<PAGE>
As filed with the Securities and Exchange Commission on October 24, 2000
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
SALES ONLINE DIRECT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 7372 73-1479833
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification
Number)
4 Brussels Street
Worcester, MA 01610
(508) 791-6710
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
Gregory Rotman, President
Sales Online Direct, Inc.
4 Brussels Street
Worcester, MA 01610
(508) 791-6710
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
Copy to:
Abba David Poliakoff, Esquire
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
233 East Redwood Street
Baltimore, Maryland 21202-3332
(410) 576-4067
Approximate date of commencement of proposed sale to public: From time to
time after Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.[ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
====================================================================================================================================
Title of Securities Amount to be Proposed Maximum Proposed Maximum Amount of Registration
to be Registered Registered Offering Price Per Aggregate Offering Price Fee
Share (1) (1)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share, Issuable Upon
Conversion of Convertible Note 19,692,792(2)(4) $.39 $7,680,189 $2,027.57
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Common Stock, par value
$.001 per share, Issuable
Upon Exercise of Warrants 700,000(3)(4) $.39 $ 273,000 $ 72.07
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Total 20,392,792 $7,953,189 $2,099.64
====================================================================================================================================
<FN>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and (g) based on the average of the bid and
asked price on October 19, 2000.
(2) Estimated number of shares of common stock issuable upon conversion of and
as payment of interest on a $3,000,000 convertible note if converted on
October 23, 2000.
(3) Common stock issuable upon exercise of stock purchase warrants issued in
connection with the purchase of the convertible note.
(4) The shares include any additional shares issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commissioner, acting pursuant to said Section
8(a), may determine.
<PAGE>
Subject to completion, dated October 24, 2000.
PROSPECTUS
SALES ONLINE DIRECT, INC.
20,392,792 Shares of Common Stock
This prospectus relates to the offer and sale by the selling
shareholders identified in this prospectus, of a maximum of 20,392,792 shares of
common stock of Sales Online Direct, Inc. The shares include up to (i)
19,692,792 shares which are reserved for issuance upon the conversion of and
payment of interest on a $3,000,000 convertible note and (ii) 700,000 shares
issuable upon the exercise of warrants issued in connection with the purchase of
the convertible note. The number of shares covered by this prospectus represent
200% of the number of shares issuable upon conversion of the convertible note,
if converted on October 23, 2000, plus 200% of the number of shares issuable
upon the exercise of one of the warrants and 100% of the number of shares
issuable upon exercise of another warrant.
We are not offering to sell any of our securities. The selling
shareholders may offer and sell some, all or none of the common stock covered
under this prospectus. We will not receive any of the proceeds from the offer
and sale of the shares, however, 400,000 of the shares offered by the selling
shareholders are issuable upon the exercise of outstanding warrants at an
exercise price of $2.70 per share. If these warrants were exercised in full, we
would receive aggregate gross proceeds of $1,080,000. We will issue these shares
only to the extent that the selling shareholders convert the convertible note
and exercise their warrants.
Shares of our common stock are currently quoted and traded on the
NASD over-the-counter bulletin board under the symbol "PAID." On October 23,
2000 the last sale price of the common stock as reported on the OTC Bulletin
Board was $.40 per share.
As used in this prospectus, the terms "we," "us," "our" and "Sales
Online" mean Sales Online Direct, Inc. and its subsidiaries (unless the context
indicates another meaning), and the term "common stock" means our common stock,
par value $0.001 per share.
Investing in our common stock involves risks. You should not
purchase our common stock unless you can afford to lose your entire investment.
See "Risk Factors" beginning on page 4 for certain information that should be
considered by prospective shareholders.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be
changed. The selling stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
-------------------
The date of this Prospectus is ______________ ___, 2000
<PAGE>
We have not authorized any dealer, salesperson or other person to
give any information or to make any representations other than those contained
or incorporated by reference in this prospectus in connection with the offer
contained in this prospectus and, if given or made, you should not rely on such
unauthorized information or representations. Neither we nor the selling
shareholders are making an offer to sell or a solicitation of any offer to buy
securities in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. You should not assume that the information provided in
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
------------------
TABLE OF CONTENTS
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Page
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SUMMARY........................................................................3
RISK FACTORS...................................................................4
DESCRIPTION OF OUR SECURITIES.................................................21
REGISTRATION RIGHTS...........................................................23
SELLING SHAREHOLDERS..........................................................24
PLAN OF DISTRIBUTION..........................................................26
LEGAL MATTERS.................................................................28
EXPERTS.......................................................................28
WHERE YOU CAN FIND MORE INFORMATION...........................................28
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................28
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<PAGE>
SUMMARY
This summary only highlights the more detailed information appearing
elsewhere in this prospectus or incorporated in this prospectus by reference. As
this is a summary, it may not contain all information that is important to you.
Our Company
Our primary business is collectibles. Our primary online collectibles
sites can be accessed through "www.collectingexchange.com" and
"www.rotmanauction.com," each of which can also be accessed through
"www.salesonlinedirect.com." In order to take advantage of the tremendous growth
in both the online auction and e-commerce industries, we are now focused on the
creation of a unique and multi-faceted internet collectibles market place that
services all aspects of the purchase, ownership and sale of collectibles. Our
mission is to become the premier internet collectibles site consisting not only
of a collectibles portal, which was initially launched on January 27, 2000, but
also a global auction search and research center. We will derive revenues from
the sale at auction of collectibles from our own inventory as well as from
merchandise under consignment type arrangements with the public; sale of
advertising on our website; and fees for services such as appraisals and
gradings.
All visitors to our new website at "www.collectingexchange.com,"
will be able to use the collectibles portal as a source for obtaining
collectibles information. We 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.
Currently, substantially all of our revenues are derived from our
Rotman Auction operations. Rotman Auction is an auction house which provides a
full range of services to sellers and buyers, including live online bidding of
premier collectibles, consignment services, authentication of merchandise,
digital photography, fulfillment of orders and the purchase and sale of
authentic memorabilia. Rotman Auction also 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.
In addition, our World Wide Collectors Digest ("WWCD") division,
located at "www.wwcd.com" (which can also be accessed through
"www.collectingexchange.com" and "www.salesonlinedirect.com" ), designs, hosts
and maintains client websites. Its software also allows our clients to operate
online stores, set prices and sell directly to online shoppers. To attract
collectors of sports memorabilia, the WWCD division website includes live sports
scores, live internet chat rooms, and a full listing of stadiums and arenas with
seating charts, directions, team schedules, addresses and telephone numbers of
major league professional sports teams.
We are organized under the laws of the State of Delaware. Our
executive office is located at 4 Brussels Street, Worcester, Massachusetts
01610, (508) 791-6710.
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<PAGE>
Securities to be Offered
On March 23, 2000, we entered into a Securities Purchase Agreement,
whereby we sold an 8% convertible note in the amount of $3,000,000, due March
31, 2002 to Augustine Fund, L.P. The note is convertible into common stock at a
conversion price equal to the lesser of: (1) 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) 75% of the average of the closing bid price for the common stock
for the five (5) trading days immediately preceding the conversion date.
In connection with the Securities Purchase Agreement, we also issued
warrants to Augustine Fund, L.P. and Delano Group Securities LLC (as the
placement agent in the financing) to purchase 300,000 and 100,000 shares of
common stock, respectively. The exercise price per share of common stock is
equal to 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.
We have granted registration rights to the selling shareholders
pursuant to which we will register common stock acquired by them upon conversion
of the convertible note and exercise of the warrants. The registration statement
of which this prospectus is a part registers 20,392,792 shares of common
stock that may be issued upon conversion of the convertible note and exercise of
the warrants.
RISK FACTORS
Before purchasing any of the shares of common stock being offered,
prospective investors should carefully consider the following factors in
addition to the other information contained in this prospectus or incorporated
by reference into it.
Statements in this document filed with the SEC include forward
looking statements under the federal securities laws. We caution you to be aware
of the speculative nature of "forward-looking statements". Statements that are
not historical in nature, including the words "anticipate," "estimate,"
"should," "expect," "believe," "intend," and similar expressions, are intended
to identify forward-looking statements. While these statements reflect our good
faith belief based on current expectations, estimates and projections about
(among other things) the industry and the markets in which we operate, they are
not guarantees of future performance, involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements, and should not be relied upon as predictions of
future events. In making these cautionary statements, we are not committed to
addressing or updating each factor in future filings of communications regarding
our business or results, or addressing how any of these factors may have caused
results to differ from discussions or information contained in previous filings
or communications. The following is a discussion of factors that could impact
future results.
Risks Relating to the Company
We have a limited operating history and have experienced development stage
losses.
Our company was formed in stages and put together as a single entity
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;
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<PAGE>
o acceptance by customers of our services and merchandise sold at
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, 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.
We incurred a net loss of $2,569,254 for the six months ended June
30, 2000 (which includes an interest expense of $1,162,456 in connection with
the sale of the 8% convertible note) and a net loss of $2,183,040 in the year
ended December 31, 1999. There can be no assurance that we will be profitable in
the future.
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 our 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. If we raise additional funds by issuing equity
securities, our shareholders will be further diluted.
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, and the
research site is not yet operational. Therefore, we are unable to provide any
assurances 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, research site development, marketing and advertising, website
development, strategic relationships, and technology and operating
infrastructure. Primarily as a result of the anticipated significant increase in
marketing and promotional expenses, 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.
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<PAGE>
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;
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;
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.
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<PAGE>
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 an 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, rely 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 auction 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, our 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
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 the listing 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 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.
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<PAGE>
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 have 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 currently includes only three executive officers. In order
to manage the expected growth of our 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:
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 the continued services of Gregory
Rotman, Richard Rotman and John Martin and our ability to attract and retain
management and qualified technical personnel.
At present, our company employs 18 full-time personnel. We are
substantially dependent on the continued services of members of our senior
management and other key personnel, particularly Gregory Rotman, our President
and Chief Executive Officer; Richard Rotman, our Vice President, Chief Financial
Officer, Vice President, and Secretary; and John Martin, our Vice President and
Chief Technical Officer. 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
- 8 -
<PAGE>
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.
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 and is our
primary source of revenue. 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 are 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 our 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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<PAGE>
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;
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.
In June 2000, we moved all of our communications hardware and
computer hardware from our leased facility in Owings Mills, Maryland to our
corporate headquarters in Massachusetts. 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 do 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.
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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 to deliberately 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 listed 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
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, as amended, 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. Our Bylaws include
advance notice requirements for the submission by stockholders of nominations
for election to the Board of Directors and for proposing matters that can be
acted upon by stockholders at a meeting.
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.
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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 limit access to and
distribution of our software, documentation and other proprietary information.
We cannot offer assurances that the steps we have taken will prevent
misappropriation of our 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
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 technologies 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 our 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;
o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
All of the above factors could adversely impact the success of any
global operations. In addition, the export of certain software from the United
States is subject to export restrictions as a result of the encryption
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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 our 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.
We are involved in litigation.
We are currently involved in a dispute with Marc Stengel and Hannah
Kramer, each of whom is a substantial shareholder of our company, and with
Whirlwind Collaborative Design, Inc. and Silesky Marketing, Inc., two entities
affiliated with Marc Stengel. Mr. Stengel and Ms. Kramer are former directors of
the Company. Mr. Stengel is also a former officer and employee.
The lawsuit was initially filed against Mr. Stengel alone in June
2000. It remains pending in the US District Court for the District of Maryland.
A First Amended Complaint was filed on October 11, 2000, which added the three
additional defendants identified above. The First Amended Complaint seeks
rescission of the transactions pursuant to which Mr. Stengel and Ms. Kramer
obtained their substantial stock interests in the company, and seeks damages
against Mr. Stengel and Ms. Kramer for misrepresentations and omissions under
the common law of fraud, the Maryland Securities Act and certain contractual
warranties and representations. The First Amended Complaint also seeks damages
and remedies against Mr. Stengel for breach of his contractual duties as an
employee of the company and for misrepresentations he made to the company while
acting as an employee. The First Amended Complaint also seeks to recover damages
from Mr. Stengel and the two corporate defendants for conversion of certain of
Sales Online's assets, resources and employee services, and for unjust
enrichment. The First Amended Complaint has not yet been responded to by any of
the defendants; the Court has not ruled on any of these claims.
In response to the Maryland lawsuit, Marc Stengel commenced an
action in the Delaware Chancery Court seeking a determination from the Court
that he was improperly removed as an officer and director of Sales Online,
should be reinstated as such, and that the Rotmans be ordered to dismiss the
Maryland action. The Delaware action was stayed pending the outcome of a special
meeting of shareholders, discussed below. Following the results of that meeting,
Sales Online moved for summary judgment and asked that the Delaware litigation
be dismissed. The Court has not yet ruled on that motion.
On July 20, 2000, in accordance with our Amended and Restated
Bylaws, Gregory Rotman, called a special meeting of the stockholders to be held
on September 19, 2000 for the election of directors. Gregory Rotman and Richard
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Rotman nominated themselves, Andrew Pilaro and John Martin for election to our
Board of Directors and filed soliciting materials with the SEC. No proxy
soliciting materials were filed by any other party. The meeting was held on
September 19, 2000 and the nominated slate of directors were elected. Although
we believe that the election was proper, we cannot predict what actions, if any,
Marc Stengel may take with respect to the election of directors, including
contesting the election.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19, 2000.
At that meeting, the new Board removed Marc Stengel as an officer of Sales
Online, formally ratified and approved the initiation and prosecution of the
lawsuit against Marc Stengel and authorized Gregory Rotman, as president and CEO
to take all actions necessary to prosecute Sales Online's claims against Marc
Stengel and others.
Marc Stengel has formally requested the Board of Directors to
indemnify him for his costs and legal fees in defending himself in these legal
proceedings and has asked Sales Online to advance those costs to him pursuant to
our Bylaws. The Board of Directors has denied these requests.
We believe that the positions asserted by Sales Online in the
Maryland lawsuit are meritorious. However, no assurance can be given with
respect thereto and substantial costs, including attorneys fees, are being
incurred in connection with this dispute.
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, ONSALE, uBID, Yahoo!
Auctions, First Auction (the auction site for Internet Shopping
Network, a wholly-owned subsidiary of Home Shopping Network Inc.),
Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.),
WebAuction (the auction site for MicroWarehouse, Inc.), Insight
Auction (the auction site for Insight Enterprises, Inc.) and others;
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.;
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
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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 our 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 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
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 may 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 financial, 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 services or product introductions embodying new technologies and emergence
of new industry standards and practices that could render 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:
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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 inhibit the growth of the Internet generally, and the Web in
particular;
o limitations on access and ease of use;
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 our 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
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,
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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.
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 or interest rate 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
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attention and resources, which would have a material adverse effect of our
business, results of operations and financial condition.
We have issued options, warrants and a convertible note that could have a
dilutive effect on our shareholders.
We have issued numerous options, warrants, and convertible securities
to acquire our common stock that could have a dilutive effect on our
shareholders. As of October 23, 2000, we had issued employee stock options to
acquire 579,000 shares of our common stock, exercisable at prices ranging from
$.01 to $1.625 per share, with a weighted average exercise price of
approximately $.33 per share. In addition to these options, we have reserved
19,692,792 shares of common stock for issuance upon conversion of and payment of
interest on our 8% convertible note and 700,000 shares issuable upon the
exercise of the warrants issued in connection with the 8% convertible note.
During the terms of these securities, the holders will have the opportunity to
profit from either an increase or, in the case of the convertible note, decrease
in the market price of our common stock followed by a subsequent increase, with
resulting dilution to the holders of shares who purchased shares for a price
higher than the respective exercise or conversion price. In addition, the
increase in the outstanding shares of our common stock as a result of the
exercise or conversion of these securities could result in a significant
decrease in the percentage ownership of our common stock by the purchasers of
our common stock.
The potentially significant number of shares issuable upon conversion
of our 8% convertible note could make it difficult to obtain additional
financing. Due to the significant number of shares of our common stock which
could result from a conversion of our 8% convertible note, new investors may
either decline to make an investment in our company due to the potential
negative effect this additional dilution could have on their investment or
require that their investment be on terms at least as favorable as the terms of
the 8% convertible note If we are required to provide similar terms to obtain
required financing in the future, the potential adverse effect of these existing
financings could be perpetuated and significantly increased.
We will be penalized if we fail to register shares underlying our 8% convertible
note and the warrants issued in connection with the 8% convertible note that we
issued in March, 2000.
We will incur penalties and costs under the terms of the
registration rights agreement and the 8% convertible note and the warrants
issued in connection with the purchase of the 8% convertible note, all issued in
the private placement in March, 2000, if we are unable to register the shares of
common stock issuable upon the conversion of the 8% convertible note and the
exercise of the warrants by December 15, 2000.
Conversion of the convertible note and exercise of the warrants and subsequent
public sale of our common stock while its market price is declining may result
in further decreases in the price.
The common stock issuable upon conversion of our convertible note
will increase as the price of our common stock decreases, which may adversely
affect the price of our common stock. On October 23, 2000, we had issued and
outstanding $3,000,000 principal amount of an 8% convertible note. If the
convertible note were converted on October 23, 2000, the number of shares of
common stock issuable to the holder would be 9,846,396. The number of shares of
common stock that may ultimately be issued upon conversion of these securities
is presently indeterminable and could fluctuate significantly (See "Description
of Securities"). Purchasers of common stock could therefore experience
substantial dilution upon conversion of the convertible note. In addition, the
significant downward pressure on the market price of our common stock could
develop as the holders convert/exercise and sell material amounts of common
stock which could encourage short sales by the holders or others, placing
further downward pressure on the market price of our common stock.
Future sales of our common stock in the public market could adversely affect the
price of our common stock.
Sales of substantial amounts of common stock in the public market
that are not currently freely tradable, or even the potential for such sales,
could have an adverse effect on the market price for shares of our common stock
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and could impair the ability of purchasers of our common stock to recoup their
investment or make a profit. As of October 23, 2000, these shares consist of:
o 18,464,456 shares of our outstanding common stock owned by Gregory
Rotman and Richard Rotman, two of our executive officers and directors
("Rotman Shares");
o 18,256,956 shares of our outstanding common stock owned by two former
directors, Hannah Kramer and Marc Stengel (together with the Rotman
Shares, the "Affiliate Shares"). Hannah Kramer has filed a Form 144
with the SEC indicating an intent to sell 400,000 shares (of which
207,500 have already been sold) and Marc Stengel filed a Form 144 with
SEC indicating an intent to sell 470,000 share; and
o approximately 579,000 shares issuable to option holders.
Unless the Affiliate Shares and the shares issuable to option holders
are further registered under the securities laws, they may not be sold except in
compliance with Rule 144 promulgated by the SEC, or some other exemption from
registration. Rule 144 does not prohibit the sale of these shares but does place
conditions on their resale which must be complied with before they can be
resold.
Future sales of our common stock in the public market could limit our ability to
raise capital.
Sales of substantial amounts of our common stock in the public market
pursuant to Rule 144, upon exercise or conversion of derivative securities or
otherwise, or even the potential for such sales, could also affect our ability
to raise capital through the sale of equity securities.
The issuance of the convertible note and warrants required us to record non-cash
expenses.
As a result of the issuance of our 8% convertible note, we recorded
non-cash interest expense attributable to the beneficial conversion feature and
amortization of the related debt acquisition costs and the fair value of the
related warrants of approximately $1,097,000 during the six months ended June
30, 2000. From July 1, 2000 through March 23, 2002 we will record additional
non-cash interest expense attributable to amortization of the related debt
acquisition costs and the fair value of the related warrants of approximately
$603,000.
Present management and former directors may 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 40% of our outstanding common stock. Additionally, Marc
Stengel and Hannah Kramer, each a former director of our company, own
approximately 40% of our outstanding common stock. As a result, each group, by
joining forces with the holders of 10% our outstanding common stock, may be able
to exercise control over 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). 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.
"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
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<PAGE>
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 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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<PAGE>
DESCRIPTION OF OUR SECURITIES
The summary of the terms of our capital stock set forth below does
not purport to be complete. For a detailed, complete description, please see our
Certificate of Incorporation, as amended, and our Amended and Restated Bylaws,
copies of which were filed with the SEC as exhibits to our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999.
General
Our certificate of incorporation authorizes us to issue up to
100,000,000 shares of common stock, par value $.001 per share.
The transfer agent and registrar for the common stock is the Olde
Monmouth Stock Transfer Company, Inc., Atlantic Heights, New Jersey.
Common Stock
As of October 23, 2000, we had 47,056,140 shares of common stock
outstanding. All outstanding shares of our common stock are fully paid and
nonassessable and the shares of our common stock offered by this prospectus will
be, upon issuance, fully paid and nonassessable. The following is a summary of
the material rights and privileges of our common stock.
Voting. Holders of our common stock are entitled to cast one vote
for each share held at all shareholder meetings for all purposes, including the
election of directors. The holders of more than 50% of the voting power of our
common stock issued and outstanding and entitled to vote and present in person
or by proxy constitute a quorum at all meetings of our shareholders. The vote of
the holders of a majority of our common stock present and entitled to vote at a
meeting will decide any question brought before the meeting, except when
Delaware law, our certificate of incorporation, or our bylaws require a greater
vote. Holders of our common stock do not have cumulative voting for the election
of directors.
Dividends. Holders of our common stock are entitled to dividends
when, as and if declared by the board of directors out of funds available for
distribution.
Preemptive Rights. The holders of our common stock have no preemptive
rights to subscribe for any additional shares of any class of our capital stock
or for any issue of bonds, notes or other securities convertible into any class
of our capital stock.
Liquidation. If we liquidate or dissolve, the holders of each
outstanding share of our common stock will be entitled to share equally in our
assets legally available for distribution to our shareholders after payment of
all liabilities.
8% Convertible Note
On March 23, 2000, we issued $3,000,000 principal amount of an 8% two
year convertible note pursuant to a Securities Purchase Agreement. The following
is a summary of the material terms of the 8% convertible note.
Conversion Price. 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.
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<PAGE>
The number of shares of common stock that may ultimately be issued
upon conversion is presently undeterminable and could fluctuate. If the
applicable conversion price is 110% of the lowest of the closing bid price for
the common stock for the five (5) trading days prior to March 23, 2000, which is
$2.48, then the number of shares that may be issued upon conversion of the note
is approximately 1,210,000 shares, subject to adjustment pursuant to stock
splits, dividends or similar events. If the convertible note would have been
converted as of October 23, 2000, the applicable conversion price would have
been $.30468 per share (75% of the average of the closing bid price for the
common stock for the five (5) trading days immediately preceding the conversion
date) and the number of shares issuable upon conversion would have been
approximately 9,846,396. Purchasers of common stock could therefore experience
substantial dilution upon conversion of the convertible note.
The convertible note includes a restriction that the convertible note
is covertible by any holder only to the extent that the number of shares thereby
issuable, together with the number of shares of common stock owned by such
holder, but not including unconverted portions of the convertible note or
unexercisable or warrants, would not exceed 4.99% of the then outstanding shares
of our common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934.
Interest. The convertible note bears interest at the rate of 8% per
annum. Interest is payable in quarterly installments in arrears, with the first
payment due on October 31, 2000. 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 the interest to be determined by dividing the amount of interest
being paid by the applicable conversion price.
Default. An "event of default" under the convertible note will occur
if, among other things, we (1) fail to pay interest or principal when due or
fail to timely honor any notice of conversion of the convertible note, or (2)
fail to perform in any material respect an agreement or obligation, or
materially breach any of our representations or warranties, under the
convertible note or the Securities Purchase Agreement. Upon an event of default,
the entire indebtedness and accrued interest may become immediately due and
payable. The convertible note may not be prepaid without the prior written
consent of the holder.
Adjustment. The conversion price and the number of shares received
upon conversion may be adjusted in the event of a stock split, stock dividend,
reorganization, merger, consolidation or sale of our assets and other similar
transactions.
Effect on Common Stock. The variable conversion price of the 8%
convertible note could affect the common stock as follows:
o Reduction in Stock Price. The number of shares of common stock
issuable upon conversion of the convertible note will be inversely
proportional to the market price of the common stock at the dates upon
which the holder converts the convertible note.
o Effect of Additional Shares in Market. To the extent that the holder
of the convertible note converts and then sells its common stock in
accordance with the 4.99% limitation, the common stock price may
decrease due to the additional shares in the market, possibly allowing
the holder to convert the convertible note into greater amounts of
common stock, further depressing the stock price.
o Impact of Dilution. The additional shares issued upon conversion of
the convertible note would dilute the percentage interest of each of
our existing common shareholders, and this dilution would increase as
more shares of common stock are issued due to the impact of the
variable conversion price. Each additional issuance of shares upon
conversion would increase the supply of shares in the market and, as a
result, may cause the market price of our common stock to decline. The
effect of this increased supply of common stock leading to a lower
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<PAGE>
market price may be magnified if there are sequential conversions of
the convertible note into shares of common stock. Specifically, the
selling shareholders could convert a portion of the convertible note
and then sell the common stock issued upon conversion, which could
result in a drop in our stock price. If the stock price were to
decrease, then the selling shareholders could convert the convertible
note at a lower conversion price and be issued a greater number of
shares of common stock due to the lower conversion price. The increase
in the aggregate number of shares of common stock issued upon
conversion of the convertible note above what it would otherwise be
could place significant downward pressure on our stock price. This
downward pressure on our stock price might encourage market
participants to sell our stock short, which would put further downward
pressure on our stock price. On the other hand, in issuing the
additional shares, we will avoid repaying a $3,000,000 debt.
Warrants Issued with Convertible Note
In connection with the issuance of the convertible note the holder of
the convertible note also was granted a five-year warrant to purchase 300,000
shares exercisable at $2.70 per share per share (120% of the lowest of the
closing bid prices for the common stock for the five trading days prior to March
24, 2000). This warrant is also subject to anti-dilution protection in the event
of the issuance of our common stock at a prices less than the then current price
for our common stock and for stock splits, stock dividends, reorganization,
merger, consolidation or sale of our assets and other similar transactions.
We also issued a five-year warrant to purchase 100,000 shares of our
common stock to the Delano Group Securities, LLC for acting as the placement
agent in the financing. The exercise price is $2.70 per share (120% of the
lowest of the closing bid prices for the common stock for the five trading days
prior to March 23, 2000). This warrant is subject to adjustment in the event of
stock splits, stock dividends, reorganization, merger, consolidation or sale of
our assets and other similar transactions.
Upon exercise of all of the outstanding warrants, we will receive
aggregate gross proceeds of $1,080,000.
REGISTRATION RIGHTS
Shelf Registration
In the Registration Rights Agreement and Securities Purchase
Agreement relating to the sale of the 8% convertible note, we agreed to file
with the SEC a registration statement for the resale of the shares issuable upon
conversion of the convertible note, the payment of interest on the convertible
note and the exercise of the warrants issued in connection with the convertible
note and to use our best efforts to keep such registration statement effective
until all of the shares have been resold or can be sold immediately without
compliance with the registration requirements of the Securities Act of 1933,
pursuant to Rule 144 or otherwise.
Pursuant to the Registration Rights Agreement, we are obligated to
register no less than the greater of (i) 2,000,000 shares of common stock or
(ii) 200% of the maximum number of shares of common stock that would be issuable
upon conversion of the convertible note and upon exercise of the warrants,
assuming that the conversion and exercise occurred just prior to the filing of
the registration statement of which this prospectus is a part.
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<PAGE>
Piggyback Registration
If at any time when there is not an effective registration statement
covering the shares issuable upon conversion of the convertible note, as payment
of interest on the convertible note, or the exercise of the warrants, we propose
to file a registration statement under the Securities Act with respect to a
primary offering of our shares for our own account or the account of others,
excluding registration statements in connection with employee or director
benefit or compensation plans or any acquisition of any entity or business, then
we will give written notice of the proposed offering to the selling shareholders
as soon as practicable and we will use our best efforts to include in the
proposed offering the shares issuable upon conversion of the convertible note,
as payment of interest on the convertible note, or the exercise of the warrants,
unless we determine not to register or to delay the registration of our
securities. We will not be required to register any shares that are eligible for
resale pursuant to Rule 144(k) of the Securities Act.
Indemnification
We have agreed to indemnify the holder of the convertible note, and
any person controlling it against certain liabilities incurred or arising out of
any untrue or alleged untrue statement of a material fact contained in the
registration statement of which this prospectus is a part, or any omission of a
material fact that is required to be stated or necessary to make the statements
contained in the registration statement not misleading, except to the extent
that the untrue statements or omissions are based upon information about the
holder of the note that was furnished by the holder to us and that we reasonably
relied upon. The holder of the convertible note has agreed to indemnify us and
certain related persons against certain liabilities incurred or arising out of
any untrue or alleged untrue statement of a material fact contained in the
registration statement of which this prospectus is a part, or any omission of a
material fact that is required to be stated or necessary to make the statements
contained in the registration statement not misleading, only to the extent that
the untrue statements or omissions are based upon information about the holder
of the note that was furnished by the holder to us and that we reasonably relied
upon.
Failure to File Registration Statement
In the event we fail to file the registration statement covering the
common stock to be issued upon the conversion of the convertible note and
exercise of the warrants by October 25, 2000, or if the registration statement
is not declared effective by the SEC by December 15, 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%).
Additionally, if the registration statement is not filed by October
25, 2000 and not declared effective by the SEC on or prior to December 15, 2000,
we must pay cash, as liquidating damages, for such failure. The required payment
will be equal to two (2%) of the purchase price of the convertible note and
warrant for each thirty-day period, until the breach of the Registration Rights
Agreement is cured.
SELLING SHAREHOLDERS
On March 23, 2000, we issued an 8% convertible note to the Augustine
Fund, L.P. for a cash investment of $3,000,000. In connection with the issuance
of the note, we also issued to the Augustine Fund, L.P. and the Delano Group
Securities, LLC (as the placement agent in the financing) warrants to purchase
300,000 and 100,000 shares of common stock, respectively, for an exercise price
of $2.70 per share. As described elsewhere herein, this prospectus covers shares
of common stock that may be acquired by the selling shareholders upon the
conversion of the convertible note, as interest on the convertible note, and
upon exercise of the warrants.
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<PAGE>
Under the Registration Rights Agreement, we are required to register
for resale by the selling shareholders 20,392,792 shares of our common stock.
This amount is based upon:
o The number of shares issuable upon conversion of and payment of
interest on the convertible note and exercise of the warrants; and
o The potential increase in the number of shares issuable with respect
to the convertible note if the conversion price declines due to a
decline in the market price for our common stock.
In accordance with the terms of the Registration Rights Agreement
with the holder of the convertible note, this prospectus covers the resale of
200% of the number of shares of common stock issuable upon conversion of the
convertible note, determined as if the convertible note was converted in full at
the assumed conversion price of $.30468, plus 200% of the number of shares
issuable upon exercise of the warrant issued to the Augustine Fund, L.P. and
100% of the number of shares issuable upon the exercise of warrants issued to
the Delano Group Securities, LLC. If the warrants were exercised in full and the
entire convertible note was converted at the conversion price of $.30468 per
share, only 10,246,396 shares of common stock would be issued and available for
resale under this prospectus. However, we cannot determine the exact number of
shares of common stock that we will ultimately issue upon exercise of the
warrants and conversion of the convertible note if the conversion price declines
and anti- dilution adjustments occur with respect to the warrants or the
convertible note.
Pursuant to its terms, the convertible note is convertible by any
holder only to the extent that the number of shares thereby issuable, together
with the number of shares of common stock owned by such holder, but not
including unconverted portions of the convertible note or unexercisable or
warrants, would not exceed 4.99% of the then outstanding shares of our common
stock as determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934. Accordingly, the number of shares of common stock set forth in the
third and fourth columns in the table below for the selling shareholders exceeds
the number of shares of common stock that the selling shareholders beneficially
own in accordance with Section 13(d) as of October 23, 2000. This 4.99% limit
may not prevent any holder from converting all of its convertible note or
exercising its warrants, because the holder can convert the convertible note or
exercise warrants into 4.99% of our outstanding common stock, then to the extent
it liquidates some or all of these shares, the holder can convert additional
amounts of the convertible note. As a result, the 4.99% limit does not prevent
selling shareholders from selling more than 4.99% of our common stock.
The following table provides information as of October 23, 2000, with
respect to the common stock beneficially owned by the selling shareholders. The
information presented is based on data furnished to us by the selling
shareholders and assumes a conversion price for the convertible note of $.30468
per share. The actual number of shares of common stock issuable upon conversion
of the convertible note is subject to adjustment and could be materially more
than the amounts set forth in the table below, depending on factors which we
cannot predict at this time, including, among other factors, the future market
price of the common stock.
The 20,392,792 shares of common stock offered by this prospectus
may be offered from time to time to the selling shareholders named below.
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<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Number of Shares Maximum Number Shares Beneficially
Shares of Common That Can Be of Shares Offered Owned After
Name of Selling Stock Owned Acquired Over Life Under This Offering (2)
Shareholder Beneficially Before of the Securities Registration
Offering(1) Owned Statement
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Augustine Fund, L.P 2,471,425 (4.99%) 9,846,396 20,292,792 0
------------------------------------------------------------------------------------------------------------------------------------
Delano Group Securities, LLC 100,000 100,000 100,000 0
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,571,425 9,946,396 20,392,792 0
------------------------------------------------------------------------------------------------------------------------------------
-----------
<FN>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. The rules also provide
that beneficial ownership includes shares of common stock, underlying
options, warrants and convertible securities that can be exercised or
converted within 60 days. To that extent, the number of shares
underlying the convertible securities presented in the table may not
represent the actual beneficial ownership from time to time of selling
shareholders in accordance with those rules because of any adjustable
rate of conversion. Unless otherwise indicated, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares beneficially
(2) Assumes that all of the selling shareholders will sell all of the
shares registered for sale hereby. Because the selling shareholders
may offer all, some or none of the shares pursuant to this prospectus,
and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares that will be held by
the selling shareholders after completion of the sale of shares
hereunder.
</FN>
</TABLE>
The selling shareholders will receive all of the proceeds of the
shares offered hereby. We will not receive any of the proceeds from the sale of
such shares. However, 400,000 of the shares offered hereby are issuable upon the
exercise of outstanding warrants to purchase shares of common stock (subject to
adjustments). If all of the warrants are exercised by the selling shareholders,
we estimate that we would receive gross cash proceeds of $1,080,000 in the
aggregate (assuming none of the warrants were exercised pursuant to the cashless
exercise provisions contained therein). Holders of the warrants have the right
to exercise the warrants held by them by delivering shares of common stock as
payment for the exercise price pursuant to the terms of the warrants. We will
bear the expenses of this offering. No selling shareholder has held any position
or office or had any other material relationship with our company.
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale by the selling
shareholders of up to 20,392,792 shares of common stock par value $.001 per
share, assuming a conversion of the convertible note and an exercise of the
warrants.
The shares covered by this prospectus may be offered and sold from
time to time by the selling shareholder. The selling shareholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling shareholders may sell the shares being offered
hereby on the OTC Bulletin Board, or otherwise, at prices and under terms then
prevailing, at prices related to the then current market price, or at negotiated
prices. Registration of the shares does not necessarily mean that any of the
shares will be offered by the selling shareholder.
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<PAGE>
Shares may be sold by one or more of the following means of
distribution:
o block trades in which the broker-dealer so engaged will attempt to
sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o over-the-counter distributions in accordance with the rules of the
NASD;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o privately negotiated transactions
We will not receive any of the proceeds from the sale of shares by
the selling shareholder. We will bear all expenses of the offering, except that
the selling shareholders will pay all underwriting commissions, brokerage fees
and transfer taxes as well as fees of its counsel.
In connection with distributions of the shares, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions who may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling shareholder. The
selling shareholders may also (i) sell our common stock short and redeliver the
shares to close out such short positions; (ii) enter into option or other
transactions with broker-dealers or other financial institutions which require
the delivery thereto of the shares offered hereby, which shares such
broker-dealer or other financial institutions may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction); or (iii)
pledge such shares to a broker-dealer or other financial institution, and, upon
a default, such broker-dealer or other financial institution, may affect sales
of such pledged shares pursuant to this prospectus (as supplemented or amended
to reflect such transaction). In addition, any such shares that qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under that Rule rather
than pursuant to this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
shareholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling shareholders in amounts to be negotiated prior to the sale. Such brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales, and any such commissions,
discounts or concessions may be deemed to be underwriting discounts or
commissions under the Securities Act.
In order to comply with the securities laws of certain states, the
shares must be sold in such states only through registered or licensed brokers
or dealers. In addition, in certain states shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirements is available and
has been complied with.
The rules and regulations in Regulation M under the Exchange Act
provide that during the period that any person is engaged in the distribution
(as defined therein) of our common stock, such person generally may not purchase
shares of our common stock. The selling shareholders are subject to such
regulation which may limit the timing of its purchases and sales of shares of
our common stock.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
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<PAGE>
We have agreed to indemnify the selling shareholder, and any person
controlling it against certain liabilities, including liabilities under the
Securities Act. The selling shareholders haves agreed to indemnify us and
certain related persons against certain liabilities, including liabilities under
the Securities Act.
We have agreed with the selling shareholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of the sale of all the shares or the date on which shares may be sold
without any restriction pursuant to Rule 144(k).
LEGAL MATTERS
Certain legal matters will be passed upon for us by Gordon,
Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore, Maryland.
EXPERTS
The financial statements of Sales Online as of December 31, 1999 and
for each of the years in the two-year period ended December 31, 1999, have been
incorporated by reference herein and in the registration statement in reliance
upon the report of Wolf & Company, P.C., independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act,
and in accordance with the Exchange Act we file reports, proxy statements and
other information with the SEC. The reports, proxy statements and other
information on file can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the SEC's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at the prescribed rates from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. The SEC also maintains a web
site that contains reports, proxy statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http:\\www.sec.gov.
We have filed a registration statement with the SEC on Form S-3 under
the Securities Act, with respect to the securities offered by this prospectus.
This prospectus, which constitutes part of the registration statement, omits
some information contained in the registration statement and the exhibits to the
registration statement on file with the SEC pursuant to the Securities Act and
the rules and regulations of the SEC under the Securities Act. For further
information with respect to us and the common stock, reference is made to the
registration statement. We will describe the material provisions of any contract
or other document referred to in this document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference the documents listed below have
which have been filed by us with the SEC under file number 0-28720:
o our Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999;
o our Quarterly Reports on Form 10-QSB for the fiscal quarters ended
March 31, 1999, June 30, 1999, September 30, 1999, March 31, 2000, and
June 30, 2000;
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<PAGE>
o our current report on Form 8-K dated March 28, 2000 and filed on March
30, 2000, and amended on Form 8-K/A, dated March 28, 2000 and filed on
March 31, 2000; and
o description of the common shares on Form 10 filed August 20, 1996, as
updated in the Schedule 14C filed on February 4, 1999 and reflected in
Form 10-KSB for the fiscal year ended December 31, 1999.
We are also incorporating all documents we file pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before the termination of the offering made by this prospectus. Any
statement in a document referenced in part or in whole shall be deemed to be
modified or superseded for purposes of the registration statement and this
prospectus to the extent that the statement is modified or superseded by the
registration statement and this prospectus. Any statement that has been modified
or superseded by this prospectus shall not be deemed to constitute a part of
this prospectus beyond the extent of the portion of the modified or superseded.
We will provide a copy of any document incorporated by reference,
other than exhibits to those documents unless the exhibits are specifically
incorporated by reference into the documents that this prospectus incorporates
by reference free of charge to any person who receives a prospectus upon written
or oral request. Requests should be directed to the Secretary, 4 Brussels
Street, Worcester, Massachusetts 01610, telephone number (508) 791-6710.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various estimated expenses to be
incurred by us in connection with the registration of the securities being
registered hereby, all of which will be borne by us except any underwriting
discounts and commissions and expenses incurred by the selling stockholder for
brokerage, accounting or tax services or any other expenses incurred by the
selling stockholder in disposing of the shares (other than the reasonable fees
and expenses of the selling shareholder's counsel).
SEC Registration Fee $ 2,100
Accounting fees and expenses $ 5,000
Legal fees and expenses $ 15,000
Printing fees $ 1,000
Transfer agent fees $ 500
Miscellaneous $ 1,000
--------
TOTAL $ 24,600
Item 15. Indemnification of Directors and Officers.
Article Eleven of our Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, a director shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability:
o for any breach of their duty of loyalty to the corporation or its
stockholders, or
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, or
o for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law, or
o for any transaction from which the director derived an improper
personal benefit.
Our Bylaws provide that, to the fullest extent permitted by Delaware
General Corporation Law our directors and officers shall be indemnified, and
employees and agents may be indemnified, against expenses, including attorneys'
fees, judgments, fines, and settlements actually and reasonably incurred in
connection with any proceeding arising out of their status as such. Section 145
of the Delaware General Corporation Law provides that a corporation may
indemnify an director, officer, and agent if such director, officer or agent
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the company, and, with the respect to any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful.
In addition, our Bylaws provide that we are required to pay or
reimburse, in advance of final disposition of a proceeding, reasonable expenses
incurred by an officer or director provided that we have received a written
undertaking by or on his behalf to repay the amount we paid or reimbursed if it
shall ultimately be determined that the standard of conduct was not met.
<PAGE>
Sales Online also maintains director and officer insurance coverage.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted of directors and officers of the Sales
Online pursuant to the foregoing provisions or otherwise, we have been advised
that, although the validity and scope of the governing statute has not been
tested in court, in the opinion of the SEC, such indemnification is against
public policy as expressed in such Act and is, therefore, unenforceable. In
addition, indemnification may be limited by state securities laws.
Item 16. Exhibits.
2.1 Agreement and Plan of Reorganization dated January 31, 1999 among the
Registrant and Gregory Rotman, Richard Rotman, Marc Stengel and Hannah
Kramer. (Incorporated by reference from Form 8-K-File No. 0-28720,
filed March 10, 1999).
4.1 Specimen of certificate for Common Stock.
4.2 Securities Purchase Agreement dated March 23, 2000 between the
Registrant and Augustine Fund, LP. (Incorporated by reference to
Exhibit 10.2 to Form 10-KSB filed on April 14, 2000).
4.3 Convertible Note dated March 23, 2000 issued to Augustine Fund, LP
pursuant to Securities Purchase Agreement (Incorporated by reference
to Exhibit 10.3 to Form 10-KSB filed on April 14, 2000).
4.4 Warrant dated March 23, 2000 issued to Augustine Fund, LP pursuant to
Securities Purchase Agreement(Incorporated by reference to Exhibit
10.4 to Form 10-KSB filed on April 14, 2000).
4.5 Registration Rights Agreement (Incorporated by reference to Exhibit
10.5 to Form 10-KSB filed on April 14, 2000).
4.6 Warrant issued by the Registrant to Delano Group Securities, LLC
(Incorporated by reference to Exhibit 10.7 to Form 10-KSB filed on
April 14, 2000).
4.7 Modification Agreement dated September 19, 2000 between the Registrant
and Augustine Fund, LP. **
5.1 Opinion of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
regarding the legality of securities.**
23.1 Consent of Wolf & Company, P.C.**
23.2 Consent of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
(included in Exhibit 5.1)
--------------------
** Filed herewith
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file with the SEC, during any period in which offers or sales are
being made in reliance on Rule 415 of the Securities Act, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect reflect in such prospectus any facts or events that
exist which, individually or together, represent a fundamental
change in the information contained in the registration
statement; provided, however, that notwithstanding the
foregoing, any increase or decrease in volume of the securities
offered (if the total dollar value of the securities offered
would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement; and
<PAGE>
(iii) To include any material information with respect to the plan of
distribution;
(2) For purposes of determining any liability under the Securities Act, to
treat each post-effective amendment as a new registration statement
relating to the securities offered, and the offering of such
securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities being registered which remain unsold at the termination
of the offering.
For determining any liability under the Securities Act, the
Registrant hereby undertakes: (1) to treat the information omitted from the form
of prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the SEC declared it effective; and (2) to
treat each post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time as the initial bona fide offering of
the securities.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities, other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding, is asserted by the
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of that issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Worcester, Massachusetts, on October 24, 2000.
SALES ONLINE DIRECT, INC.
By: /s/ Gregory Rotman
--------------------------------
Gregory Rotman, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-3 has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ Gregory Rotman Director, President, October 24, 2000
------------------------------- Chief Executive Officer
Gregory Rotman
Director, Chief Financial
/s/ Richard Rotman Officer, Vice President October 24, 2000
------------------------------- Secretary
Richard Rotman
/s/ John Martin Director, Vice President October 24, 2000
------------------------------- Chief Technology Officer
John Martin
/s/ Andrew Pilaro Director October 24, 2000
-------------------------------
Andrew Pilaro
<PAGE>
