AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER , 2000
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ADATOM.COM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 43-1771999
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
920 HILLVIEW COURT RICHARD S. BARTON
SUITE 160 CHAIRMAN
MILPITAS, CA 95035 ADATOM.COM, INC.
(408) 935-7979 920 HILLVIEW COURT
(Address, including zip code, SUITE 160
and telephone number, including area MILPITAS, CA 95035
code, of registrant's principal (408) 935-7979
executive offices) (Name, address, including zip code,
and telephone number, including
area code, of agent for service)
------------------
WITH COPIES TO:
Henry D. Evans, Esq.
McCutchen, Doyle, Brown & Enersen, LLP
Three Embarcadero Center
San Francisco, California 94111
(415) 393-2503
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS
SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended ("the Securities Act") check the following
box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
contained herein is a combined prospectus that also relates to 831,174 common
shares registered on Registration Statement No. 333-40714 and to 676,000 common
shares registered on Registration Statement No. 333-44294 that have not yet been
offered for sale.
-----------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
TITLE OF SECURITIES AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED OFFERING PRICE(1) OFFERING PRICE (1) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $.01 par value ...... 5,399,995 shares(2) $.6406 $3,459,236.79 $913.23
====================================================================================================================================
-------------
<FN>
(1) Estimated solely for purposes of calculating the registration fee,
based upon the average of the high and low sales prices of the
common stock on the Nasdaq SmallCap Market on October 18, 2000,
pursuant to Rule 457(c) under the Securities Act.
(2) Includes 4,800,000 shares issuable upon conversion of the
registrant's Series B Convertible Preferred Stock, assuming a
conversion price of $0.25 per common share, and 599,995 shares
issuable upon exercise of outstanding warrants held by selling
securityholders. A registration fee of $1,017.42 was paid with
respect to the earlier registration of 2,502,500 common shares
pursuant to Registration No. 333-40714, of which $335.74
represents the proportionate amount of the fee associated with
831,174 common shares which have not yet been sold. A registration
fee of $203.45 was paid with respect to the earlier registration
of 676,000 common shares pursuant to Registration No. 333-40714,
none of which have been sold.
</FN>
</TABLE>
THIS 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
6,907,169 SHARES
ADATOM.COM, INC.
COMMON STOCK
-------------------
The securityholders of Adatom.com, Inc. listed in this prospectus are
offering:
a) an aggregate of 1,402,500 shares of common stock issuable upon
exercise of outstanding warrants held by the four securityholders who
previously held and converted all of the Company's Series A Preferred
("Series A Preferred") and by three additional securityholders listed
in this prospectus; and
b) an aggregate of 4,800,000 shares of common stock issuable upon
conversion of outstanding shares of the Company's Series B Convertible
Preferred Stock ("Series B Preferred") (assuming a conversion price of
$0.25 per share of Series B Preferred) held by the seven holders of
Series B Preferred and an aggregate of 599,995 shares of common stock
issuable upon exercise of outstanding warrants held by the seven
holders of Preferred Stock and by one additional securityholder listed
in this prospectus.
The Series A Preferred, Series B Preferred 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 October 24, 2000, the last reported sale
price of the common stock on the Nasdaq SmallCap Market was $0.875 per share.
----------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
----------------
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.
-----------
PROSPECTUS
October ____, 2000
<PAGE>
TABLE OF CONTENTS
PAGE
Special Note Regarding Forward-Looking Statements....................... 2
Where You Can Find More Information About Us............................ 3
Our Company............................................................. 5
Risk Factors............................................................ 6
Use of Proceeds......................................................... 15
Selling Securityholders................................................. 16
Plan of Distribution.................................................... 19
Indemnification......................................................... 19
Legal Matters........................................................... 19
Experts................................................................. 19
--------------------
In this prospectus, "Adatom," the "company," "we," "us,"
and "our" refer to Adatom.com, Inc.
--------------------
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.
--------------------
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 website 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
registration statement but does not contain all of the information set forth in
the registration statement and its exhibits. For further information, we refer
<PAGE>
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;
o The Current Reports on Form 8-K dated May 19, September 5,
September 25 and September 27, 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: Tuan V. Phan, Chief Financial Officer
<PAGE>
OUR COMPANY
----------------
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 an Internet website, WWW.ADATOM.COM, in October 1998.
After shifting our focus to Internet e-commerce, we attempted to
leverage our proprietary e-commerce infrastructure and efficient distribution
system to reach both the business-to-consumer and business-to-business markets.
We also developed and implemented a turnkey e-commerce solution to provide
individuals, companies, and organizations with "instant" e-commerce
capabilities, including back-end fulfillment, website development and a
full-scale e-commerce infrastructure, providing a comprehensive product mix of
name brand products for the individual, the home, and the office. These
operations were not profitable. As noted below under "RECENT DEVELOPMENTS,"
these operations are being significantly downsized as we emphasize our China
partnerships.
RECENT DEVELOPMENTS
On September 25, 2000, we announced the restructuring of the Company to
focus almost exclusively on international operations. This restructuring
emphasizes the development of our relatively new China business, while at the
same time significantly reducing expenditures related to the former Business to
Consumer ("B2C", the providing of services by businesses to consumers through
the Internet) Internet superstore and Business to Business ("B2B," the providing
of services by businesses to other individual businesses through the Internet)
E-commerce Solution Program (AESP). As part of this restructuring, we decided to
cancel all drop-shipped orders due to our analysis of the marginal profitability
of these orders versus the anticipated costs to fulfill the orders. The
superstore and AESP, which had been the predominant revenue sources but had not
been profitable, are being refocused to liquidate existing inventory, and
thereafter will be available for licensing. These actions will result in an
overall headcount reduction of 45% and anticipated total spending reductions of
approximately 55%.
We anticipate that our restructuring will enable us to focus almost
exclusively on developing our China business while achieving significant cost
reductions through a combination of workforce reduction and decreased marketing
expenditures associated with our former superstore and AESP operations. Our
China partners are government agencies or quasi-government agencies. Two of them
have information regarding the production abilities and commercial needs of a
significant number of Chinese businesses, while another coordinates all Chinese
trade associations. These agencies can assist to varying degrees in the matching
of purchase and sale transactions. For the near future, the predominant focus of
our China business will be to match non-consumer buyers and sellers of a
potentially wide variety of goods to be both exported from and imported to
China. Sales efforts are presently being concentrated in various products in the
following areas: agriculture, automotive, computers, electronics, hardware,
household, industrial, office, personal, sports and toys. Adatom plans to take
temporary title to any such goods during the transit and delivery phases in
order to be able to charge a markup on the sold goods for its arrangement
efforts. The range of this markup is uncertain at this time due to lack of sales
and it is anticipated will vary depending on type, segment and category.
<PAGE>
Our relationship with our China partnerships to date has yielded one
order for steel from a U.S. steel buyer, which is currently pending delivery.
Other revenue opportunities with or through these partnerships have to date not
been consummated. Our current revenue opportunities encompass brokering a fiber
optics turnkey manufacturing capability, minerals trade to and from China,
consumer goods supply and agricultural exports to China.
On October 17, 2000, we announced the launch of our new international
website focused on direct trade with China (www.adatomchina.com). The new Adatom
site focuses on bringing together U.S. and international buyers and sellers for
bi-directional trade with China.
Although the change in operations described above will reduce headcount
and expenses, we must generate sufficient revenues from our China business to
cover expenses even at our reduced level. No assurance can be given that the
change in our operations as described will generate sufficient revenues to make
us profitable.
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 Series A Convertible Preferred Stock yielding gross proceeds of $1.1
million. In September, we a) consummated private placements of 329,384 shares of
our common stock yielding gross proceeds of $250,000 and b) consummated a
private placement of 1,200 shares of Series B Convertible Preferred Stock
yielding gross proceeds of $1.2 million. The net proceeds of these three
offerings was approximately $6,550,000. The remaining proceeds of this capital
have been completely committed.
Recently, the Company has been advised by Nasdaq that it no longer
meets the requirements for listing on the Nasdaq SmallCap Market. Nasdaq is
expected to hold a hearing in early November 2000 to determine whether the
Company's stock should be delisted. (See "RISK FACTORS-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" below).
<PAGE>
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 and did not commence its China
business until March 2000. 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 and as of June 30 , 2000 the
accumulated deficit was $18,427,000. 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 $2,030,000 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 for the quarter ended June 30, 1999 was $585,000, for
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 continue
because we intend to expend funds for the following items, in addition to other
expenses:
o brand development, marketing and other promotional activities to
increase our revenue; 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 operating losses for the
foreseeable future as we incur significant operating expenses and research and
development expenses and make investments, to establish and enhance our Internet
capabilities. We may never generate sufficient revenues to achieve
profitability.
WE WILL NEED ADDITIONAL FINANCING TO FUND OUR BUSINESS AND THE FAILURE TO OBTAIN
FINANCING WOULD MOST LIKELY RESULT IN CESSATION OF OUR BUSINESS.
<PAGE>
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 million to $7 million to adequately implement our business plan
and sustain and expand our sales and marketing activities through December 31,
2001. 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 may 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, 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 full
implementation of 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.
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. Currently, the minimum bid price
for our common stock is below $1.00 and we may not be able to satisfy any of
these Nasdaq listing
<PAGE>
requirements in the future. 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 Company recently has been advised
by Nasdaq that it no longer meets the requirements for listing on the SmallCap
Market. Nasdaq is expected to hold a hearing in early November 2000 to determine
whether the Company's stock should be delisted.
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.
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 websites 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.
OUR BUSINESS MODEL HAS CHANGED FROM ITS PRIOR EMPHASIS ON INTERNET RETAILING TO
ITS CURRENT EMPHASIS ON OUR JOINT VENTURES IN CHINA
On September 25, 2000, we announced the restructuring of the Company to
focus almost exclusively on international operations. This restructuring
emphasizes the development of our relatively new China business, while at the
same time significantly reducing expenditures related to the former B2C Internet
superstore and B2B E-commerce Solution Program (AESP). As part of this
restructuring, we decided to cancel all drop-shipped orders due to our analysis
of the marginal profitability of these orders versus the anticipated costs to
fulfill the orders. The superstore and AESP, which had been the predominant
revenue sources but had not been profitable, are being refocused to liquidate
existing inventory, and thereafter will be available for licensing. These
actions will
<PAGE>
result in an overall headcount reduction of 45% and anticipated total spending
reductions of approximately 55%.
We anticipate that our restructuring will enable us to focus almost
exclusively on developing our China business while achieving significant cost
reductions through a combination of workforce reduction and decreased marketing
expenditures associated with its superstore and AESP operations. Our China
partners are government agencies or quasi-government agencies that have
information regarding the production abilities and commercial needs of a
significant number of Chinese businesses, and therefore can assist to varying
degrees in the matching of purchase and sale transactions. For the near future,
the predominant focus of our China business will be to match non-consumer buyers
and sellers of a potentially wide variety of goods to be both exported from and
imported to China. Adatom plans to take temporary title to any such goods during
the transit and delivery phases in order to be able to charge a markup on the
sold goods for its arrangement efforts. The range of this markup is uncertain at
this time due to lack of sales and it is anticipated will vary depending on
type, segment and category.
Our relationship with our China partnerships to date has yielded one
order for steel from a U.S. steel buyer, which is currently pending delivery.
Other revenue opportunities with or through these partnerships have to date not
been consummated. Our current revenue opportunities encompass brokering a fiber
optics turnkey manufacturing capability, minerals trade to and from China,
consumer goods supply and agricultural exports to China.
On October 17, 2000, we announced the launch of our new international
website focused on direct trade with China (www.adatomchina.com). The new Adatom
site focuses on bringing together U.S. and international buyers and sellers for
bi-directional trade with China.
Although the change in operations described above will reduce headcount
and expenses, we must generate sufficient revenues from our China business to
cover expenses even at our reduced level. No assurance can be given that the
change in our operations as described will generate sufficient revenues to make
us profitable.
While we reduce our existing website operations, this portion of our
business will continue to be subject to the same risks to which it has
previously been subject, as discussed above and below.
Also, the shift in our business model makes us less diversified and
solely dependent on very few market segments.
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 or funding 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.
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;
<PAGE>
o fluctuations in exchange rates and restrictions on repatriation of
funds and earnings, as it is presently expected that most
transactions will be denominated in Chinese money;
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 possible longer accounts receivable payment cycles and
difficulties in collecting accounts receivable;
o costs of shipping, including transportation and insurance, tariffs
and other barriers;
o potentially adverse tax consequences;
o difficulties in staffing and managing foreign operations; and
o additional unforeseen risks.
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.
To the extent we continue to operate our Internet retail operations, we will
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.
We may continue to engage in our website retailing business while developing our
China initiative, 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.
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, and especially as a
result of the recently announced change in our business model, it is difficult
to accurately
<PAGE>
forecast our net sales and we have limited meaningful historical financial data
upon which to base planned operating expenses. We are currently liquidating our
inventory at prices below our original cost, which will negatively affect our
level of revenues and profit margins. 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 seasonality;
o our inability to adequately maintain, upgrade and develop any
website we may maintain, 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 website;
o fluctuations in the amount of consumer and business spending;
o the failure to develop new strategic marketing relationships
pursuant to which our AdatomChina website can receive exposure to
traffic on third-party websites;
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;
o the level of use of the Internet and online services and
increasing customer acceptance of the Internet and other online
services for the purchase of products;
o technical difficulties, system downtime or Internet brownouts;
o changes in gross profit margins or product mix;
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;
<PAGE>
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, shipping and handling costs, the
liquidation of our present inventory below cost, 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 commercial seasonality patterns. 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 implement our new business plan in a
rapidly evolving market requires an effective planning and management process.
We are in the process of installing new Enterprise Resource Planning (ERP)
systems with new Accounting and Financial Reporting Systems which should be
completed by the end of 2000. 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 anticipated 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 train and manage
our employee base to successfully implement our new business strategy.
Furthermore, we expect that we will be required to manage multiple relationships
with various customers and other third parties. To manage the expected growth of
our operations, 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.
For our website retailing business, 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. In
addition, Dr. Victor W. Nee, a member of our board of directors, has been the
key component of our China strategy, and introduces us to government officials
and others in China who are in a position to help us develop our business plans
in that country. Our performance would be substantially impacted by the loss of
his services.
Our Vice President of Operations joined us during the last half of
1999, as did our former Controller, who has resigned but will continue to be
available to the Company periodically as a consultant. Several others have
joined during the
<PAGE>
year 2000, including our new Chief Financial Officer who also serves as our new
Controller. Our future success depends on these individuals 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, sales, marketing and customer service personnel who are
familiar with the specifics of our business, including Internet operations and
international trading. 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 China and 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
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 and the "ADATOMCHINA.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
<PAGE>
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 service 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 and reliability of our service on the Internet,
transaction-processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers. Our revenues depend
on the number of visitors who access our Internet website and the volume of
orders we fulfill. We expect that our revenues in the future will depend more
heavily on our ability to develop and expand our joint venture initiatives in
China by intermediating the sale of goods to and from the Chinese market. There
will be a significant need to upgrade and expand internationally the capacity of
our Internet services as the business develops. 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 to our websites or increased sales volume through our
transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of service and impaired quality and
speed of order fulfillment, any of which could have a material adverse effect on
us.
As we expand into the Business to Enterprise ("B2E," the providing of
services by businesses to entire industries through the Internet) arena, we will
need to maintain a website which supports these efforts. To this end, on October
17, 2000, we announced the launch of our new international website focused on
direct trade with China (www.adatomchina.com). The new Adatom site focuses on
bringing together U.S. and international buyers and sellers for bi-directional
trade with China. There can be no assurance that the new website will accomplish
its objective and generate profitable Business to Enterprise orders.
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 websites or at the websites 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.
We may not successfully use new technologies effectively or adapt our
proprietary technology and transaction-processing systems to customer
requirements
<PAGE>
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 service. 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 Internet services 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 nine months of the calendar year 2000, we did not
experience 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, ESPECIALLY
IN THE BUSINESS TO ENTERPRISE SEGMENT. 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 businesses in seeking to buy and sell goods
and services both nationally and internationally. 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 users will adopt, and continue to use, the Internet
and online services as a medium of commerce. We rely on those who have
historically used traditional means of commerce to acquire the goods and raw
materials they need and to sell the goods they produce. For us to be successful,
these users 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 websites at a
relatively low cost. In our new business strategy, we will compete with existing
companies such as China.com Corporation, MeetChina.com, Click2China, Ariba,
Inc., Commerce One, Inc. and Alibaba.com. In our Internet retailing business we
currently or potentially compete with a variety of other companies, including
"brick and mortar" retailers such as Macys, J.C. Penney's, Nordstrom's, and
Target; catalog retailers; vendors or manufacturers that currently sell certain
of their products directly online and others.
Many of our current and potential traditional competitors have longer
operating histories, larger customer or user bases, greater brand recognition
and
<PAGE>
significantly greater financial, marketing and other resources than us. Many of
these current and potential competitors can devote substantially more resources
to marketing, sales efforts and website and systems development than we can. In
addition, our online competitors 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. 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
may direct customers to other online sources, 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,
services 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 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 fulfill orders. We must
be able to source product to fulfill demand. This may require us to perform many
tasks manually until automated systems are developed to handle these tasks. This
may adversely effect the speed of fulfillment and, consequently, customer
satisfaction and the likelihood we will receive future orders.
WE FACE RISKS FROM THE TEMPORARY OWNERSHIP OF GOODS WE BROKER, SIMILAR TO THOSE
OF A COMMON CARRIER
When we receive an order from a business to purchase goods or sell
goods and identify a interested party, we take title to the goods while they are
in transit. Part of our profit derives from a markup or commission we charge the
parties to the transaction. While we hold title to the goods, we are subject to
all the risks of ownership, which include among others:
o the risk of loss from fire or other casualty or acts of God,
theft, deterioration, and damage during shipping;
o the risk of adverse claims of title to merchandise or prior
superior liens on the merchandise;
o the risk of failure of the merchandise to conform to contractual
specifications;
o the risk of liability for defective merchandise;
o the risk of the insolvency or bankruptcy of the buyer or seller,
as the case may be;
o the risk of failure by the commercial common carriers we use to
deliver merchandise to the ultimate purchaser; and
<PAGE>
o the risk of failure to timely deliver merchandise, resulting in
partial or complete spoilage,
and other risks.
Currently, we have no insurance covering us against loss or liability from any
of these risks but plan to seek such policies on an as-needed basis. There can
be no assurance that any such insurance, if obtained, will be sufficient to
protect us from these risks.
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE SECURITY MEASURES WE
HAVE IMPLEMENTED TO PROTECT CONFIDENTIAL INFORMATION PROVE TO BE INADEQUATE.
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. 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.
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
<PAGE>
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 customers 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
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
websites 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. For example, the California legislature passed a bill in 2000
imposing sales tax on Internet sales, but the governor of California vetoed this
bill. No assurance can be given that the legislature will not reintroduce such a
bill or that such a bill will not eventually be enacted into law. 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.
<PAGE>
WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET.
Due to the fact that material may be downloaded from websites 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
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 48% 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 September 30, 2000, we had outstanding 1,200 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 September 27, 2000, or $.7906. 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 September
<PAGE>
27, 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 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, 6,530,402
and 1,194,550 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 4,998,800 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
2,002,495 shares issuable upon exercise of outstanding warrants held by eleven
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 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
<PAGE>
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.
o In June 2000, we issued 1,100 shares of Series A Preferred Stock
at $1,000 per share to four investors in a private placement.
o In June 2000, we also issued warrants for 275,000 shares of common
stock to the four purchasers of the Series A Preferred Stock
(137,500 shares exercisable at $2.295 per share and 137,500 shares
exercisable at $2.119 per share) and a warrant for 27,500 common
shares to the placement agent in that transaction exercisable at
$2.119 per share.
o In September 2000, we issued 1,200 shares of Series B Preferred
Stock at $1,000 per share to seven investors in a private
placement.
o In September 2000, we also issued warrants for 545,450 shares of
common stock to the seven purchasers of the Series B Preferred
Stock and a warrant for 54,545 common shares to the placement
agent in that transaction.
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 September 30, 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
September 30, 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
UPON COMPLETION
SHARES BEING PERCENT OWNED OF OFFERING PERCENT OWNED
NAME AND ADDRESS OFFERED BEFORE OFFERING AFTER OFFERING
<S> <C> <C> <C> <C>
Alborz Select Opportunities Fund(1) 2,389,770 11.9% 0 0%
Yasser Moustafa(2) 1,201,136 6.4% 0 0%
Robert DelGuercio(3) 12,500 .1% 0 0%
Pietro Gattini(4) 235,228 1.3% 0 0%
Richard Seifert(5) 600,000 3.3% 0 0%
Dr. Victor W. Nee(6) 500,000 2.8% 0 0%
Alain Salem(7) 222,728 1.3% 0 0%
Target Growth Fund(8) 712,726 3.9% 0 0%
IIG Equity Opportunities Fund(9) 712,726 3.9% 0 0%
Magnolia Drive Investment Corp.(10) 142,728 .8% 0 0%
Astor Capital, Inc.(11) 82,045 .5% 0 0%
------------------------
<FN>
(1) Consists of (a) 2,000,000 common shares issuable upon conversion of 500
shares of Series B Preferred based on the aggregate stated value of
these shares of $500,000 divided by an assumed conversion price of
$0.25; (b) warrants to purchase 81,250 shares of our common stock at an
exercise price
<PAGE>
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; (d) warrants to
purchase 113,635 shares of our common stock at an exercise price of
$.89375 per share, which warrants are immediately exercisable and
expire on September 27, 2005; (e) warrants to purchase 113,635 shares
of our common stock at an exercise price of $.825 per share, which
warrants are immediately exercisable and expire on September 27, 2005;
(2) Consists of (a) 1,000,000 common shares issuable upon conversion of 250
shares of Series B Preferred based on the aggregate stated value of
these shares of $250,000 divided by an assumed conversion price of
$0.25; (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; (d)
warrants to purchase 56,818 shares of our common stock at an exercise
price of $.89375 per share, which warrants are immediately exercisable
and expire on September 27, 2005; (e) warrants to purchase 56,818
shares of our common stock at an exercise price of $.825 per share,
which warrants are immediately exercisable and expire on September 27,
2005;
(3) Consists of (a) 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 (b) 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.
(4) Consists of (a) 200,000 common shares issuable upon conversion of 50
shares of Preferred B Preferred based on the aggregate stated value of
these shares of $50,000 divided by an assumed conversion price of
$0.25; (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; (d)
warrants to purchase 11,364 shares of our common stock at an exercise
price of $.89375 per share, which warrants are immediately exercisable
and expire on September 27, 2005; (e) warrants to purchase 11,364
shares of our common stock at an exercise price of $.825 per share,
which warrants are immediately exercisable and expire on September 27,
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 (a) 200,000 common shares issuable upon conversion of 50
shares of Series B Preferred based on the aggregate stated value of
these shares of $50,000 divided by an assumed conversion price of
$0.25; (b) warrants to purchase 11,364 shares of our common stock at an
exercise price of $.89375 per share, which warrants are immediately
exercisable and expire on September 27, 2005; (c) warrants to purchase
11,364 shares of our common stock at an exercise price of $.825 per
share, which warrants are immediately exercisable and expire on
September 27, 2005;
(8) Consists of (a) 640,000 common shares issuable upon conversion of 160
shares of Series B Preferred based on the aggregate stated value of
these shares of $160,000 divided by an assumed conversion price of
$0.25; (b) warrants to purchase 36,363 shares of our common stock at an
exercise price of $.89375 per share, which warrants are immediately
exercisable and expire on September 27, 2005; (c) warrants to purchase
36,363 shares of our common stock at an exercise price of $.825 per
share, which warrants are immediately exercisable and expire on
September 27, 2005;
(9) Consists of (a) 640,000 common shares issuable upon conversion of 160
shares of Series B Preferred based on the aggregate stated value of
these shares of $160,000 divided by an assumed conversion price of
$0.25; (b) warrants to
<PAGE>
purchase 36,363 shares of our common stock at an exercise price of
$.89375 per share, which warrants are immediately exercisable and
expire on September 27, 2005; (c) warrants to purchase 36,363 shares of
our common stock at an exercise price of $.825 per share, which
warrants are immediately exercisable and expire on September 27, 2005;
(10) Consists of (a) 120,000 common shares issuable upon conversion of 30
shares of Preferred B Preferred based on the aggregate stated value of
these shares of $30,000 divided by an assumed conversion price of
$0.25; (b) warrants to purchase 11,364 shares of our common stock at an
exercise price of $.89375 per share, which warrants are immediately
exercisable and expire on September 27, 2005; (c) warrants to purchase
11,364 shares of our common stock at an exercise price of $.825 per
share, which warrants are immediately exercisable and expire on
September 27, 2005;
(11) Consists of (a) 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 Series A
Preferred; and (b) warrants to purchase 54,454 shares of our common
stock at an exercise price of $.825 per share, which are immediately
exercisable and expire on September 27, 2005 which were issued in
partial payment of the placement agent's fee for the sale of the Series
B Preferred.
</FN>
</TABLE>
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.
<PAGE>
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
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 $15 million for each policy year.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
<PAGE>
The validity of the issuance of shares of common stock offered hereby
will be passed upon for us by McCutchen, Doyle, Brown & Enersen, LLP, San
Francisco, California.
EXPERTS
Our financial statements as of December 31, 1999 and for the year then
ended, have been incorporated by reference in this prospectus and in the
registration statement in reliance on the report of Richard A. Eisner & Company
LLP, independent auditors, given upon the authority of said firm as experts in
accounting and auditing. Our financial statements as of December 31, 1998 and
for the year then ended, have been incorporated by reference in this prospectus
and in the registration statement in reliance on the report of Ireland San
Filippo LLP, independent auditors, given upon the authority of said firm as
experts in accounting and auditing.
<PAGE>
6,907,169 SHARES
ADATOM.COM, INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
October __________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the distribution of the
securities being registered, all of which are to be paid by the Registrant, are
as follows:
Securities and Exchange Commission Registration Fee ...............$*
Printing and Engraving Expenses ...................................10,000
Nasdaq Qualification Fee ..........................................17,500
Legal Fees and Expenses ...........................................50,000
Accounting Fees and Expenses ...................................... 7,500
Miscellaneous Fees and Expenses ...................................*
-------
Total ................................................$ *
========
------------
* To be added by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
An Exhibit Index has been attached as part of this Registration
Statement and is incorporated herein by reference.
<PAGE>
(b) Financial Statement Schedules
Schedules are omitted because they are either not required, are not
applicable or because equivalent information has been included in the financial
statements, the notes thereto or elsewhere herein.
ITEM 17. UNDERTAKINGS
a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
provided, however, that paragraphs (1)(a) and (1)(b) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall by deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under "Item 15,
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment to 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 such 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 such
indemnification is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
<PAGE>
d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, 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 shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on a Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Milpitas, State of California, on the 23rd day
of October, 2000.
ADATOM.COM, INC.
By: /s/TUAN V. PHAN*
----------------
Name: Tuan V. Phan
Title: Chief Financial Officer, Chief
Accounting Officer and Controller
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint RICHARD S. BARTON and TUAN V.
PHAN, and each of them, with full power to act without the other, his or her
true and lawful attorney-in-fact and agent for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement including without limitation any registration statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully, for all intents and purposes, as he or she could
or might do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Richard S. Barton
-----------------------
Richard S. Barton Chairman of the Board, Chief October 23, 2000
Executive Officer, President,
and Director
(principal executive officer)
/s/Tuan V. Phan*
-----------------------
Tuan V. Phan Chief Financial Officer, October 23, 2000
Chief Accounting Officer
and Controller
(principal financial and
accounting Officer)
/s/Ralph K. Frasier
-----------------------
Ralph K. Frasier Director October 23, 2000
<PAGE>
/s/Debra Shaw
-----------------------
Debra Shaw Director October 23, 2000
*/s/Tuan V. Phan
----------------------- Individually October 23, 2000
Tuan V. Phan
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.39 Certificate of Designations relating to Series B Convertible
Preferred Stock (1)
4.40 Securities Purchase Agreement relating to Series B Convertible
Preferred Stock, dated September 27, 2000 (1)
4.41 Registration Rights Agreement relating to Series B Convertible
Preferred Stock, dated September 27, 2000 (1)
4.42 Form of A Warrant issued to purchasers of Series B Convertible
Preferred Stock on September 27, 2000 (1)
4.43 Form of B Warrant issued to purchasers of Series B Convertible
Preferred Stock and to Astor Capital, Inc. on September 27,
2000 (1)
5 Opinion of McCutchen, Doyle, Brown & Enersen, LLP*
23.1 Consent of Richard A. Eisner LLP
23.2 Consent of Ireland San Filippo, LLP
23.3 Consent of McCutchen, Doyle, Brown & Enersen, LLP (included in
Exhibit 5)
24 Power of Attorney (filed as part of signature page to
Registration Statement)
-------------
(1) Incorporated by reference to exhibit of same number filed with
Registrant's Current Report on Form 8-K dated September 27, 2000.
* To be filed by amendment.
E-1
