U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
AMENDMENT NO. 1
TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
2THEMART.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
OKLAHOMA 33-0544320
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
18301 VON KARMAN AVENUE
7TH FLOOR
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices) (Zip Code)
(949) 477-1200
(Registrant's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
(N/A) (N/A)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.0001
(Title of Class)
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TABLE OF CONTENTS
Page
Item 1 Business . . . . . . . . . . . . . . . 1
Item 2 Financial Information . . . . . . . . . 8
Item 3 Properties . . . . . . . . . 11
Item 4 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 12
Item 5 Directors and Executive Officers . . . . . 13
Item 6 Executive Compensation . . . . . . . . . . 14
Item 7 Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . 17
Item 8 Legal Proceedings . . . . . . . . . . . . 17
Item 9 Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . 18
Item 10 Recent Sales of Unregistered Securities . . 19
Item 11 Description of Registrant's Securities
to be Registered . . . . . . . . . . . . . 21
Item 12 Indemnification of Directors and Officers . 22
Item 13 Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . 22
Item 14 Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . 22
Item 15 Financial Statements and Exhibits . . . . . 23
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1
ITEM 1 - BUSINESS
This Registration Statement on Form 10 includes forward-looking statements
within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act").
These statements are based on management's current beliefs and assumptions about
the Registrant and the industry in which the Registrant competes in, and on
information currently available to management. Forward-looking statements
include, but are not limited to, the information concerning possible or assumed
future results of operations of the Registrant set forth under the headings
"Financial Information-Management's Discussion," "Plan of Operations," and
"Business." Forward-looking statements also include statements in which words
such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used. Forward-looking statements are
not guarantees of future performance. They involve risks, uncertainties and
assumptions. The Registrant's future results and shareholder values may differ
materially from those expressed or implied in these forward-looking statements.
Readers are cautioned not to put undue reliance on any forward-looking
statements.
GENERAL DEVELOPMENT OF BUSINESS
History of the Company
2TheMart.com, Inc. ("2TheMart" or the "Company") is a development stage,
Internet-based electronic commerce ("e-commerce") company. The Company has
contracted with International Business Machines, Inc. ("IBM") to develop and
launch a business-to-consumer and consumer-to-consumer trading community on the
Internet. The Company has developed an e-commerce site in which buyers and
sellers can be brought together to buy and sell a variety of goods such as
antiques, coins, collectibles, computers, memorabilia, stamps, toys and more in
an auction format. The 2TheMart service enables sellers to list items for
sale, buyers to bid on those items and it allows 2TheMart users to browse
through all items in a fully automated, topically arranged online service that
is available 24 hours a day, seven days a week. The Company launched its Web
site on November 18, 1999.
There can be no assurances that the Company's Web site will operate on a 24
hours a day, seven days a week basis. The Company's computer systems and
operations are vulnerable to, among other things, damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. These systems are also potentially subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. Any damage to, or failure
of the Company's systems could result in interruptions in the Company's service.
In addition, if the Company experiences demand for its services beyond the
capacity of its systems, the Company's Web site may become unstable and may
cease to operate for periods of time. Many of the Company's competitors have
experienced periodic unscheduled downtime. Continued unscheduled downtime could
harm the Company's business, discourage users of the Company's Web site and
reduce future revenues, if any.
The Company was originally incorporated under the laws of the State of
Oklahoma on December 2, 1992 as S.K.B. Design, Inc. Between 1992 to 1996, the
Company was inactive. On October 1, 1996, the Company acquired certain
technology and assets with the intention of developing a cd-rom based multimedia
yearbook product. On December 22, 1997, the Company changed its name from S.K.B
Design, Inc. to CD-Rom Yearbook Company, Inc. ("CD-Rom") to reflect its new
business plan. Due to certain technical and market difficulties, the business
of CD-Rom did not develop as expected. As a result, CD-Rom ceased its
operations in the fall of 1998 and began a search for new business
opportunities. Effective January 8, 1999, CD-Rom acquired all of the
outstanding Common Stock of 2TheMart.com, Inc., a Nevada corporation
("2TheMart-Nevada"), in a business combination described as a "reverse merger."
For accounting purposes, the merger has been treated as the merger of CD-Rom
into 2TheMart-Nevada. Immediately prior to the merger, CD-Rom had 2,291,850
shares of Common Stock outstanding. As part of the Reorganization and Stock
Purchase Agreement, CD-Rom issued an additional 17,800,000 shares of the Common
Stock of CD-Rom to the shareholders of 2TheMart-Nevada in exchange for
17,800,000 shares of the Common Stock of 2TheMart-Nevada. In addition, options
to purchase up to 2.5 million shares of the Company's Common Stock at an
exercise price of $3.00, immediately exercisable, were issued to the previously
controlling shareholder of CD-Rom (the "CD-Rom Options"), and 1.2 million of the
previously issued CD-Rom shares (the "Escrow Shares") were placed in escrow to
be distributed to the 2TheMart-Nevada shareholders upon the occurrence of
certain events. (1)
- -----------------
(1) The Escrow Shares are to be released to the 2TheMart-Nevada
shareholders upon the occurrence of either of the following events: 1) the
exercise of any of the CD-Rom Options; or 2) The effectiveness of any
Registration Statement filed with the SEC with respect to any of the shares
underlying the CD-Rom Options. In the event that neither of the CD-Rom Options
have been exercised, and the Company has failed to file and have declared
effective a Registration Statement covering the shares underlying the CD-Rom
options by June 22, 2000, all Escrow-Shares would be returned to the controlling
shareholder of CD-Rom. As of November 18, 1999, the Escrow Shares were released
to the 2TheMart-Nevada shareholders.
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Simultaneously with the merger, CD-Rom changed its name to "2TheMart.com,
Inc.," an Oklahoma corporation, and adopted the business plan of
2TheMart-Nevada. All officers and directors of CD-Rom resigned their positions,
and the management of 2TheMart-Nevada was appointed as new management to the
Company. The Company's Common Stock traded on the NASD Over-the-Counter
Bulletin Board ("OTCBB") under the symbol "TMRT." As of October 8, 1999, the
Company's Common Stock is traded on the National Quotation Bureau's "Pink
Sheets" under the symbol TMRT. Once the Securities and Exchange Commission has
reviewed this Registration Statement on Form 10 and has stated that it has no
further comments and the Form 10 has been declared effective, the Company's
Common Stock will once again become eligible for listing on the OTCBB and the
Company will seek to be reinstated on the OTCBB or other appropriate exchange.
Plan of Operations for the Twelve Months Ending June 30, 2000.
The Company's business plan for the twelve months ending June 30, 2000, is
to begin operations as an Internet-based e-commerce company. The Company has
completed the design, coding, testing and implementation of its Web site. The
Company launched its Web site on November 18, 1999. The site is designed to
facilitate transactions between businesses and consumers and between consumers
and consumers. The Company will charge a fee to its users for posting items on
the site and a commission-based fee upon the sale of items on the site.
In implementing the Company's business plan, the Company has contracted
with IBM to acquire hardware and software for its Web site operations and
corporate infrastructure and the development of its Web site in the amount of
approximately $11.0 million of which $7.9 million is for the hardware and
software and $3.1 million is for Web site development. As of November 19, 1999,
the Company has paid in full its obligation of $7.9 million for its hardware and
software and $1.3 million for its Web site. On November 18, 1999, the Company
entered into a payment agreement (the "Payment Agreement") with IBM whereby the
Company will pay the remaining amounts due for its Web site in 12 monthly
payments beginning January 31, 2000. The Company expects to fulfill its
obligation under the Payment Agreement from the recent sales of the Company's
Common Stock, its cash flow from operations and anticipated sales of Common
Stock. (See Item 2 - Financial Information - Management's Discussion and Results
of Operations - Liquidity).
The Company is also required to pay for the space that it has secured with
Exodus Communications ("Exodus") at Exodus' Sterling, Virginia data center at
the time the hardware placed at that facility was connected to the Internet.
The Company's minimum expected monthly obligation to Exodus pursuant to its
contract at the time the Company's hardware is connected to the Internet is
approximately $78,000 which may increase depending on the Company's bandwidth
usage. Additionally, on June 16, 1999, the Company contracted with USWeb/CKS for
the development and implementation of its marketing programs and strategies.
Under the terms of its agreement with USWeb/CKS, the Company is obligated to pay
$86,000 per month. The USWeb/CKS contract is cancelable upon giving one prior
month notice. The Company has also contracted with Ciber, Inc., formerly known
as The Summit Group, for the integration of the Company's back-end accounting
and billing software which is expected to cost the Company approximately
$400,000 of which the Company has paid approximately $290,000 as of November 18,
1999. Additionally, the Company has contracted with Lawson Associates ("Lawson")
to license the use of Lawson's accounting software system. Under the terms of
the agreement with Lawson, the Company paid Lawson approximately $127,000 and
has the option of either paying a one time flat fee to Lawson on March 10, 2000
in the amount of $573,070 or a fee based on a percentage of the Company's
revenue.
The Company expects to pay the above commitments with the proceeds from the
recent sales of the Company's Common Stock, its cash flow from operations and
anticipated sales of Common Stock (See Item 2 - Financial Information
- - Management's Discussion and Results of Operations - Liquidity).
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The Company anticipates that its personnel requirements (which is currently
supplemented with outside consultants) will increase substantially from its
current level of 45 employees. The Company expects to increase its full-time
staffing to approximately 75 to 100 people by December 31, 1999. The Company
anticipates that this increased staffing will be used for customer support,
administration, accounting, marketing, and technology. It is also anticipated
that this increased staffing will substantially increase corporate expenditures
from their current levels.
The Company expects to pay the anticipated increase in corporate
expenditures and other operating expenses through the recent sales of the
Company's Common Stock, its cash flow from operations and anticipated sales of
Common Stock.
A slower than expected rate of acceptance of the Company's Web site, when
available to the public, or lower than expected revenues generated from the
Company's Web site, would materially adversely affect the Company's liquidity.
The Company may need additional capital sooner than anticipated. The Company
has no commitments for additional financing, and there can be no assurances that
any such additional financing would be available in a timely manner or, if
available, would be on terms acceptable to the Company. Furthermore, any
additional equity financing could be dilutive to our then-existing shareholders
and any debt financing could involve restrictive covenants with respect to
future capital raising activities and other financial and operational matters.
Additionally, on September 13, 1999 and October 11, 1999, two
putative class action lawsuits were filed in the United States District Court,
Central District of California, Southern Division, against the Company and its
principal officers, Steven W. Rebeil and Dominic J. Magliarditi. The complaints
allege, on behalf of a class of individuals who purchased shares of the
Company's Common Stock between January 19, 1999 and August 26, 1999, that the
Company and its defendant officers engaged in a plan to defraud the market and
purchasers of the Company's Common Stock in violation of section 10(b) of
Exchange Act, SEC Rule 10b-5 and Section 20(a) of the Exchange Act (as against
Mr. Rebeil and Mr. Magliarditi) by failing to disclose material facts or making
material misstatements of fact regarding the status of the Company's Web site.
The complaints seek compensatory damages for themselves and for the class. The
Company is informed and believes that there may be additional purported class
action lawsuits filed against the Company based on facts and claims similar or
identical to those stated above and the Company anticipates that all such
lawsuits based on similar claims and facts would be consolidated.
The Company and its defendant officers and directors believe that the
lawsuit are without merit and that they have meritorious defenses to the above
actions. The Company has tendered the litigation to its insurers and plans on
vigorously defending the litigation. The Company believes that it has adequate
insurance coverage to meet any potential losses, subject to a $250,000
deductible. However, failure to successfully defend the litigation or other
similar actions which result in an award greater than the Company's insurance
coverage, could have a material adverse effect on the Company's results of
operations, liquidity and financial condition. See Item 8 - Legal Proceedings.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company only operates in one industry segment and has received no
operating revenues to date.
NARRATIVE DESCRIPTION OF BUSINESS
Business Summary
2TheMart is a development stage, Internet-based e-commerce company. The
Company has contracted with IBM to develop and launch a business-to-consumer and
consumer-to-consumer trading community on the Internet. The Company has
developed an e-commerce site in which buyers and sellers can be brought together
to buy and sell a variety of goods such as antiques, coins, collectibles,
computers, memorabilia, stamps, toys and more in an auction format. The
2TheMart service enables sellers to list items for sale, buyers to bid on
those items and allow 2TheMart users to browse through all items in a fully
automated, topically arranged online service that is available 24 hours a day,
seven days a week. The Company launched its Web site on November 18, 1999.
E-Commerce
The Internet provides the opportunity for merchants to expand their current
market place to a global market place without the capital requirements typically
required in expanding a "brick and mortar" business. The Internet also offers
the opportunity for even the smallest vendor (i.e., an individual with a single
product) to create a market for the sale of his or her product well beyond the
traditional geographical limits of a traditional storefront. An Internet-based,
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auction-style e-commerce site can facilitate buyers and sellers in completing a
commerce transaction. Through such a site, buyers can access a significantly
broader selection of goods to purchase and sellers have the opportunity to sell
their goods efficiently to a broader base of buyers. As a result, a significant
market opportunity exists for an Internet-based, e-commerce auction-type site.
Visitors to the 2TheMart site are able to browse among its items for sale
which are organized across numerous product categories and are facilitated by
easy navigation and searching. Browsers and buyers can also search
auction listings using a variety of means such as by category, keyword,
seller name, recently-commenced auctions or auctions about to end. Upon
registering as a 2TheMart user, a seller is able to immediately list an
item for sale, identify a minimum price for opening bids and specify how long
the auction will last. Sellers pay a nominal placement fee for an item
based on the seller's minimum price for the item (preliminary estimates of the
minimum price for the placement fee is expected to range from $0.25 to $2.00 per
item). Sellers are able to highlight their auctions through a variety of
premium services made available to them. At the end of the auction
period, if a bid exceeds the seller's minimum price, 2TheMart automatically
notifies the buyer and seller via email and then the buyer and seller consummate
the transaction independently of 2TheMart. At the time of notification of a
successful auction, 2TheMart will charge the seller a success fee that is
expected to range from 1.25% to 5%, based on the closing price of the item.
Buyers are not charged for making bids or purchases through 2TheMart. At no
point during the process does 2TheMart take possession of either the item being
sold or the buyer's payment for the item; instead, 2TheMart will only act as the
facilitator of the transaction. Following completion of a transaction, each
user will be able to rate his or her experience with the seller through the use
of "User Ratings."
2TheMart's objective is to be an online facilitator of transactions in the
business-to-consumer and consumer-to-consumer marketplace. Key elements of the
Company's strategy after the launch of its site include: (i) developing the
2TheMart community and the 2TheMart brand to attract members to the 2TheMart
community; (ii) developing 2TheMart's site by expanding product categories,
promoting new product categories and expanding internationally; (iii) enhancing
2TheMart's site features and functionality through the introduction of new
features for both sellers and buyers, new auction formats and category-specific
content; and (iv) introducing pre- and post-transaction services, such as
shipping and third-party escrow services.
Systems
2TheMart utilizes internally developed systems integrated by Ciber,
Inc. and Lawson for its service and transaction processing, including billing
and collections processing. 2TheMart will continually enhance and improve these
systems in order to accommodate the anticipated level of use of 2TheMart's
proposed Web site. Furthermore, in the future, 2TheMart may add additional
features and functionality to its services that could result in the need to
develop or license additional technologies. However, there can be no assurances
that the Company will be able to develop or license such additional
technologies.
Governmental Regulation
2TheMart is not currently subject to direct federal, state or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally.
International Operations
A component of 2TheMart's strategy is to expand internationally. In
preparation for future expansion into the international market, 2TheMart has
reserved 1,000 square feet of space at Exodus' London facility. This space has
been reserved at no cost and the Company is only obligated to pay Exodus a fee
once the Company has installed its computer servers to the Internet.
In the future, should the Company expand internationally, such expansion
will require management attention and resources. In addition, if the Company
does expand internationally, the Company will not have had any experience in
localizing its service to conform to local cultures, standards and policies
The Company may also have to compete with local companies who understand the
local market better than it does. The Company may not be successful in
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expanding into international markets or in generating revenues from foreign
operations. The Company may also be subject to risks of doing business
internationally, including the following:
- regulatory requirements that may limit or prevent the offering of the
Company's services in local jurisdictions;
- legal uncertainty regarding liability for the listings of the Company's
users, including less Internet friendly basic law and unique
local laws;
- government-imposed limitations on the public's access to the
Internet;
- difficulties in staffing and managing foreign operations;
- cultural nonacceptance of online auctions;
- political instability;
- potentially adverse tax consequences; and
- administrative burdens in collecting local taxes, including value-added
taxes.
Transaction Services
In order to offer a complete experience to buyers and sellers, 2TheMart
offers a variety of pre- and post-transaction services to enhance the
user experience. 2TheMart has pre-transaction services, such as
services to facilitate scanning and uploading of photographs of listed items and
post-transaction services, such as third-party escrow services and arrangements
with shippers to help sellers ship their products more easily. 2TheMart may
pursue strategic relationships with third parties to provide many of these
transaction related services. 2TheMart will also provide tools to enable buyers
and sellers to monitor and manage their auctions.
User Rating
Every registered 2TheMart user is able to establish a User Rating based
upon that user's prior transactions completed on the site. This information is
recorded by other users who have transacted with that particular user in a
ratings profile that includes a rating for the person and comments from other
2TheMart users who have interacted with that person over the past seven days,
the past month, the past six months and beyond. The Company designed its Web
site so that 2TheMart users will be able to review a person's ratings profile to
check on the person's reputation within the 2TheMart community before deciding
to bid on an item listed by that person or determining how to complete the
payment for and delivery of the item. 2TheMart believes its User Ratings will
be extremely useful in overcoming initial user hesitancy when trading over the
Internet as it is expected to reduce the anonymity and uncertainty of dealing
with an unknown trading partner. In addition, by focusing on the
business-to-consumer market space, 2TheMart believes that it will minimize the
possibility of a fraudulent transaction occurring between a buyer and seller as
many sellers on 2TheMart are established companies.
What Can Be Purchased or Sold on 2TheMart
2TheMart organized the products on its site under category headings to
reflect the major types of items listed and to be listed. The major product
categories are organized under the following headings:
Antiques Health & Fitness
Apparel & Sportwear Lawn & Garden
Automotive Home & Kitchen
Movies & Music Home Improvements
Coins and Stamps Jewelry
Collectibles Food & Beverages
Computers Sporting Goods
Cosmetics / Perfumes Sports Memorabilia
Electronics & Cameras Toys & Games
Furniture
Each category has numerous subcategories. As the 2TheMart site expands
and additional items are listed, 2TheMart plans to organize products under
additional categories to respond to the needs of the 2TheMart community.
2TheMart makes no assurances that product listings will be available in each and
every category.
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Customer Support
2TheMart is devoting significant resources to provide timely customer service
and support to all users of its site. 2TheMart offers customer support through
its Customer Care Center on a 24 hour a day, seven day a week basis. Most
customer support inquiries will be handled via email, with customer email
inquiries answered within 24 hours after submission, or via live chat with
2TheMart customer service representatives. 2TheMart offers an online tutorial
for new 2TheMart users and maintains live customer support bulletin boards,
where users post questions that are answered by 2TheMart customer support
personnel or other 2TheMart users. 2TheMart has entered into a strategic
relationship with a third party customer support organization to enable 2TheMart
to scale its customer support capabilities without diminishing the effectiveness
of its customer service.
Competition
The market for conducting e-commerce through an auction type format over
the Internet is new, rapidly evolving and intensely competitive, and 2TheMart
expects competition to intensify further in the future. Barriers to entry are
relatively low, and current and new competitors can launch new sites at a
relatively low cost using commercially available software. 2TheMart competes
with a number of other companies. The Company's direct competitors include
various online auction services, such as eBay, Inc., Amazon.com, Auction
Universe, Yahoo Auctions, FairMarket Auctions (an on-line auction network search
service), and Excite (a wholly-owned subsidiary of At Home Corporation; and a
number of other small services, including those that serve specialty markets.
2TheMart will also compete with business-to-consumer online auction services
such as Onsale, uBid, First Auction, and Surplus Auction (a wholly-owned
subsidiary of Egghead, Inc.). 2TheMart potentially faces competition from a
number of large online communities and services that have expertise in
developing online commerce and in facilitating online business-to-consumer and
consumer-to-consumer interaction. Certain of these potential competitors,
including America Online, Inc. and Microsoft Corporation, currently offer a
variety of business-to-consumer services. Other large companies with strong
brand recognition and experience in online commerce, such as Cendant
Corporation, QVC and traditional auction companies may also seek to compete in
the online auction market. Most of the Company's current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources. Competitive pressures created by any one of these companies, or by
the Company's competitors collectively, could have a material adverse effect on
the Company's business, results of operations and financial condition.
2TheMart believes that the principal competitive factors in its targeted
marketplace will be brand recognition, reliability of the Company's Web site,
the site's ease of use, and the number of visitors to the site.
Current Number of Employees
At November 18, 1999, the Company had 45 full time employees.
Status of the Company's Web Site
In December 1998, the Company had entered into an agreement to acquire a
fully functional and operational Internet auction Web site known as
2jauction.com, which acquisition was completed in January 1999. However, upon
further analysis of the reliability and scalability of the 2jauction software,
the Company determined that in order to compete effectively in the auction
marketplace, a more robust and scalable software was deemed necessary.
Thereafter, the Company retained the services of third parties to assist in
building the new robust and scalable auction software. The Company's Web site
developers have completed the design, coding, testing and implementation of its
Web site. The Company launched its Web site on November 18, 1999.
By December 31, 1999, the Company expects to employ approximately 75 to 100
people in customer support, administration, accounting, marketing and technology
positions in support of Web site operations.
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ITEM 2 - FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
As previously discussed, the Company was originally incorporated under the
laws of the State of Oklahoma on December 2, 1992 as S.K.B. Design, Inc.
Between 1992 to 1996, the Company was inactive. On October 1, 1996, the Company
acquired certain technology and assets with the intention of developing a cd-rom
based multimedia yearbook product. On December 22, 1997, the Company changed
its name to CD-Rom Yearbook Company, Inc. ("CD-Rom") to reflect its new business
plan. Due to certain technical and market difficulties, the business of CD-Rom
did not develop as expected. As a result, the Company ceased its operations in
the fall of 1998 and began a search for new business opportunities. Effective
January 8, 1999, CD-Rom acquired all of the outstanding Common Stock of
2TheMart-Nevada, in a business combination described as a "reverse merger."
Selected financial data has been included for the period December 22, 1998
(inception) to June 30, 1999.
The following table contains selected financial data of the Company and is
qualified by the more detailed financial statements and the notes thereto
provided in this Registration Statement. The financial data as of and for the
period December 22, 1998 (inception) to June 30, 1999, have been derived from
the Company's financial statements, which statements were audited by Grant
Thornton LLP.
Period from
December 22, 1998
(Inception)
Selected To
Financial Data June 30, 1999
- ----------------- -------------
Operating Revenue $0
Net Loss ($1,913,303)
Net loss per basic ($0.08)
and diluted share
Total assets $5,287,435
Long-Term $0
Obligations
Stockholders' $4,692,132
equity
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
After CD-Rom's merger with 2TheMart-Nevada, as previously discussed, the
Company discontinued its prior business plan and implemented in its place, the
Company's current business plan to develop and launch an e-commerce Internet
auction type Web site to facilitate transactions between businesses and
consumers and between consumers and consumers. Therefore, this discussion and
analysis will focus on the Company's current business plan and operations.
During the period from December 22, 1998 (inception) through June 30, 1999,
the Company had no revenues from its operations because it was in the
development stages of its e-commerce Internet auction Web site. However, the
Company earned approximately $87,000 on short-term investments from cash raised
in January 1999. The Company incurred general and administrative expenses of
approximately $2.0 million consisting primarily of compensation, rent, and
professional fees.
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Liquidity
Net cash used in operating activities was $(569,160) which was due
primarily to the net loss of $(1,913,303) offset by compensation expense for
stock options, issuance of common stock for services and an increase in accounts
payable totaling $545,750, $264,178 and $595,303, respectively.
Cash used in investing activities was $(3.1) million which was due to the
purchase of property and equipment and a deposit on equipment totaling $(1.1)
million and $(2.0) million, respectively.
Cash provided by financing activities was $5.8 million which was due to the
sale of Common Stock.
In the first two quarters of 1999, the Company raised approximately $5.8
million through the sale of a portion of its Common Stock to accredited
investors. In addition, on July 12, 1999, the Company initiated a private
placement of 1,000,000 shares of its Common Stock at a price of $10.00 per
share. The Company sold 53,000 shares of its restricted Common Stock pursuant
to the July 12, 1999 Private Offering, resulting in net proceeds of $530,000 to
the Company. On September 9, 1999 the Company elected to terminate the July 12,
1999 Private Offering and initiated a private placement of 2,000,000 shares of
its Common Stock at a price of $5.00 per share (the "September 9, 1999 Private
Offering"). Investors of the Company's July 12, 1999 Private Offering were
issued additional shares of Common Stock to reduce their purchase price from
$10.00 per share to $5.00 per share.
On August 18, 1999, the Company entered into a short term note in the
amount of $500,000 with an unaffliated accredited shareholder of the Company.
Under the terms of the note, the Company is obligated to pay interest in the
amount of 12% per annum. Interest and principal is due on or before October 18,
1999. The loan was converted into 100,000 shares of the restricted Common Stock
of the Company on October 18, 1999.
On September 10, 1999, the Company entered into a short-term note in the
amount of $2,000,000 with the Chief Executive Officer of the Company. Under the
terms of the note, the Company is obligated to pay interest in the amount of 12%
per annum. Interest and principal is due on or before October 31, 1999 (the
"Note"). The Note is secured by 2,000,000 shares of the Common Stock of the
Company.
On October 8, 1999, the Chief Executive Officer agreed to forgive and
cancel the Note without receiving any consideration or shares of the Company's
Common Stock.
On September 10, 1999, the Company entered into a short-term note in the
amount of $250,000 with an officer of the Company. Under the terms of the note,
the Company is obligated to pay interest in the amount of 12% per annum.
Interest and principal is due on or before October 10, 1999. The note is
secured by 250,000 shares of Common Stock of the Company. On October 8, 1999,
the officer agreed to extend the due date of the note to November 19, 1999, at
which time, the note was paid from the November 18, 1999 sale of "restricted"
Common Stock as described below.
On October 1, 1999, the Company initiated a private placement of 7,000,000
shares of its Common Stock at a price of $1.50 per share. No shares of the
Company's Common Stock were sold under this private placement until October 28,
1999. As of November 18, 1999, the Company has sold 2,488,332 shares of its
restricted Common Stock to 35 accredited investors, resulting in net proceeds of
$3,732,498.
On October 8, 1999, the Company sold 300,000 shares of the "restricted"
Common Stock of the Company to an unaffliated accredited shareholder of the
Company at a price of $3.33 per share resulting in net proceeds to the Company
of approximately $999,000.
On October 25, 1999, the Company sold an additional 1,000,000 shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1.0 million.
On November 18, 1999, the Company sold 2,000,000 shares of the "restricted"
Common Stock of the Company to an accredited shareholder of the Company at a
price of $1.50 per share resulting in proceeds to the Company of approximately
$3,000,000. This shareholder is now considered an "affiliate" of the Company
under the rules of the Securities and Exchange Commission. See Item 4 B
Security Ownership of Certain Beneficial Owners and Management.
8
<PAGE>
On November 18, 1999, the Company entered into a Payment Agreement for the
satisfaction of the remaining amounts owed for the Company's Web site as well as
additional services being provided by IBM relating to the Web site whereby the
Company will pay to IBM approximately $1.8 million plus interest at a rate of
13.5% per annum compounded monthly beginning November 1, 1999, to be paid in
twelve equal monthly payments of principal and interest totaling $162,552, with
the first payment due on January 31, 2000.
The Company believes that with its recent fund raising efforts as described
above, the Company has sufficient funds to fulfill its material commitments as
described below in Capital Expenditures.
The Company further believes that its existing capital resources together
with cash flow from operations and ongoing fund raising efforts will be
sufficient to meet its operating expenses and capital requirements until June
30, 2000. However, the Company's long-term capital requirements will depend
upon many factors, including, but not limited to, the rate of market acceptance
of the Company's Web site, the Company's ability to develop, maintain and expand
its Web user base, the level of resources required to expand the Company's
marketing and sales organization, information systems and development activities
and other factors, some of which are beyond the control of the Company.
A slower than expected rate of acceptance of the Company's Web site or
lower than expected revenues generated from the Company's Web site, would
materially adversely affect the Company's liquidity. The Company may need
additional capital sooner than anticipated. The Company has no commitments for
additional financing and there can be no assurances that any such additional
financing would be available in a timely manner or, if available, would be on
terms acceptable to the Company. Furthermore, any additional equity financing
could be dilutive to our then-existing shareholders and any debt financing could
involve restrictive covenants with respect to future capital raising activities
and other financial and operational matters.
Capital Expenditures
The Company has contracted with IBM to acquire hardware and software for
its Web site operations and corporate infrastructure and the development of its
Web site in the amount of approximately $11.0 million of which $7.9 million is
for hardware and software and $3.1 million is for Web site development. As of
November 19, 1999 the Company has paid its full obligation of $7.9 million for
its hardware and software and $1.3 million for its Web site. On November 18,
1999, the Company entered into the Payment Agreement with IBM whereby the
Company will pay the remaining amounts owed for its Web site in 12 monthly
payments beginning January 31, 2000. The Company expects to fulfill the Payment
Agreement from recent sales of the Company's Common Stock, its cash flow from
operations and anticipated sales of Common Stock.
The Company is also required to pay for the space that it has secured with
Exodus at its Sterling, Virginia data center at the time the hardware placed at
that facility was connected to the Internet. The Company's minimum expected
monthly obligation to Exodus pursuant to its contract at the time the Company's
hardware is connected to the Internet is approximately $78,000 which may
increase depending on the Company's bandwidth usage. Additionally, on June 16,
1999, the Company contracted with USWeb/CKS for the development and
implementation of its marketing programs and strategies. Under the terms of its
agreement with USWeb/CKS, the Company is obligated to pay $86,000 per month.
The USWeb/CKS contract is cancelable upon giving one month notice. The Company
has also contracted with Ciber, formerly known as The Summit Group, for the
integration of the Company's back-end accounting and billing software which is
expected to cost the Company approximately $400,000 of which the Company has
paid approximately $290,000 as of November 18, 1999. Additionally, the Company
has contracted with Lawson Associates to license the use of Lawson's accounting
software system. Under the terms of the agreement with Lawson, the Company paid
Lawson approximately $127,000 and has the option of either paying a one time
flat fee to Lawson on March 10, 2000 in the amount of $573,070 or a fee based on
a percentage of the Company's revenue.
The Company expects to pay the above commitments, the anticipated increase
in corporate payroll expenditures and other operating expenses with the proceeds
from the recent sales of the Company's Common Stock, its cash flow from
operations and anticipated sales of Common Stock.
9
<PAGE>
A slower than expected rate of acceptance of the Company's Web site or
lower than expected revenues generated from the Company's Web site, would
materially adversely affect the Company's liquidity. The Company may need
additional capital sooner than anticipated. The Company has no commitments for
additional financing, and there can be no assurances that any such additional
financing would be available in a timely manner or, if available, would be on
terms acceptable to the Company. Furthermore, any additional equity financing
could be dilutive to our then-existing shareholders and any debt financing could
involve restrictive covenants with respect to future capital raising activities
and other financial and operational matters.
Results of Operations
The Company has not realized any operating revenue to date. Additionally,
the Company does not expect to report any operating revenues until after the
launch of its Web site. Since the Company has no historical operating revenues
to gauge future operating revenues upon, it is uncertain as to what level of
revenues, if any, the Company may achieve from its Web operations.
As a result of the development stage nature of the Company's prior
operations, the Company is not reporting any impact on its operations from
inflation or changing prices.
Effects of Legal Proceedings
On September 13, 1999 and October 11, 1999, two putative
class action lawsuits were filed in the United States District Court, Central
District of California, Southern Division, against the Company and its principal
officers, Mr. Rebeil and Mr. Magliarditi. The complaints allege, on behalf of a
class of individuals who purchased shares of the Company between January 19,
1999 and August 26, 1999, that the Company and its defendant officers engaged in
a plan to defraud the market and purchasers of the Company's Common Stock in
violation of section 10(b) of the Exchange Act, SEC Rule 10b-5 and Section 20(a)
of the Exchange Act (as against Mr. Rebeil and Mr. Magliarditi) by failing to
disclose material facts or making material misstatements of fact regarding the
status of the Company's Web site. The complaints seek compensatory damages for
themselves and for the class. The Company is informed and believes that there
may be additional purported class action lawsuits filed against the Company
based on facts and claims similar or identical to those stated above and the
Company anticipates that all such lawsuits based on similar claims and facts
would be consolidated.
The Company and its defendant officers and directors believe that the
lawsuit are without merit and that they have meritorious defenses to the above
actions. The Company has tendered the litigation to its insurers and plans on
vigorously defending the litigation. The Company believes that it has adequate
insurance coverage to meet any potential losses, subject to a $250,000
deductible. However, failure to successfully defend the litigation or other
similar actions which result in an award greater than the Company's insurance
coverage, could have a material adverse effect on the Company's results of
operations, liquidity and financial condition. See Item 8 - Legal
Proceedings.
YEAR 2000 DISCLOSURE
The Company has completed a review of its computer systems to identify all
software applications and hardware that could be affected by the inability of
many existing computer systems to process time-sensitive data accurately beyond
the year 1999, referred to as the Year 2000 or Y2K issue. The Company is
dependent on third-party computer systems and applications, particularly with
respect to such critical tasks as the operation of its Web site. The Company
also relies on its own computer systems. As a result of its review, the Company
has discovered no problems with its computer systems relating to the Y2K issue.
Although the Company believes that its computer systems are Y2K compliant, the
Company is continuing to monitor its computer systems in a continual effort to
insure that its systems are Y2K compliant. Additionally, the Company has
obtained written assurances from its major suppliers and the developers of its
Web site indicating that they have completed a review of their respective
computer systems and that such systems are Y2K compliant. Costs associated with
the Company's review were not material to its results of operations.
While the Company believes that its procedures have been designed to be
successful, because of the complexity of the Y2K issue and the interdependence
of organizations using computer systems, there can be no assurances that the
Company's efforts, or those of third parties with whom the Company interacts,
have fully resolved all possible Y2K issues. Failure to satisfactorily address
10
<PAGE>
the Y2K issue could have a material adverse effect on the Company. The most
likely worst case Y2K scenario which management has identified to date is that,
due to unanticipated Y2K compliance problems, the Company's Web site may not
function at all or not function as expected, and that the Company may be unable
to bill its customers, in full or in part, for services used. Should this
occur, it would result in a material loss of some or all gross revenue to the
Company for an indeterminable amount of time, which could cause the Company to
cease operations. The Company has not yet developed a contingency plan to
address this worse case Y2K scenario, and does not intend to develop such a plan
in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not exposed to material risk based on interest rate
fluctuation, exchange rate fluctuation, or commodity price fluctuation.
ITEM 3 - PROPERTIES
Effective February 3, 1999, the Company began leasing 20,341 square feet of
administrative office space in Irvine, California. This facility serves as the
Company's headquarters, primary place of business, and will house its Irvine
back-up data center. The current monthly rental rate is $35,597. The lease
expires in June 2001.
On April 29, 1999, the Company entered into an agreement with Exodus to
secure space for the housing of its main Web site server operations in Sterling,
Virginia. Pursuant to its agreement with Exodus, the Company is required to pay
Exodus a minimum monthly fee of approximately $78,000 (which may increase
depending on the Company's Internet bandwidth usage.
11
<PAGE>
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 18, 1999, certain
information with respect to the number of shares of Common Stock of the Company
beneficially owned by (i) each officer and director of the Company; (ii) each
person known to beneficially own more than 5% of the Company' s Common Stock;
and (iii) all directors and executive officers as a group. The Company has no
other class of stock outstanding.
<TABLE>
<CAPTION>
Percent of
Name and Address of Number of all shares of
Beneficial Owners and Management Shares Common Stock
- ----------------------------------------------- --------- --------------
<S> <C> <C>
Steven W. Rebeil(1)
18301 Von Karman Avenue, 7th Floor
Irvine, California 92612 8,400,000 30.94%
Dominic J. Magliarditi(2)
18301 Von Karman Avenue, 7th Floor
Irvine, California 92612 5,600,000 20.63%
Thomas N. Benjamin(3)
18301 Von Karman Avenue, 7th Floor
Irvine, California 92612 250,000 < 1%
Robert Allende(4)
18301 Von Karman Avenue, 7th Floor
Irvine, California 92612 24,445 < 1%
William M. Wagner(5)
18301 Von Karman Avenue, 7th Floor
Irvine, California 92612 13,000 < 1%
Raymond Park Family(6)
6200 Cleveland Drive
Cleveland Ohio, 44135 4,540,000 16.72%
All directors and officers as a
group (5 total) 14,286,945 52.62%
</TABLE>
______________________
(1) Denotes shares beneficially owned by Mr. Rebeil but held of record by PZ
Holdings, Limited. Mr. Rebeil is the general partner of PZ Holdings, Limited.
(2) Denotes shares beneficially owned by Mr. Magliarditi but held of record
by DFM Holdings, Ltd. Mr. Magliarditi is a general partner of DFM Holdings,
Ltd. On November 18, 1999 and in connection with the additional capital raised
by the Company through its recent stock sales, Mr. Magliarditi agreed to
contribute 2.9 million shares of Common Stock back to the Company.
(3) Includes vested options to acquire 150,000 shares of the Company's
Common Stock at an exercise price of $3.00 per share. Does not include an
aggregate of 150,000 options to acquire shares of the Company's Common Stock at
an exercise price of $3.00 per share vesting over a period of two years
beginning September 1, 2000 in accordance with Mr. Benjamin's employment offer
letter.
(4) Includes vested options to acquire 24,445 shares of the Company's Common
Stock at exercise prices ranging from $2.375 to $5.00 per share. Does not
include an aggregate of 85,555 options to acquire shares of the Company's Common
Stock at exercise prices ranging from $2.375 to $5.00 per share vesting over a
period of three years beginning on March 1, 2000 in accordance with Mr.
Allende's employment offer letter.
(5) Includes options to acquire 12,500 shares of the Company's Common Stock
at exercise prices ranging from $2.375 to $8.00 per share which vest within 60
days of the date of this registration statement. Does not include an aggregate
of 87,500 options to acquire shares of the Company's Common Stock at exercise
prices ranging from $2.375 to $8.00 per share vesting over a period of three
years beginning on June 14, 2000 in accordance with Mr. Wagner's employment
offer letter.
(6) Denotes shares beneficially owned by the Raymond Park family but held of
record by Net Investments, Inc., an Ohio corporation.
The Company believes that the beneficial owners of securities listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of stock subject to options
or warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage of the person holding such
options or warrants, but are not deemed outstanding for purposes of computing
the percentage of any other person.
12
<PAGE>
ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one-year terms
and until their successors are elected. The executive officers serve terms of
one year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.
The directors and executive officers of the Company as of November 18, 1999
are as follows:
Name Age Position(s)
- ---- --- ----------
Steven W. Rebeil 37 Chairman of the Board and
Chief Executive Officer
Dominic J. Magliarditi 35 President, Chief Operating
Officer, Secretary, Chief
Financial Officer, and Director
Thomas N. Benjamin 35 Vice President of Strategic
Planning & Analysis
Robert Allende 33 Chief Technology Officer
William M. Wagner 33 Vice President of Finance and
Corporate Controller
STEVEN W. REBEIL has served as the Chief Executive Officer, Chairman of the
Board and a Director of the Company since January 1999. Since 1992, Mr. Rebeil
has been the principal shareholder and Chairman of the Board of Directors of Gem
Development Company, a real estate development company. From 1994-1997, Mr.
Rebeil, was a principal and officer of Gem Gaming, Inc., which designed and
developed hotel projects. From 1989 to 1996, Mr. Rebeil was a principal and
officer of Gem Homes, Inc., a Las Vegas, Nevada developer of residential real
estate properties. Between 1982 to 1989, Mr. Rebeil founded and managed R&R
Landscaping, Inc., a Las Vegas area landscape maintenance and construction
company.
DOMINIC J. MAGLIARDITI has served as the President, Chief Operating
Officer, Secretary, Chief Financial Officer, and a Director of the Company since
January 1999. From February 1994 to December 1998, Mr. Magliarditi has been the
Vice President, Secretary, General Counsel, and director of Gem Development
Company, a real estate development company. Mr. Rebeil was a principal
shareholder and director of Gem Development Company. Between March 1994 and
October 1996, Mr. Magliarditi, was a principal shareholder and officer of Gem
Gaming, Inc., which designed and developed hotel projects. During the same time
period, Mr. Magliarditi was the General Counsel and director of Gem Homes, Inc.,
a Las Vegas, Nevada developer of residential properties. From 1988 to 1994, Mr.
Magliarditi practiced law in New York, New York and Las Vegas, Nevada, where he
practiced primarily in the corporate and real estate areas.
14
<PAGE>
THOMAS N. BENJAMIN has served as the Company's Vice President of Strategic
Planning and Analysis since August 1999 and prior to that, the Company's Vice
President of Business Development from January 1999 to July 1999. From July
1995 to December 1998 Mr. Benjamin worked as a consultant for a variety of
companies advising clients on issues ranging from technological intellectual
property to real estate development. Between January 1994 and April 1995, Mr.
Benjamin worked for SpecTron Communications Corporation as its Vice President of
Operations which developed credit card activated wireless phones. From February
1990 to December 1993 Mr. Benjamin worked for The Clifford Companies, a real
estate management and restructuring company, where he last held the position of
Vice President and Regional Manager.
ROBERT ALLENDE has served as the Company's Chief Technology Officer of the
Company since March 1999. Prior to joining the Company, Mr. Allende was with
Cabletron Systems, Inc., for the years 1992 to 1998. At Cabletron, Mr. Allende
held the position of Regional Systems Engineering Manager.
WILLIAM M. WAGNER has served as the Company's Vice President of Finance and
Corporate Controller since June 1999. From 1997 until June 1999, Mr. Wagner was
Director, Financial Reporting for Irvine Apartment Communities (NYSE: IAC) where
he was responsible for all aspects of accounting and Securities and Exchange
Commission reporting as well as being involved in numerous financing
transactions. From 1990 to 1997, Mr. Wagner was an audit manager with Ernst &
Young LLP where he was involved in many initial public offerings and public
financings.
2TheMart is presently seeking additional management and directors.
ITEM 6 - EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the period December 22, 1998 (inception)
to June 30, 1999. Other than as set forth herein, no executive officer's salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- -----------------------
Awards Payouts
------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
Dominic J. 1999 69,231 -0- -0- -0- -0- -0- -0-
Magliarditi (6/30)
(President, COO
Secretary, CFO)
Steve W. Rebeil 1999 63,462 -0- -0- -0- -0- -0- -0-
(Chairman of the
Board and CEO) (6/30)
Thomas Benjamin 1999 36,923 -0- -0- 100,000 -0- -0- -0-
(V.P. of Strategic (6/30)
Planning and Analysis)
Robert Allende 1999 40,865 -0- -0- -0- 75,000 -0- -0-
(Chief Technology (6/30)
Officer)
Mark Rosenberg(1) 1999 23,077 20,000 -0- -0- 125,000 -0- -0-
(V.P. of Marketing (6/30)
and Sales)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN PERIOD
JANUARY 8, 1999 (INCEPTION) TO JUNE 30, 1999
(INDIVIDUAL GRANTS)
<S> <C> <C> <C> <C> <C>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SAR'S GRANTED TO
UNDERLYING EMPLOYEES IN PERIOD JANUARY
OPTIONS/SARS 8, 1999 (INCEPTION) TO EXERCISE OF BASE GRANT DATE
GRANTED (#) JUNE 30, 1999 PRICE ($/SH) EXPIRATION DATE PRESENT VALUE
NAME ($)
Dominic J. Magliarditi -0- n/a n/a n/a n/a
Steve W. Rebeil -0- n/a n/a n/a n/a
Thomas Benjamin -0- n/a n/a n/a n/a
Robert Allende(1) 75,000 27% 5.00 September 1, 2002 642,000
Mark Rosenberg(2) 125,000 46% 5.00 September 1, 2003 2,625,000
</TABLE>
_________________
(1) Represents vested options to acquire 12,500 shares of the Company's Common
Stock at an exercise price of $5.00 per share and 112,500 options to acquire
shares of the Company's Common Stock at an exercise price of $5.00 per share
vesting over a period of four years beginning on November 7, 1999 in accordance
with Mr. Rosenberg's employment offer letter. On September 24, 1999, Mr.
Rosenberg resigned his position as the Vice-President of Marketing and Sales.
Under the terms of his employment offer letter, all non vested options (112,500)
were immediately cancelled. In addition, the 12,500 vested options must be
exercised by Mr. Rosenberg within six months of Mr. Rosenberg's termination of
employment.
(2) Represents options to acquire 16,667 shares of the Company's Common Stock at
an exercise price of $5.00 per share which vest on September 1, 1999 and an
aggregate of 58,333 options to acquire shares of the Company's Common Stock at
an exercise price of $5.00 per share vesting over a period of three years
beginning on March 1, 2000 in accordance with Mr. Allende's employment
offer letter.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN PERIOD
JANUARY 8, 1999 (INCEPTION) TO JUNE 30, 1999
AND OPTION/SAR VALUES AS OF JUNE 30, 1999
<S> <C> <C> <C> <C>
Number of Unexercised Value of Unexercised In-
Securities Underlying The-Money Options/SARs
Shares Acquired On Value Options/SARs At June 30, 1999 At June 30, 1999 ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------------------------
Dominic J. Magliarditi n/a n/a n/a n/a
Steve W. Rebeil n/a n/a n/a n/a
Thomas Benjamin -0- -0- n/a n/a
Robert Allende -0- -0- 0/75,000 0/647,250
Mark Rosenberg -0- -0- 12,500/112,500 107,875/970,875
</TABLE>
EMPLOYMENT AGREEMENTS
On February 1, 1999, the Company entered into a five-year Employment
Agreement with Steven W. Rebeil, the Company's Chief Executive Officer and
Chairman of the Board, whereby the Company will pay Mr. Rebeil an annual salary
of $150,000. Pursuant to the Agreement, Mr. Rebeil's salary shall increase to
$200,000 on July 1, 1999. The Agreement also provides that when the Company's
Web site is available for use to the public, the Company shall pay a bonus to
Mr. Rebeil in an amount to be determined by the Company's Board of Directors.
The Company has also agreed to fund a life insurance policy insuring Mr.
Rebeil's life in the principal amount of $1,000,000, and Mr. Rebeil or his
designee will be the owner and beneficiary of such policy. The Agreement also
requires the Company to provide, at its expense, complete health insurance
coverage for Mr. Rebeil and his family and an automobile for business use,
reimbursements for auto-related expenses and other equipment, facilities and
ancillary services for the performance of Mr. Rebeil's duties. In the event of
15
<PAGE>
Mr. Rebeil's death or disability during the term of this Agreement, the Company
is obligated to pay to Mr. Rebeil or his successors and heirs a payment equal to
one year of his then base salary if the remaining term of this Agreement is less
than one year, or if more than one year remains under this Agreement, Mr.
Rebeil's successors and heirs may elect to continue to receive Mr. Rebeil's base
salary for the remaining term of this Agreement. Mr. Rebeil will also be
entitled to receive a severance payment equal to the greater of (i) the sum
equivalent to the balance of salary due to be paid under this Agreement or (ii)
300% of his base salary. If Mr. Rebeil's employment with the Company is
terminated within 24 months following a change of control of the Company, in
addition to any other compensation or benefits payable pursuant to this
Agreement, Mr. Rebeil will be entitled to a payment in cash equal to four times
his base salary and immediate vesting of all stock, options and other awards.
Notwithstanding the above, on October 8, 1999, the Board of Directors
determined not to pay a bonus to Mr. Rebeil when the Company's Web site is
available for use to the public. Effective November 18, 1999, Mr. Rebeil agreed
to terminate the Employment Agreement. However, Mr. Rebeil will continue to
serve as the Chairman of the Board and Chief Executive Officer of the Company on
an "at-will" basis at the discretion of the Company's Board of Directors at the
same level of compensation currently existing.
On February 1, 1999, the Company entered into a five-year Employment
Agreement with Dominic J. Magliarditi, the Company's President, Secretary, Chief
Financial Officer, and Treasurer, whereby the Company will pay Mr. Magliarditi
an annual salary of $150,000. Pursuant to the Agreement, Mr. Magliarditi's
salary shall increase to $200,000 on July 1, 1999. The Agreement also provides
that when the Company's Web site is available for use to the public, the Company
shall pay a bonus to Mr. Magliarditi in an amount to be determined by the
Company's Board of Directors. The Company has also agreed to fund a life
insurance policy insuring Mr. Magliarditi's life in the principal amount of
$1,000,000, and Mr. Magliarditi or his designee will be the owner and
beneficiary of such policy. The Agreement also requires the Company to provide,
at its expense, complete health insurance coverage for Mr. Magliarditi and his
family and an automobile for business use, reimbursements for auto-related
expenses and other equipment, facilities and ancillary services for the
performance of Mr. Magliarditi's duties. In the event of Mr. Magliarditi's
death or disability during the term of this Agreement, the Company is obligated
to pay to Mr. Magliarditi or his successors and heirs a payment equal to one
year of his then base salary if the remaining term of this Agreement is less
than one year, or if more than one year remains under this Agreement, Mr.
Magliarditi's successors and heirs may elect to continue to receive Mr.
Magliarditi's base salary for the remaining term of this Agreement. Mr.
Magliarditi will also be entitled to receive a severance payment equal to the
greater of (i) the sum equivalent to the balance of salary due to be paid under
this Agreement or (ii) 300% of his base salary. If Mr. Magliarditi's employment
with the Company is terminated within 24 months following a change of control of
the Company, in addition to any other compensation or benefits payable pursuant
to this Agreement, Mr. Magliarditi will be entitled to a payment in cash equal
to four times his base salary and immediate vesting of all stock, options and
other awards.
Notwithstanding the above, on October 8, 1999, the Board of Directors
determined not to pay a bonus to Mr. Magliarditi when the Company's Web site is
available for use to the public. Effective November 18, 1999, Mr. Magliarditi
agreed to terminate the Employment Agreement. However, Mr. Magliarditi will
continue to serve as the President, Chief Operating Officer, Secretary, and
Chief Financial Officer of the Company on an "at-will" basis at the discretion
of the Company's Board of Directors at the same level of compensation
currently existing.
On March 6, 1999, the Company entered into an Employment Offer Letter with
Robert Allende, the Company's Chief Technology Officer, whereby the Company will
pay Mr. Allende an annual salary of $125,000. Pursuant to the Agreement, Mr.
Allende's salary shall increase to $150,000 on September 1, 1999. On January 1,
2000, the Company is obligated, under the Agreement, to pay Mr. Allende an
amount equal to the difference of Mr. Allende's salary (at an annualized rate of
$125,000) and what Mr. Allende's salary would have been if his salary was set at
an annualized rate of $150,000, for the period between the commencement of Mr.
Allende's employment with the Company and September 1, 1999. Pursuant to the
Agreement, the Company has also agreed to grant options for up to 50,000 shares
of Common Stock of the Company to be granted at the discretion of the Board of
Directors of the Company on the first anniversary of Mr. Allende's employment
with the Company. Additionally, the Agreement granted Mr. Allende options to
purchase up to 75,000 shares of the Company's Common Stock at an exercise price
of $5.00 per share, vesting over a period of three years. The Agreement also
requires the Company to provide health benefits to Mr. Allende and his family
and to allow Mr. Allende the opportunity to participate in the company's
retirement, stock option and bonus plans as they may be established.
16
<PAGE>
On May 7, 1999, the Company entered into an Employment Offer Letter with
Mark Rosenberg, the Company's Vice-President of Marketing and Sales, whereby the
Company will pay Mr. Rosenberg an annual salary of $200,000. The Agreement also
requires the Company to provide health benefits to Mr. Rosenberg and his family
and to allow Mr. Rosenberg the opportunity to participate in the Company's
retirement, stock option and bonus plans as they may be established. Under the
Agreement, in the event of a termination of Mr. Rosenberg's employment with the
Company for reasons other than cause, Mr. Rosenberg will also be entitled to
receive his base salary for a period of six months after the termination. The
Agreement also provides for a bonus of $20,000 to Mr. Rosenberg payable upon the
commencement of his employment, and reimbursements for certain relocation
expenses. Additionally, the Agreement granted Mr. Rosenberg options to purchase
up to 125,000 shares of the Company's Common Stock at an exercise price of $5.00
per share, vesting over a period of four years. On September 24, 1999, Mr.
Rosenberg resigned his position as Vice-President of Marketing and Sales. Under
the terms of his employment agreement, all non vested options were voided.
Additionally, the 12,500 vested options must be exercised within six months of
Mr. Rosenberg's termination of employment.
On September 3, 1999, the Company entered into an Employment Offer Letter
with Thomas N. Benjamin, the Company's Vice-President of Strategic Planning &
Analysis, whereby the Company will pay Mr. Benjamin an annual salary of
$125,000. Pursuant to the agreement, Mr. Benjamin's annual salary will increase
to $150,000 on January 1, 2000. The agreement also requires the Company to
provide health benefits to Mr. Benjamin and his family and to allow Mr. Benjamin
the opportunity to participate in the Company's retirement, stock option and
bonus plans as they may be established. Under the agreement, in the event of a
termination of Mr. Benjamin's employment with the Company for reasons other than
cause, Mr. Benjamin will also be entitled to receive his base salary for a
period of twelve months after termination. Pursuant to the agreement, the
Company has also agreed to grant options for up to 300,000 shares of Common
Stock of the Company at an exercise price of $3.00 with 150,000 options vesting
immediately and the remainder over a period of two years.
COMPENSATION OF DIRECTORS
Directors currently receive no cash compensation for their services in that
capacity. Reasonable out-of-pocket expenses may be reimbursed to directors in
connection with attendance at meetings.
BOARD INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Steven W. Rebeil and Dominic J. Magliarditi are each an officer and a
director of the Company and each participates in the deliberations of the
Company's Board of Directors concerning executive officer compensation.
BOARD COMPENSATION REPORT ON EXECUTIVE COMPENSATION
Compensation for the Company's Chief Executive Officer and other executives is
determined by the full board of directors which currently consists of Mr.
Magliarditi and Mr. Rebeil. As the Company is a development stage company with
little or no historical performance information, the Company determined the
initial year's compensation for its CEO and executive officers with reference to
comparable compensation granted to executive officers of similar companies in
the Internet and high technology field.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No relationships or related transactions exist of the type required to be
reported under this Item 7.
ITEM 8 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business.
17
<PAGE>
On September 13, 1999 and October 11, 1999, two putative class
action lawsuits were filed in the United States District Court, Central District
of California, Southern Division, against the Company and its principal
officers, Steven W. Rebeil and Dominic J. Magliarditi entitled Mary Ellen
Harrington, On Behalf of Herself and All Others Similarly Situated v.
2TheMart.com, Inc., Steven W. Rebeil, and Dominic J. Magliarditi (No.
SACV99-1127 DOC (ANX)) (the "Harrington Action") and Vinh D. Diep, On Behalf of
Herself and All Others Similarly Situated v. 2TheMart.com, Inc., Steven W.
Rebeil, and Dominic J. Magliaridit (No. SACV99-1255 DOC (EEX) (the "Diep
Action"). The complaints allege, on behalf of a class of individuals who
purchased shares of the Company between January 19, 1999 and August 26, 1999,
engaged in a plan to defraud the market and purchasers of the Company's Common
Stock in violation of section 10(b) of the Exchange Act, SEC Rule 10b-5 and
Section 20(a) of the Exchange Act (as against Mr. Rebeil and Mr. Magliarditi) by
failing to disclose material facts or making material misstatements of fact
regarding the status of the Company's Web site. The complaints seek
compensatory damages for themselves and for the class. The Company is informed
and believes that there may be additional purported class action lawsuits filed
against the Company based on facts and claims similar or identical to those
state above and the Company anticipates that all such lawsuits based on similar
claims and facts would be consolidated.
The Company and its defendant officers and directors believe that the
lawsuit are without merit and that they have meritorious defenses to the above
actions. The Company has tendered the Harrington and Diep Actions to its
insurers and plans on vigorously defending the litigation. The Company believes
that it has adequate insurance coverage to meet any potential losses, subject to
a $250,000 deductible. However, failure to successfully defend the Harrington
or Diep Actions or other similar actions which result in an award greater than
the Company's insurance coverage, could have a material adverse effect on the
Company's results of operations, liquidity and financial condition.
ITEM 9 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low bid prices for shares of the
Company's Common Stock for the periods noted, as reported by the National Daily
Quotation Service and the NASD Non-NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The Company's Common Stock was not listed on the
NASDAQ Bulletin Board until December 11, 1997, and did not begin trading until
March 1998.
BID PRICES
YEAR PERIOD HIGH LOW
---- ------ ---- ----
1999 First Quarter . . . . . . . . . . . . . . . $50.00 $ 1.75
Second Quarter . . . . . . . . . . . . . . $29.00 $11.75
Third Quarter . . . . . . . . . . . . . . $20.00 $ 5.94
Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January 4,
1999, issuers who do not make current filings pursuant to Sections 13 and 15(d)
of the Securities Exchange Act of 1934 are ineligible for listing on the OTCBB.
Pursuant to the Rule, issuers who are not current with such filings are subject
to having the quotation of their securities removed from the OTCBB pursuant to a
phase-in schedule depending on each issuer's trading symbol as reported on
January 4, 1999 and thereafter may quote its Common Stock on the National
Quotation Bureaus "Pink Sheets" (the "Pink Sheets"). As previously discussed,
the Company's trading symbol on January 4, 1999 was CDRH. Therefore, pursuant
to the phase-in schedule, the Company is subject to having the quotation of its
securities removed from the OTCBB on October 7, 1999, until the Company becomes
compliant with the Rule. One month prior to having the quotation of their
securities removed from the OTCBB, non complying issuers will have their trading
symbol appended with an "E". Consequently, the Company's trading symbol was
revised on September 13, 1999 to TMRTE.
The Company is not currently in compliance with the Rule, and in the past,
has not made filings pursuant to Sections 13 and 15(d) of the Securities Act of
1934. The Company has filed this Registration Statement on Form 10 in order to
become a "reporting" company and therefore comply with the Rule. Quotation of
the Company's securities was removed from the OTCBB on October 8, 1999, and will
remain on the Pink Sheets until such time as the Securities and Exchange
Commission ("SEC") has reviewed the Company's Form 10 and has stated that it has
no further comments and the Form 10 has been declared effective. Once the
Company has complied with the Rule, it will once again become eligible for
listing on the OTCBB and will seek to be reinstated on the OTCBB or other
appropriate exchange.
18
<PAGE>
NUMBER OF SHAREHOLDERS
The number of holders of record of the Common Stock of the Company as of
the close of business on September 30, 1999 was 195.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its Common Stock,
and does not expect to pay cash dividends in the foreseeable future. The
Company intends to retain future earnings, if any, to provide funds for
operation of its business.
ITEM 10 - RECENT SALES OF UNREGISTERED SECURITIES
On December 22, 1998, CD-Rom entered into a merger agreement to acquire all
of the outstanding Common Stock of 2TheMart-Nevada in a business combination
described as a "reverse merger." The merger closed on January 8, 1999. For
accounting purposes, the merger has been treated as the merger of CD-Rom into
2TheMart-Nevada. Immediately prior to the acquisition, CD-Rom had 2,291,850
shares of Common Stock outstanding. As part of the reorganization and stock
purchase agreement, CD-Rom issued an additional 17,800,000 shares of the Common
Stock of CD-Rom to the shareholders of 2TheMart-Nevada (all of which were
"accredited" investors) in exchange for all of the shares of 2TheMart-Nevada.
In addition, 1.2 million of the previously issued CD-Rom shares were placed in
escrow to be distributed to the 2TheMart-Nevada shareholders upon the occurrence
of certain events. This issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under Section 4(2)
of the Securities Act of 1933.
On January 8, 1999, the Company issued an aggregate of 917,500 shares of
its Common Stock to six unrelated and unaffiliated "accredited" investors. The
issuances were a limited offering not over $1 million without general
advertising and solicitation made under Rule 504 of Regulation D promulgated
under the Securities Act of 1933, resulting in net proceeds to the Company in
the amount of approximately $980,000.
On January 8, 1999, the Company issued an aggregate of 80,000 shares of its
Common Stock to the Company's securities counsel in accordance with an agreement
negotiated in December 1998. The issuance was a limited offering not over $1
million without general advertising and solicitation made under Rule 504 of
Regulation D promulgated under the Securities Act of 1933, in exchange for legal
services provided in relation to the Company's merger with 2TheMart-Nevada
valued at $20,000.
On January 25, 1999, the Company issued 15,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to the Company's securities counsel, in consideration for legal services valued
at $15,000. The shares were valued at $1.00 per share in accordance to the
original pricing of the Company's then ongoing private placement. The issuance
was an isolated transaction not involving a public offering and consequently
conducted under an exemption under Section 4(2) of the Securities Act of 1933.
On January 25, 1999, the Company issued 40,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to an individual, in consideration for certain consultation and software
services rendered valued at $40,000. The shares were valued at $1.00 per
share in accordance with an agreement negotiated in December 1998. The issuance
was an isolated transaction not involving a public offering and consequently
conducted under an exemption under Section 4(2) of the Securities Act of 1933.
On January 29, 1999, the Company issued 1,000,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) Common
Stock to an unrelated "accredited" investor, resulting in net proceeds of
approximately $1,000,000 to the Company. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
On January 30, 1999, the Company issued 50,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to an unrelated "accredited" investor in exchange for $25,000 and consultation
services valued at $25,000. The issuance was an isolated transaction not
involving a public offering and consequently conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
19
<PAGE>
On February 2, 1999, the Company issued 100,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to Thomas Benjamin, the Company's Vice-President of Business Development as
employee compensation valued at $100,000. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
On February 2, 1999, the Company issued 7,500 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) to an
unrelated individual in consideration for certain consultation services rendered
valued at $7,500. The issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under Section 4(2)
of the Securities Act of 1933.
On February 2, 1999, the Company issued 5,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) to an
employee of the Company as employee compensation valued at $5,000. The issuance
was an isolated transaction not involving a public offering and consequently
conducted under an exemption under Section 4(2) of the Securities Act of 1933.
On February 4, 1999, the Company issued 1,555,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) Common
Stock to an unrelated accredited investor, resulting in net proceeds of
approximately $1,555,000 to the Company. The issuance was conducted under an
exemption provided by Rule 506 of Regulation D promulgated under the Securities
Act of 1933 and Section 4(2) of the Securities Act of 1933.
On March 1, 1999, the Company issued 15,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
the Company's securities counsel, in consideration for legal services rendered
valued at $15,000. The issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under Section 4(2)
of the Securities Act of 1933.
On April 7, 1999, the Company issued an aggregate of 75,000 "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) shares of
the Company's Common Stock in addition to warrants to purchase 125,000
"restricted" (as that term is defined under Rule 144 of the Securities Act of
1933) shares of the Company's Common Stock at an exercise price of $5.00 to an
unrelated "accredited" individual, in exchange for certain consultation services
rendered valued at $75,000. These issuances were conducted under an exemption
provided by Section 4(2) of the Securities Act of 1933 as well as Rule 506 and
701 of Regulation D promulgated under the Securities Act of 1933.
In April, 1999, the Company completed a private placement offering of
1,140,000 "restricted" (as that term is defined under Rule 144 of the Securities
Act of 1933) shares of the Company's Common Stock. The issuance was offered
without general solicitation or advertising under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933 to unrelated "accredited" investors.
An aggregate of 840,000 shares were sold at a price of $1.00. After such shares
were sold, the Company amended its PPM, increasing the price of the offered
shares to $5.00. A total of 300,080 shares were sold at a price of $5.00. The
offering resulted in aggregate net proceeds to the Company of approximately
$2,340,400.
In August, 1999, the Company issued an aggregate of 53,000 "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) shares of
the Company's Common Stock at a price of $10.00 per share pursuant to a private
offering of the Company's Common Stock commencing on July 12, 1999 (the "July
12, 1999 Private Offering") to four "accredited" investors. The sales resulted
in aggregate net proceeds to the Company of approximately $530,000. On
September 9, 1999, the Company lowered the offering price of its July 12, 1999
Private Offering to $5.00 per share. As a result, 53,000 additional shares of
the Company's Common Stock was issued to the original investors in the July 12,
1999 Private Offering to lower their net price to $5.00 per share. The
issuances were offered without general solicitation or advertising to unrelated
accredited investors under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933.
On September 1, 1999, the Company issued 5,000 "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to the Company's securities counsel in exchange for legal services
rendered valued at $25,000.
20
<PAGE>
On September 14, 1999, the Company issued 2,500 "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock to an unrelated consultant of the Company in exchange for certain
consultation services rendered valued at $26,250. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
In October and November 1999, the Company issued 2,488,332 "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) shares of its
Common Stock to "accredited" investors at a price of $1.50 per share resulting
in net proceeds of $3,732,498. The issuances were offered without general
solicitation or advertising to unrelated accredited investors under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933.
On October 8, 1999, the Company issued 300,000 "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) shares of its Common
Stock to an "accredited" investor at a price of $3.33 per share resulting in net
proceeds of $999,000. The issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under Section 4(2)
of the Securities Act of 1933.
On October 25, 1999, the Company sold an additional 1,000,000 shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1,000,000.
On November 18, 1999, the Company issued 2,000,000 "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) shares of its
Common Stock to an "accredited" investor at a price of $1.50 per share resulting
in net proceeds of $3,000,000. The issuance was an isolated transaction not
involving a public offering and consequently conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
ITEM 11 - DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
The Company's Articles of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock, $0.0001 par value per share, of which
25,741,640 shares were outstanding as of September 30, 1999. Holders of shares
of Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders. Holders of Common Stock have no cumulative voting
rights. Holders of shares of Common Stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefor. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of shares of Common Stock are entitled to share pro rata all assets remaining
after payment in full of all liabilities. Holders of Common Stock have no
preemptive rights to purchase the Company's Common Stock. There are no
conversion rights or redemption or sinking fund provisions with respect to the
Common Stock. All of the outstanding shares of Common Stock are fully paid and
non-assessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of
25,000,000 shares of preferred stock, $0.0001 par value. As of October 18, 1999
there were no issued and outstanding shares of Preferred Stock. The Company's
Board of Directors has authority, without action by the shareholders, to issue
all or any portion of the authorized but unissued preferred stock in one or more
series and to determine the voting rights, preferences as to dividends and
liquidation, conversion rights, and other rights of such series.
The Company intends to furnish holders of its common and preferred stock
annual reports containing audited financial statements and to make public
quarterly reports containing unaudited financial information.
TRANSFER AGENT
The transfer agent for the Common Stock is Pacific Stock Transfer Company,
5844 S. Pecos Road, Suite D, Las Vegas, NV 89120.
21
<PAGE>
ITEM 12 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation Laws of the State of Oklahoma and the Company's Bylaws
provide for indemnification of the Company's Officers and Directors for
liabilities and expenses that they may incur in such capacities. In general,
Directors and Officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Beginning in March 1999, the Company maintains a policy of Directors and
Officers Liability Insurance with an aggregate coverage limit of $8,000,000,
subject to a $250,000 deductible.
ITEM 13 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, together with
the notes thereto and the report thereon of Grant Thornton LLP appearing on
pages F-1 through F-15 of this Form 10.
ITEM 14 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Subsequent to the acquisition of 2TheMart-Nevada by the CD-Rom, Grant
Thornton LLP, Certified Public Accountants were retained by the Company on
August 10, 1999 as their principal accountant to audit the Company's financial
statements. There have been no disagreements between Grant Thornton LLP and
management of the type required to be reported under this Item 14 since their
date of engagement.
23
<PAGE>
ITEM 15 - FINANCIAL STATEMENTS AND EXHIBITS
(A) INDEX TO FINANCIAL STATEMENTS
Audited financial statements for 2TheMart.com, Inc.
for the period December 22, 1998 (inception) to
June 30, 1999 . . . . . . . . . . . . . . . . . . . . . . F-1
The Company has not included historical financial statements for CD-Rom
within this Form 10 as a result of the reverse merger whereby the historical
financial statements of the accounting acquirer, 2TheMart.com become the
historical financial statements of the registrant. As a result of the reverse
merger the capital structure of the accounting acquirer, 2TheMart.com changed as
described in footnote 1 in the accompanying financial statements.
(B) INDEX TO EXHIBITS
EXHIBIT NUMBER
2.1* Reorganization and Stock Purchase Agreement dated
December 22, 1998.
3.1* Articles of Incorporation.
3.2* Amended Articles of Incorporation, filed with the
Oklahoma Secretary of State on December 22, 1997.
3.3* Certificate of Merger, filed with the Oklahoma
Secretary of State on January 8, 1999.
3.4* Amended Articles of Incorporation, filed with the
Oklahoma Secretary of State on February 16, 1999.
3.5* Bylaws of the Company.
10.1* Lease by and between Cruttenden Roth Incorporated and K23 LP,
assigned to 2TheMart.com, Inc. relating to property located at
18500 Von Karman Avenue, Suite 120, Irvine, CA 92715.
10.2* Contract dated February 3, 1999 and May 28, 1999 by and between
2TheMart.com, Inc., and International Business Machines, Inc.
10.3* Contract dated April 29, 1999 by and between 2TheMart.com, Inc.,
and Exodus Communications, Inc.
10.4* Employment agreement by and between 2TheMart.com,
Inc. and Steven W. Rebeil dated February 1, 1999.
10.5* Employment agreement by and between 2TheMart.com,
Inc., and Dominic J. Magliarditi dated February 1, 1999.
10.6* Employment agreement by and between 2TheMart.com,
Inc., and Robert Allende dated March 6, 1999.
10.7* Employment agreement by and between 2TheMart.com,
Inc., and Mark Rosenberg dated May 7, 1999.
10.8* Agreement between mPRm, Inc. and 2TheMart.com, Inc., dated June
11, 1999.
10.9* Agreement between USWeb/CKS and 2TheMart.com, Inc. dated June
18, 1999.
10.10* Co-Branding and Advertising Agreement between I-Escrow, Inc. and
2TheMart.com, Inc., dated June 21, 1999.
10.11* Agreement between Summit Group and 2TheMart.com, Inc., dated
June 24, 1999.
10.12* Agreement between Lawson Association, Inc. and 2TheMart.com,
Inc., dated July 16, 1999.
10.13* IBM Computer Hardware Agreement between IBM and 2TheMart.com,
Inc., dated August 5, 1999.
10.14 Promissory Note in the amount of $500,000 dated August 8, 1999.
10.15 Employment letter agreement by and between 2TheMart.com, Inc. and
Thomas N. Benjamin dated September 3, 1999.
27.1* Financial Data Schedule
__________________
* Previously Filed
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
2THEMART.COM, INC.
Date: November 29, 1999 By: /s/ Dominic J. Magliarditi
Dominic J. Magliarditi
President
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
2TheMart.com, Inc.
We have audited the accompanying balance sheet of 2TheMart.com, Inc. (a
development stage enterprise) as of June 30, 1999, and the related statement of
operations, stockholders' equity and cash flows for the period from December 22,
1998 (inception) through June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 2TheMart.com, Inc. as of June
30, 1999, and the results of its operations and its cash flows for the period
from December 22, 1998 (inception) through June 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is not yet generating
revenues and, as shown in the financial statements, has incurred losses in its
development stage. Also, as discussed in Note 4, the Company has incurred
substantial obligations and will need to raise additional capital to complete
its development activities. These factors, among others as discussed in Note 3,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans are also discussed in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Grant Thornton LLP
August 24, 1999
Irvine, California
F-1
<PAGE>
<TABLE>
<CAPTION>
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
JUNE 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 2,110,252
------------
Total current assets 2,110,252
Property and equipment
Computer hardware and software 846,138
Furniture, fixtures and other office equipment 210,320
Tenant improvements 59,637
Less: accumulated depreciation (10,938)
------------
1,105,157
------------
Deposits 2,072,026
------------
Total Assets $ 5,287,435
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 510,759
Other accrued liabilities 84,544
------------
Total current liabilities 595,303
Stockholders' Equity
Preferred stock, par value $0.0001; 25,000,000
shares authorized; none issued and outstanding -
Common stock, par value $0.0001; 50,000,000
shares authorized; 25,041,930 issued and outstanding 2,504
Additional paid-in capital 9,798,787
Deferred compensation expense (3,195,856)
Deficit accumulated during the development stage (1,913,303)
------------
4,692,132
------------
Total Liabilities and Stockholders' Equity $ 5,287,435
============
</TABLE>
The accompanying notes are an integral part of these financial staetments
F-2
<PAGE>
<TABLE>
<CAPTION>
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 22, 1998 (INCEPTION) TO JUNE 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
Interest income $ 86,726
General and administrative
Employee compensation 448,768
Compensatory stock and option issuances 809,928
Professional fees 232,375
Rent 87,052
Other 421,906
------------
2,000,029
------------
Net loss $(1,913,303)
============
Basic and diluted loss per common share $ (0.08)
============
Basic and diluted weighted average shares outstanding 23,665,432
============
</TABLE>
The accompanying notes are an integral part of these financial staetments
F-3
<PAGE>
<TABLE>
<CAPTION>
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD DECEMBER 22, 1998 (INCEPTION) TO JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED DEFICIT
COMPENSATION ACCUMULATED
ADDITIONAL RELATED TO DURING THE
COMMON STOCK PAID-IN OPTION DEVELOPMENT
SHARES AMOUNT CAPITAL ISSUANCES STAGE TOTAL
------------- ------------- ------------ ------------- ------------ ----------
Shares issued in conjunction
with merger 17,800,000 $ 1,780 $ - $ 1,780
Common stock before merger 2,291,850 229 (229) -
Private placement offerings of
common stock:
Private placement issuance
under Ruling 504 997,500 100 979,902 980,002
Private placement issuance
under Ruling 506:
Shares issued at $1 per share 3,420,000 342 3,312,983 3,313,325
Shares issued at $5 per share 300,080 30 1,500,370 1,500,400
Issuances of common stock
for consulting services 232,500 23 264,155 264,178
Issuances of stock options
for employee compensation 3,741,606 (3,195,856) 545,750
Net loss (1,913,303) (1,913,303)
------------- ------------- ------------ ------------- ------------ ----------
BALANCE, JUNE 30, 1999 25,041,930 $ 2,504 $ 9,798,787 $ (3,195,856) $(1,913,303) $4,692,132
============= ============= ============ ============= ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial staetments
F-4
<TABLE>
<CAPTION>
2THEMART.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD DECEMBER 22, 1998 (INCEPTION) TO JUNE 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,913,303)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 10,938
Compensation expense - stock options 545,750
Issuances of common stock
for services 264,178
(Decrease) increase in cash attributable to changes
in assets and liabilities:
Deposits (72,026)
Accounts payable 595,303
------------
Net cash used in operating activities (569,160)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,116,095)
Deposit on equipment purchases (2,000,000)
------------
Net cash used in investing activities (3,116,095)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,795,507
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,110,252
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,110,252
============
</TABLE>
The accompanying notes are an integral part of these financial staetments
F-5
<PAGE>
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Company
2TheMart.com, Inc., an Oklahoma corporation, ("2TheMart" or the "Company") is a
development stage, internet-based electronic commerce company. The Company's
year end is December 31, 1999. The Company has contracted with an unrelated
party to develop and launch a business-to-consumer and consumer-to-consumer
trading community on the internet. The Company plans on developing an
electronic commerce site in which buyers and sellers will be brought together to
buy and sell a variety of goods such as antiques, coins, collectibles,
computers, memorabilia, stamps, toys and more in an auction format. Once fully
functional, the 2TheMart service will enable sellers to list items for sale,
buyers to bid on those items and allow 2TheMart users to browse through all
items in a fully automated, topically arranged online service.
Reorganization
In December 1998, CD-Rom Yearbook Company, Inc. an Oklahoma corporation,
("CD-Rom") entered into a merger agreement to acquire all of the outstanding
common stock of 2TheMart-Nevada, a Nevada corporation, in a transaction
described as a reverse merger. The merger became effective on January 8, 1999.
The surviving entity, CD-Rom, changed its name to 2TheMart.com, Inc. The
transaction has been treated as a recapitalization of 2TheMart-Nevada.
Immediately prior to the merger, CD-Rom had 2,291,850 shares of common stock
outstanding. As part of the reorganization and stock purchase agreement, CD-Rom
issued an additional 17,800,000 shares to the shareholders of 2TheMart-Nevada in
exchange for all of the shares of 2TheMart-Nevada. In addition, options to
purchase 2.5 million shares of the Company's Common Stock at an exercise price
of $3.00 were issued to the previously controlling shareholder of CD-Rom and 1.2
million of the previously issued CD-Rom shares were placed in escrow, to be
distributed to the 2TheMart-Nevada shareholders upon the occurrence of either of
the following events: 1) the exercise of any of the CD-Rom Options given to the
previous controlling shareholder of CD-Rom; or 2) The effectiveness of any
Registration Statement filed with the SEC with respect to any of the shares
underlying the CD-Rom Options. In the event that neither the CD-Rom Options are
exercised or the Company had fails to file and have declared effective a
Registration Statement covering the shares underlying the CD-Rom options by June
22, 2000, all escrow shares would be returned to the previous controlling
shareholder of CD-Rom.
Shares covered by this escrow agreement are depicted as outstanding since
January 8, 1999 (the merger date) and have been included in the calculation of
basic and diluted loss per share for the period December 22, 1998 to June 30,
1999.
F-6
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from these
estimates.
Cash and Cash Equivalents - Cash equivalents consist of money market funds whose
fair value approximates cost and are readily redeemable.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents. Cash and cash equivalents are deposited with high credit, quality
financial institutions.
Property and Equipment - Depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives. Leasehold improvements are amortized over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes, but accelerated
methods are used for tax purposes.
Income Taxes - Deferred tax assets and liabilities are recognized for the future
consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of the deferred items is based on
enacted tax laws. A valuation allowance related to a deferred tax asset is
recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Deferred Compensation Related to Stock Option Issuances - The Company granted
certain options to officers and employees at exercise prices which were less
than the fair value of such shares. Amounts recorded as deferred compensation
are amortized over the appropriate service period based upon the vesting
schedule for such grants (generally four years).
Fair Value of Financial Instruments - The Company is required to estimate the
fair value of all financial instruments included on its balance sheet at June
30, 1999. The Company considers the carrying value of such amounts in the
financial statements (cash and cash equivalents) to approximate their fair value
due to the relatively short period of time between origination of the
instruments and their expected realization and interest rates, which approximate
current market rates.
Earnings per Share - Basic net income per share is computed by dividing the net
income available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Incremental common
shares issuable upon the exercise of stock options and warrants, are included in
the computation of diluted net loss per common share to the extent such shares
are dilutive.
F-7
<PAGE>
NOTE 3 - DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN
Since December 22, 1998 (inception), the Company has been in the development
stage and its principal activities have consisted of raising capital and
developing its internet-based electronic commerce Web site.
The accompanying financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company is not yet generating
revenues from website operations and, at June 30, 1999, had accumulated a
deficit from its operating activities. Continuation of the Company as a going
concern is dependent upon, among other things, obtaining additional capital,
meeting other obligations under various agreements and achieving satisfactory
levels of profitable operations. The financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
The Company is currently raising additional funds through an ongoing private
offering (see Note 9). Management intends to seek additional financing through
future private placement offerings. Management is also seeking equipment
financing or a leasing transaction to complete the acquisition of its computer
hardware.
NOTE 4 - COMMITMENTS
The Company has entered into contracts with IBM for the acquisition of
computer hardware and software and its electronic commerce site. The total
amount of these contracts is approximately $11.0 million, of which $2.4
million (including a deposit of $2.0 million) had been paid as of June 30,
1999. The $2.0 million initial deposit was required to paid to IBM at the time
of order placement.
On April 29, 1999, the Company entered into an agreement with Exodus
Communications, Inc. ("Exodus") to secure space for the housing of its main Web
site server operations. Pursuant to its agreement with Exodus, the Company will
be required to pay Exodus a minimum monthly fee of approximately $78,000,
increasing depending on Internet bandwidth usage, once the Company has installed
its computer hardware at Exodus's Sterling, Virginia data center. The Exodus
agreement is cancelable by the Company during the first 30 days after the
installation or is cancelable by either party after one year from the
installation date upon 90 days notice by either party. As of June 30, 1999,
installation had not been completed and, as such, no amounts were currently due
under this agreement.
On June 24, 1999, the Company entered into an agreement with Ciber Inc.,
formerly known as The Summit Group, to integrate the Company's accounting and
billing software with the Company's Web site. The implementation is expected to
cost the Company approximately $400,000.
On July 16, 1999, the Company entered into an agreement with Lawson Associates,
Inc., dba Lawson Software for the use of its accounting and billing software.
Under the terms of the agreement with Lawson, the Company has made a payment to
Lawson in the amount of approximately $127,000 and has the option of either
paying a one time flat fee to Lawson on March 10, 2000 in the amount of $573,070
or a fee based on a percentage of the Company 's revenue. The Lawson agreement
is cancelable upon 90 days written notice.
F-8
<PAGE>
In February 1999, the Company entered into five-year guaranteed employment
agreements with its president and its chief executive officer. Under the
agreements, each individual is entitled to a severance payment equal to the
greater of (i) the sum equivalent of the balance of salary due to be paid under
the agreement or (ii) 300% of the individual's base salary. In addition,
certain employees have been granted employment agreements which provide for up
to six months severance pay in the event of termination without cause.
In June 1999, the Company entered into a one year agreement with USWeb/CKS to
develop and implement the marketing programs and strategies of the Company's Web
site. The Company is obligated to pay $86,000 per month. The agreement is
cancelable upon 30 days notice.
The Company conducts a substantial portion of its operations utilizing leased
office space, office equipment and communications equipment. Some of the
operating leases provide that the Company pay taxes, maintenance, insurance and
other occupancy expenses applicable to the leased premises. Generally, the
leases provide for renewal for various periods at stipulated rates. Future
minimum payments due under operating leases are as follows:
Six Months Ended
December 31,
-------------
1999 $ 241,874
Year Ended
December 31,
--------------
2000 483,748
2001 252,369
2002 30,609
2003 4,632
2004 1,544
----------
$ 1,014,776
==========
NOTE 5 - SHAREHOLDERS' EQUITY
Preferred Stock
The Company's Articles of Incorporation authorize the issuance of 25,000,000
shares of preferred stock, $0.0001 par value. As of June 30, 1999, there were
no issued and outstanding shares of Preferred Stock. The Company's Board of
Directors has authority, without action by the shareholders, to issue all or any
portion of the authorized but unissued preferred stock in one or more series and
to be determine the voting rights, preferences as to dividends and liquidation,
conversation, conversion rights, and other rights of such series.
F-9
<PAGE>
Common Stock
The Company's Articles of Incorporation authorizes the issuance of 50,000,000
shares of Common Stock, $0.0001 par value per share, of which 25,041,930 shares
were outstanding as of June 30, 1999. Holders of shares of Common Stock are
entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of Common Stock have no cumulative voting rights.
Holders of shares of Common Stock are entitled to share ratably in dividends, if
any, as may be declared, from time to time by the Board of Directors in its
discretion, from funds legally available therefore. In the event of a
liquidation, dissolution or winding up of the company, the holders of shares of
Common Stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. Holders of Common Stock have no preemptive rights
to purchase the Company's common stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the common stock. All of
the outstanding shares of Common Stock are fully paid and non-assessable.
On January 8, 1999, the Company issued an aggregate of 917,500 shares of its
Common Stock to six unrelated and unaffiliated "accredited" investors. The
issuances were a limited offering not over $1 million without general
advertising and solicitation made under Rule 504 of Regulation D promulgated
under the Securities Act of 1933, resulting in net proceeds to the Company in
the amount of approximately $980,000.
On January 8, 1999, the Company issued an aggregate of 80,000 shares of its
Common Stock to the Company's securities counsel. The issuance was a limited
offering not over $1 million without general advertising and solicitation made
under Rule 504 of Regulation D promulgated under the Securities Act of 1933, in
exchange for legal services provided in relation to the Company's merger with
2TheMart-Nevada valued at approximately $20,000.
On January 25, 1999, the Company issued 15,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
the Company's securities counsel, in consideration for legal services valued at
$75,000. The shares were valued at $5.00 per share in accordance to the revised
pricing of the Company's then ongoing private placement. The issuance was an
isolated transaction not involving a public offering and consequently conducted
under an exemption under Section 4(2) of the Securities Act of 1933.
On January 25, 1999, the Company issued 40,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to an
individual, in consideration for certain consultation and software services
rendered valued at $40,000. The shares were valued at $1.00 per share in
accordance with an agreement negotiated in December 1999. The issuance was an
isolated transaction not involving a public offering and consequently conducted
under an exemption under Section 4(2) of the Securities Act of 1933.
On January 29, 1999, the Company issued 1,000,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to an unrelated "accredited" investor, resulting in net proceeds of
approximately $1,000,000 to the Company. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
F-10
<PAGE>
On January 30, 1999, the Company issued 50,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to an
unrelated "accredited" investor in exchange for $25,000 and consultation
services valued at $25,000. The issuance was an isolated transaction not
involving a public offering and consequently conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
On February 2, 1999, the Company issued 100,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
Thomas Benjamin, the Company's Vice-President of Business Development as
employee compensation valued at $100,000. The issuance was an isolated
transaction not involving a public offering and consequently conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
On February 2, 1999, the Company issued 7,500 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) to an unrelated
individual in consideration for certain consultation services rendered valued at
$7,500. The issuance was an isolated transaction not involving a public
offering and consequently conducted under an exemption under Section 4(2) of the
Securities Act of 1933.
On February 2, 1999, the Company issued 5,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) to an employee of
the Company as employee compensation valued at $5,000. The issuance was an
isolated transaction not involving a public offering and consequently conducted
under an exemption under Section 4(2) of the Securities Act of 1933.
On February 4, 1999, the Company issued 1,555,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) Common Stock
to an unrelated accredited investor, resulting in net proceeds of approximately
$1,555,000 to the Company. The issuance was conducted under an exemption
provided by Rule 506 of Regulation D promulgated under the Securities Act of
1933 and Section 4(2) of the Securities Act of 1933.
On March 1, 1999, the Company issued 15,000 shares of "restricted" (as that term
is defined under Rule 144 of the Securities Act of 1933) Common Stock to the
Company's securities counsel, in consideration for legal services rendered
valued at $15,000. The issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under Section 4(2)
of the Securities Act of 1933.
On April 7, 1999, the Company issued an aggregate of 75,000 "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933) shares of the
Company's Common Stock in addition to warrants to purchase 125,000 "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933) shares of
the Company's Common Stock at an exercise price of $5.00 to an unrelated
"accredited" individual, in exchange for certain consultation services rendered
valued at $75,000. These issuances were conducted under an exemption provided
by Section 4(2) of the Securities Act of 1933 as well as Rule 506 and 701 of
Regulation D promulgated under the Securities Act of 1933.
F-11
<PAGE>
In April, 1999, the Company completed a private placement offering of 1,140,000
"restricted" (as that term is defined under Rule 144 of the Securities Act of
1933) shares of the Company's Common Stock. The issuance was offered without
general solicitation or advertising under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933 to unrelated "accredited" investors. An
aggregate of 840,000 shares were sold at a price of $1.00. After such shares
were sold, the Company amended its PPM, increasing the price of the offered
shares to $5.00. A total of 300,080 shares were sold at a price of $5.00. The
offering resulted in aggregate net proceeds to the Company of approximately
$2,340,400.
NOTE 6 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the period December 22, 1998 (inception) to June 30, 1999:
Numerator:
Numerator for basic and diluted earnings
per share - net loss $ (1,913,303)
==============
Denominator:
Denominator for basic and diluted earnings
per share - weighted average shares outstanding 23,665,432
==============
Options to purchase 2,773,200 shares of common stock ranging from $3.00 - $12.25
a share were outstanding at June 30, 1999. Such options were not included in
the computation of diluted earnings per common share because they were
antidilutive.
NOTE 7 - STOCK OPTIONS AND WARRANTS
The Company accounts for its stock option plan in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees. Had
compensation cost for the stock option plan been determined based on the fair
value at the grant date consistent with the method of SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net loss and net loss per share
would have been the pro forma amounts indicated below:
For the Period
January 8, 1999
(inception) to
June 30, 1999
------------------
Actual net loss $1,913,303
Pro forma net loss $1,791,628
Actual net loss per share $(.08)
Pro forma net loss per share $(.08)
F-12
<PAGE>
The fair value of each option grant was estimated at the grant date using the
Black-Scholes option-pricing model for the period December 22, 1998 (inception)
to June 30, 1999, assuming a risk-free interest rate of 6%, volatility of 61%,
zero dividend yield, and an expected life of 6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options and warrants have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
A summary of the status of the company's options as of June 30, 1999 and changes
during the period December 22, 1998 (inception) to June 30, 1999 is presented
below.
Exercise Price Weighted Average
per Share Exercise Price Shares
-------------- ---------------- ----------
Granted
Above FMV $3.00 $3.00 2,500,000
Below FMV $5.00 - 10.00 $5.87 273,500
At FMV $12.25 $12.25 200
----------
Options outstanding at
June 30, 1999 - $3.28 2,773,700
Options exercisable at
June 30, 1999 $5.00 $5.00 12,500
Weighted-average fair
value of options granted
during the year 1.87
<TABLE>
<CAPTION>
The following table summarizes information concerning options outstanding at June 30,
1999:
Total Outstanding Exercisable
---------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Weighted
Range of Weighted Weighted Average
Exercise Number Average Average Number Exercise
Prices of Shares Remaining Life Exercise Price of Shares Price
- -------------- ---------- -------------- --------------- --------- ---------
3.00 - 8.00 2,765,000 6.00 $ 3.26 12,500 $5.00
10.00 - 12.25 8,700 6.00 $10.05 - -
---------- ---------
2,773,700 12,500
========== =========
</TABLE>
The Company has committed to issue a warrant for 125,000 common shares at $5 per
share for services received in connection with a private placement offering.
F-13
<PAGE>
NOTE 8 - INCOME TAXES
As of June 30, 1999, the Company had net deferred tax assets of approximately
$765,321, which has been offset in full by a valuation allowance as the Company
is still in the development stage and has not generated any revenue or income.
This deferred tax asset is comprised of unused federal and state net operating
losses and credits that can be used to reduce taxes through 2019 for federal and
2004 for state purposes.
NOTE 9 - SUBSEQUENT EVENTS
In August 1999, the Company issued 53,000 shares of "restricted" common stock to
four accredited investors at a price of $10.00 per share pursuant to an ongoing
private offering of the Company's Common Stock, resulting in net proceeds of
approximately $530,000 to the Company.
In August 1999, the Company received a short-term loan from a shareholder in the
amount of $500,000. The loan bears interest at 12% per annum and is due and
payable on or before October 18, 1999. The loan is collateralized by an
agreement to issue 100,000 shares of restricted common stock of the Company (see
Note 10).
NOTE 10 - EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On September 24, 1999, the Company's Vice President of Marketing and Sales
resigned from the Company. who had 112,500 unvested compensatory stock options
These compensatory stock options resulted in $153,799 of compensatory stock
expense and approximately $2,209,000 of deferred compensation, which are
reflected in the accompanying financial statements. Due to the voluntary
termination of this former officer the stock options were cancelled and the
Company plans to reverse the aforementioned charges and deferred compensation in
the quarter ended September 30, 1999.
On September 13, 1999 and October 11, 1999, the Company was served with class
action lawsuits which allege that the Company and certain of its officers
engaged in a plan to defraud the market and purchasers of the Company's Common
Stock by failing to disclose material facts or making material misstatements of
fact regarding the status of the Company's Web site. Additionally, the Company
has been informed and believes there may be additional purported class action
lawsuits filed against the Company based upon similar alleged facts and claims.
The Company believes that such lawsuits or claims are without merit and they
have meritorious defenses to the actions. The Company also believes that they
have adequate insurance to meet any potential losses from these claims.
However, failure to successfully defend these actions which results in an award
greater than the Company's insurance coverage, could have a material adverse
effect on the Company's results of operations, liquidity and financial
condition.
F-14
<PAGE>
On October 18, 1999, the $500,000 short term note entered into with an
unaffiliated accredited shareholder was converted into 100,000 shares of the
restricted Common Stock of the Company.
On September 10, 1999, the Company entered into a short-term note in the amount
of $2,000,000 with the Chief Executive Officer of the Company. Under the terms
of the note, the Company is obligated to pay interest in the amount of 12% per
annum. Interest and principal is due on or before October 31, 1999 (the
"Note"). The Note is secured by 2,000,000 shares of the Common Stock of the
Company. On October 8, 1999, the Chief Executive Officer agreed to forgive and
cancel the Note without receiving any consideration or shares of the Company's
Common Stock. The forgiveness of the Note will be accounted for as a capital
contribution to the Company.
On September 10, 1999, the Company entered into a short-term note in the amount
of $250,000 with an officer of the Company. Under the terms of the note, the
Company is obligated to pay interest in the amount of 12% per annum. Interest
and principal is due on or before October 10, 1999. The note is secured by
250,000 shares of Common Stock of the Company. On October 8, 1999, the officer
agreed to extend the due date of the note to November 19, 1999, at which time,
the note was paid from proceeds from the November 18, 1999 sale of "restricted"
Common Stock as described below.
On October 8, 1999, the Company sold an additional 300,000 shares of the
"restricted" Common Stock of the Company to an unaffliated accredited
shareholder of the Company at a price of $3.33 per share resulting in net
proceeds to the Company of approximately $999,000.
On October 25, 1999, the Company sold an additional 1,000,000 shares of the
"restricted" Common Stock of the Company to an unaffiliated accredited
shareholder of the Company at a price of $1.00 per share resulting in proceeds
to the Company of approximately $1,000,000.
On November 18, 1999, the Company sold 2,000,000 shares of the "restricted"
Common Stock of the Company to an accredited shareholder of the Company at a
price of $1.50 per share resulting in proceeds to the Company of approximately
$3,000,000. This shareholder is now considered an "affiliate" of the Company.
On November 18, 1999, Mr. Magliarditi agreed to contribute 2.9 million shares of
Common Stock back to the Company.
On November 18, 1999, the Company entered into a payment agreement for the
satisfaction of the remaining amounts owed for the Company's Web site as well as
additional services being provided by IBM relating to the Web site whereby the
Company will pay to IBM $1,775,000 plus interest at a rate of 13.5% per annum
compounded monthly beginning November 1, 1999, to be paid in twelve equal
monthly payments of principal and interest totaling $162,552, with the first
payment due on January 31, 2000.
F-15
1
PROMISSORY NOTE
----------------
U.S. 500,000.00 August 18, 1999
------------
For value received, the undersigned promises to pay to the order of Paul
Rosenberg, or his agent, successors and assigns at 650 Northeast 5th Avenue,
Boca Raton, FL 33432, or at such other place as may be designated by the holder
of this Note, the principal sum of FIVE HUNDRED THOUSAND AND NO/100THS DOLLARS
(U.S. $500,000.00), together with interest on the principal amount of this Note
at the rate of twelve percent (12.00%) per annum, or such lesser rate as shall
be the maximum rate that may be charged hereunder under applicable law.
Interest will be calculated on the basis of a 365 day year for the actual number
of days elapsed during such interest period.
All payments of any nature made or required to be made under this Note
shall be made in lawful money of the United States on October 18, 1999. The
unpaid principal of this Note together with all accrued interest thereon shall
become due and payable on or before the October 18, 1999.
This Note shall be non-recourse to the undersigned and shall be secured by, and
the undersigned hereby grants a security interest to the holder of this Note in,
100,000 shares of newly issued unregistered common stock of 2TheMart.com, Inc.
(the "Shares"). To perfect the holder's security interest in such Shares, the
undersigned delivers to Kris W. Aldridge, Esq., of Ballard Spahr Andrews &
Ingersoll, LLP, 1735 Market Street, 51st Floor, Philadelphia, PA 19103-7599, on
behalf of the holder, within 5 business days of the delivery of this Note, a
certificate representing the Shares, together with endorsed stock powers
therefor in the name of the holder. If, for any reason the principal amount of
this Note, together with accrued interest thereon to the date of payment is not
paid in full on October 18, 1999, the holder of this Note may, at his sole
option, without notice to the undersigned or any other action, cancel this Note
and all obligations hereunder, and take ownership of the Shares.
In the event that the holder takes ownership of the Shares, the Company agrees
that if the Company at any time proposes to register any of its securities under
the Securities Act of 1933, it will, each such time, give 30 days written notice
to holder of its intention to do so, and upon holder's written request given
within 30 days after receipt of such notice, the Company will use its best
efforts to cause the Shares to be registered under the Securities Act, and for
the registration statement to remain effective until the holder shall sell the
Shares, all at the Company's expense. The holder of the Shares agrees not to
sell the Shares for such reasonable period after any such registration becomes
effective (not exceeding 90 days) as shall then be specified in writing by the
Company's underwriter or underwriters if in the opinion of such underwriter or
underwriters the Company's offering would be materially adversely affected in
the absence of such an agreement.
At any time prior to October 18, 1999, upon written notice to the undersigned,
the holder of this Note may, at his sole option, cancel this Note and all
obligations hereunder and receive 50,000 shares of common stock upon the terms
and subject to the conditions set forth in the Private Placement Memorandum of
the Company dated July 1999.
This Note may be prepaid in whole or in part before maturity without
penalty at any time.
This Note shall be governed and construed in accordance with Pennsylvania
law applicable to contracts executed and performed exclusively within
Pennsylvania.
The provisions of this Note shall be deemed severable, so that if any
provision hereof is declared invalid under the laws of any state where it is in
effect, or of the United States, all other provisions of this Note shall
continue in full force and effect. This Note may be amended only in writing
signed on behalf of each party.
2TheMart.com, Inc.
By: /s/ Dominic J. Magliarditi
______________________
Dominic J. Magliarditi
President
October 5, 1999
Thomas N. Benjamin
1175 Gaviota Drive
Unit No. 4
Laguna Beach, California 92651
RE: EMPLOYMENT OFFER
Dear Tom:
This letter shall serve as 2TheMart.com, Inc.'s (the "Company") offer of
employment to you to serve as the Vice President/Strategic Planning & Analysis
("Executive") of the Company. You understand that your position and function as
an Executive will be determined from time to time by the Board of Directors of
the Company. Your duties shall be to perform all functions generally
appropriate for an Executive and as further described by the Board of Directors.
We are very pleased to offer you the position of Vice President/Strategic
Planning & Analysis with our Company in accordance with the following terms and
conditions:
1. BASE SALARY. Your beginning Base Salary will be in the annualized amount of
$125,000, payable bi-weekly (your first payroll pay date at this salary amount
will be September 3, 1999). Your Base Salary will be increased to the
annualized amount of $150,000 beginning January 1, 2000.
2. STOCK OPTIONS. The Company will grant to you options to acquire an
aggregate of 300,000 shares of common stock of the Company at an exercise price
of $3.00 per share ("Options"). The Options shall vest as follows:
A. The right to acquire 150,000 shares shall vest on October 5, 1999.
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B. The right to acquire an additional 75,000 shares shall vest on
September 1, 2000 provided you have been continuously employed by the Company as
of that vesting date.
C. The right to acquire the balance of the Options, 75,000 shares, shall
vest on September 1, 2001, provided you have been continuously employed by the
Company as of that vesting date, until the Options are fully vested. The
Options shall fully vest upon any sale of a majority interest in the Company.
In the event you are not continuously employed by the Company as of any vesting
date, all Options that have not vested shall become void.
3. VACATION. As an executive of the Company you will be entitled to 3 weeks
paid vacation, to be utilized at the discretion of the executive. The Company
prefers that no executive take more than 2 weeks of continuous vacation.
6. HEALTH BENEFITS. The Company will provide health insurance coverage
(including dental and vision) for you and your family at the Company's cost.
Our health plan is underwritten by the Principal Insurance Group, and is a
combined PPO/Indemnity type coverage. We will provide you with additional
information on our health plan under separate cover.
7. EXECUTIVE BENEFITS. As an executive of the Company, you will be entitled to
participate in all other executive benefits as they are implemented. The
Company will be establishing a retirement plan (i.e. 401K Plan) (probably by the
4th quarter) and an Incentive Stock Option Plan (by the 3rd or 4th quarters).
8. BONUSES. As an executive of the Company, you will be able to participate
in any annual bonus program implemented by the Company. The Company's Bonus
Plan will be a combination of a cash based and Incentive Stock Option based
plan. A high level executive such as you would participate in both plans, based
upon your performance, which bonuses will be at the discretion of the Board of
Directors of the Company.
9. TERMINATION OF EMPLOYMENT. In the event of the termination of your
employment for other than cause, you would be entitled to continue to receive
your Base Salary, payable bi-weekly, for a period of 12 months. "For cause"
shall be defined as follows:
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(i) incompetence, insubordination, failure, inability, or refusal to
perform assigned duties; (ii) gross negligence, willful misconduct or breach of
fiduciary duty; (iii) condition of a crime (other than minor traffic
violations or similar offenses); (iv) being under the influence of, or use,
sale, distribution, or possession of unauthorized or illegal drugs or
intoxication beverages while on duty or on the Company's or a subsidiary's
premises; (v) willful destruction or defacement of Company's or a
subsidiary's, a customer's, or an employee's property; (vi) unauthorized
disclosure of confidential information; and (vii) continued and unexplained
absences from work.
You shall be immediately terminated without notice for the following Causes:
(i) unauthorized entry into Company's secured non-public areas; (ii)
falsifying or altering the Company's or a subsidiary's records; (iii) theft,
embezzlement, fraud or forgery; (iv) any act which results or was
intended to result in significant gain or personal enrichment to the you at the
Company's expense; and (vi) any act which results in substantial injury or
embarrassment to the reputation, business, or business relationship of Company.
10. CONFIDENTIAL AND SECRET INFORMATION/COMPANY PROPERTY. You acknowledge that
you will have access to items used in the Company's business which the Company
deems to be secret, confidential, unique and valuable; were developed by Company
at a great cost and over a long period of time; and that disclosure of any of
these items to anyone other than Company's officers, directors, agents or
authorized employees will cause Company irreparable injury. You agree that upon
termination of this Agreement, you will return any and all documentary
information or written documents to Company. Such items and information shall
be held in strict confidence by you and shall not be revealed to any third party
unless otherwise required by law. All other material and property that may be
furnished to you during the course of your employment with the Company such as
customer lists, customer tracking, automobiles, books and records shall be and
remain the Company's property and shall be returned to the Company at any time
upon demand.
Please acknowledge your understanding and agreement of the terms of your
employment with the Company by signing this letter where noted below.
If you have any questions, of course, please do not hesitate to contact me.
Sincerely,
2THEMART.COM, INC.
Dominic J. Magliarditi
President
DJM:
ACKNOWLEDGED AND AGREED
/s/ Thomas N. Benjamin
_____________________________
Thomas N. Benjamin
Date: September 3, 1999
