Filed under Rule 424(b)(3)
Registration No. 333-40714
2,502,500 SHARES
ADATOM.COM, INC.
COMMON STOCK
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The securityholders of Adatom.com, Inc. listed in this prospectus are
offering an aggregate of 1,100,000 shares of the common stock of the Company
issuable upon conversion of outstanding shares of the Company's Series A
Convertible Preferred Stock ("Preferred Stock") held by four of the
securityholders listed in this prospectus and an aggregate of 1,402,500 shares
of the common stock of the Company issuable upon exercise of outstanding
warrants held by the four holders of Preferred Stock and by three additional
securityholders listed in this prospectus.
The Preferred Stock and the warrants were sold to the selling
securityholders in transactions exempt from registration under the Securities
Act. Adatom.com, Inc. will not receive any of the proceeds from the sale of the
common stock offered hereby although it will receive the proceeds of sales of
common stock upon exercise of the warrants (except to the extent warrants are
exercised on a net exercise basis).
The shares of common stock being offered by the selling securityholders
may be sold from time to time in transactions on the Nasdaq SmallCap Market, in
the over-the-counter market or in negotiated transactions. The selling
securityholders directly, or through agents or dealers designated from time to
time, may sell the common stock offered by them at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices.
Adatom.com, Inc.'s common stock is listed on the Nasdaq SmallCap Market
under the symbol "ADTM." On August 17, 2000, the last reported sale price of the
common stock on the Nasdaq SmallCap Market was $1.1563 per share.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
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August 18, 2000
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TABLE OF CONTENTS
PAGE
Special Note Regarding Forward-Looking Statements....................... 2
Where You Can Find More Information About Us............................ 2
Our Company............................................................. 4
Recent Developments..................................................... 4
Risk Factors............................................................ 5
Use of Proceeds......................................................... 19
Selling Securityholders................................................. 19
Plan of Distribution.................................................... 21
Indemnification......................................................... 22
Legal Matters........................................................... 23
Experts................................................................. 23
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In this prospectus, "Adatom," the "company," "we," "us,"
and "our" refer to Adatom.com, Inc.
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You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Our Company," "Risk Factors" and
elsewhere in this prospectus constitute forward-looking statements. These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our or our industry's actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements.
Moreover, neither we nor any other person assumes responsibility for
the accuracy and completeness of such statements. We undertake no obligation to
update or revise any of the forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed herein may
not occur.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Public Reference Room at
the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information
concerning the Public Reference Room. The Commission also makes these documents
and other information available on its web site at http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3
under the Securities Act of 1933, as amended, relating to the common stock
offered by this prospectus. This prospectus constitutes a part of the
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registration statement but does not contain all of the information set forth in
the registration statement and its exhibits. For further information, we refer
you to the registration statement and its exhibits.
The Commission allows us to "incorporate by reference" the information
we file with it, which means that we can disclose important information to you
by referring you to another document we have filed with the Commission. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Commission will automatically update
and supersede this information. We incorporate by reference the following:
o The description of common stock contained in the Registration
Statement on Form 8-A filed with the Commission on August 5, 1997;
o Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999 filed with the Commission on March 30, 2000;
o The Proxy Statement for the Annual Meeting of Stockholders to be held
on May 25, 2000 filed with the Commission on April 28, 2000;
o The Information Statement dated January 6, 2000;
o The Quarterly Reports on Form 10-QSB for the quarters ended March 31
and June 30, 2000 filed with the Commission on May 12 and August 14,
2000, respectively;
o The Current Report on Form 8-K dated May 19, 2000 and filed with the
Commission on June 30, 2000;
o Any future filings we make with the Commission until the selling
securityholders sell all of the common stock offered by them
pursuant to this prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address or telephone number:
Adatom.com, Inc.
920 Hillview Court, Suite 160
Milpitas, CA 95035
(telephone no. 408-935-7979)
Attention: Michael M. Wheeler, Controller
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OUR COMPANY
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Adatom was established in October 1995 as MegaVision L.L.C., a Missouri
limited liability company ("MegaVision"). In February 1997, MegaVision merged
into HealthCore Medical Solutions, Inc., a Delaware corporation ("HealthCore").
In October 1999, Adatom, Inc., a California corporation which was established in
October 1996, merged into HealthCore, with HealthCore surviving under the name
"Adatom.com, Inc." Since the stockholders of Adatom, Inc. owned 76.4% of the
surviving company after the merger, the merger has been accounted for as a
reverse acquisition, whereby Adatom, Inc. acquired HealthCore. Our executive
offices are located at 920 Hillview Court, Suite 160, Milpitas, CA 95035
(telephone no. (408) 935-7979).
Adatom, Inc. was incorporated in 1996 by four people. Two of the
founders were Richard S. Barton and Sridhar Jagannathan, who are two of our
directors and officers. Adatom, Inc. commenced business in 1997 as a retailer,
which had no store sites and used a mobile sales force of franchisees enabled
with a CD-ROM electronic catalogue. The total revenues from our mobile sales
force were not significant and not profitable. We discontinued this form of
retailing and launched our Internet website, WWW.ADATOM.COM, in October 1998.
Since we shifted our focus to Internet e-commerce, Adatom.com has been
continuously attempting to maximize the convenience of on-line shopping by
incorporating selection, convenience, value, guarantee, warranty, security and
customer service onto the web. By leveraging our proprietary e-commerce
infrastructure and efficient distribution system, we reach both the
business-to-consumer and business-to-business markets. In addition to owning and
operating an Internet superstore, we have developed and implemented a turnkey
e-commerce solution that will provide individuals, companies, and organizations
with "instant" e-commerce capabilities, including back-end fulfillment, web site
development and a full-scale e-commerce infrastructure. We believe that our cost
efficient business model will allow us to pass value on to consumers in the form
of increased customer service and price savings. We provide a comprehensive
product mix of name brand products for the individual, the home, and the office
in 29 product categories. We provide access through our Internet store to over 3
million Stock Keeping Units (SKUs) offered for sale. Products offered are not
limited solely to those products posted on the www.adatom.com site but can also
be sourced from virtually any manufacture or supplier.
RECENT DEVELOPMENTS
We are dependent upon raising additional capital to finance our current
operations and future plans for expansion. In March 2000, we consummated a
private placement of 2,000,000 shares of our common stock yielding gross
proceeds of $4 million. In June, we consummated a private placement of 1,100
shares of Preferred Stock yielding gross proceeds of $1.1 million. The net
proceeds of these two offerings was approximately $4,950,000. The remaining
proceeds of this capital have been exhausted.
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RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently, known to us or that we currently
deem immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks and you may lose all or
part of your investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in the prospectus.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of the company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Stockholders
are cautioned not to put undue reliance on any forward-looking statements. In
addition, the Company does not have any intention or obligation to update
forward-looking statements, even if new information, future events or other
circumstances have made them incorrect or misleading. For those statements, the
Company is relying on the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors could affect the
future results of the company, and could cause results to differ materially from
those expressed in such forward-looking statements.
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE
FUTURE.
Adatom, Inc was incorporated in October 1996 but did not begin to generate
Internet revenues until October 1998. Accordingly, we have had only a limited
operating history upon which to evaluate our business and prospects. We will
encounter risks and difficulties that are frequently encountered by early stage
companies in new and rapidly evolving markets. Many of these risks are described
in more detail in this section. If we are unsuccessful in addressing these risks
and uncertainties, our business, results of operations and financial condition
will be harmed. We have incurred significant losses, as of March 31, 2000 the
accumulated deficit was $16,825,000. The accumulated deficit as of June 30, 2000
was $18,857,000. The accumulated deficit as of June 30, 1999 was $2,821,000. The
Company incurred net losses of $2,173,000 for the quarter ended March 31, 2000
and $2,031,000 for the quarter ended June 30, 2000, for year to date losses of
$4,204,000. The net loss for the quarter ended March 31, 1999 was $298,000 and
the net loss for the quarter ended June 30, 1999 was $585,000, for year to date
losses as of June 30, 1999 of $883,000. There is an uncertainty about our
ability to continue as a going concern. We anticipate our losses will increase
from current levels because we intend to increase our costs and expenses related
to:
o brand development, marketing and other promotional activities to
increase our revenue;
o the expansion of our inventory management and order fulfillment
infrastructure;
o the continued development of our Web site, transaction-processing
systems and network infrastructure;
o the expansion of our product offerings and Web site content; and
o strategic relationship development.
Our ability to become profitable depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot be certain that we would be able to
sustain or increase profitability on a quarterly or annual basis in the future.
We are an early stage company and expect to incur substantial operating losses
for the foreseeable future as we incur significant operating expenses and
research and
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development expenses and make investments, to enhance our line of products and
services and establish Internet capabilities. We may never generate sufficient
revenues to achieve profitability. Even if we do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual basis
in the future.
WE WILL NEED ADDITIONAL FINANCING TO FUND OUR BUSINESS AND THE FAILURE TO OBTAIN
FINANCING WOULD MOST LIKELY RESULT IN CESSATION OF OUR BUSINESS.
We are dependent upon raising additional capital for working capital and to
finance our future plans for expansion. We estimate that we will require a
minimum of $5.5 million to adequately implement our business plan and sustain
and expand our sales and marketing activities through December 31, 2000. We have
experienced negative cash flow from operations from our inception and expect to
experience significant negative cash flow from operations for the foreseeable
future. We need additional funds to sustain and expand our sales and marketing
activities and arrangements, particularly if there is a shift in the type of
Internet services that are developed and ultimately receive customer acceptance.
Adequate funds for these and other purposes on terms acceptable to us, whether
through additional equity financing, debt financing or other sources, may not be
available when needed or may result in significant dilution to existing
stockholders. Failure to obtain financing would most likely result in cessation
of our business. Our lack of tangible assets to pledge has to date prevented us
from obtaining bank or similar debt financing, and will probably continue to do
so in the future. In their reports on the audits of our financial statements for
each of the years in the two-year period ended December 31, 16 1999, our
independent auditors included an explanatory paragraph in each of their reports
because of the uncertainty that we could continue in business as a going
concern. Any raise of additional capital will dilute all of our stockholders. We
estimate that approximately $55.5 million will be required to fund the four
separate joint venture agreements signed with the four Chinese organizations.
OUR COMMON STOCK PRICE MAY BE VOLATILE.
The market price for our Common Stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or services
by us or our competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet and/or online commerce industries;
o changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o potential litigation.
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. Broad market and industry factors may
adversely affect the market price of our Common Stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of their stock, many companies have been the subjects of securities
class action litigation. If we were sued in a securities class action, we could
incur substantial costs and a diversion of management's attention and resources
could have an adverse affect on our stock price.
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IF WE CANNOT SATISFY NASDAQ'S MAINTENANCE REQUIREMENTS, IT MAY DELIST OUR COMMON
STOCK FROM ITS SMALLCAP MARKET AND WE MAY NOT HAVE AN ACTIVE PUBLIC MARKET FOR
OUR COMMON STOCK. THE ABSENCE OF AN ACTIVE TRADING MARKET WOULD LIKELY MAKE THE
COMMON STOCK AN ILLIQUID INVESTMENT.
Our common stock is quoted on the Nasdaq SmallCap Market. To continue to be
listed, we are required to maintain net tangible assets of $2,000,000 or a
market capitalization of $35 million and our common stock must maintain a
minimum bid price of $1.00 per share. From time to time our stock has had a
minimum bid price of less than $1.00 per share. We may not be able to continue
to satisfy those requirements. If this occurs, trading in the common stock would
be conducted in the over-the-counter market in the so-called "pink sheets" or,
if available, the "OTC Bulletin Board Service." As a result, an investor would
likely find it significantly more difficult to dispose of, or to obtain accurate
quotations as to the value of, our shares. The conversion of our convertible
preferred stock may have consequences that could cause Nasdaq to delist our
common stock. The conversion of our preferred stock and resale of the common
stock acquired upon conversion, or the possibility of the conversion of our
preferred stock and resale of our common stock, may depress or inhibit increases
in the market price of our common stock. As a result, the minimum bid price for
our common stock may decline below $1.00. Nasdaq also may delist our common
stock if it deems it necessary to protect investors and the public interest. If
Nasdaq determines that the returns on our convertible preferred stock are
excessive compared with the returns received by the holders of our common stock,
and those excess returns were determined to be egregious, Nasdaq could delist
our common stock.
IF OUR COMMON STOCK IS DELISTED, IT MAY BECOME SUBJECT TO THE SEC'S "PENNY
STOCK" RULES AND MORE DIFFICULT TO SELL.
SEC rules require brokers to provide information to purchasers of securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the Nasdaq Stock Market. If our common stock becomes a "penny stock"
that is not exempt from these SEC rules, these disclosure requirements may have
the effect of reducing trading activity in our common stock and making it more
difficult for investors to sell. The rules require a broker--dealer to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
market. The broker must also give bid and offer quotations and broker and
salesperson compensation information to the customer orally or in writing before
or with the confirmation. The SEC rules also require a broker to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction
before a transaction in a penny stock.
RISK OF INTERNATIONAL EXPANSION.
We plan to expand our presence in foreign markets especially China. We have
relatively little experience in purchasing, marketing and distributing products
or services for these markets and may not benefit from any first-to-market
advantages. It will be costly to establish international facilities and
operations, promote our brand internationally, and develop localized Web sites
and stores and other systems. We may not succeed in our efforts in these
countries. If revenues from international activities do not offset the expense
of establishing and maintaining foreign operations, our business prospects,
financial condition and operating results will suffer. As the international
online commerce market continues to grow, competition in this market will likely
intensify. In addition, governments in foreign jurisdictions may regulate
Internet or other online services in such areas as content, privacy, network
security, encryption or distribution. This may affect our ability to conduct
business internationally.
WE FACE RISKS AND UNCERTAINTIES WITH RESPECT TO OUR PROPOSED JOINT VENTURES IN
CHINA.
Our agreements with the China Product Trade Net Center, ShenZhen Bay Industrial,
Education and Research Center, China Federation of Industrial Economics, and
Yangling Agricultural Hi-Tech Industrial Demonstration Zone contemplate the
formation of joint ventures in China. We may not be successful in establishing
any of these joint ventures. We may not succeed with any of these joint ventures
or in entering the China market, and each venture will be subject to all of the
risks attendant to a start-up business as well as those specific to operating in
China. The risks attendant to a start-up business are similar to those relating
to our
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existing business. We will be subject to various risks relating to operating in
China, including:
o various new and unfamiliar regulatory requirements;
o the risks of being subject to a different legal system in which prior
court decisions may not have as much precedential value as in common
law countries;
o the risk of inadequate or inconsistent enforcement of intellectual
property rights;
o issues relating to currency exchange;
o fluctuations in exchange rates and restrictions on repatriation of
currency;
o the risks associated with doing business in a country with a more
volatile economy;
o the effects of possible political and economic changes and disruptions;
o establishment of and change in government policies and regulations
regarding the use of the internet, including taxation, censorship and
personal privacy issues;
o tariffs and other barriers;
o difficulties in staffing and managing foreign operations.
We also face the risk of diverting management and other personnel from our
existing business to development of the joint ventures. If we are unsuccessful
in addressing these risks and uncertainties, our business, results of operations
and financial condition will be harmed.
WE DEPEND HEAVILY UPON MARKETING ARRANGEMENTS. WITHOUT THEM, OUR BUSINESS WILL
BE ADVERSELY AFFECTED.
We rely heavily on certain marketing arrangements with other companies that have
websites to attract shoppers to purchase our products. We have entered into
marketing arrangements with a number of existing organizations with a definable
user base. Our ability to generate revenues from online commerce depends, among
other things, upon the increased traffic, purchases, advertising and
sponsorships that we generate through our marketing arrangements. We cannot be
sure that other companies will continue these relationships with us, or, if
continued that they will be on terms favorable to us. Our inability to enter
into new marketing arrangements or to maintain our existing arrangements would
have a material adverse effect on us.
WE RELY ON SUPPLIERS FOR OUR RETAIL MERCHANDISE AND SHIPMENTS TO CUSTOMERS. LOSS
OF THESE RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our current suppliers may not continue to sell merchandise to us on current
terms. We may not be able to maintain our current arrangements with suppliers or
be able to establish new or extend current supplier relationships to ensure
acquisition of merchandise in a timely and efficient manner and on acceptable
commercial terms. Loss of these relationships could have a material adverse
effect on us. We also rely on most of our suppliers to process and ship
merchandise directly to customers and where required to install merchandise on
our customers' premises. We have limited control over the shipping procedures of
our suppliers, and shipments by these suppliers have at times been subject to
delays. If the quality of service provided by such suppliers falls below a
satisfactory standard or if our level of returns exceeds our expectations, our
business will be materially adversely affected.
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OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND FLUCTUATIONS IN OUR QUARTERLY
RESULTS MAY CAUSE VOLATILITY IN OUR STOCK VALUATION.
As a result of our limited operating history, it is difficult to accurately
forecast our net sales and we have limited meaningful historical financial data
upon which to base planned operating expenses. We base our current and future
expense levels on our operating plans and estimates of future net sales, and our
expenses are to a large extent fixed. Sales and operating results are difficult
to forecast because they generally depend on the volume and timing of the orders
we receive. As a result, we may be unable to adjust our spending in a timely
manner to compensate for any unexpected revenue shortfall. We may also be unable
to increase our spending and expand our operations in a timely manner to
adequately meet customer demand to the extent it exceeds our expectations. We
expect to experience significant fluctuations in our future quarterly operating
results due to a variety of factors, many of which are outside of our control
which include, without limitation:
o our ability to attract new customers at reasonable cost and at a
steady rate, retain existing customers, or encourage repeat
purchases and maintain customer satisfaction;
o decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
o seasonality;
o our ability to manage inventory levels and to manage fulfillment
operations;
o our inability to adequately maintain, upgrade and develop our Web site,
transaction-processing systems or network infrastructure;
o the announcement or introduction of new sites, services and products by
our competitors;
o price competition in the industry;
o the level of merchandise returns experienced by us;
o the level of traffic on our web site;
o fluctuations in the amount of consumer spending;
o the termination of existing, or failure to develop new, strategic
marketing relationships pursuant to which we receive exposure to
traffic on third-party Web sites;
o increases in the cost of online or offline advertising;
o our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner or retain
existing personnel;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations, and infrastructure;
o unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
o the level of use of the Internet and online services and
increasing consumer acceptance of the Internet and other online
services for the purchase of consumer products such as those
offered by us;
o technical difficulties, system downtime or Internet brownouts;
o changes in gross profit margins or product mix;
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o effects of acquisitions and other business combinations and related
integration issues;
o failure to maintain good relationships with our business partners and
suppliers;
o government regulations related to use of the Internet for commerce;
o general economic conditions and economic conditions specific to the
Internet, online commerce.
A number of factors will cause our gross margins to fluctuate in future periods,
including the mix of product sold by us, inventory management, inbound and
outbound shipping and handling costs, the level of product returns and the level
of discount pricing and promotional activity. Any change in one or more of these
factors could materially and adversely affect our gross margins and operating
results in future periods. We expect that we will experience seasonality in our
business, reflecting a combination of seasonal fluctuations in Internet usage
and traditional retail seasonality patterns. Internet usage and the rate of
Internet growth may be expected to decline during the summer. Further, sales in
the traditional retail industry are significantly higher in the fourth calendar
quarter of each year than in the preceding three-quarters. Due to the foregoing
factors, we believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. Additionally it is likely
that in one or more future quarters 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 MAY NOT BE ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to increase the scope of our operations and have
grown the headcount substantially. At June 30, 1999, Adatom had a total of 18
employees full and part time combined and at June 30, 2000, we had a total of 57
employees full and part time combined. This growth has placed, and our
anticipated future operations will continue to place, a strain on our
management, information systems and resources. As a result, during the remainder
of 2000, we intend to increase our headcount and to install new Enterprise
Resource Planning (ERP) systems with new Accounting and Financial Reporting
Systems. We anticipate expanding our financial and management information
systems to accommodate new data. If we fail to successfully implement and
integrate our new financial reporting and management information systems with
our existing systems or if we are not able to expand these systems to
accommodate our growth, we may not have adequate, accurate or timely financial
information. Our failure to have such information would hinder our ability to
manage our business and operating results. If we grow rapidly, we will face
additional challenges in upgrading and maintaining our financial and reporting
systems. A failure to successfully implement and integrate these systems would
adversely affect our business. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures. In addition, we will need to continue to expand, train and manage
our already growing employee base. Furthermore, we expect that we will be
required to manage multiple relationships with various vendors and other third
parties. To manage the expected growth of our operations and personnel, we will
be required to improve existing and implement new transaction-processing,
operational and financial systems, procedures and controls. Further, we will be
required to maintain and expand our relationships with various merchandise
manufacturers, distributors, Internet and other online service providers and
other third parties necessary to our business. If we are unable to manage growth
effectively, our business will be materially adversely affected.
IF WE EXPERIENCE PROBLEMS WITH OUR THIRD PARTY SHIPPING SERVICES, WE COULD LOSE
CUSTOMERS.
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We rely upon third-party carriers, primarily UPS, for product shipments,
including shipments to and from our warehouse. We are therefore subject to the
risks, including employee strikes and inclement weather associated with these
carriers' ability to provide delivery services to meet our shipping needs. In
addition, failure to deliver products to our customers in a timely manner would
damage our reputation and brand identity.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our performance will be substantially dependent on the continued services and on
the performance of our senior management, particularly Richard Barton,
President, Chief Executive Officer, and Chairman of the Board, and Sridhar
Jagannathan, Chief Technical Officer and Executive Vice President. Two of our
senior management team joined us during the last half of 1999. They are the
Controller and the Vice President of Operations. Our future success depends on
these officers effectively working together with our original management team.
Other than the President, none of our officers or key employees is bound by an
employment agreement for any specific term. Our relationships with these
officers and key employees are at will. We do not have any "key person" life
insurance policies covering any of our employees. Our performance depends on our
ability to compensate, retain and motivate our officers and key employees. The
loss of the services of any of our executive officers or other key employees
could have a material adverse effect on us. Our future success also depends on
our ability to identify, attract, hire, train, retain and motivate other highly
skilled officers and technical, managerial, editorial, merchandising, marketing
and customer service personnel. Competition for such personnel is intense, and
we may not be able to successfully attract, compensate, assimilate, or retain
sufficiently qualified personnel. This inability could have a material adverse
effect on us.
WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, WHICH WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our performance and ability to compete are dependent to a significant degree on
our proprietary technology. We regard our copyrighted material, service marks,
trademarks, trade secrets, and similar intellectual property as critical to our
success, and rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. We have the registered
trademarks "Adatom" and "Discovering New Shopping Dimensions" in the United
States and have a trademark application pending for the mark "Adatom Home
Dimensions." We cannot be sure that we will be able to secure significant
protection for these trademarks. It is possible that our competitors or others
will adopt product or service names similar to "Adatom" and our other
trademarks, thereby impeding our ability to build brand identity and possibly
leading to customer confusion. We generally have entered into agreements
containing confidentiality and non-disclosure provisions with our employees and
consultants and have limited access to and distribution of our software,
documentation and other proprietary information. We cannot be sure that the
steps taken by us will prevent misappropriation of our technology or that
agreements entered into for that purpose will be enforceable. Notwithstanding
the precautions taken by us, 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 us little or no effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available online. In the future, we may also need to file lawsuits to enforce
our intellectual property rights, protect our trade secrets, and 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 us. We also rely on a
variety of technology that is licensed from third parties, including our
database and Internet server software, which is used in our website to perform
key functions. These third party technology licenses may not continue to be
available to us on commercially reasonable terms. Our loss of or 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
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developed and integrated. Any such delays would have a material adverse effect
on us.
PROTECTION OF DOMAIN NAME IS UNCERTAIN.
We currently hold various Web domain names relating to our brand, including the
"ADATOM.com" domain name. Governmental agencies and their designees generally
regulate the acquisition and maintenance of domain names. For example, in the
United States, the National Science Foundation has appointed Network Solutions,
Inc. as the current exclusive registrar for the ".com", ".net" and ".org"
generic top-level domains. The regulation of domain names in the United States
and in foreign countries is subject to change. Such changes in the United States
are presently expected to include a transition from the current system to a
system that is controlled by a non-profit corporation and the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may be unable to acquire
or maintain relevant domain names in all countries in which we conduct business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS DUE TO OUR RELIANCE ON INTERNALLY
DEVELOPED TRANSACTION-PROCESSING SYSTEMS.
If we suffer any system interruptions that result in the unavailability of our
store on the Internet or reduced order fulfillment capability, such
interruptions would reduce the volume of goods sold and the attractiveness of
our product offerings. We have experienced periodic system interruptions, which
we believe will continue to occur from time to time. The satisfactory
performance, reliability and availability of our store on the Internet,
transaction-processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers and maintain adequate
customer service levels. Our revenues depend on the number of visitors who shop
at our store on the Internet and the volume of orders we fulfill. There will be
a significant need to upgrade the capacity of our store on the Internet in order
to handle thousands of simultaneous shoppers. Our inability to add additional
software and hardware or to develop and upgrade further our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic on our store on the Internet or increased sales volume through
our transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of customer service and impaired
quality and speed of order fulfillment, any of which could have a material
adverse effect on us.
OUR BUSINESS MAY SUFFER IF OUR SYSTEMS FAIL OR IF THE SYSTEMS OF OUR BUSINESS
PARTNERS FAIL.
We presently have limited redundant systems. We do not have a complete disaster
recovery plan and carry limited business interruption insurance to compensate us
for losses that may occur. Despite our implementation of network security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data or the inability to accept and fulfill customer orders. Our ability
to successfully receive and fulfill orders and provide high-quality customer
service largely depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. In
addition, any disruptions of those web sites or at the web sites of other
companies where we market goods or have a website link could have a material
adverse effect on us and the volume of sales generated. The occurrence of any of
the foregoing risks could have a material adverse effect on us.
IF WE ARE NOT ABLE TO SUSTAIN RAPID TECHNOLOGICAL CHANGES, OUR BUSINESS MAY
SUFFER.
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We may not successfully use new technologies effectively or adapt our
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. Our failure to adapt in a timely
manner for technical, legal, financial or other reasons, to changing market
conditions or customer requirements, could have a material adverse effect on us.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online stores. The Internet
and the online commerce industry are characterized by rapid technological
change, changes in user and customer requirements and preferences, frequent new
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing store on
the Internet and proprietary technology and systems obsolete. Our success will
depend, in part, on our ability to license leading technologies useful in our
business, enhance our existing services, develop new services and technology
that address the increasingly sophisticated and varied needs of our prospective
customers, and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
YEAR 2000 UPDATE
Through the first six months of the calendar year 2000, we have not experienced
any significant problems associated with the Year 2000 issue. Although it
appears that the Year 2000 issue will not have a significant adverse effect on
us, we continue to monitor the Year 2000 compliance of our internal systems.
Undetected errors in our internal systems that may be discovered in the future
could have a material adverse affect on our business, operating results or
financial condition.
OUR BUSINESS STRATEGY REQUIRES CONTINUED GROWTH OF ONLINE COMMERCE. IF ON-LINE
COMMERCE DOES NOT CONTINUE TO GROW, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED
Our future revenues and any future profits are substantially dependent upon the
widespread acceptance and use of the Internet and online services as a
significant medium of commerce by consumers. Rapid growth in the use of and
interest in the Internet and online services is a recent phenomenon, and we
cannot be sure that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and online services as a medium of commerce. We rely on consumers who
have historically used traditional means of commerce to purchase merchandise.
For us to be successful, these consumers must accept and utilize novel ways of
conducting business and exchanging information. Moreover, critical issues
concerning the commercial use of the Internet, such as ease of access, security,
privacy, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use or the attractiveness of conducting commerce
online. In addition, the Internet and online services may not be accepted as a
viable commercial marketplace for reasons relating to the adequacy of
technology. To the extent that the Internet and online services continue to
experience significant growth, we cannot be sure that the infrastructure of the
Internet and online services will prove adequate to support increased user
demands. Difficulties with the telecommunications used to support the Internet
or online services also could result in slower response times and adversely
affect usage of the Internet.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The online commerce market is new, rapidly evolving and intensely competitive.
We expect competition to intensify in the future. Barriers to entry are minimal,
and current and new competitors can launch new Web sites at a relatively low
cost. We currently or potentially compete with a variety of other companies,
including:
o major "brick and mortar" retailers such as Macys, J.C. Penney's,
Nordstrom's, and Target;
o online efforts of these traditional retailers, including the online
stores operated by Macy, J. C. Penney, Toys R Us, and Wal-Mart, Sears;
o catalog retailers;
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o vendors or manufacturers that currently sell certain of their products
directly online, such as Mattel;
o other online retailers such as Amazon.com, Taydo.com, Furniture.com,
CDnow, Beyond.com and Reel.com;
o on line stores that have a presence on Internet portals and online
service providers that feature shopping services, such as AOL, Yahoo!,
Excite and Lycos;
o various online retailers.
Many of our current and potential traditional store-based and online competitors
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than us. Many of these current and potential competitors can devote
substantially more resources to Web site and systems development than we can. In
addition, online retailers may be acquired by, receive investments from or enter
into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Many of our competitors may be able to secure merchandise from
manufacturers on more favorable terms, fulfill customer orders more efficiently
and adopt more aggressive pricing or inventory availability policies, and devote
greater resources to marketing than we can. Traditional store-based retailers
also enable customers to see and feel products in a manner that is not possible
over the Internet. Our online competitors are able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs that select specific titles from a variety of Web sites may
direct customers to other online retailers, and may increase competition.
Increased competition may result in reduced operating margins, loss of market
share and a diminished brand franchise. New technologies and the expansion of
existing technologies may increase the competitive pressures on us.
WE MAY ENTER NEW BUSINESS CATEGORIES.
We may choose to expand our operations by developing new departments or product
categories, promoting new or complementary products or sales formats, expanding
the breadth and depth of products and services offered or expanding our market
presence through relationships with third parties. In addition, we may pursue
the acquisition of new or complementary businesses, products or technologies. We
may not be successful in our efforts to expand our operations, and potential
customers may not react favorably to these efforts. Furthermore, any new
department or product category that is launched by us but not favorably received
by consumers could damage our brand or reputation. An expansion of our business
in this manner would also require significant additional expenses and expose us
to additional inventory risk and development, operations and editorial resources
and would strain our management, financial and operational resources and subject
us to increased inventory risk.
WE FACE FULFILLMENT OPERATIONS RISKS.
Our success depends on our ability to rapidly scale our fulfillment operations
in order to accommodate a significant increase in customer orders. Our current
fulfillment operations are not adequate to accommodate significant increases in
customer demand that may occur during the fourth calendar quarter of 2000. We
must also be able to rapidly scale our fulfillment operations and information
systems to accommodate significant increases in demand, which may require us to
automate tasks that are currently performed manually. If we do not successfully
scale our fulfillment operations to accommodate demand generally and, in
particular, increased demand during the fourth calendar quarter of each year,
due to the seasonal nature of our business, our business will be adversely
affected.
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE SECURITY MEASURES WE
HAVE IMPLEMENTED TO PROTECT CONFIDENTIAL INFORMATION PROVE TO BE INADEQUATE.
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Advances in computer capabilities, new discoveries in the field of cryptography,
or other developments may result in a compromise or breach of the algorithms
used by us to protect customer transaction data. Any compromise of our security
could have a material adverse effect on our reputation and on us. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information, such as customer credit card numbers. A party who is
able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. Furthermore, our servers
may be vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions. We may be required to expend significant additional capital
and other resources to protect against such security breaches or to alleviate
problems caused by such breaches. Our business may be adversely affected if our
security measures do not prevent security breaches and we cannot assure that we
can prevent all security breaches.
CREDIT CARD FRAUD.
During the first half of 2000 we suffered losses of less than $9,000 as a result
of orders placed with fraudulent credit card data even though the associated
financial institution approved payment of the orders. Under current credit card
practices, a merchant is liable for fraudulent credit card transactions where,
as is the case with the transactions we process, that merchant does not obtain a
cardholder's signature. A failure to adequately control fraudulent credit card
transactions would adversely affect our business.
GROWING CONCERNS ABOUT THE USE OF "COOKIES" AND DATA COLLECTION MAY LIMIT OUR
ABILITY TO DEVELOP USER PROFILES.
Our current technology uses small files of information, commonly known as
"cookies", on a user's hard drive to collect information about our customers'
movements through our Website. Most Internet browsers allow users to modify
their browsers settings to prevent cookies from being stored on their hard
drive, and small minorities of users are currently choosing to do so. Users can
also delete cookies from their hard drive at any time. Some Internet
commentators and privacy advocates have suggested limiting or eliminating the
use of cookies. The reduction or limitation in the use of cookies could:
o reduce the effectiveness of our technology to gather data on our
customers;
o require us to switch to other potentially less effective technology in
order to gather demographic or behavioral information; and
o require us to expend financial and technological resources,
originally allocated to other purposes, to create alternatives
that might be unsuccessful.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION.
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 covering issues such as user privacy,
pricing, content, copyrights, distribution and quality of products and services.
We are not currently subject to regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce. The
adoption of any additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
our products and services and increase our cost of doing business, or otherwise
have a material adverse effect on us. Moreover, the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes and personal
privacy is uncertain and may take years to resolve. In addition, as our service
is available over the Internet in multiple states and foreign countries, and as
we sell to numerous consumers residing in such states and foreign countries,
such jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each such state and foreign country. We could be subject
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to taxes and penalties for failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could have a material
adverse effect on us.
Congress has enacted the Children's Online Privacy Protection Act of
1998 (COPPA) and the Federal Trade Commission ("FTC") has issued rules to
implement COPPA. The main goal of COPPA and the rule is to protect the privacy
of children using the Internet. Under the FTC's rules, certain commercial Web
sites must obtain parental consent before collecting, using, or disclosing
personal information from children under 13. The statute and rule apply to
commercial websites and online services directed to, or that knowingly collect
information from, children under 13. To inform parents of their information
practices, these sites are required to provide notice on the site and a separate
notification to parents about their policies with respect to the collection, use
and disclosure of children's personal information. With certain statutory
exceptions, sites will also have to obtain "verifiable parental consent" before
collecting, using or disclosing personal information from children. Websites
have six months from the rule's April 21, 2000 effective date to comply. A
website operator must post a clear and prominent link to a notice of its
information practices on its home page and at each area where personal
information is collected from children. The notice must state the name and
contact information of all operators, the types of personal information
collected from children, how such personal information is used, and whether
personal information is disclosed to third parties. The notice also must state
that the operator is prohibited from conditioning a child's participation in
activity on the child's disclosing more personal information than is reasonably
necessary. In addition, the notice must state that the parent can review and
have deleted the child's personal information, and refuse to permit further
collection or use of the child's information. The COPPA regulations could reduce
our ability to engage in direct marketing. The cost to the Company of complying
with COPPA is not known and it is not clear what impact the regulations will
have on the Company.
In addition, governments in foreign jurisdictions may regulate Internet
or other online services in such areas as content, privacy, network security,
encryption or distribution. This may affect our ability to conduct business
internationally. For example, the European Union recently enacted its own
privacy regulations. The European Union Directive on the Protection of Personal
Data, which became effective in October 1998, fosters electronic commerce by
establishing a stable framework to ensure both a high level of protection for
private individuals and the free movement of personal data within the European
Union. The EU and the U.S. Department of Commerce are currently negotiating an
agreement under which the privacy policies of American businesses may be deemed
to be adequate under the EU Directive. Until such time as an agreement is
reached, the EU has voluntarily agreed to a moratorium on enforcement of the EU
Directive against U.S. businesses. The European legislation and its adoption via
any agreement could adversely affect our ability to expand our sales efforts to
Europe by limiting how information about us can be sent over the Internet in the
EU and limiting our efforts to collect information from European users.
WE MAY BE SUBJECT TO SALES AND OTHER TAXES.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than California. However, one or more
local, state or foreign jurisdictions may seek to impose sales tax collection
obligations on us. In addition, any new operation in states outside California
could subject our shipments in such states to state sales taxes under current or
future laws. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on the sale of our products, it
could adversely affect our business.
WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET.
Due to the fact that material may be downloaded from web sites and
subsequently distributed to others, there is a potential that claims will be
made against us for negligence, copyright or trademark infringement or other
theories based on the nature and content of such material. Although we carry
general liability insurance, our insurance may not cover potential claims of
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this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed. Any
costs or imposition of liability that is not covered by insurance or in excess
of insurance coverage could have a material adverse effect on us.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims
against us. We cannot predict whether third parties will assert claims of
infringement against us, or whether any future assertions or prosecutions will
adversely affect our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
then we may face costly litigation, diversion of technical and management
personnel, or product shipment delays. As a result of such a dispute, we may
have to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there is a successful claim
of product infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, it
could adversely affect our business.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS COULD CONTROL
STOCKHOLDER VOTES AND OUR MANAGEMENT AND AFFAIRS.
Our executive officers, directors and 5% or greater stockholders, and
their respective affiliates, in the aggregate, own approximately 52.3% of our
outstanding common stock. As a result, they could act together to control all
matters submitted to 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 delay, defer or prevent a change in control, impede a merger, consolidation,
takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
us. This could, in turn, have an adverse effect on the market price of our
common stock.
ADDITIONAL FINANCING FOR OUR OPERATIONS COULD ADVERSELY AFFECT HOLDERS OF OUR
COMMON STOCK.
We may issue common stock or debt or equity securities convertible into shares
of common stock to obtain additional financing if required. Any additional
financing may result in substantial dilution to current holders of our common
stock.
CONVERSION OF OUR PREFERRED STOCK, EXERCISE OF OUR OUTSTANDING WARRANTS AND
OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON STOCK WHILE ITS MARKET PRICE IS
DECLINING MAY RESULT IN FURTHER DECREASES IN ITS PRICE.
As of June 30, 2000, we had outstanding 1,100 shares of Preferred Stock. Each
share of Preferred Stock has a stated value of $1,000 per share and is
convertible into common stock at a conversion price equal to 85% of the average
of the two lowest closing bid prices of the common stock on the Nasdaq SmallCap
Market over the ten trading days preceding the date of conversion ("Market
Price") subject to a maximum conversion price of 115% of the Market Price on the
issue date of June 22, 2000, or $2.03. The number of shares of common stock that
may be acquired upon conversion is determined by dividing the stated value of
the number of shares of Preferred Stock to be converted by the conversion price.
Also, certain additional amounts calculated on the basis of 6% of the stated
value from June 22, 2000, the issue date of the Preferred Stock, to the date of
conversion would also be converted into common stock using the same formula.
Since there is no minimum conversion price, the number of shares of common stock
that holders of preferred stock may acquire upon conversion would simply
continue to increase if the stock price declines. Since upon conversion holders
of Preferred Stock acquire common stock for at least a 15% discount to the
market price, they have an incentive to sell these shares of common stock at
market price either concurrently with, or shortly after, conversion, in order to
profit from the difference between the market price and the
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discounted conversion price. The holders of the preferred stock also could
engage in short sales of our common stock, after delivering a notice of
conversion to us, which could contribute to a decline in the market price of the
common stock and give them the opportunity to profit from that decrease by
covering their short position with shares acquired upon conversion for at least
a 15% discount to the prevailing market price. The conversion of the preferred
stock and subsequent sale of a large number of shares of common stock acquired
upon conversion during periods when the market price of the common stock
declines, or the possibility of such conversions and sales, may exacerbate the
decline or impede increases in the market price of the common stock. In
addition, we have other warrants and stock options exercisable at various prices
for a total of, respectively, 5,362,902 and 1,006,050 shares of common stock.
OTHER ISSUANCES OF PREFERRED STOCK COULD ADVERSELY AFFECT EXISTING HOLDERS OF
OUR COMMON STOCK.
Under our certificate of incorporation, our Board of Directors may, without
further stockholder approval, issue up to an additional 4,998,900 shares of
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
common stock. We could use new classes of preferred stock as a method of
discouraging, delaying or preventing a change in persons that control us. In
particular, the terms of the preferred stock could effectively restrict our
ability to consummate a merger, reorganization, sale of all or substantially all
of our assets, liquidation or other extraordinary corporate transaction without
the approval of the holders of the preferred stock. We could also create a class
of preferred stock with rights and preferences similar to those of our
outstanding convertible preferred stock, which could result in substantial
dilution to holders of our common stock or adversely affect its market price.
CONVERSION OF OUR OUTSTANDING PREFERRED STOCK AND THE EXERCISE OF OUR
OUTSTANDING WARRANTS AND STOCK OPTIONS AND SUBSEQUENT PUBLIC SALE OF OUR COMMON
STOCK WILL RESULT IN SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS.
Existing stockholders will experience substantial dilution in their percentage
ownership of our common stock if the preferred stock is converted and warrants
and stock options are exercised.
USE OF PROCEEDS
All of the shares of common stock offered pursuant to this prospectus
are being offered by the selling securityholders listed under "Selling
Securityholders." We will not receive any proceeds from sales of common stock by
the selling securityholders. The shares offered hereby include an aggregate of
1,402,500 shares issuable upon exercise of outstanding warrants held by the four
holders of Preferred Stock and three additional securityholders named in this
prospectus. We will receive proceeds from any exercise of these warrants. The
proceeds, if any, will be added to our working capital and be available for
general corporate purposes.
SELLING SECURITYHOLDERS
The Preferred Stock and the warrants were sold to the selling
securityholders in several separate transactions exempt from registration under
the Securities Act, as follows:
o We issued 1,100 shares of Preferred Stock at $1,000 per share to four
investors in a private placement consummated in June 2000.
o The Company also issued warrants for 275,000 shares of common
stock to the four purchasers of the Preferred Stock and warrants
for 27,500 common shares to the placement agent in that
transaction
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o In March 2000, the Company issued a warrant to purchase up to
600,000 shares of common stock to Richard Seifert at $2.25 per
share, for consulting services. The warrant expires on March 1,
2004. Mr. Seifert will receive warrants for an additional 600,000
shares of common stock at the same price if the trading price of
the Company's stock exceeds $9.10 for 30 days.
o In May 2000, after receiving stockholder approval, the Company
issued a warrant to purchase 500,000 shares of common stock to Dr.
Victor W. Nee. The exercise price of the warrant is $4.375 per
share. The warrant expires on March 31, 2004. Dr. Nee assisted
with the negotiation of a joint venture agreement between the
Company and an entity in the People's Republic of China. Warrants
are issuable to Dr. Nee for up to an additional 4,500,000 shares
of common stock if and when various investment and/or
profitability benchmarks are met for the China joint venture. On
May 25, 2000, the Company's stockholders elected Dr. Nee as a
director of the Company.
As part of the foregoing transactions, we agreed to register the shares
being offered by this Prospectus.
The following table sets forth information as of June 29, 2000 with
respect to the selling securityholders and the respective number of shares of
common stock beneficially owned by each selling securityholder, all of which are
offered pursuant to this prospectus. For purposes of computing the number and
percentage of shares beneficially owned by a selling securityholder on June 29,
2000, any shares which such person has the right to acquire within 60 days after
such date are deemed to be outstanding, but those shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
selling securityholder:
<TABLE>
<CAPTION>
Shares Owned
Shares Being Percent Owned Upon Completion Percent Owned
Name and Address Offered Before Offering Of Offering After Offering
---------------- ------------ --------------- --------------- --------------
<S> <C> <C> <C> <C>
Alborz Select Opportunities Fund(1) 812,500 4.8% 0 0%
Yasser Moustafa(2) 437,500 2.6% 0 0%
Robert DelGuercio(3) 62,500 .39% 0 0%
Pietro Gattini(4) 62,500 .39% 0 0%
Richard Seifert(5) 600,000 3.6% 0 0%
Dr. Victor W. Nee(6) 500,000 3.0% 0 0%
Astor Capital, Inc.(7) 27,500 .17% 0 0%
------------------------
</TABLE>
[FN]
(1) Consists of (a) 650,000 common shares issuable upon conversion of 650
shares of Preferred Stock based on the aggregate stated value of these
shares of $650,000 divided by an assumed conversion price of $1.00; (b)
warrants to purchase 81,250 shares of our common stock at an exercise
price of $2.295 per share, which are immediately exercisable and expire
on June 22, 2005; and (c) warrants to purchase 81,250 shares of our
common stock at an exercise price of $2.119 per share, which warrants
are immediately exercisable and expire on June 22, 2005.
(2) Consists of (a) 350,000 common shares issuable upon conversion of 350
shares of Preferred Stock based on the aggregate stated value of these
shares of $350,000 divided by an assumed conversion price of $1.00; (b)
warrants to purchase 43,750 shares of our common stock at an exercise
price of $2.295 per share, which are immediately exercisable and expire
on June 22, 2005; and (c) warrants to purchase 43,750 shares of our
common stock at an exercise price of $2.119 per share, which warrants
are immediately exercisable and expire on June 22, 2005.
(3) Consists of (a) 50,000 common shares issuable upon conversion of 50
shares of Preferred Stock based on the aggregate stated value of these
shares of $50,000 divided by an assumed conversion price of $1.00; (b)
warrants to purchase 6,250 shares of our common stock at an exercise
price of $2.295 per share, which are immediately exercisable and expire
on June 22, 2005; and (c) warrants to purchase 6,250 shares of our
common stock at an exercise price of $2.119 per share, which warrants
are immediately exercisable and expire on June 22, 2005.
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(4) Consists of (a) 50,000 common shares issuable upon conversion of 50
shares of Preferred Stock based on the aggregate stated value of these
shares of $50,000 divided by an assumed conversion price of $1.00; (b)
warrants to purchase 6,250 shares of our common stock at an exercise
price of $2.295 per share, which are immediately exercisable and expire
on June 22, 2005; and (c) warrants to purchase 6,250 shares of our
common stock at an exercise price of $2.119 per share, which warrants
are immediately exercisable and expire on June 22, 2005.
(5) Consists of a warrant to purchase 600,000 shares of our common stock at
an exercise price of $2.25 per share. The warrant expires on April 4,
2003.
(6) Consists of a warrant to purchase 500,000 shares of our common stock at
an exercise price of $4.375 per share. The warrant expires on March 31,
2004.
(7) Consists of warrants to purchase 27,500 shares of our common stock at
an exercise price of $2.119 per share, which are immediately
exercisable and expire on June 22, 2005 which were issued in partial
payment of the placement agent's fee for the sale of the Preferred
Stock.
</FN>
PLAN OF DISTRIBUTION
The selling securityholders may sell the common stock being offered by
the prospectus from time to time directly to other purchasers, or to or through
dealers or agents. To the extent required, a prospectus supplement with respect
to the common stock will set forth the terms of the offering of the common
stock, including the name(s) of any dealer or agents, the number of shares of
common stock to be sold, the price of the common stock, any underwriting
discount or other items constituting underwriters' compensation.
The common stock offered hereby may be sold from time to time directly
by the selling securityholders or, alternatively, through broker-dealers or
agents. The selling securityholders will act independently of us in making
decisions regarding the timing, manner and size of each sale. Such common stock
may be sold in one or more transactions at fixed prices, at prevailing market
prices at the time of sale, at varying prices determined at the time of sale or
at negotiated prices. Such sales may be effected in transactions (which may
involve crosses or block transactions) (1) on any national securities exchange
for quotation services on which the common stock may be listed or quoted at the
time of sale (2) in the over-the-counter market, (3) in transactions other than
on such exchanges or services or in the over-the-counter market or (4) through
the writing of options. In connection with sales of the common stock, the
selling securityholders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of such common stock in the course of
hedging the positions they assume. The selling securityholders may also sell
short the common stock offered hereby and deliver such common stock to close out
such short positions, or lend or pledge such common stock to broker-dealers that
in turn may sell such securities. Some of the common stock offered hereby also
may be sold pursuant to Rule 144 under the Securities Act.
The selling securityholders and any such brokers, dealers or agents may
be deemed "underwriters" as that term is defined by the Securities Act.
Each Selling Securityholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Securityholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distribution, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
If a dealer is used in the sale of any common stock where this
prospectus is delivered, the selling securityholders may sell such common stock
to the public at varying prices to be determined by such dealer and at the time
of resale. To the extent required, the name of the dealer and the terms of the
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transaction will be set forth in the related prospectus supplement.
In connection with the sale of common stock, dealers or agents may
receive compensation from the selling securityholders or from purchasers of such
common stock for whom they may act as agents in the form of discounts,
concessions, or commissions. Agents and dealers participating in the
distribution of the common stock may be deemed to be underwriters, and any
compensation received by them and any profit on the resale of common stock by
them may be deemed to be underwriting discounts or commissions under the
Securities Act.
Pursuant to the Registration Rights Agreements entered into among us
and certain selling securityholders, and the warrants issued to Victor W. Nee
and Richard Seifert, we have agreed to pay costs and expenses associated with
the registration of the shares of common stock to be sold pursuant to this
prospectus. In addition, the selling securityholders may be entitled to
indemnification against certain liabilities pursuant to the Registration Rights
Agreements and the warrants.
We will make copies of this prospectus available to the Selling
Securityholders and have informed the Selling Securityholders of the need to
deliver a copy of this prospectus to each purchaser prior to or at the time of
such sale.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law ("GCL") grants
corporations the power to indemnify their directors, officers, employees and
agents in accordance with the provisions thereof. Article Sixth of the
Registrant's Amended and Restated Certificate of Incorporation
("Certificate")and Article V of the Registrant's By-laws provide for
indemnification of Registrant's directors, officers, agents and employees to the
full extent permissible under Section 145 of the GCL. Section 102(b)(7) of the
GCL authorizes a corporation to eliminate the liability of directors for breach
of fiduciary duty in certain cases. Article Eighth of the Certificate eliminates
such liability to the full extent permitted by the GCL.
Registrant has entered into indemnification agreements with each of
its directors and executive officers. Each such agreement provides that
Registrant will indemnify the indemnitee against expenses, including reasonable
attorneys' fees, judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any civil or criminal
action or administrative proceeding arising out of the performance of his duties
as an officer, director, employee or agent of Registrant. Such indemnification
will be available if the acts of the indemnitee were in good faith, if the
indemnitee acted in a manner he reasonably believes to be in or not opposed to
the best interest of Registrant and, with respect to any criminal proceeding,
the indemnitee had no reasonable cause to believe his conduct was unlawful.
The Registration Rights Agreements entered into between Registrant and
certain selling securityholders, as well as the warrants held by the selling
securityholders, contain indemnification provisions.
Registrant maintains directors' and officers' liability insurance
coverage with an aggregate policy limit of $15 million for each policy year.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered hereby
will be passed upon for us by McCutchen, Doyle, Brown & Enersen, LLP, San
Francisco, California.
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EXPERTS
Our financial statements as of December 31, 1999 and for the year then
ended, have been incorporated by reference in this prospectus and in the
registration statement in reliance on the report of Richard A. Eisner & Company
LLP, independent auditors, given upon the authority of said firm as experts in
accounting and auditing. Our financial statements as of December 31, 1998 and
for the year then ended, have been incorporated by reference in this prospectus
and in the registration statement in reliance on the report of Ireland San
Filippo LLP, independent auditors, given upon the authority of said firm as
experts in accounting and auditing.
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2,502,500 SHARES
ADATOM.COM, INC.
COMMON STOCK
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PROSPECTUS
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August 18, 2000
