As filed with the Securities and Exchange Commission on December 1, 2000
Registration No. 333-48542
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Pre-effective Amendment No. 1
to FORM S-3
on
Form SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------------
SALES ONLINE DIRECT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Delaware 7372 73-1479833
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation or organization) Classification Code Number) Number)
</TABLE>
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 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 this form is a post-effective amendment filed pursuant to Rule
462(d) 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. [ ]
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
====================================================================================================================================
Title of Securities to be Registered Amount to be Proposed Maximum Proposed Maximum Amount of Registration
Registered Offering Price Per Aggregate Offering Fee(5)
Share (1) Price (1)
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<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share, Issuable Upon Conversion of 19,692,792 (2)(4) $.39 $7,680,189 $2,027.57
Convertible Note
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Common Stock, par value $.001 per
share, Issuable Upon Exercise 700,000 (3)(4) $.39 $273,000 $ 72.07
of Warrants
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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.
(5) Previously paid upon the filing of the Registrant's Registration
Statement on Form S-3 on October 25, 2000.
</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 December 1, 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 November 27,
2000 the last sale price of the common stock as reported on the OTC Bulletin
Board was $.52 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.
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TABLE OF CONTENTS
Page
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SUMMARY.......................................................................3
RISK FACTORS..................................................................4
DESCRIPTION OF OUR SECURITIES................................................21
REGISTRATION RIGHTS..........................................................23
SELLING SHAREHOLDERS.........................................................24
USE OF PROCEEDS..............................................................26
PLAN OF DISTRIBUTION.........................................................26
LEGAL PROCEEDINGS............................................................28
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES..............................29
EXECUTIVE COMPENSATION.......................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............32
DESCRIPTION OF BUSINESS......................................................33
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................40
DESCRIPTION OF PROPERTY......................................................44
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................44
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.....................................................44
LEGAL MATTERS................................................................45
EXPERTS......................................................................45
WHERE YOU CAN FIND MORE INFORMATION..........................................45
FINANCIAL STATEMENTS........................................................F-1
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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
$2.70, which is 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 we will
be successful in addressing these risks.
We incurred a net loss of $3,483,974 for the nine months ended
September 30, 2000 (which includes an interest expense of $1,309,956 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 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 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
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<PAGE>
difficulty in hiring qualified successors and could experience a loss in
productivity while any such successor obtains the necessary training and
experience. In order to meet expected growth, we believe that our future success
will depend upon our ability to identify, attract, hire, train, motivate and
retain other highly-skilled managerial, merchandising, engineering, technical
consulting, marketing and customer service personnel. We do not have a long-term
employment agreements with any of our key personnel and we do not maintain any
key person life insurance. We cannot offer assurances that we will be successful
in attracting, assimilating or retaining the necessary personnel, and the
failure to do so could have a material adverse effect on our business.
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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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 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
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material adverse effect on our business, results of operations and financial
condition.
To date, we have experienced variable interruptions to our service as
a result of loss of power and telecommunications connections. Despite our
implementation of network security measures and firewall security, our servers
are also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties 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
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offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
Our success is dependent upon the protection of our intellectual property.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and 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
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States is subject to export restrictions as a result of the encryption
technology in such software and may give rise to liability to the extent we
violate such restrictions. We cannot offer assurances that we will be able to
successfully market, sell and distribute 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 Whirl
Wind Collaborative Design, Inc. ("Whirl Wind") 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. Various motions and responses have been filed in connection with the
First Amended Complaint. The Court has not ruled on these matters. Mr. Stengel,
Whirl Wind and Silesky Marketing, Inc. have filed answers to the First Amended
Complaint, and Whirl Wind has filed a counterclaim against Sales Online for
conversion of a small quantity of computer equipment alleged to be owned by
Whirl Wind; the Court has not ruled on any of these claims.
On or about June 16, 2000 Stengel commenced an action in the
Delaware Chancery Court pursuant to Section 225 of the Delaware General
Corporation Law (the "Delaware 225 Action") 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 225 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. That motion is pending.
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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
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 as our
Board of Directors. 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
Maryland action 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.
On or about October 3, 2000, Mr. Stengel submitted to Sales Online a
demand for advancement of certain expenses (including attorneys' fees) he
allegedly incurred in connection with the Delaware 225 Action and Maryland
action discussed above. On October 20, 2000, the Company notified Mr. Stengel
that the Board of Directors had denied Mr. Stengel's advancement request.
On or about October 24, 2000, Mr Stengel filed a second action in
the Delaware Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that, pursuant to our
Bylaws, he is entitled to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
action (the "Delaware 145 Action"). Sales Online and Mr. Stengel have each moved
for summary judgment in the Delaware 145 Action. A hearing on these matters is
scheduled for December 22, 2000.
On November 1, 2000, we filed with the Maryland Court a Motion for a
Preliminary Injunction requesting that the Court enjoin Mr. Stengel and Ms.
Kramer from selling, attempting to sell, or otherwise disposing of their shares
of the Company's stock pending resolution of the merits of our claim for
rescission. On November 9, 2000, Mr. Stengel filed an Opposition to our Motion
for a Preliminary Injunction. On November 9, 2000, Mr. Stengel also filed a
Motion for Preliminary Injunction requesting that the Court (i) order Sales
Online to instruct its transfer agent to implement and complete all measures
necessary to sell his restricted stock in compliance with Rule 144 and (ii)
enjoin Sales Online from interfering with or preventing the sale of stock by Mr.
Stengel in accordance with Rule 144. Both motions have been rescheduled for
hearing by the Court on December 7, 2000.
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
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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
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.
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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:
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
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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,
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
websites 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 our business, results of operations and financial
condition.
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Risks Associated with our Common Stock
Our stock price has been and may continue to be very volatile.
The market price of the shares of our common stock has been, and is
likely to be, highly volatile and could be subject to wide fluctuations in
response to factors such as actual or anticipated variations in our results of
operations, announcements of technological innovations, new sales formats by the
company or our competitors, developments with respect to patents, copyrights or
proprietary rights, changes in financial estimates by securities analysts,
conditions and trends in the Internet and electronic commerce industries,
adoption of a new accounting standards affecting the retail sales industry,
general market conditions and other factors. Further, the stock markets have
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies and
that often have been unrelated or disproportionate to the operating performance
of such companies.
The trading prices of many technology companies' stock have
experienced extreme price and volume fluctuations in recent months. These
fluctuations often have been unrelated or disproportionate to the operating
performance of these companies. The valuation of many Internet stocks are
extraordinarily high based on conventional valuation standards such as price to
earnings and price to sales ratios. We cannot offer any assurance that these
trading prices and price earnings ratios will be sustained. These broad market
factors may adversely affect the market price of our common stock. These market
fluctuations, as well as general economic, political and market conditions such
as recessions 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
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.
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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 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 number of shares of 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
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 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 the SEC indicating an
intent to sell 470,000 shares; 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
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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
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 is 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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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 November 27, 2000, we had 54,963,281 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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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 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.
Interest. The convertible note bears interest at the rate of 8% per
annum. Interest is payable in quarterly installments in arrears. 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 of the convertible note 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
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common stock leading to a lower 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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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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<TABLE>
<CAPTION>
Number of Shares Maximum Number of
Shares of Common That Can Be Shares Offered
Stock Owned Acquired Over Life Under This Shares Beneficially
Name of Selling Beneficially of the Securities Registration Owned After
Shareholder Before Offering (1) Owned Statement Offering (2)
----------- ------------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Augustine Fund, L.P. 2,471,425 (4.99%) 10,146,396 20,292,792 0
Delano Group Securities, LLC 100,000 100,000 100,000 0
------- ------- ------- -
TOTAL 2,571,425 10,246,396 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>
USE OF PROCEEDS
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 shareholders. 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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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 shareholders. 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 shareholders. 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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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 PROCEEDINGS
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 Whirl
Wind Collaborative Design, Inc. ("Whirl Wind") 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
defendants other than Stengel 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 our assets, resources and employee services, and for unjust
enrichment. Various motions and responses have been filed in connection with the
First Amended Complaint. The Court has not ruled on these matters. Mr. Stengel,
Whirl Wind and Silesky Marketing, Inc. have filed answers to the First Amended
Complaint, and Whirl Wind has filed a counterclaim against Sales Online for
conversion of a small quantity of computer equipment alleged to be owned by
Whirl Wind; the Court has not ruled on any of these claims.
On or about June 16, 2000, Marc Stengel commenced an action in the
Delaware Chancery Court pursuant to Section 225 of the Delaware General
Corporation Law (the "Delaware 225 Action") 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 Gregory Rotman and Richard Rotman be
ordered to dismiss the Maryland action. The Delaware 225 Action was stayed
pending the outcome of a special meeting of shareholders, discussed below.
Following the results of that meeting, we moved for summary judgment and asked
that the Delaware 225 Action be dismissed. That motion is pending.
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
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 as our
Board of Directors.
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
Maryland action 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.
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On or about October 3, 2000, Mr. Stengel submitted to Sales Online a
demand for advancement of certain expenses (including attorneys' fees) he
allegedly incurred in connection with the Delaware 225 Actions and the Maryland
action. On October 20, 2000, we notified Mr. Stengel that the Board of Directors
had denied Mr. Stengel's advancement request.
On or about October 24, 2000, Mr Stengel filed a second action in the
Delaware Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that he is entitled to
pursuant to our Bylaws to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
action (the "Delaware 145 Action"). Sales Online and Mr. Stengel have each moved
for summary judgment in the Delaware 145 Action. A hearing on these matters is
scheduled for December 22, 2000.
On November 1, 2000, we filed with the Maryland Court a Motion for a
Preliminary Injunction requesting that the Court enjoin Mr. Stengel and Ms.
Kramer from selling, attempting to sell, or otherwise disposing of their shares
of the Company's stock pending resolution of the merits of our claim for
rescission. On November 9, 2000, Mr. Stengel filed an Opposition to our Motion
for a Preliminary Injunction. On November 9, 2000, Mr. Stengel also filed a
Motion for Preliminary Injunction requesting that the Court (i) order Sales
Online to instruct its transfer agent to implement and complete all measures
necessary to sell his restricted stock in compliance with Rule 144 and (ii)
enjoin Sales Online from interfering with or preventing the sale of stock by Mr.
Stengel in accordance with Rule 144. Both motions have been rescheduled for
hearing by the Court on December 7, 2000.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the
directors and executive officers of Sales Online:
Name Age Position
---- --- --------
Gregory Rotman* 34 Director, Chief Executive Officer
& President
Richard Rotman* 30 Director, Chief Financial Officer,
Vice President, Treasurer & Secretary
John Martin 35 Director, Chief Technology Officer &
Vice President
Andrew Pilaro 30 Director
----------------------
*Gregory Rotman and Richard Rotman are brothers.
The following is a description of the current occupation and business
experience for the last five years for each director and executive officer.
Gregory P. Rotman has served as a Director and the Chief Executive
Officer and President of Sales Online since February 1999. From 1995 to 1998, he
served as a Partner of Teamworks, Inc., LLC , which was responsible for the
design, financing and build-out of MCI National Sports Gallery.
Richard S. Rotman has served as a Director and the Chief Financial
Officer, Vice President, Treasurer and Secretary of Sales Online since February
1999. Prior to joining Sales Online, he was involved in the management and
day-to-day operations of Rotman Auction, which he formed in February 1997. From
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1995 until February 1997, Mr. Rotman worked for the family business, Rotman
Collectibles, where he began in sales and distribution in the new product
division. As the industry was changing, Rotman Collectibles began focusing on
auctions as a more permanent division and during 1996, he began to create a
presence on the Internet. Mr. Rotman's primary expertise is in management and
daily operations. From 1994 to 1995, Mr. Rotman served as the director of an art
gallery in Jackson, Wyoming, selling original artwork to high-end clientele.
John Martin has served as a Director and the Vice President of Sales
Online since September 2000, and our Chief Technology Officer since May 2000.
From May 1999 until May 2000, he served as vice president-technology. From June
1997 to May 1998, Mr. Martin was an instructor at Clark University Computer
Career Institute. From August 1996 to May 1999, he served as a Software Engineer
with Sybase, Inc., a software development company. From prior to 1995 to August
1996, Mr. Martin was the Senior Programmer at Presidax, which manufactures
barcoded labels and is a division of Avery Dennison. From prior to 1995 to May
1999, he was also a software consultant.
Andrew Pilaro has served as a Director of Sales Online since
September 2000. Since August, 1996, he has served as the Assistant to the
Chairman of CAP Advisors Limited, an investment management company, with
responsibility for asset management. From August, 1995 to August, 1996, Mr.
Pilaro was a clerk at Fowler, Rosenau & Geary, L.P., a stock specialist firm.
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities
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: (1) for any breach of
their duty of loyalty to the corporation or its stockholders, (2) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (3) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
Corporation Law, or (4) 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 a 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.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted of directors and officers of 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.
EXECUTIVE COMPENSATION
The following table presents the compensation paid, on a cash basis,
to the Chief Executive Officer of Sales Online and those executive officers of
the Company as of December 31, 1999 who received compensation in excess of
$100,000.
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Summary Compensation Table
Name and Fiscal
Principal Position Year (1) Salary
------------------ -------- ------
Gregory Rotman, 1999 $124,519
President & Chief Executive
Officer
Richard Rotman, 1999 $126,191
Chief Financial Officer, Vice
President, Treasurer and Secretary
Marc Stengel, 1999 $126,194
Executive Vice President
(1) Each of the named executive officers assumed their positions as of February
25, 1999.
None of the named executive officers received, holds or exercised any
options or stock appreciation rights with respect to our securities, and none of
such persons was granted any awards under any long-term incentive plan of Sales
Online.
None of our directors receives any compensation from Sales Online for
serving as directors
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 25, 1999, we purchased all of the outstanding common
stock of Internet Auction, Inc., a Massachusetts corporation ("Internet
Auction"), which was wholly owned by Gregory Rotman, Richard Rotman, Marc
Stengel and Hannah Kramer, in exchange for the issuance to these individuals of
an aggregate of 36,928,912 shares, representing approximately 78.4%, of the our
common stock. As a result of this transaction, the principal business of
Internet Auction became the business of Sales Online and Gregory Rotman, Richard
Rotman, Marc Stengel and Hannah Kramer became directors of Sales Online.
Following the transaction with Internet Auction, John Martin was
granted options to purchase 471,000 shares of our common stock at an exercise
price of $.01 per share, of which 177,250 are currently exercisable.
In September 1999, we purchased certain computer equipment, Internet
research technology and coding material for a purchase price of $70,000 from a
corporation owned by Gregory Rotman and Richard Rotman. Sales Online believes
that the terms of the purchase were fair and reasonable and on terms no less
favorable than could have been obtained by an unaffiliated party.
In February 1999 prior to the transaction with Internet Auction,
Rotman Productions, an entity owned by Steven Rotman, the father of Gregory
Rotman and Richard Rotman, contributed an inventory of collectibles with an
estimated value of $629,000 to Internet Auction in exchange for 236 shares of
Internet Auction common stock which in the transaction converted to 220,000
shares of our common stock. After the Internet Auction transaction, as
additional consideration for the contribution of the inventory of collectibles,
we assigned to Steven Rotman options we held to purchase 700,000 shares of our
common stock owned by a third party, Universal Funding, Inc., at an exercise
price of $.50 per share, which options were exercised by Steven Rotman.
On March 7, 2000, we acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles web sites in a variety of categories. In the
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lawsuit we filed against Marc Stengel and others described above, we allege that
this acquisition was an undisclosed related party transaction.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the Management of Sales Online the following
table sets forth the beneficial ownership of our common stock as of November 27,
2000 of each of our directors and executives officers, and all of our directors
and executive officers as a group. The address of each person named below is the
address of Sales Online.
Name and Address of Number of Shares % of
Beneficial Owner Beneficially Owned Class
---------------- ------------------ -----
Gregory Rotman 8,309,005 15.18%
Richard Rotman 10,155,451 18.48%
John Martin 177,250 (1) *
Andrew Pilaro 11,700 *
__________ ______
All directors and
officers as a group 18,653,406 33.83%
* Represents less than 1%
(1) Represents currently exercisable options to purchase shares of our common
stock.
To the knowledge of the Management of Sales Online, as of November
27, 2000, there are no persons and/or companies who or which beneficially own,
directly or indirectly, shares carrying more than 5% of the voting rights
attached to all outstanding shares of Sales Online, other than Gregory Rotman
and Richard Rotman, set forth above and the following:
Name and Address of Number of Shares % of
Beneficial Owner Beneficially Owned Class
---------------- ------------------ -----
Marc Stengel 12,925,119 23.52%
3743 Birch Lane
Owings Mills, MD 21117
Hannah Kramer 5,331,837 9.70%
673 Korisa Drive
Huntingdon Valley, PA 19006
DESCRIPTION OF BUSINESS
History of the Company
After its formation on August 9, 1995 as Rose International Ltd., our
company acted primarily as a non-operating holding company overseeing the
operations of its subsidiaries and joint ventures. It's two wholly-owned
subsidiaries included RCI, a New Jersey corporation, organized on December 2,
1987, and SPS Alfachem, Inc. ("SPS"), a New Jersey corporation, organized on May
22, 1995 and acquired May 14, 1996. RCI was primarily engaged in the
manufacturing and marketing of specialty organic chemical dyes used principally
in the petroleum and plastics industries. On September 30, 1997, the company
transferred to the Chiralt Corp. its ownership of RCI and SPS in exchange for
three million (3,000,000) common shares of NexTech Enterprises International,
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Inc. (formerly International Imaging, Inc.), a Delaware corporation, which
resulted in the Company's owning less than 20% of NexTech.
On June 5, 1998, the company acquired 82.02% of the issued and
outstanding common stock of the Accord Group, Inc., a Delaware corporation,
located in Port Washington, New York and on July 8, 1998, changed its name to
Securities Resolution Advisors, Inc. ("SRAD"). Accord, through its operating
subsidiary Securities Resolution Advisors, Inc. ("SRA"), a New York corporation,
served members of the investing community who had lost money due to the advice,
lack of fiduciary responsibility or fraudulent practices of brokers and broker
dealers. SRA advised its customers as to appropriate courses of action with
respect to arbitration, as well as settlement with brokers and brokerage firms.
All services were rendered on a contingency fee basis. The acquisition was
accounted for utilizing the purchase method of accounting, wherein the assets of
the company were recorded at fair value and the operations of Accord have become
the historical operations of the company. The company issued 8,000,000 shares
common stock to three individuals in exchange for 8,000,000 shares (82.02%) of
the common stock of Accord. In December 1998, as a part of a restructuring, SRA
became a wholly owned subsidiary of SRAD, and the company sold Accord, which had
no other assets, for $40,000.
On February 24, 1999, SRAD sold the SRA business to Richard Singer,
the former president of the company in exchange for 8,000,000 shares of our
common stock, all of which were cancelled. On February 25, 1999, SRAD purchased
all of the outstanding common stock of Internet Auction, Inc., a Massachusetts
corporation ("Internet Auction"), and subsequently changed the name to Sales
OnLineDirect, Inc. The acquisition was pursuant to an Agreement and Plan of
Reorganization dated January 31, 1999 between Sales Online and Gregory Rotman,
Richard Rotman, Marc Stengel and Hannah Kramer, the principal shareholders of
Internet Auction. Pursuant to the Agreement, we acquired all of the issued and
outstanding shares of the capital stock of Internet Auction in exchange for the
issuance to the principal shareholders of Internet Auction of an aggregate of
37,368,912 shares, representing approximately 80%, of our common stock. As a
result of the transaction, Internet Auction became a wholly-owned subsidiary of
Sales Online, the principal shareholders of Internet Auction own approximately
80% of our issued and outstanding common stock, and the principal business of
Sales Online became the business of Internet Auction. Prior to the transaction
with Internet Auction, Richard Singer was a principal beneficial owner of our
common stock.
In accordance with the Agreement, after the transaction, the Internet
Auction shareholders were appointed to our Board of Directors, and the
previously serving directors resigned from the Board.
The following is a description of our current business.
Overview
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."
Immediately following the transaction with Internet Auction, our
mission was to offer a branded network of comprehensive shopping services to
buyers and sellers of collectibles. This was accomplished through our four main
business divisions:
Rotman Auction--an auction house that has provided 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. This division has maintained a substantial inventory of memorabilia
with popular and historical significance which allows customers to directly
purchase the memorabilia without the competition from bidders in an auction
format.
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Internet Auction, Inc.--offered sellers a vehicle for listing items
for sale, and has brought buyers and sellers together to buy and sell personal
items including but not limited to antiques, coins, collectibles, computers,
memorabilia, stamps and toys online.
World Wide Collectors Digest ("WWCD")-- located at "www.wwcd.com"
(which can also be accessed through "www.collectingexchange.com" and
"www.salesonlinedirect.com"), designed, hosted and maintained client websites.
Its software also allowed clients to operate online stores, set prices and sell
directly to online shoppers. To attract collectors of sports memorabilia, the
WWCD division website included 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.
Internet Collectibles--a wholesale and retail collectibles business
that buys, stores, markets and sells collectibles and memorabilia, and maintains
a substantial inventory of memorabilia with popular and historical significance.
In order to take advantage of the tremendous growth in both the
online auction and e-commerce industries, we shifted our focus to 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.
When fully operational, the site will contain components developed by
Sales Online as well as components licensed from others or developed for Sales
Online. The site is planned to be a general information search engine like
"Yahoo" that is specific to collectible web sites. The portal has several main
functions. First, it searches and collects information from every collectible
site on the Internet. Through a technique known as "spidering," the Web will be
searched 24 hours a day to retrieve collectibles information. This information
is then stored in the site's database where users can retrieve it instantly.
Second, the portal provides information on a variety of collectible topics
including price guides, show calendars, auction listings, library information,
grading and authentication, publications restoration services, collecting
software, dealers, classifieds, etc. Third, it serves as a gatekeeper by linking
collectors immediately to selected websites. Finally, when fully operational,
the portal will enable users to customize their home pages with both real time
auction prices of specific collectible items and more traditional Internet
services (stock quotes, news, weather, etc.) and view these while pursuing their
collectible interests on the site's search engine.
In addition, when more fully operational, the site is expected to
integrate with a global auction search and bidding platform--a one-stop, feature
rich resource for online auctions. The advanced cross-auction search engine will
provide a comprehensive, categorized and searchable index of all auction sites
for a specific item, eliminating the need to search multiple auction sites.
Additionally, bidders can be notified about the listing of new items, have them
monitored and participate on multiple auction sites simultaneously. Sellers,
too, will benefit from this search engine as they will be able to list items
across multiple sites simultaneously. Sellers also benefit from the ability to
quickly and easily list items across multiple sites. They will also be able to
better manage the selling process, working in conjunction with leading auction
sites, through use of the following features:
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o Scheduled postings--sellers can schedule the specific day and
time they want their items listed, freeing them from constant
computer monitoring
o Auction tracking--sellers can track all of their auctions from
one centralized location and can view current auctions, pending
auctions, closed auctions and even track offline activities
o Track post auction activity--sellers can track emails, receipt of
payment, shipping status and receive feedback
o Customized templates--sellers can create effective, eye-catching
listings with automated, customized templates
o Cross Auction Postings--sellers only need to list their sale
items once before posting on multiple auction sites
o Inventory Management--software to automatically recalculate the
value of available inventory, track existing inventory and inform
sellers when to restock
o Quick Start--online sellers can immediately import existing
auctions into collectingexchange.com's interface
o One-Click Re-list--sellers can re-enter unsold items with one
keystroke
The site is also expected to provide research information for users.
The research feature will be a real-time, industry-wide repository of accurate
information that can be used to research specific collectible items. The search
engine will store information on each and every collectible item, enabling users
to have access to historical pricing information based on realized prices,
actual views of the collectible articles, experts on authentication, appraisal
and grading services, feedback opportunities and community discussions.
As a search engine for the collectibles industry,
collectingexchange.com is intended to provide its visitors with information with
which to make educated decisions regarding collectibles. The advanced
architectural technology of the search engine will allow for the collection of
information about collectible items. Because fraudulently sold items are the
largest concern facing the industry and its consumers, the Company will provide
visitors with the research tools to complete transactions based on the most
accurate, verified material available. Buyers and sellers will also benefit from
direct linkage to auctions, storefronts, and classifieds, thus reducing the
buyer's search time for desired items while accelerating the sale cycle for the
seller.
We believe that as a "collectibles community," the site will not
only meet the collectibles needs of its visitors but their other service needs
as well. The web site's user friendly approach will personalize the Web by
providing visitors with a wide range of the more typical search engine services,
e.g., news, email, stock quotes, travel, etc.
On November 8, 2000, we acquired a substantial portion of the assets
of ChannelSpace Entertainment, Inc., a Virginia corporation ("CSEI") and
Discribe, Ltd., ("Discribe") a Canadian corporation wholly owned by CSEI. CSEI
and Discribe are converged Internet content providers and producers of affinity
portals, including the CollectingChannel.com and the CelticChannel.com websites.
CollectingChannel.com is a leading online and broadcast destination, targeting
consumers, dealers, and manufacturers in the collecting marketplace. The
consideration we paid for the acquired assets was 7,530,000 unregistered shares
of our common stock, and $300,000 worth of our common stock which is to be
registered.
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Industry Background
Growth of the Internet and the Web
Consumers are spending an increasing amount of time on the Web.
International Data Corporation ("IDC") has estimated that at the end of 1998
there were over 51 million Web users in the United States and that by the end of
2002 the number of Web users in the United States will increase to over 135
million. The growth in the number of Web users and the amount of time spent on
the Web is being driven by the increasing importance of the Internet as a
communications medium, an information resource, and a sales and distribution
channel. The Internet has also evolved into a unique marketing channel. Some
examples of business transactions which occur on the Internet include trading
securities, buying consumer goods, paying bills and purchasing airline tickets.
Unlike the traditional marketing channels, Internet retailers do not have many
of the overhead costs borne by traditional retailers. The Internet offers the
opportunity to create a large, geographically dispersed customer base more
quickly than traditional retailers. The Internet also offers customers a broader
selection of goods to purchase, provides sellers the opportunity to sell their
goods more efficiently to a broader base of buyers and allows business
transactions to occur at all hours.
Growth of the Collectibles and Online Auction Industries
Sales Online serves both the collectibles and online auction
industries. Collectibles Industry Report, 1999 recently reported that total
consumer sales rose 6%, to reach $ 10.7 billion, in 1998. The Internet captured
$280 million dollars in collectible sales. As an industry, collectibles are
enjoying a 10% compounded annual growth rate for the fifth continuous year.
There are 37 million collectors in America today, 10 million of whom use the
Internet as a source to buy, sell and trade collectibles. (NewsEdge
Corporation). The industry, according to Collectibles Industry Report, 1999, has
seen a shift in demographics as baby-boomers have begun to take up the
collecting pastime. The new market has more male collectors, higher household
incomes, children in the home, and a willingness to use a range of distribution
channels, including the Internet. The new demographics have also created a shift
in interest from traditional collectibles, e.g. figurines and dolls, to products
that meet the demands of this generation of collectors.
The online auction industry is a large and rapidly growing industry and
is expected to become a permanent player in e-commerce. The IDC, in a recent
publication Online Auctions: The New E-Commerce Enabler, explained how online
auctions resolve the weaknesses of traditional auctions (i.e. limited
geographical coverage, a dearth of product variety, high transaction costs and
information inefficiency). The Internet overcomes these issues because it can
handle large quantities of data and support an infinite number of products and
services. It also allows buyers and sellers to trade on a global basis.
Online auctions are also good for e-commerce because they can drive
user retention and build brands. Auctions fit the definition of a sticky
application--something that engages users and keeps them coming back.
According to Forrester Research, a consulting firm that reports on the
online auction industry, online auction sales are estimated to reach $19 billion
by 2003. According to the November 1, 1999 Online Reporter, eBay is the largest
of the online auctions, with a user base of 7.7 million people, up from 1.3
million a year ago. Two-thirds of these users are repeat customers. It is also
estimated that users, in general, spend an average of 130 minutes per month on
this site, making it one of the most visited sites on the entire Internet.
According to an article in the San Jose Mercury News dated September 18, 1999,
eBay lists three million items per day for sale for $7 million in daily
transactions.
The number of auction sites and the recent industry mergers suggest
that the online auction industry is not a passing fad. In fact, because auction
sites are becoming viewed as alternatives to retail stores, it is anticipated
that they will ultimately play a role in driving down retail prices.
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Business Strategy
Because of the enormous growth in the online auction industry and its
concomitant increase in merger and acquisition activity, we decided to
consolidate our entities in order to focus on the collectors' "stock exchange."
The integrated collectibles portal, global auction search and research center
have become our core focus.
We have adopted an incremental growth strategy and have in place
agreements with the companies to complete the three milestones:
o The launch of the collectibles portal
o The launch of the global auction search
o The launch of the research center
This approach provides us with the ability to begin growing our
business through the portal while providing sufficient time for development and
testing of the research center. During this research and development period, we
will begin implementing an innovative marketing and sales campaign. This
campaign will focus on building our advertising and sponsor base as well as
implementing a more traditional media buying strategy.
We believe that "stickiness" is one of the most important trends in
today's Internet. Stickiness refers to finding ways of keeping Web users "glued"
to a particular web site. The key to stickiness is providing users with so much
useful content that they can find virtually everything they need onsite without
having to go to another site. The collectibles portal will provide the
"stickiness factor" for www.collectingexchange.com. Individuals will have the
opportunity to create personalized home pages, providing them with access to
their daily Internet services while pursuing their collectibles interests on a
search engine designed to provide general information by category. Together, the
three site components will provide site visitors with a comprehensive, one-stop
shopping collectible experience.
On February 1, 2000, we launched a financial website that offers
visitors real-time financial and business news and a comprehensive source for
stock quotes, charts, news, financial analysis, portfolios and investment
research. We plan to add message boards and online trading to the site in the
future. The new site is located at "www.collectingexchange.com/finance/".
Marketing and Sales
The success of collectingexchange.com is incumbent upon the visibility
it will receive on the Internet and the associated revenues generated by
advertising and services. Branding our corporate identity and our services is
the key to its success.
The marketing plan is designed to position Sales Online as the premier
collectibles site on the Internet. The site's unique feature will be its value
as an information provider to buyers and sellers in the collectible marketplace.
Marketing strategies will need to generate a substantial number of unique
visitors from around the globe. These visitors will need to become repeat users
for the site to create traffic and become successful. We will target both the
traditional collector and the new generation of collectors (as previously
described in "Industry Background.") We will also target dealers, licensors,
licensees, distributors and others to host collectible pavilions and other
e-commerce sites and storefronts.
Marketing Internet companies is a relatively new phenomenon. Whereas
earlier Internet advertising was mostly accomplished through banner advertising,
the industry is now marketing web sites through a combination of online
advertising and more traditional media and direct mail advertisement. We are
adopting this approach in our marketing campaign.
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Revenue Sources
Following the transaction with Internet Auction on February 25, 1999,
we primarily generated revenue from sales of our purchased inventory and from
fees and commissions on sales of merchandise under consignment arrangements.
Currently, substantially all of our revenues are derived from our Rotman Auction
operations. However, we anticipate that future sources of revenue generation
will include advertising revenue and service revenue, particularly through the
sale of pavilion spots and referral links. Pavilion spots are company
sponsorships that we will sell. These sponsorships give companies exclusive
storefront rights for their collectible category. For example, if Sony were to
purchase a pavilion, it would host the only site on collectingexchange.com
dealing with music and music videos. In the Sony pavilion, visitors would be
able to research the history of these items, the historical pricing of these
collectibles, read articles and speak with experts on authentication. Visitors
would also be provided with referral links to Sony and other sites for purchase
of merchandise.
It is anticipated that referral links may also become a source of
advertising income for Sales Online. Sellers of merchandise will pay us for
listing their storefronts on collectingexchange.com. When a site visitor
requests a search for a collectible item, we will provide the visitor with a
direct link to the seller's site, thus driving the sale. This referral link is
the manner in which the seller can obtain visibility for its collectible item.
In addition to pavilions and referral links, advertising revenues may
also come from targeted banner advertising and general banner advertising.
In terms of services, we anticipate users will pay for appraisal and
grading services. Other services generating revenue will include training
seminars, online autograph signings, fulfillment services for merchants, and the
selling of historical price trend reports.
Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive, and 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. Under our former
structure, we were competing with a variety of other companies depending on the
type of merchandise and sales format offered to customers. These competitors
include: (i) various Internet auction houses such as ONSALE, uBID, Yahoo!
Auctions, First Auction, Surplus Auction, WebAuction and Insight Auction; (ii) a
number of indirect competitors that specialize in electronic commerce or derive
a substantial portion of their revenue from electronic commerce, including
Internet Shopping Network, AOL, Shopping Com and Cendant Corp.; and (iii) a
variety of other companies that offer merchandise similar to that of our company
but through physical auctions.
Because our new collectibles portal structure is not a buyer or
seller of collectibles, it is not in direct competition with existing
collectible or online auction sites. The portal will not compete with either the
giants or the small players in the collectibles auction and e-commerce
industries. Rather, we will work in collaboration with these companies. Further,
because the research capacity of the new website will be able to validate the
authenticity of collectible items, other sites will value its services.
Additionally, we recently acquired a substantial portion of the assets of
ChannelSpace Entertainment, Inc., a Virginia corporation ("CSEI") and Discribe,
Ltd., ("Discribe") a Canadian corporation wholly owned by CSEI. CSEI and
Discribe are converged Internet content providers and producers of affinity
portals, including the CollectingChannel.com and the CelticChannel.com websites.
By acquiring the assets of CSEI and Discribe, we have eliminated a strong source
of competition. However, our Rotman Auction operations will still continue to
face the competition discussed above.
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Many collectible and online auction sites are beginning to use a
portal, or community, as a means of retaining its users. What distinguishes
collectingexchange.com from these other sites will be its research center. The
industry currently lacks an independent repository of expert and verifiable
collectible information to enable collectors to make educated purchases. Because
our website neither buys nor sells collectibles, it can maintain its independent
integrity. Herein lies the difference between collectingexchange.com and other
sites that purport to offer expert opinions and historical information.
Although no other site currently has the technology to store the
extent of collectible information as our site, 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 us. Increased competition is likely to result in reduced operating margins,
loss of market share and a diminished brand franchise, any one of which could
materially adversely affect the our business, results of operations and
financial condition.
Intellectual Property
Our software programs are proprietary. To protect our interest in our
intellectual property, we have non-disclosure agreements with our employees and
we restrict access by others to our proprietary software.
We believe that our products and other proprietary rights do not
infringe on the proprietary rights of third parties. However, we are a recent
entrant in the sale of merchandise on the Internet, and there can be no
assurance that third parties will not assert infringement claims against us in
the future with respect to current or future products or other works of ours.
Such an assertion may require us to enter into royalty arrangements or result in
costly litigation.
We are also dependent upon existing technology related to our
operations. To the extent that new technological developments are unavailable to
us on terms acceptable to us, or not at all, we may be unable to continue to
implement our business plan which would have a material adverse effect on our
business, prospects, financial condition and results of operations.
Research and Development
Over the past 18 months we invested approximately $350,000 into the
Collecting Exchange web site for design, graphics, labor and various software
components. We licensed an e-commerce software system for $50,000 that will
allow our merchant customers to create and manage their own storefront on the
web. An additional $10,000 was paid for the source code. We spent $200,000 to
design and install a high scalability, reliable and secure
network/communications infrastructure to sustain our anticipated web traffic
going forward. Other labor and consulting fees amounted to $250,000 for system
security and integrity.
Employees
We currently employ 18 full-time personnel. We believe that our
future success will depend in part on its continued ability to attract, hire and
retain qualified personnel.
Government Regulation
We are not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our financial statements and notes thereto included elsewhere in this
prospectus contain detailed information that should be referred to in
conjunction with the following discussion.
Overview
Our primary business is collectibles. Our primary online collectibles
site is located at "www.collectingexchange.com", which can also be accessed at
"www.rotmanauction.com" and "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 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 through our
Rotman Auction division; sale of advertising on our website; and fees for
services such as appraisals and gradings.
QUARTER ENDED SEPTEMBER 30, 2000
Results of Operations
The following discussion compares our results of operations for the
three months ended September 30, 2000, with those for the three months ended
September 30, 1999.
Revenue. For the three months ended September 30, 2000 revenue was
$462,000, substantially all of which is attributable to sales of our own product
and fees from buyers and sellers through the Rotman Auction operations. This
represents an increase of approximately $82,000, or 21% from the three-month
period ended September 30, 1999, in which revenue was $380,000. The primary
reason for the increase is that we are focused on selling higher end auction
lots. Most of the our sales now consist of product owned by our company rather
than consignment sales. Gross profit from product sales for the three months
ended September 30, 2000 was $32,000, which represents an increase of $15,000
from the comparable quarter in 1999, in which gross profit was $17,000. The
increase is a result of our selling higher end auction lots.
Sales, General, and Administrative Expenses. Sales, general and
administrative ("SG&A") expenses for the three months ended September 30, 2000
were $825,000, compared to $665,000 for the three months ended September 30,
1999. The increase in SG&A costs includes an increase in professional fees of
$52,000, which are primarily attributable to our legal activities. Marketing and
advertising costs decreased by approximately $35,000 from the three months ended
September 30, 1999. Marketing expenses were primarily attributable to print and
online marketing and advertising programs designed to create brand awareness for
our online sites. In addition we made investments in product development that we
believe are required to remain competitive and handle increased growth.
Interest expense. We incurred interest charges associated with the
$3,000,000 convertible note and warrants during the three months ended September
30, 2000, while no such charges were incurred in the prior year.
Loss. We recognized a loss for the three months ended September 30,
2000 of $915,000, or ($.02) per share as compared to a loss of $739,000, or
($.02) per share for the three months September 30, 1999.
The following discussion compares our results of operations for the
nine months ended September 30, 2000, with those for the nine months ended
September 30, 1999.
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Revenue. For the nine months ended September 30, 2000 revenue was
$1,008,000, substantially all of which is attributable to sales of the our own
product and fees from buyers and sellers through the Rotman Auction operations.
This represents an increase of approximately $315,000 or 45% from the nine-month
period ended September 30, 1999 in which revenue was $693,000. The primary
reason for the increase is that we are offering more lots during each auction
and have increased the amount of the average dollars sold per lot. Gross profit
for the nine months ended September 30, 2000 was $217,000 compared with $256,000
for the nine months ended September 30, 1999.
Sales, General, and Administrative Expenses. SG&A expenses during the
nine months ended September 30, 2000 were $2,445,000 compared to $1,457,000 for
the nine months ended September 30, 1999. The increase in SG&A costs includes
professional fees ($211,000), which are primarily attributable to our legal
activities, personnel related costs ($348,000), and depreciation and
amortization of ($126,000). Marketing and advertising costs decreased by
approximately $104,000 from the nine months ended September 30, 1999. We also
incurred significant expenses relating to the closing of the Maryland office and
moving of our Internet infrastructure to Massachusetts in June 2000. In addition
we made significant investments in product development that it believes are
required to remain competitive and handle increased growth.
Interest expense. We incurred $310,000 of interest charges associated
with the issuance of a $3,000,000 convertible note and warrants as well as a
$1,000,000 one time charge associated with the beneficial conversion feature in
that debt. See "Liquidity and Capital Resources" below.
Loss. We realized a loss for the nine months ended September 30, 2000
of $3,484,000, or ($.07) per share, compared to $1,244,000, or ($.03) per share
for the nine months ended September 30, 1999.
Inflation. We believe that inflation has not had a material effect of
its results of operations.
Working Capital and Liquidity
Cash and cash equivalents were approximately $832,000 at September 30,
2000, compared to $564,000 at September 30, 1999.
On March 23, 2000, we entered into the Securities Purchase Agreement
previously discussed in the prospectus, 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) one hundred ten percent (110%) of the lowest of the closing bid price for
the common stock for the five (5) trading days prior to March 23, 2000, or (2)
seventy-five percent (75%) of the average of the closing bid price for the
common stock for the five (5) trading days immediately preceding the conversion
date. Had the Augustine Fund converted the note on March 23, 2000, it would have
received $4,000,000 in aggregate value of the company's common stock upon the
conversion of the $3,000,000 convertible note. As a result, the intrinsic value
of the beneficial conversion feature of $1,000,000 has been allocated to debt
discount and additional paid-in capital. Since the debt was convertible at the
date of issuance, the debt discount was charged to earnings during the quarter
ended March 31, 2000.
In connection with the Securities Purchase Agreement, we also issued
warrants to the Augustine Fund, L.P. and Delano Group Securities, LLC to
purchase 300,000 and 100,000 shares of common stock, respectively. The purchase
price per share of common stock is equal to one hundred and twenty percent
(120%) of the lowest of the closing bid prices for the common stock during the
five (5) trading days prior to the closing date, or $2.70 per share. If the
warrants are exercised in full, we will receive gross proceeds in the amount of
$1,080,000. The warrants expire on March 31, 2005.
In addition, we entered into a Registration Rights Agreement (modified
on September 19, 2000), in pursuant to which we agreed to file the Registration
Statement of which this prospectus is a part with the SEC by October 25, 2000
covering the common stock to be issued upon the conversion of the convertible
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note and stock purchase warrants. If this Registration Statement is not declared
effective by the SEC on or before 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%).
Also, if the Registration Statement is not declared effective by the
SEC on or prior to December 15, 2000, we will pay cash, as liquidating damages,
for such failure. The required payment will be equal to two (2%) of the purchase
price of the note and warrant for each thirty-day period, until the breach of
the Registration Rights Agreement is cured.
Management believes that the proceeds from this 8% convertible note and
cash from operations will provide sufficient liquidity and capital resources to
finance the our operations through the end of the current fiscal year.
Subsequent Event
On November 8, 2000, we acquired a substantial portion of the assets
of ChannelSpace Entertainment, Inc., a Virginia corporation (CSEI") and
Discribe, Ltd., ("Discribe") a Canadian corporation wholly owned by CSEI. CSEI
and Discribe are converged Internet content providers and producers of affinity
portals, including the CollectingChannel.com and the CelticChannel.com websites.
FISCAL YEAR ENDED DECEMBER 31, 1999
Historical Overview
As of December 31, 1998, the sole business of our company was the
business of Securities Resolution Advisors, Inc. (""SRA"), the sole,
wholly-owned subsidiary, which served members of the investing community who had
lost money due to fraudulent practices of brokers. In December 1998, our former
management decided to discontinue the operations of that business. In February
1999, the company sold SRA to the management of SRA, in exchange for eight
million shares of our common stock, with the goal of entering into the Internet
business. In furtherance of that goal, on February 25, 1999, we purchased all of
the outstanding stock of Internet Auction in exchange for 37,368,912 shares of
our common stock. At the time the transaction was agreed upon by our then
current management, the average price of our common stock was approximately $.28
per share. As a result of this transaction, Internet Auction became our
wholly-owned subsidiary, and our principal business is now the business of
Internet Auction, Inc.
Prior to the transaction with Internet Auction, the business
currently conducted by Sales Online was conducted through four related
companies: Internet Auction, Inc., Rotman Auction, Internet Collectibles and
World Wide Collectors Digest, Inc. Prior to, and in anticipation of the
transaction with Sales Online, the companies were combined and their operations
were integrated. As a part of this integration, a substantial inventory of
Internet Collectibles was transferred into Internet Auction.
For accounting purposes, the transaction is considered a capital
transaction rather than a business combination transaction. This accounting
treatment is identical to that resulting from a reverse acquisition, except that
no goodwill or other intangible asset has been recorded. Our financial
statements reflect the acquisition by Internet Auction of the net assets of
Sales Online and the recapitalization of Internet Auction's common stock based
on the exchange rate in the merger agreement.
The following is a discussion of our results of operations and
financial condition for the year ended, and as of, December 31, 1999. These
operations in the preceding fiscal year were conducted largely through Internet
Auction, Inc. as a private company. Consequently, a comparison to the results of
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operations and financial condition of Sales Online for the year ended, and as
of, December 31, 1998 is not particularly meaningful.
Results of Operations
For the year ended December 31, 1999 we experienced rapid growth in
its online traffic. To support this new level of activity, we made significant
investment in personnel, infrastructure and marketing programs during the year.
For the year ended December 31, 1999, gross merchandise sales were
approximately $1,643,000 including consignment sales of approximately $790,000.
Net revenues (sales of our own inventory plus commissions on consignment items)
were $1,003,200, most of which is attributable to sales of our own inventory.
Consignment sales for the year ended December 31, 1999 were approximately
$790,000, or 48% of gross merchandise sales. In the 3rd quarter of 1999 we
switched from an 80% consignment model to 20% consignment sales and now sell 80%
of company-owned product.
Costs of revenues increased to $706,488 in the year ended December
31, 1999. This increase is due to the fact that most of the revenues for 1999
were derived from sales of our own inventory rather than fee based income from
consignment sales.
Sales, general and administrative ("SG&A") expenses for the year
ended December 31, 1999 were $2,459,743 (compared to $10,357 for 1998). This
increase in SG&A expenses include higher personnel and related costs, consulting
fees attributable to our engineering and product development.
As a result of the significant SG&A expenses and the relatively brief
period of combined operations, we experienced a net loss of $2,183,040 for the
year ended December 31, 1999 or ($.05) per share.
We believe that inflation has not had a material effect on our
results of operations.
Working Capital and Liquidity
Cash and cash equivalents were $221,213 at December 31, 1999.
In April 1999 we assigned and surrendered options we held to acquire
502,500 shares of our common stock from Universal Funding, Inc. for
approximately $2,450,000. In March 2000, we assigned options to investors to
purchase 142,500 shares of our common stock from Universal Funding, Inc. and the
net proceeds we received were approximately $87,188; it is not anticipated that
the proceeds received from the assignment of these options will be a significant
or recurring source of capital in the future.
On March 23, 2000, we entered into the Securities Purchase Agreement
previously discussed in this prospectus, whereby we sold an 8% convertible note
in the amount of $3,000,000, due March 31, 2002 to Augustine Fund, L.P.
In connection with the Securities Purchase Agreement, we also issued
warrants to the Augustine Fund, L.P. and Delano Group Securities, LLC to
purchase 300,000 and 100,000 shares of common stock, respectively. The purchase
price per share of common stock is equal to one hundred and twenty percent
(120%) of the lowest of the closing bid prices for the common stock during the
five (5) trading days prior to the closing date, or $2.70 per share. The
warrants expire on March 31, 2005.
Management believes that the proceeds from this convertible note and
cash from operations will provide sufficient liquidity and capital resources to
finance our operations through the end of the current fiscal year.
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DESCRIPTION OF PROPERTY
Our corporate headquarters are presently located at 4 Brussels
Street, Worcester, Massachusetts 01610. In July, 1999, we opened a second office
located at 100 Painters Mill Road in Owings Mills, Maryland 21117. We lease the
Maryland office, which was the primary location of the host computers and
Internet access lines. The lease is a five year lease with a monthly rent of
$7,494.67. In June 2000, we moved the operations in the Maryland office up to
our corporate headquarters in Worcester, Massachusetts. We pay rent on the
Brussels Street, Worcester location and another office in Canton, Massachusetts
in the amount of approximately $2,500 per month on a tenant-at-will basis.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $.001 per share, began trading on August
11, 1995 and is presently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol, "PAID".
The following table sets forth the high and low bid prices for our
common stock as reported by OTCBB for the eleven quarters ended September 30,
2000. The quotations from the OTCBB reflect inter-dealer prices without retail
mark-up, mark-down, or commissions and may not represent actual transactions.
2000 High Low
---- ---
Quarter ended March 31, 2000 2 9/16 17/32
Quarter ended June 30, 2000 2 7/32 21/32
Quarter ended September 30, 2000 23/32 5/16
1999 High Low
---- ---
Quarter ended March 31, 1999 2 1/2 1/4
Quarter ended June 30, 1999 8 3/16 1 1/16
Quarter ended September 30, 1999 3 1/16 1 3/16
Quarter ended December 31, 1999 1 3/8 13/32
1998 High Low
---- ---
Quarter ended March 31, 1998 3/8 5/32
Quarter ended June 30, 1998 3/8 1/8
Quarter ended September 30, 1998 1 3/16 3/8
Quarter ended December 31, 1998 7/8 1/4
As of November 27, 2000, there were approximately 171 holders of
record of our common stock.
The Company has not previously paid cash dividends on its common
stock, and intends to utilize current resources to expand the business; thus, it
is not anticipated that cash dividends will be paid on our common stock in the
foreseeable future
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On February 15, 1999. our former Board of Directors approved the
appointment of Stephen P. Higgins, C.P.A. ("Higgins") as Sales Online's
independent certified public accountants to provide accounting and auditing
services for Sales Online for the year ended December 31, 1998 and also approved
the dismissal of Guest & Company as Sales Online's independent auditors.
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Guest & Company's report on the annual financial statements of Sales
Online for the prior fiscal years ending December 31, 1997 and 1996 did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles. In addition,
during the years ended December 31, 1997 and 1996 and for the subsequent interim
period preceding the dismissal of Guest & Company, there were no disagreements
between Sales Online and Guest & Company on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of Guest & Company,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report on the annual financial statements of Sales
Online.
On March 28, 2000, our Board of Directors formally approved the
termination of the accounting services provided by Higgins as Sales Online's
independent auditors. We had previously, on March 24, 2000, engaged Wolf &
Company, P.C. as Sales Online's independent certified accountants to provide
accounting and auditing services for the year ended December 31, 1999.
Higgins' report on the annual financial statements of Sales Online for
the prior fiscal year ending December 31, 1998 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. In addition, during the year
ended December 31, 1998 and for the subsequent interim period preceding the
dismissal of Higgins, there were no disagreements between Sales Online and
Higgins on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Higgins, would have caused it to make reference to the
subject matter of the disagreement in connection with its report on the annual
financial statements of Sales Online.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Gordon,
Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore, Maryland.
EXPERTS
Wolf & Company, P.C., independent certified accountants, have audited
our financial statements as of December 31, 1999 and for each of the years in
the two-year period ended December 31, 1999, as set forth in their report. We've
included our financial statements in this prospectus in reliance upon Wolf &
Company, PC's report, 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.
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We have filed a registration statement with the SEC on Form SB-2
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.
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FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-2
Balance Sheet at December 31, 1999................................ F-3
Statements of Operations -
Years ended December 31, 1999 and 1998............................ F-4
Statements of Changes in Stockholders' Equity -
Years ended December 31, 1999 and 1998............................ F-5
Statements of Cash Flows -
Years ended December 31, 1999 and 1998............................ F-6-F-7
Notes to Financial Statements
Years ended December 31, 1999 and 1998............................ F-8-F-18
INTERIM FINANCIAL STATEMENTS
Interim Balance Sheet -
September 30, 2000 (unaudited).................................... F-19
Interim Statements of Operations--
Three and Nine months ended September 30, 2000 and
1999 (unaudited).................................................. F-20
Interim Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 (unaudited)......... F-21-F-22
Interim Statements of Changes in Stockholders' Deficit -
Nine months ended September 30, 2000 and 1999 (unaudited)......... F-23
Notes to Interim Financial Statements
Nine-months ended September 30, 2000 and 1999..................... F-24-F-31
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sales OnLine Direct, Inc.
Worcester, Massachusetts
We have audited the accompanying balance sheet of Sales OnLine Direct, Inc. as
of December 31, 1999, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sales OnLine Direct, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for each
of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
April 12, 2000
F-2
<PAGE>
SALES ONLINE DIRECT, INC.
BALANCE SHEET
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 221,213
Accounts receivable 48,682
Inventory 629,729
Prepaid expenses 72,992
Other current assets 11,236
--------
Total current assets 983,852
-------
Property and equipment, net 613,365
Goodwill, net 49,765
Other assets 18,667
--------
Total assets 1,665,649
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 348,504
Accrued expenses 81,483
--------
Total current liabilities 429,987
-------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized; 46,711,140 shares issued and outstanding 46,711
Additional paid-in capital 4,010,033
Accumulated deficit (2,207,171)
Unearned compensation (613,911)
---------
Total stockholders' equity 1,235,662
---------
Total liabilities and stockholders' equity $1,665,649
==========
See accompanying notes to financial statements.
F-3
<PAGE>
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
1999 1998
---- ----
Revenues $ 1,003,200 $ 24,755
Cost of revenues 706,488 -
----------- --------
Gross profit 296,712 24,755
Selling general and administrative
expenses 2,459,743 10,357
----------- --------
Income (loss) from operations (2,163,031) 14,398
Other income 92,701 -
Loss on sale of securities (112,710) -
----------- --------
Income (loss) before income taxes (2,183,040) 14,938
Provision for taxes on income - (2,160)
----------- -------
Net income (loss) $(2,183,040) $ 12,238
=========== ========
Earnings (loss) per share:
Basic $ (0.05) $ -
=========== ==========
Weighted average shares 45,277,812 37,368,912
=========== ==========
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
Common Stock
------------------- Additional Stock
Paid-in Accumulated Subscriptions Unearned
Shares Amount Capital Deficit Receivable Compensation Total
------ ------ ------- ------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 37,368,912 $ 37,369 $ - $ (36,369) $ - $ - $ 1,000
Stock subscriptions receivable - - - - (1,000) - (1,000)
Net income - - - 12,238 - - 12,238
---------- -------- ------- ---------- ---------- ---------- --------
Balance, December 31, 1998 37,368,912 37,369 - (24,131) (1,000) - 12,238
Collection of stock subscriptions
receivable - - - - 1,000 - 1,000
Contribution of assets of World
Wide Collectors Digest - - 33,229 - - - 33,229
Contribution of collectibles
Inventories - - 769,764 - - - 769,764
Acquisition of Securities Resolution
Advisors, Inc. 9,342,228 9,342 (8,854) - - - 488
Proceeds from assignment of options - - 2,450,000 - - - 2,450,000
Compensatory stock options granted - - 757,848 - - (757,848) -
Amortization of stock-based
compensation - - - - - 143,937 143,937
Issuance of stock options to consultant
for services - - 8,046 - - - 8,046
Net loss - - - (2,183,040) - - 2,183,040)
---------- -------- --------- ---------- ----------- --------- ---------
Balance, December 31, 1999 46,711,140 $ 46,711 $4,010,033 $(2,207,171) $ - $ (613,911) $1,235,662
========== ======== ========= ========== ========== ========= =========
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $(2,183,040) $ (12,238)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 72,194 2,276
Amortization of unearned compensation 143,937 -
Amortization of Goodwill 19,140 -
Stock options issued for compensation 8,046 -
Loss on sale of securities 112,710 -
Changes in assets and liabilities:
Accounts receivable (36,841) -
Inventory 171,489 -
Accounts payable 218,144 -
Accrued expenses 76,483 5,000
Income taxes payable (2,160) 1,081
Other, net (94,025) 2,160
---------- -------
Net cash provided by (used in)
operating activities (1,493,923) 22,755
---------- -------
Investing activities:
Purchase of securities (3,247,091) -
Proceeds from sale of securities 3,134,381 -
Cash received from Rotman Auction, Inc. acquisition 9,864 -
Cash received from Securities Resolutions Advisors, Inc. acquisition 488 -
Property and equipment acquisitions (633,506) (22,755)
---------- --------
Net cash used in investing activities (735,864) (22,755)
---------- --------
Financing activities:
Proceeds from assignment of common stock call options 2,450,000 -
Proceeds from stock subscriptions 1,000 -
---------- --------
Net cash provided by (used in)
financing activities 2,451,000 -
---------- --------
Net increase in cash 221,213 -
Cash - beginning - -
---------- --------
Cash - ending $ 221,213 $ -
========== ========
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1999 and 1998
Supplemental disclosures of cash flow information:
Cash paid during the period for:
1999 1998
---- ----
<S> <C> <C>
Income taxes $2,432 $ --
Supplemental Schedule of Non-cash Investing and Financing Activities
1999 1998
---- ----
Contributions of inventories (Note 2) $ 769,764 $ --
Contribution of the net assets of World Wide Collectors Digest, Inc. were recorded at their fair values as follows:
Due from shareholder $ 2,737 $ --
Other current assets $ 1,000 $ --
Property and equipment $ 29,877 $ --
Liabilities assumed $ (385) $ --
Paid in capital $ 33,229 $ --
Merger of Rotman Auction, Inc. accounted for utilizing the purchase method of accounting. The assets were recorded at their fair
value as follows:
Cash received in the transaction $ 9,864 $ --
Accounts receivable $ 11,841 $ --
Merchandise inventories $ 31,454 $ --
Due from affiliate $ 10,919 $ --
Other current assets $ 7,115 $ --
Property and equipment $ 1,697 $ --
Due to Shareholder $ (11,820) $ --
Other liabilities assumed $(129,975) $ --
Goodwill $ 68,905 $ --
Common stock subscribed $ -- $1,000
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
1. ORGANIZATION
On February 25, 1999, Securities Resolution Advisors, Inc. ("SRAD")
purchased all of the outstanding common stock of Internet Auction, Inc.
("Internet Auction"). The acquisition was made pursuant to an Agreement and Plan
of Reorganization (the "Agreement") dated January 31, 1999 between SRAD and the
principal shareholders ("IA Shareholders") of Internet Auction. Pursuant to the
Agreement, SRAD acquired all of the issued and outstanding shares of the capital
stock of Internet Auction in exchange for the issuance to the IA Shareholders of
an aggregate of 37,368,912 shares, representing approximately 80%, of SRAD's
issued and outstanding common stock, and the business of Internet Auction became
the business of SRAD. In accordance with the Agreement, after the transaction
described above, the IA Shareholders were appointed to SRAD's Board of Directors
and became officers of SRAD. The previously serving directors resigned from the
Board. SRAD subsequently changed its name to Sales OnLine Direct, Inc. (the
"Company").
For accounting purposes, the transaction described above is
considered, in substance, a capital transaction rather than a business
combination. It is equivalent to the issuance of common stock by Internet
Auction for the net assets of the Company, accompanied by a recapitalization.
This accounting treatment is identical to that resulting from a reverse
acquisition, except that no goodwill or other intangible asset had been
recorded. Accordingly, the accompanying financial statements reflect the
acquisition by Internet Auction of the net assets of the Company and the
recapitalization of Internet Auction's common stock based on the exchange ratio
in the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Prior to the transaction described above, the business conducted by
Internet Auction was through four related companies: Internet Auction, Inc.,
Rotman Auction, Internet Collectibles and World Wide Collectors Digest,
Inc.("WWCD"). In anticipation of the transaction with the Company, the companies
were combined and their operations integrated as follows:
Internet Auction, Inc. - A person-to-person auction site offering
sellers a vehicle for listing items for sale and allows buyers to bid on items
of interest.
Rotman Auction - A full-service auction house located in Worcester,
Massachusetts. The Company provides a full range of services to sellers and
buyers including live online bidding, consignment services, authentication of
merchandise, digital photography as well as purchases and sales of authentic
memorabilia.
F-8
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Internet Collectibles - A wholesale and retail collectibles division
engaging in the business of buying, warehousing, distribution, marketing and
selling collectibles. Internet Collectibles maintains inventory of memorabilia
with popular and historical significance that allows customers to directly
purchase the memorabilia without the competition from bidders in an auction
format.
WWCD - An e-commerce website for dealers in the collectibles
community. WWCD is a full-service company that designs hosts and maintains
dealer websites. WWCD's software allows clients to create online storefronts,
set prices, and sell directly to online shoppers.
Inventory Purchase Agreements
On February 12, 1999, Internet Auction acquired collectibles,
collectors items and memorabilia from Rotman Production, a related party, with
an estimated fair value of approximately $629,000 in exchange for 236 shares of
the Internet Auction's common stock received from a stockholder of Internet
Auction. In addition, the Seller was assigned the right to acquire 700,000
option shares of SRAD common stock from Universal at $.50 per share. See Note 4.
On February 25, 1999, Internet Auction acquired collectibles,
collectors items and memorabilia from Kim Stengel, a related party, with an
estimated value of approximately $140,000 in exchange for 236 shares of the
Internet Auction's common stock received from a stockholder of Internet Auction.
Purchase of Assets of WorldWide Collectors Digest, Inc. (WWCD)
On February 25, 1999, Internet Auction acquired the assets of WWCD, a
related party, with an estimated value of approximately $34,000 in exchange for
3,835 shares of Internet Auction's common stock received from a stockholder of
Internet Auction.
Merger with Rotman Auction, Inc.
Effective February 25, 1999, Internet Auction merged with Rotman
Auction, Inc. ("Rotman"), a related party. Under the terms of the merger
agreement, the shareholder of Rotman received 870 shares of the Internet
Auction's common stock in exchange for the Rotman shares owned by the
shareholder. Internet Auction was the surviving corporation in the merger. The
merger was recorded using the purchase method of accounting. The operations of
Rotman are included in the financial statements from the date of merger.
In connection with the acquisition, the Company recognized goodwill in
the amount of $68,905. Amortization of goodwill for 1999 amounted to $19,140.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-9
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory consists of collectible merchandise for sale and is stated
at the lower of average cost or market on a first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the double declining balance method over the estimated useful life of 5
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life of the asset or the life of the related
lease.
Goodwill
Goodwill is being amortized on a straight-line basis over an
estimated useful life of three years.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and
from fees and commissions on sales of merchandise under consignment type
arrangements.
For sales of merchandise owned and warehoused by the Company, the
Company is responsible for conducting the auction, billing the customer,
shipping the merchandise to the customer, processing merchandise returns and
collecting accounts receivable. The Company recognizes the gross sales amount as
revenue upon verification of the credit card transaction and shipment of the
merchandise.
For sales of merchandise under consignment-type arrangements, the
Company takes physical possession of the merchandise, but is not obligated to
and does not take title to or ownership of the merchandise. When an auction is
completed, consigned merchandise which has been sold is shipped upon receipt of
payment. The Company recognizes the net commission and service revenues relating
to the consigned merchandise upon receipt of the gross sales proceeds. The
Company then releases the net sales proceeds to the Consignor.
Advertising Costs
Advertising costs are charged to operations when incurred.
F-10
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Deferred tax asset and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the enacted income tax rates expected to be in effect when the
taxes are actually paid or recovered. A deferred tax asset is also recorded for
net operating loss, capital loss and tax credit carry forwards to the extent
their realization is more likely than not. The deferred tax expense for the
period represents the change in the deferred tax asset or liability from the
beginning to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the amounts reported of assets and liabilities as of the date of the
balance sheet and reported amounts of revenue and expenses during the reporting
period. Material estimates that are particularly susceptible to significant
change in the near term relate to the inventory valuation and the deferred tax
asset valuation. Although these estimates are based on management's knowledge of
current events and actions, they may ultimately differ from actual results.
Stock Compensation Plans
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan typically have no intrinsic value at the grant date,
and under Opinion No. 25 no compensation cost is recognized for them. The
Company has elected to continue with the accounting methodology in Opinion No.
25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value based method of
accounting had been applied. The pro forma disclosures include the effects of
all awards granted during 1998. There were no outstanding options at December
31, 1998. (See Note 4.)
F-11
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
Earnings Per Common Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common hares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options, and are determined using the treasury stock
method. Stock options have been excluded from the computation of diluted
earnings per share because they were antidilutive as a result of the Company's
net loss for the year.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued a proposed
interpretive release, Stock Compensation-Interpretation of Opinion 25
("Interpretation"). The Interpretation will provide accounting guidance on
several issues that are not specifically addressed in Accounting Principles
Board ("APB") No. 25, "Accounting for Stock Issued to Employees". Of the many
questions addressed in the Interpretation, the most significant are a
clarification of the definition of the term "employee" for purposes of applying
the opinion and the accounting for options that have been repriced.
The Interpretation is generally effective beginning July 1, 2000. The
Interpretation applies prospectively at that date for repricings that occurred
after December 15, 1998. It also applies prospectively on July 1 to new awards
granted after December 15, 1998 for purposes of applying the definition of
"employee ".
In December1999, the Securities and Exchange Commission (the
"Commission") published Staff Accounting Bulletin ("SAB") No. 101,"Revenue
Recognition", which provides guidance for applying generally accepted principles
to revenue recognition in financial statements filed with the Commission,
including income statement presentation and disclosure. As originally issued,
SAB 101 was to be applied no later than the first quarter of the fiscal year
beginning after December 15, 1999. However, the Commission has delayed the
effective date of the SAB for companies with fiscal years beginning between
December 16, 1999 and March 15, 2000. For such entities, the mandatory
implementation date may now be no later than the second quarter of the fiscal
year beginning after December 15, 1999.
The Company is in the process of reviewing the pronouncements
detailed above to determine the impact on the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the
following:
1999
----
Computer equipment and software $518,434
Office Furniture 56,075
Leasehold Improvements 54,995
Purchased software 70,000
------
699,504
Accumulated depreciation (86,139)
--------
$613,365
=======
F-12
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
PROPERTY AND EQUIPMENT (Continued)
Depreciation and amortization expense of property and equipment for
the years ended December 31, 1999 and December 31, 1998 amounted to $ 72,194 and
$ 2,276, respectively.
The Company leases its technology location under an operating lease
commencing on January 1, 2000 and expiring on December 31, 2004. The Company
also leases offices and warehouse facilities for approximately $2,500 per month
on a tenant-at-will basis.
The following is a schedule of future minimum lease payments for the
operating lease in effect at December 31, 1999:
Year Amount
---- ------
2000 $ 89,936
2001 89,936
2002 89,936
2003 91,980
2004 94,024
--------
$ 455,812
========
Rent expense for the year ended December 31, 1999 amounted to
$29,265.
4. COMMON STOCK
Call Option Agreement
In connection with the agreement described in Note 1, on February 25,
1999, SRAD entered into a Call Option Agreement ("Option Agreement") with
Universal Funding, Inc. (Universal), a shareholder of SRAD and a beneficial
owner of 3,000,000 shares of SRAD's common stock. Under the Agreement, Universal
agreed to grant certain options to SRAD to acquire 2,000,000 shares of SRAD's
common stock owned by Universal. The options consist of 1,000,000 shares at $.50
per share exercisable through February 25, 2000 and 1,000,000 shares at $.75 per
share exercisable through February 25, 2001. The exercise price was reduced to
.375 per share through April 30, 1999.
In addition, the Company assigned options to purchase 160,000 shares
of stock from Universal to Richard Singer, the former President of SRAD, for
services rendered to SRAD in connection with the acquisition of Internet
Auction, Inc. Also, the Company assigned options to purchase 700,000 shares of
stock from Universal in connection with the acquisition of certain inventories.
See Note 2.
In April 1999, the Company assigned options to purchase 500,000
shares of stock from Universal to certain individuals in exchange for
$2,450,000, which was added to the paid-in capital of the Company.
At December 31, 1999, the Company had a balance of 640,000 shares
remaining under the agreement with an exercise price of $.75 and an expiration
date of February 25, 2001.
F-13
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (continued)
Stock Options
In June 1999, the Company's Board of Directors adopted the 1999 Stock
Option Plan (the "1999 Plan") which provided for the issuance of options to
directors, officers, employees and consultants of the Company to purchase up to
1,000,000 shares of the Company's common stock. Options granted under the plan
may be either incentive stock options ("ISO") or nonqualified stock options
("NSO").
The 1999 Plan provides that each option be granted at a price
determined by the Board of Directors on the date such option is granted and have
a maximum option term of ten years. The options granted become exercisable
during a period of time as specified by the Board of Directors at the date such
option is granted.
In July 1999, the Company granted an option to an employee to
purchase 471,000 shares of common stock at $.01 per share. The option is
exercisable over a four-year period. The Company recorded unearned compensation
of $757,848, based on the difference between the fair market value of the common
stock at the grant date and the exercise price. The unearned compensation is
being amortized over the vesting period of the option. Amortization expense
related to unearned compensation amounted to $143,937 for the year ended
December 31, 1999.
An analysis of the activity in the 1999 Plan is as follows:
Weighted
Average
Exercise
Shares Price
------ -----
Shares under option:
Outstanding at beginning of year - $ -
Granted 597,000 0.33
Exercised - -
Expired/Cancelled (18,000) 1.63
--------
Outstanding at end of year 579,000 $ 0.29
=======
Options exercisable at year end 94,750
Weighted average fair value of
options granted during the year $1.62 $ 0.01
F-14
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (continued)
Stock Options (continued)
Information pertaining to options outstanding at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ .01 471,000 9 years $ 0.010 89,125 $0.010
.812 14,000 9 0.812 125 0.812
1.625 94,000 9 1.625 5,500 1,625
------ ------
Outstanding at end
of year 579,000 $ 0.330 94,750 $0.010
======= =======
</TABLE>
During July 1999, the Company's Board of Directors adopted, subject
to stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan")
which provides for both incentive and non-qualified stock options, stock
appreciation rights and other awards to directors, officers and employees of the
Company to purchase or receive up to 1,000,000 shares of the Company's stock. A
committee of the Board of Directors ("Committee") establishes the option price
at the time each option is granted, which price may, in the discretion of the
Committee, be less than 100% of the fair market value of the shares on the date
of the grant. The options granted will have a maximum term of ten years and
shall be exercisable during a period as specified by the Committee. There were
no incentive options granted under the Omnibus Plan during 1999.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized only to the extent described above. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
Years Ended December 31,
1999 1998
---- ----
Net income(loss) As reported $(2,183,040) $ 12,238
Pro forma $(2,197,613) N/A
Basic loss per share As reported $ (0.05) N/A
Pro forma $ (0.05) N/A
F-15
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
COMMON STOCK (concluded)
Stock Options (concluded)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31,
1999 1998
---- ----
Expected life 4 years N/A
Risk-free interest rate 6.0% N/A
Dividend yield None N/A
Volatility 254% N/A
5 INCOME TAXES
There was no provision for income taxes for the years ended December
31, 1999 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts
computed by applying the statutory federal income tax rate of 34% and the
Company's effective tax rate is due primarily to the net operating loss incurred
by the Company and the valuation reserve against the Company's deferred tax
asset.
The tax effects of temporary differences and carryforwards that give
rise to deferred taxes are:
Federal net operating loss carryforwards $ 625,000
State net operating loss carryforwards 195,000
Stock-based compensation recognized for
financial statement purposes 60,000
---------
880,000
Valuation reserve (880,000)
---------
Net deferred tax asset $ -
=========
The valuation reserve applicable to net deferred tax asset for the
year ended December 31, 1999 is due to the likelihood of the deferred tax not
expected to be utilized.
At December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $2,200,000 available to offset future
taxable income which will expire in 2019.
F-16
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. RELATED PARTY TRANSACTION
During September 1999, the Company purchased certain computer
equipment and internet research technology and coding material from Timeline,
Inc. ("Timeline") in the amount of $70,000. Timeline is a related party as it is
owned by certain officers of the Company.
7. SUBSEQUENT EVENTS
Convertible Debt Financing
On March 23, 2000, the Company entered into a Securities Purchase
Agreement (the "Agreement"), whereby the Company sold an 8% convertible note in
the amount of $3,000,000, due March 31, 2002 to Augustine Fund, L.P. (the
"Buyer").
The note is convertible into common stock at a conversion price equal
to the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
March 23, 2000, or (2) seventy-five percent (75%) of the average of the closing
bid price for the common stock for the five (5) trading days immediately
preceding the conversion date.
Had the Buyer converted the note on March 23, 2000, the Buyer would
have received $4,000,000 in aggregate value of the company's common stock upon
the conversion of the $3,000,000 convertible note. As a result, the intrinsic
value of the beneficial conversion feature of $ 1,000,000 will be allocated to
debt discount and additional paid-in capital. Since the debt is convertible at
date of issuance, the debt discount will be charged to earnings at that time.
In connection with the Agreement, the Company also issued warrants to
the Buyer and Delano Group Securities to purchase 300,000 and 100,000 shares of
common stock, respectively. The purchase price per share of common stock is
equal to one hundred and twenty percent (120%) of the lowest of the closing bid
prices for the common stock during the five (5) trading days prior to the
closing date. The warrants expire on March 31, 2005.
In addition, the Company entered into a Registration Rights
Agreement, whereby the Company agreed to file a Registration Statement with the
Securities and Exchange Commission (SEC), within 180 days of the closing date,
covering the common stock to be issued upon the conversion of the convertible
note and stock purchase warrants.
F-17
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
SUBSEQUENT EVENTS (concluded)
Convertible Debt Financing (concluded)
If the Registration Statement is not declared effective by the SEC on
or before September 30, 2000, then with respect to any portion of the note not
previously converted into common stock, the applicable conversion percentage
will decrease by two percent (2%) each thirty day period until the Registration
Statement is declared effective by the SEC. If the SEC has not declared the
Registration Statement effective within one year after March 23, 2000, the
applicable conversion percentage shall be fifty percent (50%).
Also, if the Registration Statement is not filed by the filing date
and not declared effective by the SEC on or prior to September 30, 2000, the
Company shall pay cash, as liquidating damages, for such failure. The required
payment will be equal to two (2%) of the purchase price of the note and warrant
for each thirty-day period, until the breach of the Registration Rights
Agreement is cured.
All fees and expenses related to the registration of the common stock will be
paid by the Company.
Issuance of Common Stock
On February 17, 2000, the Company issued 75,000 shares of its common
stock to Universal Funding, Inc. for payment of certain fees due in connection
with the granting of the common stock call options and temporary reduction of
the call option exercise price. In addition, the Company issued 35,000 shares of
its common stock to an investment consultant for service rendered in connection
with the common stock option grant transactions.
Also, the Company issued 35,000 shares to a consultant for services
rendered in the first quarter of 2000.
The value of the common shares at the date of issuance of the shares
described above was $1.28 per share.
Assignment of Stock Options
In March 2000, the Company assigned to an investor options to
purchase 42,500 shares of the Company's common stock from Universal. The net
proceeds to the Company were approximately $21,000.
Business Acquisition
On March 7, 2000, the Company acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles Web sites in a variety of categories. As
consideration for the acquisition, the Company paid $50,000 cash and issued
200,000 shares of the Company's common stock valued at $237,500 (based on the
Company's stock price at the date of acquisition). The acquisition will be
accounted for under the purchase method of accounting.
F-18
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
BALANCE SHEET
SEPTEMBER 30, 2000
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 831,589
Inventory 729,812
Marketable securities 31,041
Prepaid expenses 97,348
Other current assets 46,105
-----------
Total current assets 1,735,895
Property and equipment, net 581,625
Goodwill 32,539
Other intangible assets 254,550
Debt financing costs, net 198,750
Other assets 15,667
-----------
Total assets $ 2,819,026
===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 87,081
Accrued expenses 357,781
------------
Total current liabilities 444,862
------------
Convertible Debt 2,683,446
------------
Stockholders' deficit:
Common stock, $.001 par value, 100,000,000 shares
authorized; 47,056,140 shares issued and outstanding 47,056
Additional paid-in capital 5,809,211
Accumulated deficit (5,691,145)
Unearned compensation (474,404)
------------
Total stockholders' deficit (309,282)
------------
Total liabilities and stockholders' deficit $ 2,819,026
=============
</TABLE>
See accompanying notes to unaudited financial statements
F-19
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATION
(unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 2000 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 461,554 $ 1,007,692 $ 380,148 $ 692,792
Cost of revenues 429,511 790,449 363,232 437,063
------- ---------- ------- -------
Gross Profit 32,043 217,243 16,916 255,729
Selling, general and
administrative expenses 825,169 2,445,492 665,520 1,456,714
------- --------- ------- ---------
Loss from operations (793,126) (2,228,249) (648,604) (1,200,985)
-------- --------- ------- ---------
Other income (expense)
Interest expense (147,500) (1,309,956) - -
Other income (expense) 25,905 54,231 (89,927) (43,394)
------- --------- ------ ------
Total other income (expense) (121,595) (1,255,725) (89,927) (43,394)
------- --------- ------ ------
Loss before income taxes (914,721) (3,483,974) (738,531) (1,244,379)
Provision for taxes on income - - - -
-------- --------- ------- ---------
Net loss $ (914,721) $ (3,483,974) (738,531) $(1,244,379)
================ ================ ================ ============
Loss per share
Basic $ (0.019) $ (0.074) $ (0.016) $ (0.028)
================ ================ =============== ==============
Weighted average shares 47,056,140 46,983,093 46,711,140 44,794,786
================ ================ =============== ==============
</TABLE>
See accompanying notes to unaudited financial statements
F-20
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
STATEMENT OF CASH FLOWS
For the nine months ended
(unaudited)
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Operating activities:
Net (loss) $ (3,483,974) $ (1,244,379)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities
Depreciation and amortization 230,626 33,314
Amortization of unearned compensation 139,507 -
Realized (gain) loss on marketable securities 26,286 15,069
Unrealized (gain) loss on marketable securities (41,098) 49,912
Beneficial conversion feature 1,000,000 -
Amortization of debt discount 113,446 -
Changes in assets and liabilities:
Accounts receivable 48,682 (81,942)
Inventory (100,083) 28,739
Due from related parties - 4,006
Accounts payable (266,588) 11,351
Accrued expenses 276,298 89,952
Other, net (59,225) (51,262)
---------- -----------
Net cash (used in) operations (2,116,123) (1,145,240)
---------- ----------
Investing activities:
Acquisition of marketable securities (407,975) (2,149,446)
Proceeds from sales of marketable securities 391,746 1,710,029
Acquisition of Securities Resolution Advisors, Inc. - 488
Merger with Rotman Auction, Inc. - 9,864
Other assets - (70,000)
Property and equipment additions (74,460) (230,994)
---------- ----------
Net cash (used in) investing activities (90,689) (730,059)
---------- ----------
Financing activities:
Proceeds from assignment of common stock call options 87,188 2,450,000
Stock subscription receivable - 1,000
Repayment of officer loan - (12,000)
Net proceeds from convertible securities 2,300,000 -
Proceeds from sale of warrants 430,000 -
---------- ----------
---
Net cash provided by financing activities 2,817,188 2,439,000
---------- ----------
---
Net increase in cash and equivalents 610,376 563,701
Cash and equivalents, beginning 221,213 -
---------- ----------
Cash and equivalents, ending $ 831,589 $ 563,701
========== ==========
See accompanying notes to unaudited financial statements
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC
STATEMENTS OF CASH FLOWS (continued)
For the nine months ended
(unaudited)
September 30, September 30,
2000 1900
------------- -------------
Supplemental disclosures of cash flow information:
<S> <C> <C>
Cash paid during the period for:
Interest $ - $ -
============= =============
Income taxes $ 5,185 $ -
============= =============
Supplemental schedule of Non-cash Investing and Financing Activities:
Contributions of inventories $ - $ 769,764
============= =============
Contribution of the net assets of World Wide Collectors Digest, Inc. were
recorded at their fair values as follows:
Due from shareholder $ - $ 2,737
Other current assets - 1,000
Property and equipment - 29,877
Liabilities assumed - (385)
Paid-in capital - 33,229
Merger of Rotman Auction, Inc. accounted for utilizing the purchase
method of accounting. The assets were recorded at their fair values
as follows:
Cash received in the transaction - 9,864
Accounts receivable - 11,841
Inventory - 31,454
Due from affiliate - 10,919
Other current assets - 7,115
Property and equipment - 1,697
Due to shareholder - (11,820)
Other liabilities assumed - (129,975)
Goodwill - 68,905
Acquisition of Internet Collectible Awards
for Common stock and liabilities $ 287,500
Consulting fees paid in common stock 44,835
See accompanying notes to unaudited financial statements
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the nine months ended September 30, 2000
(unaudited)
Common Stock
-----------------------------
Additional
Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
---------- --------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 46,711,140 $46,711 $4,010,033 $(2,207,171) $(613,911) $1,235,662
Common stock issued in connection with 110,000 110 (110) - - -
call option agreement
Common stock issued to consultant 35,000 35 44,800 - - 44,835
for services
Acquisition of Internet Collectible Awards 200,000 200 237,300 - - 237,500
Proceeds from assignment of options - - 87,188 - - 87,188
Beneficial conversion discount - - 1,000,000 - - 1,000,000
Issuance of warrants - - 430,000 - - 430,000
Amortization of stock-based compensation - - - - 139,507 139,507
Net loss - - - (3,483,974) - (3,483,974)
---------- ------- ---------- ----------- --------- ----------
Balance, September 30, 2000 47,056,140 $47,056 $5,809,211 $(5,691,145) $(474,404) $ (309,282)
========== ======= ========== =========== ========= ==========
See accompanying notes to unaudited financial statements
</TABLE>
F-23
<PAGE>
SALES ONLINE DIRECT, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and 1999
1. ORGANIZATION
On February 25, 1999, Securities Resolution Advisors, Inc. ("SRAD")
purchased all of the outstanding common stock of Internet Auction, Inc.
("Internet Auction"). The acquisition was made pursuant to an Agreement and
Plan of Reorganization (the "Agreement") dated January 31, 1999 between SRAD
and the principal shareholders ("IA Shareholders") of Internet Auction.
Pursuant to the Agreement, SRAD acquired all of the issued and outstanding
shares of Internet Auction in exchange for the issuance to the IA
Shareholders of an aggregate of 37,368,912 shares, representing approximately
80%, of SRAD's issued and outstanding common stock, and the business of
Internet Auction became the business of SRAD. In accordance with the
Agreement, after the transaction described above, the IA Shareholders were
appointed to SRAD's Board of Directors and became officers of SRAD. The
previously serving directors resigned from the Board.
SRAD subsequently changed its name to Sales OnLine Direct, Inc. (the
"Company"). For accounting purposes, the transaction described above is
considered, in substance, a capital transaction rather than a business
combination. It is equivalent to the issuance of common stock by Internet
Auction for the net assets of the Company, accompanied by a recapitalization.
This accounting treatment is identical to that resulting from a reverse
acquisition, except that no goodwill or other intangible asset has been
recorded. Accordingly, the accompanying financial statements reflect the
acquisition by Internet Auction of the net assets of the Company and the
recapitalization of Internet Auction's common stock based on the exchange
ratio in the Agreement.
On March 7, 2000, the Company acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and
reports on the best Internet collectibles Web sites in a variety of
categories. As consideration for the acquisition, the Company recorded
accounts payable of $50,000 and issued 200,000 shares of the Company's common
stock valued at $237,500 (based on the Company's stock price at the date of
acquisition). The acquisition has been accounted for under the purchase
method of accounting. The excess of the purchase price, $287,500, over the
fair value of the assets acquired has been allocated to other intangible
assets. (See Note 6)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The financial statements included in this report have been prepared by
the Company pursuant to the rules and regulations of the United States
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation. These financial
statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations for interim reporting. The Company believes that the
disclosures contained herein are adequate to make the information presented
not misleading. However, these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report for the year ended December 31, 1999 which is
included in the Company's Form 10KSB.
F-24
<PAGE>
Marketable Securities
Marketable securities are classified as trading and are stated at fair
value.
Goodwill
Goodwill is being amortized on a straight-line basis over an estimated
useful lives of three to five years.
Other intangible assets
The other intangible assets acquired from Internet Collectible Awards
are being amortized over their estimated useful life of five years.
Debt financing costs
Debt financing costs associated with the convertible debt are being
amortized over the two year term of the related debt.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and
from fees and commissions on sales of merchandise under consignment type
arrangements.
For sales of merchandise owned and warehoused by the Company, the
Company is responsible for conducting the auction, billing the customer,
shipping the merchandise to the customer, processing merchandise returns and
collecting accounts receivable. The Company recognizes the gross sales amount
as revenue upon verification of the credit card transaction and shipment of
the merchandise.
For sales of merchandise under consignment-type arrangements, the
Company takes physical possession of the merchandise, but is not obligated
to, and does not, take title to or ownership of the merchandise. When an
auction is completed, consigned merchandise which has been sold is shipped to
the customer upon receipt of payment. The Company recognizes the net
commission and service revenues relating to the consigned merchandise upon
receipt of the gross sales proceeds. The Company then releases the net sales
proceeds to the Consignor.
F-25
<PAGE>
Income Taxes
Deferred tax asset and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the enacted income tax rates expected to be in effect when
the taxes are actually paid or recovered. A deferred tax asset is also
recorded for net operating loss, capital loss and tax credit carry forwards
to the extent their realization is more likely than not. The deferred tax
expense for the period represents the change in the deferred tax asset or
liability from the beginning to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the amounts reported of assets and liabilities as of
the date of the balance sheet and reported amounts of revenue and expenses
during the reporting period. Material estimates that are particularly
susceptible to significant change in the near term relate to the inventory
valuation and the deferred tax asset valuation. Although these estimates are
based on management's knowledge of current events and actions, they may
ultimately differ from actual results.
Earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Company relate to outstanding stock options, convertible debt and common
stock warrants and are determined using the treasury stock method. The
potential common shares have been excluded from the computation of earnings
per share because they were antidilutive as a result of the Company's net
loss for the period.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, and
marketable securities, approximate fair value. The fair value of the convertible
debt, based upon the market value of the common stock and the terms of the note,
is estimated to be $4.0 million.
3. COMMON STOCK
Call Option Agreement
In connection with the agreement described in Note 1, on February 25,
1999 SRAD entered into a Call Option Agreement ("Option Agreement") with
Universal Funding, Inc. (Universal), a shareholder of SRAD and a beneficial
owner of 3,000,000 shares of SRAD's common stock. Under the Agreement,
Universal agreed to grant certain options to SRAD to acquire 2,000,000 shares
of SRAD's common stock owned by Universal. The options consist of 1,000,000
shares at $.50 per share exercisable through February 25, 2000 and 1,000,000
shares at $.75 per share exercisable through February 25, 2001. The exercise
price was reduced to .375 per share through April 30, 1999.
In addition, the Company assigned options to purchase 160,000 shares of
stock from Universal to Richard Singer, the former President of SRAD, for
services rendered to SRAD in connection with the acquisition of Internet
Auction, Inc. Also, the Company assigned options to purchase 700,000 shares
of stock from Universal to Steven Rotman, the father of Richard and Gregory
Rotman, in connection with the acquisition of certain inventories.
F-26
<PAGE>
In April 1999, the Company assigned options to purchase 500,000 shares
of stock from Universal to certain individuals in exchange for $2,450,000,
which was added to the paid-in capital of the Company.
In March 2000 the Company assigned options to purchase 142,500 shares
of stock from Universal to certain individuals in exchange for $87,188, which
was added to the paid-in capital of the Company.
At September 30, 2000, the Company had a balance of 497,500 shares
remaining under the agreement with an exercise price of $.75 and an
expiration date of February 25, 2001.
Issuance of Common Stock
On February 17, 2000, the Company issued 75,000 shares of its common
stock to Universal Funding, Inc. for payment of certain fees due in
connection with the granting of the common stock call options and temporary
reduction of the call option exercise price. In addition, the Company issued
35,000 shares of its common stock to an investment consultant for service
rendered in connection with the common stock option grant transactions. The
aggregate value of the common stock issued was $140,000 treated as a cost of
raising capital, with no impact on the net worth of the Company. Also, the
Company issued 35,000 shares to a consultant for services rendered in the
first quarter of 2000.
The fair value of the shares issued, $44,800, was charged to expense
and added to additional paid in capital in the first quarter of 2000.
4. INCOME TAXES
There was no provision for income taxes for the periods ended September
30, 2000 or 1999 due to the Company's net operating loss and its valuation
reserve against deferred income taxes.
The difference between the provision for income taxes from amounts
computed by applying the statutory federal income tax rate of 34% and the
Company's effective tax rate is due primarily to the net operating loss
incurred by the Company and the valuation reserve against the Company's
deferred tax asset.
At September 30, 2000 the Company has federal and state net operating
loss carryforwards of approximately $4,175,000 available to offset future
taxable income that will expire in 2020.
5. CONVERTIBLE DEBT FINANCING
On March 23, 2000, the Company entered into a Securities Purchase
Agreement (the "Agreement"), whereby the Company issued an 8% convertible
note in the amount of $3,000,000, due March 31, 2002 to Augustine Fund, L.P.
(the "Buyer").
The note is convertible into common stock at a conversion price equal
to the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
March 23, 2000, or (2) seventy-five percent (75%) of the average of the
closing bid price for the common stock for the five (5) trading days
immediately preceding the conversion date.
F-27
<PAGE>
Had the Buyer converted the note on March 23, 2000, the Buyer would
have received $4,000,000 in aggregate value of the company's common stock
upon the conversion of the $3,000,000 convertible note. As a result, for the
period ended March 31, 2000, the intrinsic value of the beneficial conversion
feature of $ 1,000,000 has been allocated to debt discount and additional
paid-in capital. Since the debt was convertible at date of issuance, the debt
discount was charged to interest expense in the period ended March 31, 2000.
In connection with the Agreement, the Company also issued warrants to
the Buyer and Delano Group Securities to purchase 300,000 and 100,000 shares
of common stock, respectively. The purchase price per share of common stock
is equal to one hundred and twenty percent (120%) of the lowest of the
closing bid prices for the common stock during the five (5) trading days
prior to the closing date. The warrants are exercisable on June 23, 2000 and
expire on March 31, 2005. The fair value of the warrants granted is estimated
to be $430,000 using the Black-Scholes option-pricing model. The amount of
the proceeds allocated to the warrants results in a debt discount of $430,000
which will be amortized as additional interest expense during the two years
ending March 23, 2002. Amortization of $53,750 and $113,446 has been charged
to operations during the three and nine months ended September 30, 2000,
respectively.
In addition, the Company entered into a Registration Rights Agreement
(modified on September 19, 2000), whereby the Company agreed to file a
Registration Statement with the Securities and Exchange Commission (SEC) on
or before October 25, 2000 covering the common stock to be issued upon the
conversion of the convertible note and stock purchase warrants. A
Registration Statement was filed on October 25, 2000. All fees and expenses
related to the registration of the common stock will be paid by the Company.
Estimated fees and expenses to be incurred in connection with this agreement
in the amount of $35,000 have been accrued during the nine months ended
September 30, 2000.
If the Registration Statement is not declared effective by the SEC on
or before 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%).
Also, if the Registration Statement is not declared effective by the
SEC on or prior to December 15, 2000, the Company shall pay cash, as
liquidating damages, for such failure. The required payment will be equal to
two (2%) of the purchase price of the note and warrant for each thirty-day
period, until the breach of the Registration Rights Agreement is cured.
Expenses incurred in connection with the sale of this convertible
note amounted to $270,000. These expenses are being amortized to interest
expense over the term of the convertible note.
6. LITIGATION
The Company is currently involved in a dispute with Marc Stengel
("Stengel") and Hannah Kramer ("Kramer"), each of whom is a substantial
shareholder of the Company, and with Whirl Wind Collaborative Design, Inc.
("Whirl Wind") and Silesky Marketing, Inc., two entities affiliated with
Stengel. Stengel and Kramer are former directors of the Company. Stengel is also
a former officer and employee.
F-28
<PAGE>
The lawsuit was initially filed against Stengel alone in June 2000.
It remains pending in the US District Court for the District of Maryland (the
"Maryland Action"). A First Amended Complaint ("Complaint") was filed on October
11, 2000, which added the defendants other than Stengel identified above. The
Complaint seeks rescission of the transactions pursuant to which Stengel and
Kramer obtained their substantial stock interests in the Company, and seeks
damages against them for misrepresentations and omissions under the common law
of fraud, the Maryland Securities Act and certain contractual warranties and
representations. The Complaint also seeks damages and remedies against 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
Complaint also seeks to recover damages from Stengel and the two corporate
defendants for conversion of certain of the Company's assets, resources and
employee services, and for unjust enrichment. The Complaint also alleges that
the acquisition of Internet Collectible Awards discussed in note 1 is a related
party transaction. Various motions and responses have been filed in connection
with the Complaint. The Court has not ruled on these matters. Stengel, Whirl
Wind and Silesky Marketing, Inc. have filed answers to the Complaint, and Whirl
Wind has filed a counterclaim against the Company for the conversion of a small
quantity of computer equipment alleged to be owned by Whirl Wind; the Court has
not ruled on any of these claims.
On or about June 16, 2000, Stengel commenced an action in the
Delaware Chancery Court pursuant to Section 225 of the Delaware General
Corporation Law (the "Delaware 225 Action") seeking a determination from the
Court that he was improperly removed as an officer and director of the Company,
should be reinstated as such, and that Gregory and Richard Rotman ("Rotmans") be
ordered to dismiss the Maryland Action. The Delaware 225 Action was stayed
pending the outcome of a special meeting of shareholders, discussed below.
Following the results of that meeting, the Company moved for summary judgment
and asked that the Delaware 225 Action be dismissed. That motion is pending.
On July 20, 2000, Gregory Rotman, called a special meeting of the
stockholders to be held on September 19, 2000 for the election of directors. The
Rotmans nominated themselves, Andrew Pilaro and John Martin for election to the
Company's 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 was elected as the
Company's Board of Directors.
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 Stengel as an officer of the Company,
formally ratified and approved the initiation and prosecution of the Maryland
Action against Stengel, authorized the president and CEO to take all actions
necessary to prosecute the Company's claims against Stengel and others and
authorized the reimbursement of approximately $75,000 of Rotmans' expenses in
connection with the aforementioned solicitation.
On or about October 3, 2000, Stengel submitted to the Company a
demand for advancement of certain expenses (including attorneys' fees) he
allegedly incurred in connection with the Delaware 225 Action and Maryland
Action. On October 20, 2000, the Company notified Stengel that the Board of
Directors had denied his advancement request.
On or about October 24, 2000, Stengel filed a second action in the
Delaware Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that he is entitled to
pursuant to the Company's by-laws to be advanced his expenses, including
attorneys' fees, incurred by him in connection with the Delaware 225 Action and
the Maryland Action (the "Delaware 145 Action"). The Company and Stengel have
each moved for summary judgment in the Delaware 145 Action. A hearing on these
matters is scheduled for December 22, 2000.
F-29
<PAGE>
On November 1, 2000, the Company filed with the Maryland Court a
Motion for a Preliminary Injunction requesting that the Court enjoin Stengel and
Kramer from selling, attempting to sell, or otherwise disposing of their shares
of the Company's stock pending resolution of the merits of the Company's claim
for rescission. On November 9, 2000, Stengel filed an Opposition to the
Company's Motion for a Preliminary Injunction. On November 9, 2000, Stengel also
filed a Motion for Preliminary Injunction requesting that the Court (i) order
the Company to instruct its transfer agent to implement and complete all
measures necessary to sell his restricted stock in compliance with Rule 144 and
(ii) enjoin the Company from interfering with or preventing the sale of stock by
Stengel in accordance with Rule 144. Both motions have been rescheduled for
hearing by the Court on December 7, 2000.
The Company is unable to predict the ultimate outcome of the
litigation described above. The Company's financial statements do not include
any adjustments related to these matters.
7. RESTATEMENT
Historically, the Company recognized the revenue relating
consignment-type arrangements on a net commission basis.
In connection with its review of the current quarter, the Company
found that certain consignment-type arrangements were recorded in the first and
second quarter of 2000 on a gross basis rather than on a net basis. As a result,
the revenues and cost of revenues were overstated for these quarters.
Accordingly, the restatement of the financial statements for the first and
second quarters of 2000 did not have any impact on the previously reported loss
from operations or net loss for those quarters.
The Company has properly reflected the net commission service revenue
relating consignment-type arrangements in the current quarter and has adjusted
the year-to-date revenues and cost of revenues in the quarter ended September
30, 2000.
The items in the financial statements that are affected by the
restatement are as follows:
for the quarter ended
---------------------
3/30/00 3/31/00 6/30/00 6/30/00
Previously AS Previously AS
Reported Restated Reported Restated
INCOME STATEMENT
--------------------------------------------------------------------------------
Revenue $ 442,370 $402,743 $327,927 $143,395
Cost of revenue 228,566 188,939 356,532 172,000
Net loss (1,506,958) (1,506,958) (1,062,296) (1,062,296)
for the six-months ended
------------------------
6/30/00 6/30/00
Previously AS
Reported Restated
INCOME STATEMENT
--------------------------------------------------------------------------------
Revenue $ 770,297 $546,138
Cost of revenue 585,098 360,939
Net loss (2,569,254) (2,569,254)
F-30
<PAGE>
8. SUBSEQUENT EVENT
On November 8, 2000, the Company acquired a substantial portion of
the assets of ChannelSpace Entertainment, Inc., a Virginia corporation (CSEI")
and Discribe, Ltd., ("Discribe") a Canadian corporation wholly owned by CSEI.
CSEI and Discribe are converged Internet content providers and producers of
affinity portals, including the CollectingChannel.com and the CelticChannel.com
websites.
The consideration paid by the Company for the acquired assets was
7,530,000 unregistered shares of the Company's common stock, and $300,000 worth
of the Company's common stock which is to be registered.
F-31
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 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.
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 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 25. 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).
<PAGE>
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 26. Recent Sales of Unregistered Securities
(c) (1) During April 1999 the Registrant assigned and surrendered
options it held to acquire 502,500 shares of its own stock. The net cash
proceeds totaling approximately $2,450,000 have been recorded in cash and paid
in capital. Such transaction is exempt from registration under Section 4(2) of
the Securities Act of 1933. The transaction was privately negotiated and the
offeree and purchaser was an accredited investor that represented that it
acquired the option for its own account. No public offering or public
solicitation was used by the registrant in the placement of these securities.
(2) On February 17, 2000, the Registrant issued 75,000 shares of its
common stock to Universal Funding, Inc. for payment of certain fees due in
connection with the granting of the common stock call options and temporary
reduction of the call option exercise price. In addition, the Registrant issued
35,000 shares of its common stock to an investment consultant for service
rendered in connection with the common stock option grant transactions. Also,
the Company issued 35,000 shares to a consultant for services rendered in the
first quarter of 2000.
(3) In March 2000, the Registrant assigned options to investors to
purchase 142,500 shares of the Registrant's common stock from Universal Funding,
Inc. The net proceeds to the Registrant were approximately $87,188. Such
transaction is exempt from registration under Section 4(2) of the Securities Act
of 1933. The transaction was privately negotiated and the offeree and purchaser
was an accredited investor that represented that it acquired the option for its
own account. No public offering or public solicitation was used by the
registrant in the placement of these securities.
(4) On March 23, 2000, the Registrant entered into a Securities
Purchase Agreement (the "Agreement"), whereby the Registrant sold an 8%
convertible note in the amount of $3,000,000, due March 31, 2002 to Augustine
Fund, L.P. (the "Buyer"). The note is convertible into common stock at a
conversion price equal to the lesser of: (1) one hundred ten percent (110%) of
the lowest of the closing bid price for the common stock for the five (5)
trading days prior to March 23, 2000, or (2) seventy-five percent (75%) of the
average of the closing bid price for the common stock for the five (5) trading
days immediately preceding the conversion date. In connection with the
Agreement, the Registrant also issued warrants to the Buyer and Delano Group
Securities, LLC to purchase 300,000 and 100,000 shares of common stock,
respectively. The purchase price per share of common stock is equal to one
hundred and twenty percent (120%) of the lowest of the closing bid prices for
the common stock during the five (5) trading days prior to the closing date. The
warrants expire on March 31, 2005. Such transaction is exempt from registration
under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder. The transaction was privately negotiated and the purchaser was an
accredited investor that represented that it acquired the convertible note and
warrants for its own account. No public offering or public solicitation was used
by the registrant in the placement of these securities.
<PAGE>
Item 27. 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)
3.1 Certificate of Incorporation, as amended (incorporated by reference from
Form 10-KSB, filed April 14, 2000)
3.2 Amended and Restated Bylaws (incorporated by reference from Form 10-KSB,
filed April 14, 2000)
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 Escrow Agreement dated March 23, 2000 among the Registrant, Augustine Fund,
LP and H. Glenn Bagwell, Jr. pursuant to Securities Purchase Agreement
(incorporated by reference to Exhibit 10.6 to Form 10-KSB filed on April
14, 2000)
4.7 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)
4.8 Modification Agreement dated September 19, 2000 between the Registrant and
Augustine Fund, LP (incorporated by reference to Exhibit 4.7 to Form S-3
filed on October 25, 2000)
5.1 Opinion of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
regarding the legality of securities*
10.1 Lease Agreement, dated July 26, 1999 between 100 Painters Mill, LLC and the
Registrant and First Amendment to Lease Agreement, dated December 31, 1999
(incorporated by reference to Exhibit 10.5 to Form 10-KSB filed on April
14, 2000)
10.2 1999 Stock Option Plan*
10.3 1999 Omnibus Share Plan*
16.1 Letter from Guest & Company on change in certifying accountant
(incorporated by reference from Form 8-K, filed on April 29, 1999)
16.2 Letter from Stephen P. Higgins, C.P.A. on change in certifying accountants
(incorporated by reference from Form 8-K/A, filed on March 31, 2000)
21.1 Subsidiaries of the Company (included in Item I)*
23.1 Consent of Wolf & Company, P.C.*
23.2 Consent of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
(included in Exhibit 5.1)
24.1 Power of Attorney, included on Signature Page
27.1 Financial Data Schedule*
27.2 Financial Data Schedule*
---------------
* filed herewith
<PAGE>
Item 28. 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 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
(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
In accordance with 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 SB-2 and has authorized this registration
statement on Form SB-2/A to be signed on its behalf by the undersigned,
thereunto duly authorized, in Worcester, Massachusetts, on November 29, 2000.
SALES ONLINE DIRECT, INC.
By: /s/ Gregory Rotman
--------------------------------
Gregory Rotman, President
SIGNATURES AND POWER OF ATTORNEY
The officers and directors of Sales Online Direct, Inc. whose
signatures appear below, hereby constitute and appoint Gregory Rotman as their
true and lawful attorney-in-fact and agent, with full power of substitution,
with power to act alone, to sign and execute on behalf of the undersigned any
amendment or amendments to this registration statement on Form SB-2/A, and each
of the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or his substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amended registration statement on Form SB-2/A has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Gregory Rotman Director, President, November 29, 2000
---------------------- Chief Executive Officer
Gregory Rotman
/s/ Richard Rotman Director, Chief Financial Officer, November 29, 2000
---------------------- Vice President, Secretary
Richard Rotman
/s/ John Martin Director, Vice President November 29, 2000
---------------------- Chief Technology Officer
John Martin
/s/ Andrew Pilaro Director November 29, 2000
----------------------
Andrew Pilaro
</TABLE>
