required to be made under the terms
hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any
Warrant or Warrants or otherwise issuable pursuant to any Warrant or
Warrants.
8. Other Notices. In case at any time:
(A) the Issuer shall make any distributions to the holders of
Common Stock; or
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<PAGE>
(B) the Issuer shall authorize the granting to all holders of
its Common Stock of rights to subscribe for or purchase any
shares of Capital Stock of any class or of any Common Stock
Equivalents or Convertible Securities or other rights; or
(C) there shall be any reclassification of the Capital Stock of
the Issuer; or
(D) there shall be any capital reorganization by the Issuer; or
(E) there shall be any (i) consolidation or merger involving
the Issuer or (ii) sale, transfer or other disposition of
all or substantially all of the Issuer's property, assets
or business (except a merger or other reorganization in
which the Issuer shall be the surviving corporation and its
shares of Capital Stock shall continue to be outstanding
and unchanged and except a consolidation, merger, sale,
transfer or other disposition involving a wholly-owned
Subsidiary); or
(F) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of
Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of all meetings and
actions by written consent of its stockholders, at the same time in the same
manner as notice of any meetings of stockholders is required to be given to
stockholders who do not waive such notice (or, if such requires no notice, then
two Trading Days written notice thereof describing the matters upon which action
is to be taken). The Holder shall have the right, at Holder's expense, to send
two representatives selected by it to each meeting, who shall be permitted to
attend, but not vote at, such meeting and any adjournments thereof. This Warrant
entitles the Holder to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in
this Warrant may be amended, or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
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<PAGE>
Issuer and the Majority Holders; provided, however, that no such amendment or
waiver shall reduce the Warrant Share Number, increase the Warrant Price,
shorten the period during which this Warrant may be exercised or modify any
provision of this Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. This warrant shall be governed by and construed in
accordance with the laws of the state of Delaware, without giving effect to
principles of conflicts of law.
11. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., central standard time,
on a Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., central standard time, on any
date and earlier than 11:59 p.m., central standard time, on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The addresses for such communications shall be
with respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to such Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
Sales Online Direct, Inc.
4 Brussels Street
Worcester, Massachusetts 01610
Telephone Number: 781.821.0199 or 508.791.6710
Facsimile Number: 508.797.5398 and 305.489.6114
Attention: Greg Rotman, CEO
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice.
12. Warrant Agent. The Issuer may, by written notice to each Holder of
this Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant
to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by
the Issuer in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate and that, to the fullest extent
permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
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<PAGE>
14. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Issuer, the Holder hereof and (to the extent provided herein)
the Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by
any such Holder or Holder of Warrant Stock.
15. Modification and Severability. If, in any action before any court
or agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. Headings. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day
and year first above written.
SALES ONLINE DIRECT, INC.
By:____________________________________
Greg Rotman, Chief Executive Officer
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<PAGE>
EXERCISE FORM
SALES ONLINE DIRECT, INC.
The undersigned, pursuant to the provisions of the within Warrant, hereby elects
to purchase _____ shares of Common Stock of ___________________ covered by the
within Warrant. Check here if purchase will be by cashless exercise: ______. No.
of Warrant Shares surrendered pursuant to exercise: _______________.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. _____ cancelled (or transferred or exchanged) this _____ day of
___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. ____ issued for ____ shares of Common Stock in the
name of _______________.
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EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made as of
March 23, 2000, by and between Sales Online Direct, Inc., a corporation
organized under the laws of the State of Delaware, U.S.A., with headquarters
located at 4 Brussels Street, Worcester, Massachusetts 01610 (the "Company") and
Augustine Fund, L.P., an Illinois limited partnership with its headquarters
located at 141 West Jackson Boulevard, Suite 2181, Chicago, Illinois 60604 (the
"Purchaser").
This Agreement is being entered into pursuant to that Securities
Purchase Agreement, dated as of the date hereof, by and between the Company and
the Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions.
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have the meaning set forth in Section 3(m).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Blackout Period" shall have the meaning set forth in Section 3(n).
"Board" shall have the meaning set forth in Section 3(n).
"Business Day" means any day except Saturday, Sunday and any day that
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, $.001 par value per
share.
"Effectiveness Date" means with respect to the Registration Statement
September 30, 2000.
<PAGE>
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Event" shall have the meaning set forth in Section 7(e)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the 180th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities. "Indemnified Party" shall have the
meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Note" or "Notes" means the Series A Eight Percent (8%) Convertible
Notes of the Company, the form of which is shown as Exhibit A to the Purchase
Agreement, issued or to be issued to the Purchaser pursuant to the Purchase
Agreement.
"OTC Bulletin Board" shall mean the over-the-counter electronic
bulletin board market or exchange.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock issuable
upon conversion of the Note (the "Conversion Shares") or in payment of interest
in accordance with the terms of the Note ("Interest Shares"), and exercise of
the Warrants (the "Warrant Shares"), and upon any stock split, stock dividend,
recapitalization or similar event with respect to such Conversion Shares,
Interest Shares, Warrant Shares or any Note, (ii) the shares of Common
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<PAGE>
Stock issued upon any redemption of a Note pursuant to the terms of the Notes
and (iii) any other dividend or other distribution with respect to, conversion
or exchange of, or in replacement of, Registrable Securities; provided, however,
that Registrable Securities shall include (but not be limited to) a number of
shares of Common Stock (the "Required Number") equal to no less than the greater
of (x) 2,000,000 shares of Common Stock, or (y) 200% of the maximum number of
shares of Common Stock which would be issuable upon conversion of the Not and
upon exercise of the Warrants, assuming such conversion and exercise occurred on
the Closing Date or the Filing Date, whichever date would result in the greater
number of Registrable Securities. Notwithstanding anything contained herein to
the contrary, if the actual number of shares of Common Stock issuable upon
conversion of the Note and upon exercise of the Warrants exceeds the Required
Number, the term "Registrable Securities" shall be deemed to include such
additional shares of Common Stock as ar necessary to include all of the shares
of Common Stock issuable upon conversion of the Note, in payment of Interest (if
applicable) and upon exercise of the Warrants.
"Registration Statement" means the registration statements and any
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
2. Registration.
(a) Required Registration. On or prior to the Filing Date the Company
shall prepare and file with the Commission a Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case such registration shall be on another appropriate
form in accordance herewith). The Company shall use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Registration Statement continuously
effective under the Securities Act until such date as is the earlier of (x) the
date when all Registrable Securities covered by such Registration Statement
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<PAGE>
have been sold or (y) the date on which the Registrable Securitie may be sold
without any restriction pursuant to Rule 144(k) as determined by the counsel to
the Company pursuant to a written opinion letter, addressed to the Company's
transfer agent to such effect (the "Effectiveness Period"). If an additional
Registration Statement is required to be filed because the actual number of
shares of Common Stock into which the Note is convertible and the Warrants are
exercisable exceeds the number of shares of Common Stock initially registered in
respect of the Conversion Shares, the Interest Shares and the Warrant Shares
based upon the computation on the Closing Date, the Company shall have twenty
(20) Business Days to file such additional Registration Statement, and the
Company shall use its best efforts to cause such additional Registration
Statement to be declared effective by the Commission as soon as possible, but in
no event later than ninety (90) days after filing.
(b) Shelf Registration. If the Company is not on the Filing Date
eligible to file a registration statement on Form S-3, then as soon as possible
but no later than thirty (30) days after becoming eligible to file a
registration statement for a secondary or resale offering of the Registrable
Securities on Form S-3, the Company shall prepare and file with the Commission a
post-effective amendment to Form SB-2 (or such other applicable form filed in
accordance with Section 2(a) above) on Form S-3 to continue the registration of
all Registrable Securities pursuant to a "shelf" Registration Statement on Form
S-3 covering all Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. Notwithstanding anything to the contrary
contained herein, at no time during the Effectiveness Period shall any of the
Registrable Securities cease being registered.
3. Registration Procedures.
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form S-3 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3 such
registration shall be on another appropriate form in accordance herewith) in
accordance with the method or methods of distribution thereof as specified by
the Holder (except if otherwise directed by the Holder), and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall (i) furnish to the Holder
and its counsel, copies of all such documents proposed to be filed, which
documents (other than those incorporated by reference) will be subject to the
review of the Holder an its counsel , and (ii) at the request of the Holder
cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to such Holder, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holder or its counsel shall reasonably object
in writing within three (3) Business Days of their receipt thereof.
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<PAGE>
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as possible to any comments received
from the Commission with respect to the Registration Statement or any amendment
thereto and as promptly as possible provide the Holder true and complete copies
of all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holder thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holder of Registrable Securities to be sold and its
counsel as promptly as possible (and, in the case of (i)(A) below, not less than
five (5) Business Days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one (1) Business Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies th Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement and (C) with respect to the Registration Statement
or any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
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<PAGE>
(e) If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment.
(f) Furnish to the Holder and its counsel, without charge, at least
one conformed copy of each Registration Statement and each amendment thereto,
including financial statements and schedules, all documents incorporated or
deemed to be incorporated therein by reference, and all exhibits to the extent
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to the Holder and its counsel, without charge, as
many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
its counsel in connection with the registration or qualification (or exemption
from such registration or qualification) of such Registrable Securities for
offer and sale under the securities or Blue Sky laws of such jurisdictions
within the United States as any Holder reasonably requests in writing, to keep
each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holder to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold pursuant
to a Registration Statement, which certificates shall be free of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any Holder may request at least two (2) Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(vi),
as promptly as possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact
6
<PAGE>
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the OTC Bulletin Board and any
other securities exchange, quotation system, market or over-the-counter bulletin
board, if any, on which similar securities issued by the Company are then listed
as and when required pursuant to the Purchase Agreement.
(l) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) Require each selling Holder to furnish to the Company information
regarding such Holder and the distribution of such Registrable Securities as is
required by law to be disclosed in the Registration Statement, and the Company
may exclude from such registration the Registrable Securities of any such Holder
who fails to furnish such information within a reasonable time prior to the
filing of each Registration Statement, supplemented Prospectus and/or amended
Registration Statement.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be
required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
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(n) If (i) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose and which the Company would be required to disclose
under the Registration Statement, then the Company may postpone or suspend
filing or effectiveness of a registration statement for a period not to exceed
20 consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 12 month period (each, a "Blackout Period"); provided, however, that no such
postponement or suspension shall be permitted for consecutive 20 day periods,
arising out of the same set of facts, circumstances or transactions.
4. Registration Expenses
All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company whether or not
the Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the OTC
Bulletin Board and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed, (B) with respect to filings
required to be made with the Commission, (C) with respect to filings required to
be made under the OTC Bulletin Board and (D) in compliance with state securities
or Blue Sky laws (including, without limitation, fees and disbursements of
counsel for the Holder in connection with Blue Sky qualification of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the Holders of
a majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement, including, without limitation, the Company's independent public
accountants (including the expenses of any comfort letters or costs associated
with the delivery b independent public accountants of a comfort letter or
comfort letters). In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
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<PAGE>
5. Indemnification
(a) Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, and employees of each of them, each Person who
controls any such Holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out
of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that such
untrue statements or omissions are based upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein,
which information was reasonably relied on by the Company for use therein or to
the extent that such information relates to such Holder or such Holder's
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto. The Company shall notify the Holder promptly of
the institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of an Indemnified Party and shall survive the transfer of
the Registrable Securities by the Holder.
(b) Indemnification by Holder. The Holders shall, notwithstanding any
termination of this Agreement, severally and not jointly, indemnify and hold
harmless the Company, the directors, officers, agents and employees, each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted by
applicable law, from and against all Losses, as incurred, arising out of or
based upon any untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or arising solely out of
or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, to the extent, but
only to the extent, that such untrue statement or omission is contained in or
omitted from any information so furnished in writing by such Holder to the
Company specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the Company
for use in the Registration Statement, such Prospectus or such form of
prospectus or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus
Supplement.
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<PAGE>
(c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the "Indemnifying Party) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurre in connection with defense thereof; provided, that the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party because of a failure or refusal of a
governmental authority to enforce such indemnification in accordance with its
terms (by reason of public policy or otherwise), then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses, in
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<PAGE>
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as any other
relevant equitable considerations. The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission of a material fact, has been
taken or made by, or relates to information supplied by, such Indemnifying,
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties
6. Rule 144.
As long as any Holder owns Notes, Interest Shares, Conversion Shares,
Warrants or Warrant Shares, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Holder
with true and complete copies of all such filings. As long as any Holder owns
Notes, Interest Shares, Conversion Shares, Warrants or Warrant Shares, if the
Company is not required to file reports pursuant to Section 13(a) or 15(d) of
the Exchange Act, it will prepare and furnish to the Holder and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in report
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Interest Shares, Conversion Shares and Warrant Shares without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 promulgated under the Securities Act, including providing any legal
opinions of counsel to the Company referred to in the Purchase Agreement. Upon
the request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
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7. Miscellaneous.
(a) Remedies. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holder in this Agreement or
otherwise conflicts with the provisions hereof except for registration rights
provisions disclosed in the Company's Disclosure Schedule to the Purchase
Agreement. Except for registration rights provisions disclosed in the Company's
Disclosure Schedule to the Purchase Agreement, neither the Company nor any of
its subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person.
(c) [Intentionally Omitted.]
(d) Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering (i) Conversion Shares and Interest
Shares or (ii) Warrant Shares, the Company shall determine to prepare and file
with the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or its the equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each holder of Registrable Securities
written notice of such determination and, if within thirty (30) days after
receipt of such notice, any such holder shall so request in writing (which
request shall specify the Registrable Securities intended to be disposed of by
the Purchaser), the Company will cause the registration under the Securities Act
of all Registrable Securities which the Company has been so requested to
register by the holder, to the extent requisite to permit the disposition of the
Registrable Securities so to be registered, provided that if at any time after
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to such holder and, thereupon, (i) in the
case of a determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such registration (but
not from its obligation to pay expenses in accordance with Section 4 hereof),
and (ii) in the case of a determination to delay
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<PAGE>
registering, shall be permitted to delay registering any Registrable Securities
being registered pursuant to this Section 7(d) for the same period as the delay
in registering such other securities. The Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, however, that the Company shall not
be required to register any Registrable Securities pursuant to this Section 7(d)
that are eligible for sale pursuant to Rule 144(k) of the Securities Act. In the
case of an underwritten public offering, if the managing underwriter(s) or
underwriter(s) should reasonably object to the inclusion of the Registrable
Securities in such registration statement, then if the Company after
consultation with the managing underwriter should reasonably determine that the
inclusion of such Registrable Securities, would materially adversely affect the
offering contemplated in such registration statement, and based on such
determination recommends inclusion in such registration statement of fewer or
none of the Registrable Securities of the Holder, then (x) the number of
Registrable Securities of the Holders included in such registration statement
shall be reduced pro-rata among such Holders (based upon the number of
Registrable Securities requested to be included in the registration), if the
Company after consultation with the underwriter(s) recommends the inclusion of
fewer Registrable Securities, or (y) none of the Registrable Securities of the
Holder shall be included in such registration statement, if the Company after
consultation with the underwriter(s) recommends the inclusion of none of such
Registrable Securities; provided, however, that if securities are being offered
for the account of other persons or entities as well as the Company, such
reduction shall not represent a greater fraction of the number of Registrable
Securities intended to be offered by the Holder than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).
(e) Failure to File Registration Statement and Other Events. The
Company and the Purchaser agree that the Holder will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period or
if certain other events occur. The Company and the Holder further agree that it
would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if (i) the Registration Statement is not filed on or prior to the
Filing Date, or is not declared effective by the Commission on or prior to the
Effectiveness Date (or in the event an additional Registration Statement is
filed because the actual number of shares of Common Stock into which the Note is
convertible and the Warrants are exercisable exceeds the number of shares of
Common Stock initially registered is not filed and declared effective within the
time periods set forth in Section 2(a)), or (ii) the Company fails to file with
the Commission a request for acceleration in accordance with Rule 12dl-2
promulgated under the Exchange Act within five (5) Business Days of the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be "reviewed," or not subject
to further review, or (iii) the Registration Statement is filed with and
declared effective by the Commission but thereafter ceases to be effective as to
all Registrable Securities at any time prior to the expiration of the
Effectiveness Period, without being succeeded immediately by a subsequent
Registration Statement filed with and declared effective by the Commission, or
(iv) trading in the Common Stock shall be suspended or if the Common Stock is
delisted from the OTC Bulletin Board for any reason for more than ninety (90)
days in the aggregate, or (v) the conversion rights of the Holder are suspended
for any reason, including by the Company, or (vi) the Company breaches in a
material respect any covenant or other material term or condition to this
Agreement, the the Notes, the Purchase Agreement (other than a representation or
warranty
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contained therein) or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated hereby and
thereby, and such breach continues for a period of thirty days after written
notice thereof to the Company, or (vii) the Company has breached Section 3(n) of
this Agreement (any such failure or breach being referred to as an "Event"), the
Company shall pay in cash as liquidated damages for such failure and not as a
penalty to the Holder an amount equal to 2% of the Purchase Price paid by the
Holder for all Notes and Warrants (or Common Stock held by the Holder upon
conversion or exercise thereof) purchased and then outstanding pursuant to the
Purchase Agreement for each thirty (30) day period until the applicable Event
has been cured, which shall be pro rated for such periods less than thirty (30)
days (the "Periodic Amount"). Payments to be made pursuant to this Section 7(e)
shall be due and payable immediately upon demand in immediately available funds.
The parties agree that the Periodic Amount represents a reasonable estimate on
the part of the parties, as of the date of this Agreement, of the amount of
damages that may be incurred by the Holder if the Registration Statement is not
filed on or prior to the Filing Date or has not been declared effective by the
Commission on or prior to the Effectiveness Date and maintained in the manner
contemplated herein during the Effectiveness Period or if any other Event as
described herein has occurred.
(f) Specific Enforcement, Consent to Jurisdiction.
(i) The Company and the Purchaser acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Registration Rights Agreement or the Purchase Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Registration
Rights Agreement or the Purchase Agreement and to enforce specifically the terms
and provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(ii) Each of the Company and the Purchaser (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in the
County of Cook, State of Illinois for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement or the Purchase
Agreement and (ii) hereby waives, and agrees not to assert in any such suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Purchaser consents to process being served
in any such suit, action or proceeding by mailing a copy thereof to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 7(f) shall affect or limit any right to serve
process in any other manner permitted by law.
(g) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holder. Notwithstanding the foregoing, a waiver or consent to depart
from the provisions hereof with respect to a matter that relates exclusively to
the rights of Holder and that does not directly or indirectly affect the rights
of other Holders may
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<PAGE>
be given by Holders of at least a majority of the Registrable Securities to
which such waiver or consent relates; provided, however, that the provisions of
this sentence may not be amended, modified, or supplemented except in accordance
with the provisions of the immediately preceding sentence.
(h) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., central standard time,
on a Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., central standard time, on any
date and earlier than 11:59 p.m., central time, on such date, (iii) the Business
Day following the date of mailing, if sent by nationally recognized overnight
courier service or (iv) actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be with
respect to each party at such party's address as set forth in the Purchase
Agreement or to such other address or addresses or facsimile number or numbers
as any such party may most recently have designated in writing to the other
parties hereto by such notice.
(i) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns
and shall inure to the benefit of the Holder and its successors and assigns. The
Company may not assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the Holder.
(j) Assignment of Registration Rights. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any transferee of such Holder of all
or a portion of the Notes or the Registrable Securities if: (i) the Holder
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment, (ii) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee, and (b) the securities with respect to
which such registration rights are being transferred or assigned, (iii)
following such transfer or assignment the further disposition of such securities
by the transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In
addition, each Holder shall have the right to assign its rights hereunder to any
other Person with the prior written consent of the Company, which consent shall
not be unreasonably withheld. The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.
(k) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is
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<PAGE>
delivered by facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
were the original thereof.
(l) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to
principles of conflicts of law thereof.
(m) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(n) Severability. If any term, provision, covenant or restriction of
this Agreement is held to be invalid, illegal, void or unenforceable in any
respect, the remainder of the terms, provisions, covenants and restrictions set
forth herein shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall use their
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result a that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(o) Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
(p) Shares Held by the Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage and shall not be counted as outstanding.
(q) Notice of Effectiveness. Within two (2) business days after the
Registration Statement which includes the Registrable Securities is ordered
effective by the Commission, the Company shall deliver, and shall cause legal
counsel for the Company to deliver, to the transfer agent for such Registrable
Securities and to the Purchaser (with copies to the Holders whose Registrable
Securities are included in such Registration Statement, if other than the
Purchaser) confirmation that the Registration Statement has been declared
effective by the Commission in the form attached hereto as Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed by their respective authorized persons as
of the date first indicated above.
[SIGNATURE PAGE FOLLOWS]
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[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT DATED AS OF
MARCH 23, 2000]
SALES ONLINE DIRECT, INC.
By: /s/Greg Rotman
----------------------------------------
Name: Greg Rotman
Title: Chief Executive Officer
AUGUSTINE FUND, L.P.
By: Augustine Capital Management, L.L.C.
By: /s/Thomas F. Duszynski
-----------------------------------------
Mr. Thomas F. Duszynski, Member
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT
[NAME AND ADDRESS OF TRANSFER AGENT]
Attn: _____________
The Augustine Fund, L.P.
C/o Augustine Capital Mangement, L.L.C.
141 West Jackson Blvd., Suite 2182
Chicago, Illinois 60604
Attn: Mr. Thomas F. Duszynski
Re: Sales Online Direct, Inc.
Ladies and Gentlemen:
We are counsel to Sales Online Direct, Inc., a Delaware corporation
(the "Company"), and have represented the Company in connection with that
certain Securities Purchase Agreement (the "Purchase Agreement"), dated as of
March 23, 2000, by and among the Company and the Purchaser named therein (the
"Holder") pursuant to which the Company issued to the Holder its Series A Eight
Percent (8%) Convertible Notes (the "Notes") along with warrants (the
"Warrants") to purchase shares of the Company's commo stock, $.001 par value per
share (the "Common Stock"). Pursuant to the Purchase Agreement, the Company has
also entered into a Registration Rights Agreement with the Holder (the
"Registration Rights Agreement"), dated of even date with the Purchase
Agreement, pursuant to which the Company agreed, among other things, to register
the Registrable Securities (as defined in the Registration Rights Agreement),
including the shares of Common Stock issuable upon conversion of the Notes and
exercise of the Warrants, under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the Registration
Rights Agreement, on , 2000, the Company filed a Registration Statement on Form
___ (File No. 333- ) (the "Registration Statement") with the Securities and
Exchange Commission (the "SEC") relating to the resale of the Registrable
Securities which names the Holder as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By: /s/
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EXHIBIT D
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is dated as of March 23, 2000,
by and among Sales Online Direct, Inc., a corporation organized under the laws
of the State of Delaware, U.S.A. (the "Company"), the buyer set forth on the
execution page hereof (the "Buyer") and H. Glenn Bagwell, Jr., a duly licensed
attorney who practices law in the State of North Carolina, U.S.A., as Escrow
Agent (the "Escrow Agent").
Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in that Securities Purchase Agreement between the
Company and the Buyer dated of even date herewith (the "Securities Purchase
Agreement").
W I T N E S S E T H:
WHEREAS, the Buyer and the Company have entered into the Securities
Purchase Agreement, pursuant to which the Company has agreed to sell, and the
Buyer has agreed to purchase, at the Closing, a number of Notes along with a
number of Warrants (collectively, the "Securities"); and
WHEREAS, the Buyer and the Company have agreed to effectuate the
Closing utilizing an escrow arrangement as described in this Agreement; and
WHEREAS, it is a condition of the Company's obligation to sell, and the
Buyer's obli-gation to purchase, the Securities, that this Agreement be executed
and delivered; and
WHEREAS, the Escrow Agent is willing to act hereunder on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth below, the parties hereto hereby agree as follows:
1. ESCROW ACCOUNT.
1.1 Deposit. On the Closing Date, by wire transfer of immediately
available funds in United States Dollars, Buyer shall deposit the full Purchase
Price (the "Escrow") with the Escrow Agent, to be held by the Escrow Agent in a
separate non-interest bearing account (the "Escrow Account"), established at
Wachovia Bank, N.A., (the "Bank"), subject to the terms and provisions contained
herein. At the request of the Company the Escrow Agent shall provide the Company
with all Bank statements, notices and other writings that it receives from the
Bank in connection with the Escrow Account.
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2. DISBURSEMENT OF ESCROW/SECURITIES; ESCROW OF COMMON STOCK.
2.1 Disbursement. At the Closing, upon receipt by the Escrow Agent of
all of the moneys, documents, and things from the respective parties with
respect to such Closing as described in the Securities Purchase Agreement and as
further described in Sections 2.1(a) and 2.1(b) below, the Escrow Agent shall
deliver to each party via facsimile the documents and things (or if requested by
the parties, only the signature pages thereto) to have been delivered by the
other party in accordance with the Securities Purchase Agreement and this
Agreement. The Escrow Agent shall transfer, by the next business day following
the Closing, by wire transfer to the Company the full Escrow then held, less any
charges and fees agreed to be paid by the Company, including (without
limitation) the fees owed by the Company to Delano Group Securities. The Escrow
Agent shall, upon receipt thereof, deliver (via overnight delivery service) to
the Company originals of all other documents and things listed in Section 2.1(b)
below. The Escrow Agent shall, upon receipt thereof, deliver (via overnight
delivery service) originals of all of the documents and things listed in Section
2.1(a) below to the Buyer at the address provided in writing by the Buyer to the
Escrow Agent.
The Closing may take place via facsimile. This shall be accomplished in
the following manner. Each party shall deliver via facsimile to the Escrow
Agent, at the telecopier number provided on the signature page to this
Agreement, the first page and the fully executed signature page to each of the
documents and things to be executed by such party at the Closing. If stock
certificates, Notes or Warrants are to be delivered, each such certificate or
document shall be delivered via overnight courier to the Escrow Agent. Upon
receipt of the requisite documents and things via facsimile or otherwise from
each party, the Escrow Agent shall in turn send to each party the documents and
things received from the other party. Thereafter, upon receipt by the Escrow
Agent of the Purchase Price and the original Notes and Warrants being sold at
such Closing, the Escrow Agent shall wire transfer the Escrow (less any charges
and fees agreed to be paid by the Company to third parties) to the Company. Each
party closing the transactions contemplated herein via facsimile shall deliver
via overnight courier service to the Escrow Agent complete originals of all
documents and things (as called for in Sections 2.1(a) and 2.1(b) below) within
one (1) business day after such delivery via facsimile. Each party hereby agrees
that a facsimile of each document and thing to be delivered hereunder, once
delivered to the Escrow Agent, shall be binding upon such party in the same
manner as would an original to the full extent allowed by applicable law.
(a). Items to be Delivered by the Company to the Escrow Agent.
At the Closing. On the Closing Date, the Company shall send to the
Escrow Agent on behalf of the Buyer, unless otherwise stated, three (3) fully
executed (by the authorized officer(s) of the Company) originals of each of the
following documents: (I) the Securities Purchase Agreement, (II) the
Registration Rights Agreement, (III) one (1) original of each Note, as
applicable, fully executed, along with two (2) copies of each Note issued by the
Company; (IV) one (1) original fully executed Warrant along with two (2) copies
of the Warrant; (V) the executed original Legal Opinion (Exhibit E to the
Securities Purchase Agreement) along with two (2) copies thereof; and (VII) this
Agreement.
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(b) Items to be Delivered by the Buyer to the Escrow Agent.
At the Closing. On or before the Closing Date, the Buyer shall send to
the Escrow Agent on behalf of the Company, unless otherwise stated, three (3)
fully executed originals of each of the following documents: (I) the Securities
Purchase Agreement, (II) the Registration Rights Agreement, (III) this
Agreement; and (IV) the full purchase price for the Securities being purchased
at such Closing, via wire transfer to the Escrow Account.
2.2. Escrow of Common Stock. In accordance with Section 4(h) of the
Securities Purchase Agreement, and based upon certain representations and
warranties contained in the Securities Purchase Agreement, upon registration of
the Registrable Securities, and from time to time as requested by the Buyer
thereafter, the Company shall place in trust with the Escrow Agent one or more
stock certificates representing a number of non-legended shares of Common Stock
as specified in the Securities Purchase Agreement ("Escrow Shares"). The Escrow
Agent shall hold the Escrow Shares in certificate form or in a brokerage account
as the Escrow Agent deems appropriate to fulfill his duties under the Securities
Purchase Agreement and hereunder. None of the Escrow Shares shall be disbursed
other than in accordance with the terms of Section 4(h) of the Securities
Purchase Agreement and of the terms hereof, or in accordance with the written
instructions of both the Company and the Buyer delivered to the Escrow Agent. In
no event shall the Escrow Agent release or transfer any Escrow Shares to any
party other than to the Buyer (or another buyer) or to the Company in accordance
with this Agreement, absent express written instructions from the Company to
transfer Escrow Shares to a third party.
Upon a full or partial conversion of the Note, the Buyer shall deliver
via facsimile to the Escrow Agent a copy of the Notice of Conversion. The Escrow
Agent shall use its reasonable best efforts to cause the delivery from escrow to
the Buyer (in accordance with the Buyer's written instructions to the Escrow
Agent, and via electronic transfer or otherwise) of the number of shares of
Common Stock specified in the Notice of Conversion within three (3) business
days after receipt of such Notice of Conversion. The Escrow Agent shall not be
responsible for any breach by the Company of its obligation to timely deliver
sufficient Escrow Shares to effect a conversion or exercise.
Upon Buyer's receipt of all Common Stock due upon conversion of all of
the Notes issued to the Buyer, the Buyer shall inform the Escrow Agent in
writing that the requirements of the Securities Purchase Agreement with respect
to the Notes have been satisfied. The Company shall instruct the Escrow Agent in
writing as to the return to the Company of the remaining Escrow Shares, and the
Escrow Agent shall as soon as practicable return such remaining Escrow Shares in
accordance with the Company's instructions. Thereafter the Escrow Agent shall
have no further obligation to any party with respect to the Escrow Shares,
whether those delivered to the Buyer or those returned to the Company.
2.3 Controversies. If any controversy arises between two or more of the
parties hereto, or between any of the parties hereto and any person not a party
hereto, as to whether or not or to whom the Escrow Agent shall deliver the
Escrow or any portion thereof or as to any other matter arising out of or
relating to this Escrow Agreement, the Escrow Agent shall not be required to
determine the same and need not make any delivery of the Escrow concerned or any
portion thereof but may retain the same until the rights of the parties to the
dispute shall have been finally determined by agreement or by final judgment of
a court of competent jurisdiction after all appeals have been finally determined
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(or the time for further appeals has expired without an appeal having been
made). The Escrow Agent shall deliver that portion of the Escrow concerned
covered by such agreement or final order within five (5) days after the Escrow
Agent receives a copy thereof. The Escrow Agent shall assume that no such
controversy has arisen unless and until it receives written notice from the
Buyer or the Company that such controversy has arisen, which refers specifically
to this Agreement and identifies the adverse claimants to the controversy.
2.4 No Other Disbursements. No portion of the Escrow shall be disbursed
or otherwise transferred except in accordance with this Section 2, Section 4 or
Section 5.1(b). Without limiting the foregoing, neither Escrow Agent nor the
Buyer shall be entitled to any right of offset against the Escrow or otherwise
entitled to receive any portion of the Escrow.
3. ESCROW AGENT. The acceptance by the Escrow Agent of his duties
hereunder is subject to the following terms and conditions, which the parties to
this Agreement hereby agree shall govern and control with respect to the rights,
duties, liabilities and immunities of the Escrow Agent:
3.1 The Escrow Agent shall not be responsible or liable in any manner
whatever for the sufficiency, correctness, genuineness or validity of any cash,
investments or other amounts deposited with or held by the Escrow Agent.
3.2 The Escrow Agent shall be protected in acting upon any written
notice, certificate, instruction, request or other paper or document believed by
the Escrow Agent to be genuine and to have been signed or presented by the
proper party or parties.
3.3 The Escrow Agent shall not be liable for any act done hereunder
except in the case of the Escrow Agent's willful misconduct or bad faith.
3.4 The Escrow Agent shall not be obligated or permitted to investigate
the correctness or accuracy of any document or to determine whether or not the
signatures contained in said documents are genuine or to require documentation
or evidence substantiating any such document or signature.
3.5 The Escrow Agent shall have no duties as Escrow Agent except those
that are expressly set forth herein, and in any modification or amendment
hereof; provided, however, that no such modification or amendment hereof shall
affect his duties unless it shall have given his written consent thereto. The
Escrow Agent shall not be prohibited from owning an equity interest in the
Company, the Buyer, another buyer, any of their respective subsidiaries or any
third party that is in any way affiliated with or conducts business with either
the Company, the Buyer or another buyer.
3.6 The Company and the Buyer specifically acknowledge that the Escrow
Agent is a practicing attorney in Raleigh, North Carolina U.S.A., and may have
worked with or be affiliated with the Company, the Buyer, or affiliates of
either of them on other transactions, and that they and each of them has
specifically requested that the Escrow Agent draft the documents for the said
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transactions and act as Escrow Agent with respect to the said transactions. Each
party represents that it has retained legal and other counsel of its choosing
with respect to the transactions contemplated herein and in the Securities
Purchase Agreement, and is satisfied in its sole discretion with the form and
content of the documentation drafted by the Escrow Agent, as the same has been
approved prior to closing by the parties and their respective counsel. The
Escrow Agent may own an equity interest in the Company and/or may be an equity
owner of the Buyer or another buyer, and may increase or sell any such interest,
so long as in accordance with any and all applicable law, and without further
disclosure of any kind to any party. The said parties hereby waive any objection
to the Escrow Agent so acting based upon conflict of interest or lack of
impartiality. The Escrow Agent agrees to act impartially and in accordance with
the terms of this Agreement and with the parties' respective instructions, so
long as they are not in conflict with the terms of this Agreement.
4. TERMINATION. This Agreement shall terminate on the earlier of (a)
the date on which the Escrow and all other escrowed documents and things
described herein shall have been fully disbursed in accordance with the terms
and conditions of this Agreement, (b) any other date agreed to by the Buyer and
the Company, or (c) the next business day after the maturity date of the last of
the Notes to be issued by the Company in accordance with the terms of the
Securities Purchase Agreement, in which event the Escrow shall be disbursed in
full to the Company.
5. MISCELLANEOUS.
5.1 Indemnification of Escrow Agent.
(a) The Company and the Buyer each agree, jointly and severally, to
indemnify the Escrow Agent for, and to hold him harmless against, any loss
incurred without willful misconduct or bad faith on the Escrow Agent's part,
arising out of or in connection with the administration of this Agreement,
including the costs and expenses of defending himself against any claim or
liability in connection with the exercise or performance of any of his powers or
duties hereunder. This indemnification shall not apply to with respect to a
direct claim against the Escrow Agent by the Company or the Buyer alleging in
good faith a breach of this Agreement by the Escrow Agent, which claim results
in a final non-appealable judgment against the Escrow Agent with respect to such
claim.
(b) In the event of any dispute as to the nature of the rights or
obligations of the Buyer, the Company or the Escrow Agent hereunder, the Escrow
Agent may at any time or from time to time interplead, deposit and/or pay all or
any part of the Escrow Funds with or to a court of competent jurisdiction
sitting in Wake County, North Carolina or in any appropriate federal court, in
accordance with the procedural rules thereof. The Escrow Agent shall give notice
of such action to the Company and the Buyer. Upon such interpleader, deposit or
payment, the Escrow Agent shall immediately and automatically be relieved and
discharged from all further obligations and responsibilities hereunder,
including the decision to interplead, deposit or pay such funds.
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5.2 Amendments. This Agreement may be modified or amended only by a
written instrument executed by each of the parties hereto.
5.3 Notices. All communications required or permitted to be given under
this Agreement to any party hereto shall be sent by first class mail or
facsimile to such party at the address, except in the case of the Escrow Agent,
of such party set forth in the Securities Purchase Agreement and, in the case of
the Escrow Agent, at 3005 Anderson Drive, Suite 204, Raleigh, North Carolina
U.S.A. 27609; fax number 919.785.3116.
5.5 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Escrow Agent shall not assign his duties under this
Agreement.
5.6 Governing Law. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of North Carolina.
5.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, and all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
[SIGNATURE PAGE FOLLOWS]
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[SIGNATURE PAGE TO ESCROW AGREEMENT DATED AS OF MAR. 23, 2000]
THE COMPANY:
SALES ONLINE DIRECT, INC.
By: /s/Greg Rotman
-------------------------------------
Mr. Greg Rotman, CEO
THE BUYER:
AUGUSTINE FUND, L.P.
By: Augustine Capital Management, L.L.C., its General
Partner
By:/s/Thomas F. Duszynski
-------------------------------------
Mr. Thomas F. Duszynski, Member
ESCROW AGENT:
/s/ H. Glenn Bagwell, Jr.
------------------------------------------
H. GLENN BAGWELL, JR., ESQ.
Address: 3005 Anderson Drive, Suite 204
Raleigh, North Carolina USA 27609
Telephone 919.785.3113
Telecopier 919.785.3116
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EXHIBIT 10.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
SALES ONLINE DIRECT, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No. 01-B Number of Shares: 100,000
Date of Issuance: March 23, 2000
Sales Online Direct, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Delano Group Securities, and permitted
assigns, the registered holder hereof ("Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time after the date hereof, but not after 5:00 P.M. Chicago time
on the Expiration Date (as defined herein) 100,000 fully paid and nonassessable
shares of Common Stock (as defined herein) of the Company (each a "Warrant
Share" and collectively the "Warrant Shares") at a purchase price per share
equal to one hundred twenty percent (120%) of the lowest of the closing bid
prices for the Common Stock for the five trading days prior to the date of this
Warrant (the "Exercise Price") in lawful money of the United States. The number
of Warrant Shares purchasable hereunder and the Exercise Price are subject to
adjustment as provided in Section 9 below.
Section 1.
(a) Definitions. The following words and terms used in this Warrant shall
have the following meanings:
"Common Stock" means (a) the Company's common stock and (b) any capital
stock into which such Common Stock shall have been changed or any capital stock
resulting from a reclassification of such Common Stock.
"Convertible Securities" mean any securities issued by the Company that
are convertible into or exchangeable for, directly or indirectly, shares of
Common Stock.
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"Expiration Date" means the date which is five (5) years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the State of Illinois (a
"Holiday"), the next preceding date that is not a Holiday.
"Market Price" means the closing bid price on the day prior to the date
on which the Exercise Form is delivered to the Company, as quoted on the
National Association of Securities Dealers' OTC Bulletin Board Market or such
other national securities exchange or market on which the Common Stock may then
be listed.
"Registration Rights Agreement" shall have the meaning assigned to it in
the Securities Purchase Agreement (defined below).
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Purchase Agreement" shall mean the Securities Purchase
Agreement between Augustine Fund, L.P. (or its predecessor in interest) and the
Company for the purchase of certain Securities (as defined in the Securities
Purchase Agreement).
"Transfer" shall include any disposition of this Warrant or any Warrant
Shares, or of any interest in either thereof which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended, or
applicable state securities laws.
"Warrant" shall mean this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" per share shall be equal to one hundred twenty
percent (120%) of the lowest of the closing bid prices for the Common Stock for
the five (5) trading days prior to the date of this Warrant.
(b) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors; and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, unless the otherwise specified in a
particular instance, the words "herein," "hereof," and "hereunder," and words of
similar import, shall refer to this Warrant as a whole and not to any provision
of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer
to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
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Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the Holder, as a whole or in part, at any time prior to 5:00 P.M.
Chicago Time on the Expiration Date. The rights represented by this Warrant may
be exercised by the Holder, as a whole or from time to time in part (except that
this Warrant shall not be exercisable as to a fractional share) by (i) delivery
of a written notice, in the form of the exercise form attached as Exhibit I
hereto (an "Exercise Form"), of the Holder's election to exercise this Warrant,
which notice shall specify the number of Warrant Shares to be purchased, (ii)
payment to the Company of an amount equal to the Warrant Exercise Price
multiplied by the number of Warrant Shares as to which the Warrant is being
exercised (plus any applicable issue or transfer taxes) in immediately available
funds (either by wire transfer or a certified or cashier's check drawn on a
United States bank), for the number of Warrant Shares as to which this Warrant
shall have been exercised, and (iii) the surrender of this Warrant, properly
endorsed, at the principal office of the Company (or at such other agency or
office of the Company as the Company may designate by notice to the Holder).
In addition, and notwithstanding anything to the contrary contained in
this Warrant, this Warrant may be exercised by presentation and surrender of
this Warrant to the Company in a cashless exercise, including a written
calculation of the number of Warrant Shares to be issued upon such exercise in
accordance with the terms hereof (a "Cashless Exercise"). In the event of a
Cashless Exercise, in lieu of paying the Exercise Price, the Holder shall
surrender this Warrant for, and the Company shall issue in respect thereof, the
number of Warrant Shares determined by multiplying the number of Warrant Shares
to which the Holder would otherwise be entitled by a fraction, the numerator of
which shall be the difference between the then current Market Price per share of
the Common Stock and the Exercise Price, and the denominator of which shall be
the then current Market Price per share of Common Stock.
The Warrant Shares so purchased shall be deemed to be issued to the
Holder or Holder's designees, as the record owner of such Warrant Shares, as of
the date on which this Warrant shall have been surrendered, the completed
Exercise Form shall have been delivered, and payment (or notice of an election
to effect a Cashless Exercise) shall have been made for such Warrant Shares as
set forth above.
In the event of any exercise of the rights represented by this Warrant
in compliance with this Section 2(a), a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by, the
Holder, shall be delivered to, or as directed by, the Holder within three (3)
business days after such rights shall have been so exercised.
(b) Unless this Warrant shall have expired or shall have been fully
exercised, the Company shall issue a new Warrant identical in all respects to
the Warrant exercised except (i) it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
the Warrant exercised, less the number of Warrant Shares with respect to which
such Warrant is exercised, and (ii) the holder thereof shall be deemed to have
become the holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of such share certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are properly closed, such person shall be deemed to have become
the holder of such Warrant Shares at the opening of business on the next
succeeding date on which the stock transfer books are open.
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(c) In the case of any dispute with respect to an exercise, the Company
shall promptly issue such number of Warrant Shares as are not disputed in
accordance with this Section. If such dispute only involves the number of
Warrant Shares receivable by the Holder under a Cashless Exercise, the Company
shall submit the disputed calculations to the Company's independent accounting
firm of national standing via facsimile within two (2) business days of receipt
of the Exercise Form. The accountant shall audit the calculations and notify the
Company and the Holder of the results no later than two (2) business days from
the date it receives the disputed calculations. The accountant's calculation
shall be deemed conclusive absent manifest error. The Company shall then issue
the appropriate number of shares of Common Stock in accordance with this
Section.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance and upon payment by the holder
of the Exercise Price for the Warrant Shares, be validly issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the rights then
represented by this Warrant and that the par value of said shares will at all
times be less than or equal to the applicable Warrant Exercise Price.
Section 4. Taxes. The Company shall not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any
permitted transfer involved in the issue or delivery of any certificates for
Warrant Shares in a name other than that of the registered holder hereof or upon
any permitted transfer of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. No holder, as such,
of this Warrant shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of this
Warrant. Notwithstanding the foregoing, the Company will provide the holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section 6. No Limitation on Corporate Action. No provisions of this
Warrant and no right or option granted or conferred hereunder shall in any way
limit, affect or abridge the exercise by the Company of any of its corporate
rights or powers to recapitalize, amend its Certificate of Incorporation,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any other
of its corporate rights and powers.
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Section 7. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment and not with a view to, or for sale in
connection with, any distribution hereof or of any of the shares of Common Stock
or other securities issuable upon the exercise thereof, and not with any present
intention of distributing any of the same. Upon exercise of this Warrant, the
holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale. If
such holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such holder's exercise of the Warrant that
the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of the Warrant shall not violate any United States or state
securities laws. The holder of this Warrant, by the acceptance hereof,
represents that it is an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.
Section 8. Transfer; Opinions of Counsel; Restrictive Legends.
(a) The holder of this Warrant understands that (i) this Warrant and the
Warrant Shares have not been and are not being registered under the Securities
Act or any state securities laws (other than as herein), and may not be offered
for sale, sold, assigned or transferred unless (a) subsequently registered
thereunder, or (b) pursuant to an exemption from such registration; (ii) any
sale of such securities made in reliance on Rule 144 promulgated under the
Securities Act may be made only in accordance with the terms of said Rule and
further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such securities (other than as described herein) under
the Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. The Warrant Shares receivable upon
exercise of this Warrant shall contain (or not) such restrictive legend(s) as
may be required by applicable law.
Section 9. Adjustments.
(a) Reclassification and Reorganization. In case of any reclassification,
capital reorganization or other change of outstanding shares of the Common
Stock, or in case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock),
the Company shall cause effective provision to be made so that the Holder shall
have the right thereafter, by exercising this Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation or merger by a holder of the number of shares of Common Stock that
could have been purchased upon exercise of the Warrant immediately prior to such
reclassification, capital reorganization or other change, consolidation or
merger. Any such provision shall include provision for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 9. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations or mergers. If the
consideration received by the holders of Common Stock is other than cash, the
value shall be as determined by the Board of Directors of the Company acting in
good faith.
5
<PAGE>
(b) Dividends and Stock Splits. If and whenever the Company shall effect
a stock dividend, a stock split, a stock combination, or a reverse stock split
of the Common Stock, the number of Warrant Shares purchasable hereunder and the
Warrant Exercise Price shall be proportionately adjusted in the manner
determined by the Company's Board of Directors acting in good faith. The number
of shares, as so adjusted, shall be rounded down to the nearest whole number and
the Warrant Exercise Price shall be rounded to the nearest cent.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen or destroyed, the Company shall, on receipt of an
indemnification undertaking reasonably satisfactory to the Company, issue a new
Warrant of like denomination and tenor as the Warrant so lost, stolen or
destroyed. In the event the holder hereof asserts such loss, theft or
destruction of this Warrant, the Company may require such holder to post a bond
issued by a surety reasonably satisfactory to the Company with respect to the
issuance of such new Warrant.
Section 11. Notice. Any notices required or permitted to be given under
the terms of this Warrant shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt, if
delivered personally or by courier or by facsimile, in each case properly
addressed to the party to receive the same. The Company's address for such
communications shall be as provided in the Securities Purchase Agreement. The
Holder's notice address shall be: Delano Group Securities, Attn: Mr. David
Asplund, 141 West Jackson Blvd., Suite 2176, Chicago, Illinois 60604, Facsimile
312.593.1949. Each party shall provide notice to the other party of any change
in address.
Section 12. Registration Right. Notwithstanding anything herein to the
contrary, unless the Warrant Shares have been registered along with the
Securities (as defined in the Registration Rights Agreement), during the five
(5) year period commencing on the date of this Warrant, if the Company proposes
to file a registration statement (including without limitation the registration
statement(s) described in the Registration Rights Agreement) with respect to any
of its securities under the Securities Act of 1933, as amended, it will give
written notice, at least twenty (20) days prior to the filing of each such
registration statement, to the holder of the Warrant and/or the Common Stock
previously received upon exercise hereof (and not previously sold by such
holder) of its intention to do so. Upon the holder's request within ten (10)
days after it has received such notice from the Company, the Company shall
include the Common Stock received or receivable upon exercise of this Warrant
owned in such registration statement such that said Common Stock received or
receivable upon such exercise shall be registered or qualified under such
registration statement. This provision is not applicable to a registration
statement filed on Form S-4 or Form S-8, nor is it applicable to the extent the
Company's underwriter (if such registration statement relates to an underwritten
offering) limits or prohibits such inclusion, nor is it applicable to the
Warrant once it has expired under the terms hereof or has been exercised and the
holder received non-restricted Common Stock upon such exercise. The rights
described in this Section 12 are in addition to the rights afforded the Holder
by the applicable provisions of the Securities Purchase Agreement.
Section 13. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought. This Warrant shall be governed by
and interpreted under the laws of the State of Delaware. Headings are for
convenience only and shall not affect the meaning or construction of any of the
provisions hereof. This Warrant shall be binding upon the Company and its
6
<PAGE>
successors and assigns and shall inure to the benefit of the Holder and its
successors and assigns. The Holder may not assign this Warrant except in
accordance with applicable federal and state securities laws. The Holder shall
immediately notify the Company with respect to any permitted assignment of this
Warrant.
Section 14. Date. The date of this Warrant is March 23, 2000. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 8 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
SALES ONLINE DIRECT, INC.
By: /S/ Greg Rotman
----------------------------------------
Mr. Greg Rotman, Chief Executive Officer
7
<PAGE>
EXHIBIT I TO WARRANT
EXERCISE FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
SALES ONLINE DIRECT, INC.
The undersigned hereby exercises the right to purchase the number of
Warrant Shares covered by the Warrant attached hereto as specified below
according to the conditions thereof and herewith makes payment of U.S.
$_____________ (unless effected by a Cashless Exercise in accordance with the
terms of the Warrant), the aggregate Warrant Exercise Price of such Warrant
Shares in full pursuant to the terms and conditions of the Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained upon exercise of the Warrant, except under
circumstances that will not result in a violation of the 1933 Act or applicable
state securities laws.
(ii) The undersigned requests that the stock certificates for the Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to the terms of the Warrant in the name of the Holder (or such
other person(s) indicated below) and delivered to the undersigned (or
designee(s)) at the address or addresses set forth below.
Dated:_____________, _____.
HOLDER: ___________________________________
By: ________________________________________
Name: _____________________________________
Title: _____________________________________
Address: ___________________________________
___________________________________
___________________________________
Number of Warrant Shares
Being Purchased: ________________________
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SALES ONLINE DIRECT, INC.'S ANNUAL FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM
10-KSB.
</LEGEND>
<CIK> 0001017655
<NAME> SALES ONLINE DIRECT, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 221,213
<SECURITIES> 0
<RECEIVABLES> 48,682
<ALLOWANCES> 0
<INVENTORY> 629,729
<CURRENT-ASSETS> 983,852
<PP&E> 699,504
<DEPRECIATION> 86,139
<TOTAL-ASSETS> 1,665,649
<CURRENT-LIABILITIES> 429,987
<BONDS> 0
0
0
<COMMON> 46,711
<OTHER-SE> 1,188,951
<TOTAL-LIABILITY-AND-EQUITY> 1,665,649
<SALES> 1,003,200
<TOTAL-REVENUES> 1,003,200
<CGS> 706,488
<TOTAL-COSTS> 2,459,743
<OTHER-EXPENSES> 112,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,183,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,183,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,183,040)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
Exhibit 99.1
RISK FACTORS
Risks Relating to the Company
We have a limited operating history and have experienced development stage
losses.
Our 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 our business and prospects.
Our 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 include:
o an evolving and unpredictable business model;
o management of growth, if any;
o our ability to anticipate and adapt to a developing market;
o acceptance by customers of our services and merchandise sold at such
auctions;
o dependence upon the level of hits to our sites;
o development of equal or superior Internet portals, auctions and
related services by competitors;
o dependence on vendors for merchandise; and
o the ability to identify, attract, retain and motivate qualified
personnel.
To address these risks, we must, among other things, increase traffic
to our websites, maintain our customer base and attract significant numbers of
new customers, respond to competitive developments, implement and execute
successfully our business strategy and continue to develop and upgrade our
technologies and customer services. We cannot offer any assurances that that we
will be successful in addressing these risks.
Our capital is limited and we may need additional financing to implement our
business plan and continue operations.
We require substantial working capital to fund our business. We expect
that additional funds will be necessary for our company to implement its
business plan. If we are unable to obtain financing in the amounts desired and
on acceptable terms, or at all, we may be required to reduce significantly the
scope of its presently anticipated advertising and other expenditures, which
could have a material adverse effect on our growth prospects and the market
price of our common stock.
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We have only recently introduced the collectibles portal and we are unable to
guarantee that the marketplace will except our services and products.
The collectibles portal was only launched in January 2000. The research
site is not expected to be launched until mid to late 2000. Therefore, we are
unable to provide any assurances that that the marketplace will accept the new
direction the company has taken and the services it is offering, or that we will
be able to provide such services at a profit.
We expect to incur additional losses as a result of the anticipated significant
increase in marketing and promotional expenses.
We intend to expend significant financial and management resources on
brand development, development of the research site, 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, we expect to incur additional losses, and
such losses are expected to increase significantly from current levels. In
addition, we plan to continue to increase our operating expenses significantly
in order to increase our customer base, increase the size of our staff, expand
our marketing efforts to enhance our brand image, increase our visibility on
other companies' high-traffic websites, increase our software development
efforts, support our growing infrastructure, and acquire complementary
businesses and technologies.
Moreover, to the extent that increases in such operating expenses
precede or are not subsequently followed by increased revenues, our business,
results of operations and financial condition will be materially adversely
affected. We cannot provide any assurances that our revenues will increase or
even continue at their current level or that we will achieve or maintain
profitability or generate positive cash flow from operations in future periods.
We have made and expect in the future to continue to make significant
investments in infrastructure and personnel in advance of levels of revenue
necessary to offset such expenditures. We may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Our operating results are unpredictable and are expected to fluctuate in the
future.
Because of the uncertain nature of the rapidly changing market we
serve, period-to-period comparisons of operating results are not likely to be
meaningful. In addition, you should not rely on the results for any period as an
indication of future performance. Our operating results are unpredictable and
are expected to fluctuate in the future, due to a number of factors, many of
which are outside our control. These factors include:
o our ability to significantly increase our customer base and traffic
to our websites, manage our inventory mix and the mix of products
offered, liquidate our inventory in a timely manner, maintain gross
margins, and maintain customer satisfaction;
o the availability and pricing of merchandise from vendors;
o consumer confidence in encrypted transactions in the Internet
environment;
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<PAGE>
o the timing, cost and availability of advertising on our websites and
other entities' websites;
o the amount and timing of costs relating to expansion of our
operations;
o the announcement or introduction of new types of merchandise,
service offerings or customer services by our company or our
competitors;
o technical difficulties with respect to consumer use of our websites;
o acquisitions of complementary business and technologies;
o governmental regulation by federal or local governments; and
o general economic conditions and economic conditions specific to the
Internet and electronic commerce.
As a strategic response to changes in the competitive environment, we
may from time to time make certain service, marketing or supply decisions or
acquisitions that could have a material adverse effect on our results of
operations and financial condition. Due to all of the foregoing factors, our
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of our common stock would likely be
materially adversely affected.
We rely on our relationships with online companies.
We have increased our 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 the following:
o the possibility that a competitor will purchase exclusive rights to
attractive space on one or more key sites;
o the uncertainty that significant spending on these relationships
will increase our revenues substantially or at all;
o the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that we are
expecting;
o 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;
o the possibility that, if these relationships are successful, we may
not be able to obtain adequate amounts of merchandise to meet the
increased demand that is generated;
3
<PAGE>
o the possibility that we may not be able to develop partnerships with
lead manufacturers, licensers, licensees, collecting communities,
and major auction houses for the collectibles portal;
o the possibility that such online companies will be unable to deliver
a sufficient number of customer visits or impressions; and
o the possibility that such online companies will compete with our
company for limited online auction revenues.
Any termination of the our arrangements with other online companies could have a
material adverse effect on our business, results of operations and financial
condition.
The successful operation of our business depends upon the supply of critical
elements from other third parties.
Our operations depend on a number of third parties for Internet/telecom
access, delivery services, credit card processing and software services. We have
limited control over these third parties and no long-term relationships with any
of them.
Technology: We do not own a gateway onto the Internet, but instead,
rely on an Internet service provider to connect our websites to the Internet.
From time to time, we have experienced temporary interruptions in our websites
connection and also our telecommunications access. We license technology and
related databases from third parties for certain elements of our properties,
including, among others, technology underlying the delivery of news, stock
quotes and current financial information. Furthermore, we are dependent on
hardware suppliers for prompt delivery, installation, and service of servers and
other equipment to deliver our products and services. Our internally-developed
auction software depends on operating system, database and server software that
was developed and produced by and licensed from third parties. We have 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. Any errors, failures, interruptions, or delays experienced
in connection with these third-party technologies and information services could
negatively impact our relationship with users and adversely affect our brand and
our business, and could expose us to liabilities to third parties.
Order Fulfillment. We use overnight courier and delivery services for
substantially all of our products. Should these services be unable to deliver
our products for a sustained time period as a result of a strike or other
reason, our 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, we experience any delays in
shipment, its business, results of operations and financial condition would be
adversely affected.
Distribution. To increase traffic for our online properties and make
them more available and attractive to advertisers and consumers, we expect to
have distribution agreements and informal relationships with leading Web browser
providers such as Microsoft, operators of online networks and leading Web sites,
software developers and computer manufacturers. These distribution arrangements
4
<PAGE>
typically are not exclusive and do not extend over a significant amount of time.
Potential distributors may not offer distribution of our properties and services
on reasonable terms. Third parties that provide distribution typically charge
fees or otherwise impose additional conditions on th elisting of our online
properties. Any failure to cost-effectively obtain distribution or to obtain
distribution on terms that are reasonable, could have a material adverse effect
on our business, results of operations, and financial condition.
Our failure to attract advertising revenue in quantities and at rates that are
satisfactory to us could harm our business.
We expect to derive a large portion of our net revenue from
advertisements displayed on our websites. Our ability to continue to achieve
substantial advertising revenue depends upon:
o the development of a large base of users possessing demographic
characteristics attractive to advertisers;
o the level of traffic on our websites;
o our ability to derive better demographic and other information from
our users;
o acceptance by advertisers of the Web as an advertising medium; and
o our ability to transition and expand into other forms of
advertising.
No standards have yet been widely accepted for the effectiveness of
Web-based advertising. Advertising filter software programs are available that
limit or remove advertising from an Internet user's desktop Such software, if
generally adopted by users may have a materially adverse effect upon the
viability of advertising on the Internet. If we are unsuccessful in sustaining
or increasing advertising sales levels, it could harmve a material adverse
effect on our business, operating results and financial condition.
Our failure to manage growth could harm us.
We have rapidly and significantly expanded our operations and
anticipate that significant expansion of our 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 our
management, operational and financial resources. Increases in the number of
employees and the volume of merchandise sales have placed significant demands on
our management, which as of December 31, 1999 included only four executive
officers. In order to manage the expected growth of its operations, we will be
required to expand existing operations, particularly with respect to customer
service and merchandising, to improve existing and implement new operational,
financial and inventory systems, procedures and controls.
If our company's growth continues, we will experience a significant
strain on our resources because of:
5
<PAGE>
o the need to manage relationships with various strategic partners,
technology licensors, advertisers, other Websites and services,
Internet service providers and other third parties;
o difficulties in hiring and retaining skilled personnel necessary to
support our businesses;
o the need to train and manage a growing employee base; and
o pressures for the continued development of our financial and
information management systems.
Difficulties we may encounter in dealing successfully with the above
risks could seriously harm our operations. We cannot offer any assurance that
our current personnel, systems, procedures and controls will be adequate to
support our future operations or that management will be able to identify, hire,
train, retain, motivate and manage required personnel.
If future acquisitions are not successful, or if we are not able to structure
future acquisitions in a financially efficient manner, there could be an adverse
effect on our business and operations.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe will help us
develop and expand our business. The process of integrating an acquired
business, technology, service or product may result in operating difficulties
and expenditures which we cannot anticipate and may absorb significant
management attention that would otherwise be available for further development
of our existing business. Moreover, the anticipated benefits of any acquisition
may not be realized. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which might not be available to us on favorable terms or at all, and
might be dilutive. Additionally, we may not be able to successfully identify,
negotiate or finance future acquisitions or to integrate acquisitions with our
current business.
Our company's success still depends upon its ability to attract and retain
management and qualified technical personnel.
At present, our company employs approximately 20 full-time personnel.
We are substantially dependent on the continued services of members of our
senior management and other key personnel, particularly our President, Gregory
Rotman; Vice President, Treasurer and Secretary, Richard Rotman; and Vice
President, Marc Stengel. Each of these individuals has acquired specialized
knowledge and skills with respect to our company and our operations. As a
result, if any of these individuals were to leave our company, we could face
substantial difficulty in hiring qualified successors and could experience a
loss in productivity while any such successor obtains the necessary training and
experience. In order to meet expected growth, we believe that our future success
will depend upon our ability to identify, attract, hire, train, motivate and
retain other highly-skilled managerial, merchandising, engineering, technical
consulting, marketing and customer service personnel. We do not have a long-term
employment agreements with any of our key personnel and we do not maintain any
key person life insurance. We cannot offer assurances that we will be successful
in attracting, assimilating or retaining the necessary personnel, and the
failure to do so could have a material adverse effect on our business.
6
<PAGE>
Our success is dependent upon our ability to purchase inventory at attractive
prices and to liquidate inventory rapidly.
Although we have shifted our focus to our collectibles site, at the
present time Rotman Auction is still a distinct operating entity. In addition to
auctioning collectibles on consignment, currently approximately 80% of the
aggregate sales prices of collectibles sold at our auctions are from our own
inventory. We purchase these collectibles from dealers and collectors and assume
the inventory and price risks of these items until they are sold. 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 we paid. Further,
because minimum opening bid prices for the merchandise listed on our websites
generally are lower than our acquisition costs for such merchandise, we cannot
offer any assurance that we will achieve positive gross margins on any given
sale. If we were unable to resell our purchased collectibles when we want or
need to, or at prices sufficient to generate a profit on their resale, or if the
market value of our inventory of purchased collectibles were to decline, our
operating results would be negatively affected.
Our success is dependent upon market awareness of our brand.
We believe that the importance of brand recognition will increase as
more companies engage in commerce over the Internet. Development and awareness
of our company will depend largely on our success in increasing our customer
base. If vendors do not perceive us as an effective marketing and sales channel
for their merchandise, or consumers do not perceive our company as offering an
entertaining and desirable way to purchase merchandise, we may be unsuccessful
in promoting and maintaining its brand.
Furthermore, in order to attract and retain customers and to promote
and maintain our company in response to competitive pressures, we may find it
necessary to increase our marketing and advertising budgets and otherwise to
increase substantially our financial commitment to creating and maintaining
brand loyalty among vendors and consumers. We will need to continue to devote
substantial financial and other resources to increase and maintain the awareness
of our online brands among website users, advertisers and e-commerce partners
through:
o Web advertising and marketing;
o traditional media advertising campaigns; and
o providing a high quality user experience.
Our results of operations could be seriously harmed if our investment of
financial and other resources in an attempt to achieve or maintain a leading
position in Internet commerce or to promote and maintain our brand, does not
generate a corresponding increase in net revenue, or if the expense of
developing and promoting our online brands becomes excessive.
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Our competitors often provide Internet access or computer hardware to our
customers and they could make it difficult for our customers to access our
services.
Our users must access our services through an Internet access provider,
or ISP, with which the user establishes a direct billing relationship using a
personal computer or other access device. To the extent that an access provider,
such as America Online, or a computer or computing device manufacturer offers
online services or properties that are competitive with those of our company,
the user may find it more convenient to use the services or properties of that
access provider or manufacturer. In addition, the access provider or
manufacturer may make it difficult to access our services by not listing them in
the access provider's or manufacturer's own directory. Also, because an access
provider gathers information from the user in connection with the establishment
of the billing relationship, an access provider may be more effective than our
company in tailoring services and advertisements to the specific tastes of the
user. To the extent that a user opts to use the services offered by his or her
access provider or those offered by computer or computing device manufacturers
rather than the services provided by our company our business, operating results
and financial condition will be materially adversely affected.
Our systems may fail or experience a slow down.
A key element of our strategy is to generate a high volume of traffic
to, and use of, our websites. A portion of our revenues depend on the number of
customers who use our websites to purchase merchandise. Accordingly, the
satisfactory performance, reliability and availability of our websites,
transaction-processing systems, network infrastructure and delivery and shipping
systems are critical to our operating results, as well as our reputation and our
ability to attract and retain customers and maintain adequate customer service
levels.
We periodically have experienced minor systems interruptions, including
Internet disruptions, which we believe may continue to occur from time to time.
Any systems interruptions, including Internet disruptions, that result in the
unavailability of our websites or reduced order fulfillment performance would
reduce the volume of goods sold, which could harm our business. We are
continually enhancing and expanding our transaction-processing systems, network
infrastructure, delivery and shipping systems and other technologies to
accommodate a substantial increase in the volume of traffic on the our websites.
We cannot guarantee that:
o we will be able to accurately project the rate or timing of
increases if any, in the use of our websites;
o we will be able to timely expand and upgrade our systems and
infrastructure to accommodate increases in the use of our websites;
o we will have uninterrupted access to the Internet;
o our users will be able to reach our Web sites;
o communications via our Web sites will be secure;
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<PAGE>
o we or our suppliers' network will be able to timely achieve or
maintain a sufficiently high capacity of data transmission,
especially if the customer usage of our websites increases.
Any disruption in the Internet access to our Websites or any systems failures
could significantly reduce consumer demand for our services, diminish the level
of traffic to our websites, impair our reputation and reduce our commerce and
advertising revenue.
Our success depends upon our communications hardware and computer hardware.
Substantially all of our communications hardware and computer hardware
are located at our leased facility in Owings Mills, Maryland. Our systems are
vulnerable to damage from fire, flood, power loss, telecommunication failure,
break-in and similar events. We do 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 us for all losses that may occur. A substantial interruption in these
systems would have a material adverse effect on our business, results of
operations and financial condition.
To date, we have experienced variable interruptions to our service as a
result of loss of power and telecommunications connections. Despite our
implementation of network security measures and firewall security, our servers
are also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of our 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 our services and products and could seriously
harm our business and results of operations.
Our future revenues will depend upon the continued consumer interest in the
collectibles industry and demand for the types of collectibles that are listed
for sale.
We obtain some of our revenues from fees from sellers for listing
products for sale on our service and fees from successfully completed auctions.
Demand for collectibles is influenced by the popularity of certain themes,
cultural and demographic trends, marketing and advertising expenditures and
general economic conditions. 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. Because these factors can change rapidly, customer demand also can
shift quickly. Some collectibles appeal to customers for only a limited time.
The success of new product introductions depends on various factors, including
product selection and quality, sales and marketing efforts, timely production
and delivery and consumer acceptance. We may not always be able to respond
quickly and effectively to changes in customer taste and demand due to the
amount of time and financial resources that may be required to bring new
products to market. A decline in the popularity of, or demand for, certain
collectibles or other items sold through our service could reduce the overall
volume of transactions on our service, resulting in reduced revenues. In
addition, certain consumer "fads" may temporarily inflate the volume of certain
types of items list on our service, placing a significant strain upon our
infrastructure and transaction capacity. These trends may also cause significant
fluctuations in our operating results from one quarter to the next. Any decline
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in demand for the goods or services offered through our collectibles portal as a
result of changes in consumer trends could have a material adverse effect on our
business.
There are certain provisions of Delaware law that could have anti-takeover
effects.
Certain provisions of Delaware law and our Certificate of Incorporation
and Amended and Restated Bylaws could make more difficult our acquisition by
means of a tender offer, a proxy contest or otherwise and the removal of our
incumbent officers and directors. Our Certificate of Incorporation and Amended
and Restated Bylaws do not do not provide for cumulative voting in the election
of directors. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Sales Online Direct, Inc. to first
negotiate with us. Section 203 could adversely affect the ability of
stockholders to benefit from certain transactions which are opposed by the Board
or by stockholders owning 15% of our common stock, even though such a
transaction may offer our stockholders the opportunity to sell their stock at a
price above the prevailing market price.
We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which will prohibit us 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. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior
to the determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders. Section 203 could adversely affect the ability of stockholders to
benefit from certain transactions which are opposed by the Board or by
stockholders owning 15% of our common stock, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
Our success is dependent upon the protection of our intellectual property.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
We cannot offer assurances that the steps we have taken will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken, it
might be possible for a third party to copy or otherwise obtain and use our
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of our 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 our company little or
no effective protection of its intellectual property.
We may in the future receive notices from third parties claiming
infringement by our software or other aspects of our business. Although we are
not currently subject to any such claim, any future claim, with or without
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merit, could result in significant litigation costs and diversion of resources,
including the attention of management, and require us to enter into royalty and
licensing agreements, which could have a material adverse effect on our
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, we may also need to file lawsuits to
enforce our intellectual property rights, to protect the our 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
our business, results of operations and financial condition.
We also rely on a variety of technology that we license from third
parties. We cannot make any assurances that these third-party technology
licenses will continue to be available to the company on commercially reasonable
terms. Our inability 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 our business, results of operations and financial
condition.
We face risks associated with global expansion
We do not currently have any overseas fulfillment or distribution
facility or arrangement or any websites content localized for foreign markets.
We cannot offer any assurances that we will be able to establish a global
presence. In addition, there are certain risks inherent in doing business on a
global level, such as:
o regulatory requirements;
o export restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o difficulties in protecting intellectual property rights;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
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o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
All of the above factors could adversely impact the success of our
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 we
violate such restrictions. We cannot offer assurances that we 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 our
future global operations, and consequently, on our business, results of
operations and financial condition.
We may be exposed to liability for content retrieved from our websites.
We may be exposed to liability for content retrieved from our websites.
Our exposure to liability from providing content on the Internet is currently
uncertain. Due to third party use of information and content downloaded from our
websites, we may be subject to claims relating to:
o the content and publication of various materials based on
defamation, libel, negligence, personal injury and other legal
theories;
o copyright, trademark or patent infringement and wrongful action due
to the actions of third parties; and
o other theories based on the nature and content of online materials
made available through our websites.
Our exposure to any related liability could result in us incurring
significant costs and could also be a drain on our financial and other
resources. We do not maintain insurance specifically covering such claims.
Liability or alleged liability could further harm our business by diverting the
attention and resources of our management and by damaging our reputation in our
industry and with our customers.
Risks Associated With Our Industry
The market for online services is intensely competitive.
The market for Internet products and services is new, rapidly evolving
and intensely competitive, and we expect 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. We
currently or potentially compete with a variety of other companies depending on
the type of merchandise and sales format offered to customers. These competitors
include:
o various Internet auction houses such as eBay, Egghead, 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.);
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o 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
o a variety of other companies that offer merchandise similar to ours
but through physical auctions and with which we compete for sources
of supply; and
o other companies that have combined a variety of services under one
brand in a manner similar to ours including CMGI (Alta Vista), the
Walt Disney Company (The GO Network), Excite and Lycos.
We believe that the principal competitive factors affecting our 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. We cannot offer any assurances that we can maintain our competitive
position against current and potential competitors, especially those with
greater financial, marketing, customer support, technical and other resources.
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 our business,
results of operations and financial condition. Many of our 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 we
can, 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 we can.
With respect to our new collectibles portal, several other companies
have combined a variety of services under one brand in a manner similar to our
portal, including Yahoo!, Microsoft (MSN), Excite, Lycos and CMGI (Alta Vista).
Although our portal is focused specifically on the collectibles industry and no
other site currently has the technology to store the extent of collectible
information as our company, we run the risk of other sites entering into this
sector and there can be no assurance that we can maintain our competitive
position against potential competitors, especially those with greater financial,
marketing, customer support, technical and other resources than tour 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 our business, results of operations and financial
condition.
Market consolidation has created and continues to create companies
that are larger and have greater resources than us.
As the online commerce market continues to grow, other companies may
enter into business combinations or alliances that strengthen their competitive
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positions. In the recent past, there have been a number of significant
acquisitions and strategic plans announced among and between our competitors,
including:
o America Online's acquisition of Netscape and its proposed merger
with TimeWarner, Inc.;
o CMGI's acquisition of 83% of AltaVista;
o Disney's acquisition of the remaining interest in Infoseek not
already owned by Disney;
o @Home Network's acquisition of Excite;
o Yahoo!'s acquisition of GeoCities and Broadcast.com; and
o FairMarket's new alliance network comprised of Microsoft Corp.,
Excite@home, Ticketmaster Online and many others.
The effects of these completed and pending acquisitions and strategic
plans will have on us cannot be predicted with accuracy, but some of these
competitors are aligned with companies that are larger or more well established
than us. In addition, these potential competitors include television
broadcasters with access to unique content and substantial marketing resources.
As a result, these competitors may have access to greater finanical, marketing
and technical resources than us.
Our operations significantly depend upon maintenance and continued improvement
of the Internet's infrastructure.
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 our
existing websites and proprietary technology obsolete. Our performance will
depend, in part, on our ability to license or acquire leading technologies, to
enhance our existing services, and to respond to technological advances and
emerging industry standards and practices on a timely and cost-effective basis.
The Internet may ultimately prove not to be a commercially viable
commercial marketplace for a number of reasons, including:
o unwillingness of consumers to shift their purchasing from
traditional retailers to online purchases;
o 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;
o limitations on access and ease of use;
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o congestion leading to delayed or extended response times;
o inadequate development of Web infrastructure to keep pace with
increased levels of use; and
o increased governmental regulation.
We cannot offer assurances 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 emergence and growth of the market for our services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
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 our services.
Our ability to increase the speed with which we provide 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 our 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,
our business, results of operations and financial condition will be materially
adversely affected.
Security breaches and credit card fraud could harm our business.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information. We cannot give assurances 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 we use
to protect customer transaction data. If any such compromise of our security
were to occur, it could have a material adverse effect on our business, results
of operations and financial condition. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. To the extent that activities of our company or
third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. We 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. We cannot
offer assurances that our security measures will prevent security breaches or
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that failure to prevent such security breaches will not have a material adverse
effect on our business,
Our industry may be exposed to increased government regulation.
Our 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. Today there are
relatively few laws specifically directed towards online services. 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, freedom of expression, pricing, content
and quality of products and services, fraud, taxation, advertising, intellectual
property rights and information security. Compliance with additional regulation
could hinder our growth or prove to be prohibitively expensive.
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 our
Internet auctions and increase our cost of doing business or otherwise have an
adverse effect on our business, results of operations and financial condition.
Several recently passed federal laws could have an impact on our
business. The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights of others.
The Children's Online Protection Act and the Children's Online Privacy
Protection Act are intended to restrict the distribution of certain materials
deemed harmful to children and impose additional restrictions on the ability of
online services to collect user information from minors. Such legislation may
impose significant additional costs on our business or subject us to additional
liabilities.
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, because our service is available over the Internet in
multiple states, and we sell to numerous consumers resident in such states, such
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each such state. Our failure to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject our
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 our business, could have
a material adverse effect on the Company's business, results of operations and
financial condition.
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Risks Associated with our Common Stock
Our stock price has been and may continue to be very volatile.
The market price of the shares of our 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 anticipated variations in our results of
operations, announcements of technological innovations, new sales formats by the
company or our 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 have experienced
extreme price and volume fluctuations in recent months. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. The valuation of many Internet stocks are extraordinarily high based
on conventional valuation standards such as price to earnings and price to sales
ratios. We cannot offer any assurance that these trading prices and price
earnings ratios will be sustained. These broad market factors may adversely
affect the market price of our 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 our common stock. Any negative change in the public's perception
of the prospects of Internet or e-commerce companies could depress our stock
price regardless of our results. 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 our
business, results of operations and financial condition.
Present management will control the election of our directors and all other
matters submitted to the stockholders for approval.
Our executive officers and directors, in the aggregate, beneficially
own approximately 80% of our outstanding common stock. As a result, such
persons, acting together, will have the ability to control all matters submitted
to our stockholders for approval (including the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
our 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 our common stock.
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"Penny stock" regulations may impose certain restrictions on marketability of
securities.
The SEC adopted regulations which generally define "penny stock" to be
an equity security that has a market price of less than $5.00 per share. Our
common stock may be subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's prior written consent to the
transaction.
Additionally, for any transaction, other than exempt transactions,
involving a penny stock, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the SEC relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability to sell our common stock in the secondary market.
The market for our company's securities limited and may not provide adequate
liquidity.
Our common stock is currently traded on the OTC Electronic Bulletin
Board. We are unable to provide any assurance or guarantee that the OTC Bulletin
Board will provide adequate liquidity or that a trading market will be
sustained. Holders of our company's stock may be unable to sell shares purchased
should they desire to do so.
It is unlikely that we will issue stock dividends in the future.
Anticipated capital requirements make it highly unlikely that any
dividends will be paid with respect to our common stock in the foreseeable
future.
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