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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AUCTION-SALES.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5960 77-0398037
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3543 OLD CONEJO ROAD #105
NEWBURY PARK, CALIFORNIA 91320
(805) 376-9171
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ZAHID RAFIQ
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
AUCTION-SALES.COM, INC.
3543 OLD CONEJO ROAD #105
NEWBURY PARK, CALIFORNIA 91320
(805) 376-9171
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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THOMAS J. POLETTI, ESQ. V. JOSEPH STUBBS, ESQ.
SUSAN B. KALMAN, ESQ. HOWARD J. KERN, ESQ.
TED WEITZMAN, ESQ. KIMBERLY A. LEONE, ESQ.
KIRKPATRICK & LOCKHART LLP TROOP STEUBER PASICH REDDICK & TOBEY, LLP
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST 2029 CENTURY PARK EAST, 24TH FLOOR
BEVERLY HILLS, CALIFORNIA 90212 LOS ANGELES, CALIFORNIA 90067-3010
TELEPHONE (310) 273-1870 TELEPHONE (310) 728-3243
FACSIMILE (310) 274-8357 FACSIMILE (310) 728-2243
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
AGGREGATE OFFERING REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1)
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Common Stock, $.001 par value(2)............................ $34,500,000 $9,108.00
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Representative's Warrant.................................... $5 $--
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Common Stock, $.001 par value(3)............................ $3,600,000 $950.40
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Totals...................................................... $38,100,005 $10,058.40
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes shares which the underwriters have the option to purchase to cover
over-allotments, if any, equal to fifteen percent (15%) of the shares being
offered.
(3) Issuable upon exercise of the Representative's Warrant.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED , 2000
SHARES
[AUCTION-SALES.COM LOGO]
AUCTION-SALES.COM, INC.
COMMON STOCK
This is our initial public offering, and no public market currently exists
for our shares. We are selling shares and the selling stockholders are
selling shares offered by this prospectus. The offering price may not
reflect the market price of our shares after the offering. We currently estimate
that the public offering price for our common stock will range between $ and
$ per share.
YOUR INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
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THE OFFERING PER SHARE TOTAL
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Public offering price...................... $ $
Underwriting discounts..................... $ $
Proceeds to us............................. $ $
</TABLE>
We are also offering the underwriters a 45-day option to purchase up to
shares solely to cover any over-allotments on these same terms.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WESTPARK CAPITAL, INC.
Prospectus dated , 2000
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
[LOGO]
AUCTION-SALES.COM, INC.
[PICTURES]
THE INFORMATION ON OUR WEBSITE IS NOT A PART OF THIS PROSPECTUS.
We intend to furnish stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year. Our fiscal year ends on June 30 each year.
<PAGE> 4
AUCTION-SALES.COM PROSPECTUS
ABOUT AUCTION-SALES.COM
We were incorporated as Alto Corporation in February 1995. In February
1999, we changed our name to Auction-Sales.com, Inc. Our executive offices are
located at 3543 Old Conejo Road, #105, Newbury Park, California 91320. Our
website address is www.auction-sales.com and our telephone number is (805)
376-9171.
INTRODUCTION
Please read this prospectus carefully. It describes our business, our
products and services and our financial condition and results of operations. We
have prepared this prospectus so that you will have the information necessary to
make an informed investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of the prospectus, regardless of the time the
prospectus is delivered or the common stock is sold.
PROSPECTUS DELIVERY OBLIGATIONS
Until , 2000 (25 days after the date of this prospectus), all
dealers effecting transactions in our common stock may be required to deliver a
prospectus, even if they do not participate in this offering. This is in
addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 3
Risk Factors........................... 5
Forward-Looking Statements............. 11
Use of Proceeds........................ 11
Dividend Policy........................ 11
Capitalization......................... 12
Dilution............................... 13
Selected Combined Financial Data....... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 23
Management............................. 38
Certain Transactions................... 42
Principal and Selling Stockholders..... 43
Description of Capital Stock........... 43
Shares Eligible for Future Sale........ 45
Underwriting........................... 48
Legal Matters.......................... 50
Experts................................ 50
Where You Can Get More Information..... 50
Index to Financial Statements.......... F-1
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Auction-Sales.com and the financial statements and notes
appearing elsewhere in this prospectus. Unless we inform you otherwise, this
prospectus: assumes no exercise of (1) the underwriters' over-allotment option
and (2) outstanding options and warrants. Our fiscal year ends on June 30 of
each year.
AUCTION-SALES.COM, INC.
We are an Internet retailer and distributor offering products through
public interactive business-to-business and business-to-person auctions. Our
online auctions provide an interesting sales format and a compelling shopping
experience that enable customers to bid against each other in a friendly,
competitive marketplace. From September 1997 through December 31, 1999, we
auctioned over 2.6 million merchandise units, out of which 1.8 million were in
the last two quarters of 1999. As of December 31, 1999, we had over 106,000
registered users out of which 14,000 registered in the last quarter of 1999. For
the month of December 1999, we recorded over 1.5 million page views to our
website. Additionally, the number of links to our website has grown to over
3,000 in December 1999. Since June 1, 1999 we have offered on average over 7,000
total items in each of our auctions.
We have built a robust, scalable, easy-to-use user interface and auction
management system that is based on internally-developed, proprietary software.
Our order processing and fulfillment systems are fully automated and fully
integrated within our website. Most of the products we sell are new and recently
introduced. However, we also offer close-out and refurbished products.
We provide a fully automated, convenient auction service available 24 hours
a day, seven days a week. Individual users can immediately access our auction
service through our anchor, tenant and banner advertisements and integrated
links to our site on the sites of online portals, fast growing e-commerce sites
and Internet service providers such as America Online, CompuServe, Freei.net,
Shopnow, Freeshop, Channel 2000 and Netscape.
OUR PORTAL SOLUTION
We plan to create an online auction portal that will act as a "one-stop"
auction Internet community. We are developing a portal to cater to the specific
needs of our auction audience by providing each individual user and business
access to unique specialized services and helping each user locate, retrieve and
manage information tailored to individual interests. We intend to provide our
consumers and businesses with innovative online value-added services to enable
them to manage their buy and sell transaction cycle from beginning to end. Our
goal is to develop a sense of community to draw large audiences, encourage
repeat visits and keep users engaged.
Our auction services provide business-to-business auction solutions to
small to medium sized businesses faced with procurement and liquidation needs.
Our technology and services are designed to enable buyers and sellers to
participate in auctions and reverse auctions through our auction-sales.com
portal site. Our solution is designed to offer corporate buyers the ability to
obtain real-time market prices for goods and services in a more streamlined
manner than the traditional procurement process. Corporate sellers can access
new and dynamic channels to quickly and efficiently dispose of excess inventory
at a true market value.
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THE OFFERING
Shares offered by
Auction-Sales.com................ shares
Shares to be outstanding after
the offering..................... shares
Use of proceeds.................. For advertising and brand development
expenditures, for capital expenditures,
for the repayment of indebtedness, for
the development of auction application
software and technology infrastructure
and general corporate purposes, including
working capital.
We intend to apply to have our shares approved for quotation on the Nasdaq
National Market under the symbol "AUCT."
SUMMARY COMBINED FINANCIAL DATA
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SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
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1998 1999 1998 1999
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STATEMENT OF OPERATIONS DATA:
Total net revenue............ $ 2,255,637 $ 3,887,167 $ 1,865,091 $ 2,406,935
Gross profit........................... 678,859 544,490 465,126 275,101
Operating expenses:
Selling and marketing................ 229,862 654,483 270,963 602,367
Product development.................. 158,095 271,896 111,572 335,353
General and administrative........... 233,343 725,584 378,809 362,233
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Income (loss) from operations.......... $ 57,559 $(1,107,473) $ (296,218) $(1,024,852)
Basic income (loss) per share (1)...... $ (0.00) $ (0.09) $ (0.03) $ (0.08)
Shares used to compute net income
(loss) per share(1).................. 12,438,027 12,647,945 12,456,351 12,730,000
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales(2)............. $ 3,548,461 $ 4,017,137 $ 1,992,531 $ 2,340,633
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AT DECEMBER 31, 1999
AT JUNE 30, ---------------------------
1999 ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash, cash equivalents and certificate of
deposit....................................... $ 571,274 $ 801,591 $
Working capital (deficiency).................... 56,606 (983,035)
Total current assets............................ 934,610 1,422,249
Total assets.................................... 1,034,729 1,509,620
Total current liabilities....................... 878,604 2,405,284
Long term debt.................................. 23,977 15,035
Stockholders' equity (deficit).................. 132,148 (910,699)
</TABLE>
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(1) See Note 2 of Notes to Combined Financial Statements for a description of
the computation of net income (loss) per share and the number of shares used
in the per share calculation.
(2) Gross merchandise sales is a non-GAAP measure of total sales. Gross
merchandise sales represent the amount the Company's total revenue would
have been if all agent sales had been made as principal sales.
(3) Reflects our sale of shares of common stock at an assumed
public offering price of $ per share and our application of the
estimated net proceeds. See "Use of Proceeds."
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
financial condition and operating results.
If any of the following risks occurs, our business, financial condition and
operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
WE HAVE A LIMITED OPERATING HISTORY WITH WHICH TO JUDGE OUR PERFORMANCE
We were incorporated in February 1995. We began selling products on our
website in October 1996. Accordingly, we have a limited operating history.
Before you decide to purchase our common stock, you should consider the risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets. We cannot assure you that our business strategy will
be successful or that we will successfully address any of these risks. Our
failure to do so could materially adversely affect our business, financial
condition and operating results.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH
FLOW
Since inception, we have incurred operating losses, and as of December 31,
1999, we had an accumulated deficit of $2.5 million. We incurred net losses of
$1.1 million for the six months ended December 31, 1999.
We anticipate that the net proceeds of this offering will be sufficient to
meet our anticipated needs through at least the next 13 months. However, we
expect operating losses and negative cash flow to continue for the foreseeable
future. We anticipate our losses will increase significantly from current levels
because we expect to incur additional costs and expenses related to:
- - the continued development of our website transaction processing and network
infrastructure
- - marketing and advertising related to brand development and traffic generation
- - the hiring of additional personnel
- - the expansion of our product offerings and website content.
Our future profitability depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot assure you that we will be able to
sustain it or improve upon it on a quarterly or annual basis for future periods.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND OUR
FUTURE OPERATING RESULTS ARE UNPREDICTABLE
Period-to-period comparisons of our operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Our operating results are unpredictable and have fluctuated significantly.
We expect to continue to experience significant fluctuations in our quarterly
results of operations due to a variety of factors, many of which are outside of
our control.
As a result, because of our limited operating history, we cannot accurately
forecast our net sales. We rely upon limited historical financial data to
predict our future operating results. Sales and operating results are difficult
to forecast because they generally depend on the volume and timing of orders we
receive. In addition, because of our rapid growth and anticipated future growth,
historical financial data may be unreliable as an indicator of our future
operating results. Because of these factors, we may be unable to decrease our
spending in a timely manner to adjust for any unexpected revenue shortfall.
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IF WE CANNOT SUCCESSFULLY IMPLEMENT OUR PORTAL STRATEGY, WE WILL NOT BE ABLE TO
FULFILL OUR BUSINESS PLAN
Our future success depends in large part upon the implementation and
acceptance of our portal solution. Developing and maintaining a portal requires
extensive software development, the bulk of which, we intend to develop
internally. It is difficult to predict the costs of our future software
development needs. If our costs are extensive, we may outsource our software
development needs to third parties. Despite testing, the software we develop or
acquire may contain defects that may result in:
- - a loss of data
- - delays in implementing our portal solution
- - a diversion of development resources
- - injury to our reputation
- - substantial remedial costs.
We cannot assure you that we will be successful in developing or marketing
our portal solution or that we will be able to do so in a timely and
cost-effective manner. Our failure to do so could materially adversely affect
our business, financial condition and operating results.
WE RELY ON THIRD PARTIES SUCH AS SUPPLIERS, VENDORS, DISTRIBUTORS AND SHIPPERS
Our success depends in part on our ability to purchase products in
sufficient quantities at competitive prices. We do not have long-term or
exclusive arrangements with any supplier, vendor or distributor that guarantees
the availability of products for purchase or auction. From time to time we have
experienced difficulty in obtaining sufficient product allocation from certain
vendors. If we are not able to offer our users sufficient quantities or a
variety of products, our business, financial condition and operating results
will be materially adversely affected.
Also, we rely upon third party carriers to ship the products we sell.
Therefore, we are subject to risks affecting a carrier's ability to provide
delivery services to meet our shipping needs. In the past, our failure to
promptly deliver products has led to customer complaints and regulatory action
against us. Failure to deliver the products we sell in a timely manner could
materially adversely affect our business, financial condition and operating
results.
OUR MARKET IS HIGHLY COMPETITIVE
The online commerce market and the market for business-to-business,
business-to-person and person-to-person sales over the Internet is relatively
new, rapidly evolving and intensely competitive, and we expect competition to
intensify in the future because barriers to entry are relatively low. We compete
with a number of other companies offering similar products or providing similar
services.
We potentially face competition from a number of large online communities
and services that have expertise in developing online commerce and in
facilitating online business-to-business, business-to-person and
person-to-person interaction. Other large companies with strong brand name
recognition and experience in online commerce may also seek to compete in the
online auction market. Competitive pressures created by any one of these
companies, or by our competitors collectively, could have a material adverse
effect on our business, financial condition and operating results.
Certain of our current and potential competitors have longer operating
histories, larger customer bases and greater brand name recognition in sales and
Internet markets. They may also have significantly greater financial, marketing,
technical and other resources than we have. Increased competition may result in
reduced operating margins, loss of market share and diminished value in our
brand. We cannot assure you that we will be able to compete successfully against
current and future competitors or receive investments from or enter into other
commercial relationships with larger, better-established and better-financed
companies as use of the Internet and other online services increases. Our
competitors may be able to devote greater resources to marketing and promo-
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tional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we can.
They may also be able to attract traffic by offering other services for free
such as bulletin boards, stock quotes and chat rooms. Although we intend to
offer similar free services on our portal site in the near future, we do not
currently have the resources to do so.
Because of the quantity of goods purchased, our competitors may be able to
secure products from vendors on more favorable terms, fulfill customer orders
more efficiently and adopt more aggressive pricing policies. Traditional
store-based retailers also have facilities where customers can see the products
and test them in a manner not available over the Internet.
THE FAILURE TO MANAGE GROWTH IN OUR OPERATIONS AND HIRE ADDITIONAL QUALIFIED
EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT UPON US
At December 31, 1999, we had a total of 18 employees. The expected growth
of our operations will place a significant strain on our current management
resources. To manage the expected growth, we will need to improve our:
- - transaction processing methods
- - operations and financial systems
- - procedures and controls
- - training and management of our employees.
A portion of the proceeds from this offering will be used to hire
additional key personnel. Competition for personnel is intense, and we cannot
assure you that we will be able to successfully attract, integrate or retain
sufficiently qualified personnel. Our failure to attract and retain the
necessary personnel or to effectively manage our employee and operations growth
could have a material adverse affect on our business, financial condition and
operating results.
WE FACE FULFILLMENT OPERATIONS RISKS
We need to continually improve and invest in our customer service
department. Due to our rapid growth and limited resources, we have encountered
regulatory and customer complaints that involve order fulfillment problems.
Also, our current fulfillment operations are not adequate to accommodate
significant increases in customer demand that may occur if our increased
marketing efforts are successful. Therefore, we cannot assure you that we will
not experience fulfillment problems or receive customer or regulatory
complaints. If we do not successfully scale our fulfillment operations to
accommodate increased demand, our business, financial condition and operating
results could be materially adversely affected.
CYCLICALITY, SEASONALITY AND DEPENDENCE ON THE DOMESTIC ECONOMY MAY ADVERSELY
AFFECT OUR BUSINESS
In the event that the U.S. economy should suffer a significant downturn, we
expect that the sales of our more expensive merchandise would also suffer,
adversely affecting our business, financial condition and operating results.
We have experienced a higher volume of sales during the months of November
and December as a result of the onset of the holiday season. Our sales typically
diminish during January and February as a result of reduced disposable income
following the holiday season.
Our limited operating history, however, makes it difficult to fully assess
the impact of these seasonal factors or to determine whether our business is
susceptible to seasonal or cyclical fluctuations in the domestic economy. We
cannot assure you that seasonal or cyclical variations in the our operations
will not become more pronounced over time or that they will not materially
adversely affect our business, financial condition and operating results.
AS WE ENTER NEW BUSINESS CATEGORIES, WE WILL BE SUBJECT TO A VARIETY OF RISKS
We plan to expand our operations by developing and promoting new or
complementary services, products or transaction formats and by expanding the
breadth and depth of the services we provide. We cannot assure you that we will
be able to expand our
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operations in a cost-effective or timely manner or that any such efforts will
maintain or increase overall market acceptance of our services or products. Any
new business or service launched by us that is not favorably received by
consumers may damage our reputation and diminish the value of our brand name.
Expansion of our operations in this manner would also require significant
additional expenses and development, operations and other resources, straining
our current levels. The lack of market acceptance of our products and services
or our inability to generate satisfactory revenues from such expanded products
and services to offset their cost could have a material adverse effect on our
business, financial condition and operating results.
WE CANNOT AFFORD PERSISTENT SYSTEM FAILURES
Our success depends on the efficient and uninterrupted operation of our
computer and communications systems. We depend upon our systems and
communications hardware presently located in Newbury Park, California to conduct
our auction services. Our systems, communications hardware and fulfillment
operations are vulnerable to damage or interruption from a variety of factors,
many of which are outside our control.
We have experienced periodic system interruptions, which we believe will
continue to occur from time-to-time. Serious systems interruptions due to our
inability to alleviate capacity constraints could materially adversely affect
our business, financial condition and operating results.
OUR CUSTOMERS MAY HAVE CONCERNS WITH INTERNET COMMERCE SECURITY WHICH COULD
INHIBIT OUR GROWTH AND WE MAY INCUR LOSSES RESULTING FROM CREDIT CARD FRAUD
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, we rely on
encryption and authentication technology that we license from third parties. We
cannot predict whether events or developments will compromise or breach the
technology that protects our customer transaction data. If our security measures
do not prevent security breaches, this could have a material adverse effect on
our business, financial condition and operating results.
To date, we have suffered minimal losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, a merchant
is liable for fraudulent credit card transactions where the merchant does not
obtain a cardholder's signature. We do not obtain the signatures of the
cardholder when we process orders. Although we have implemented mechanisms to
try to detect credit card fraud, we cannot assure you that our efforts will be
successful. Our inability to adequately detect credit card fraud could
materially adversely affect our business, financial condition and operating
results.
To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. Our insurance
policies carry limited coverage, which may not be adequate to reimburse us for
losses caused by security breaches. We cannot assure you that our security
measures will prevent security breaches. Our failure to prevent security
breaches could have a material adverse effect on our business, financial
condition and operating results.
THE MARKET PRICE FOR YOUR COMMON STOCK MAY BE VOLATILE WHICH COULD CAUSE YOU TO
LOSE ALL OR PART OF YOUR INVESTMENT
The trading price of our stock is likely to be highly volatile and could be
subject to fluctuations in response to factors unrelated to our operating
performance.
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. Continued volatility may materially and
adversely affect the market price of our common stock, regardless of our
operating performance.
Market price volatility may also engender securities class-action
litigation. Such litiga-
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tion, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, financial condition and operating results.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT OUR
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS FROM INFRINGEMENT
We currently hold various Internet domain names, including the "Auction-
Sales.com" domain name. Governing bodies may establish additional top-level
domain name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names in
countries in which we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
Our success and the integrity of our brand name depends upon our ability to
protect our proprietary technology and other intellectual property rights. We
rely on a combination of copyright, trademark, service mark and trade secret
laws and contractual restrictions to establish and protect our proprietary
rights. We protect our proprietary software through U.S. copyright laws, and the
source code for our proprietary software is protected under trade secret laws.
In February 1999, we applied to the United States Patent and Trademark Office to
register the trademarks: "Auction Sales," "BidExpose" and "Wheels and Deals!".
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our services are made available online,
and thus, the steps that we take may be inadequate to protect our rights.
OUR BUSINESS SUBJECTS US TO CERTAIN LITIGATION RISKS
To the extent we make sales under an agent sales model, our success depend
largely upon sellers reliably delivering and accurately representing the
auctioned goods and buyers paying the agreed purchase price. Under an agent
sales model, we sell goods owned by others and are paid a commission for our
services. To the extent our agent sales increase in the future, we may not take
physical possession of goods we auction, and will have no ability to ensure that
such goods are ultimately delivered. We have received in the past, and
anticipate that we will receive in the future, communications from users who did
not receive the goods they ordered. If we receive customer complaints relating
to our agent sales, our only recourse may be to discontinue selling products for
the applicable vendors.
To date, all of the products sold at our auctions have been purchased with
a credit card. The transactions are processed through Card Service
International. If Card Service International suffers computer malfunctions or is
otherwise unable to process credit card purchases, our customer relations may
become damaged. Prolonged exposure to dilatory payment processing could
materially adversely effect our business, financial condition and operating
results.
SALES TAX COLLECTION BY STATES MAY ADVERSELY AFFECT OUR GROWTH
We do not collect sales or other similar taxes for goods sold through the
our website, other than for goods sold to California residents. However, one or
more states may seek to impose sales tax or similar collection obligations on
out-of-state companies, such as ours, which engage in Internet commerce. A
successful assertion by one or more states or any foreign country that we should
collect sales or other taxes on the sale of merchandise on our system could have
a material adverse effect on our operations.
9
<PAGE> 12
THE INTERNET INDUSTRY MAY BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION
WHICH COULD HAVE A NEGATIVE EFFECT ON OUR OPERATIONS
Various actions have been taken by the United States Congress and the
Federal courts that in some cases impose some forms of regulation on the
Internet, and in other cases protect the Internet from regulation. Domestic and
international authorities regularly consider proposed legislation that could
result in new regulations on the Internet. It is impossible to say at this time
whether and to what extent the Internet may ultimately be regulated domestically
or internationally. Increased regulation of the Internet may decrease its
growth, which may negatively impact the cost of doing business via the Internet
or otherwise materially adversely affect our business, results of operations and
financial condition.
In addition, because our services are accessible worldwide, and we
facilitate the sale of goods to users worldwide, other jurisdictions may claim
that we are required to comply with their laws. We are qualified to do business
in California only, and failure by us to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify.
WE NEED TO CONTINUE TO DEVELOP OUR BRANDS NAMES
We believe that our growth has been largely attributable to word-of-mouth.
Our growth in the future depends upon strengthening brand recognition,
particularly in light of the increasing number of competitors, in our market.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. If we fail
to promote and maintain our brand or increase brand name awareness, our
business, financial condition and operating results could be materially
adversely affected.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our performance has been and is substantially dependent on the continued
services and performance of our senior management and other key personnel,
especially the services of Zahid "Mike" Rafiq and Pierre Rafiq. We have
employment contracts with both Mike and Pierre Rafiq and intend to obtain "key
person" life insurance in the amount of $1.0 million, on each of their lives,
although we do not expect that the recovery of this amount would adequately
compensate us if we were to lose either of their services. The loss of the
services of either of Mike Rafiq or Pierre Rafiq or other key personnel or
members of our senior management could have a material adverse effect on our
business, financial condition and operating results.
WE MAY NEED TO SEEK ADDITIONAL CAPITAL IN THE FUTURE
We require substantial working capital to fund our business. Since our
inception, we have experienced negative cash flow from operations and expect to
experience negative cash flow from operations for the foreseeable future. Our
working capital requirements and cash flow provided by operating activities can
vary from quarter to quarter depending on revenues, operating expenses, capital
expenditures and other factors. We believe that the net proceeds of this
offering will be sufficient to meet our anticipated needs through at least the
next 13 months. Thereafter, we may need to raise additional funds. We may also
need to raise additional funds sooner than anticipated to:
- - fund more rapid expansion
- - develop new or enhanced services or products
- - respond to competitive pressures
If additional funds are raised through the issuance of equity or
convertible debt securities your rights and ownership in Auction-Sales.com, Inc.
may be reduced. If adequate funds are not available, or are not available on
acceptable terms, we may not be able to fund planned expansion, take advantage
of acquisition opportunities, develop or enhance services or products or respond
to competitive pressures.
10
<PAGE> 13
FORWARD-LOOKING STATEMENTS
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements refer to our future plans,
objectives, expectations and intentions. These statements can be identified by
the use of words such as "expects," "anticipates," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
anticipated in such forward-looking statements. Factors that could contribute to
these differences include, but are not limited to, those discussed below and
elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of shares of common stock
offered by us at an assumed initial public offering price of $ per share
(after deducting estimated underwriting discounts, the underwriters'
non-accountable expense allowance and other estimated offering expenses payable
by us), are estimated to be $ . We will not receive any proceeds from the
sale of shares by the selling stockholders. We expect to use approximately
$ million of the net proceeds for advertising and brand development
expenditures, $ million for capital expenditures, $1.2 million to repay
outstanding notes and $ million for the development of auction application
software and technology infrastructure. The balance of the proceeds will be used
for general corporate purposes, including working capital. The indebtedness to
be repaid consists of unsecured subordinated promissory notes having interest at
a rate of 8% per annum. The notes mature at the earlier of the closing of this
offering or December 31, 2000. Prior to their eventual use, the net proceeds
will be invested in high quality, short-term investment instruments such as
short-term corporate investment grade or United States Government
interest-bearing securities.
DIVIDEND POLICY
We have never paid any dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends will depend on our results
of operations, future earnings, financial condition and capital requirements,
applicable restrictions under any credit facilities or other debt arrangements
and such other factors deemed relevant by our Board of Directors.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth, as of December 31, 1999, our (1) actual
capitalization at December 31, 1999 and (2) as adjusted to reflect the sale by
us of shares of common stock offered by us at an assumed initial
public offering price of $ per share and the application of the net proceeds
therefrom (after deducting estimated underwriting discounts, the underwriters'
non-accountable expense allowance and other estimated offering expenses payable
by us).
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt............................................. $ 1,323,478 $
Long-term debt.............................................. $ 15,035 $
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares
authorized; none issued and outstanding actual and as
adjusted............................................... -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 12,730,000 shares issued and outstanding
actual; shares issued and outstanding
pro forma as adjusted(1)............................... 12,730
Additional paid-in capital................................ 1,559,873
Accumulated deficit....................................... (2,483,302)
----------- ---------
Total stockholders' equity........................ (910,699)
----------- ---------
Total capitalization.............................. 427,814 $
=========== =========
</TABLE>
- ---------------
(1) Excludes shares issuable pursuant to outstanding warrants and options to
purchase an aggregate of shares of common stock at a weighted
average exercise price of $ per share.
12
<PAGE> 15
DILUTION
Our pro forma net tangible book value at December 31, 1999 was $
or $ per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to the receipt
by us of the net proceeds from the sale of shares of common stock by us offered
hereby at the assumed initial public offering price of $ per share and the
application of the net proceeds therefrom (after deducting the estimated
underwriting discounts, the underwriters' non-accountable expense allowance and
other estimated offering expenses payable by us), our pro forma as adjusted net
tangible book value at December 31, 1999 would have been $ or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to the existing stockholders and an immediate
substantial dilution of $ per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $
Increase per share attributable to new investors..........
-------
Pro forma net tangible book value per share after this
offering (as adjusted).................................
-------
Dilution per share to new investors....................... $
=======
</TABLE>
The following table summarizes as of December 31, 1999, the differences
between existing stockholders and new investors (before deducting the estimated
underwriting discounts, the underwriters' non-accountable expense allowance and
other estimated offering expenses payable by us) with respect to the number of
shares of common stock purchased from us, the total consideration paid and the
average price per share.
<TABLE>
<CAPTION>
SHARES OWNED AFTER TOTAL
THE OFFERING CONSIDERATION
------------------ ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ % $
New investors......................... $
-------- ----- ------- ----- -------
Total....................... 100.0% 100.0%
======== ===== ======= ===== =======
</TABLE>
- ---------------
(1) The above tables excludes shares issuable upon the exercise
of outstanding warrants and options at an weighted average exercise price of
$ per share. To the extent outstanding warrants or options are
exercised, new investors will experience further dilution.
13
<PAGE> 16
SELECTED COMBINED FINANCIAL DATA
You should read the selected combined financial and operating data set
forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the notes included elsewhere herein. The statement of operations data and
supplemental financial data for the fiscal years ended June 30, 1999 and 1998
and the balance sheet data as of June 30, 1999, each as set forth below, have
been derived from our audited financial statements appearing elsewhere herein.
The statement of operations data and supplemental financial data set forth below
for the six months ended December 31, 1999 and 1998 and the balance sheet data
as of December 31, 1999, each as set forth below, have been derived from our
unaudited financial statements appearing elsewhere herein, and include all
adjustments which management considers necessary for a fair presentation of such
financial information for those periods. The historical results are not
necessarily indicative of results to be expected for any future period.
Prior to January 1, 1999, all agent sales on our website were made by
Auction Business. Auction Business was incorporated in August, 1997. Prior to
its incorporation, Auction Business was a sole proprietorship of Mike Rafiq, our
Chief Executive Officer. Pursuant to a Sale of Rights and Affiliation Agreement
dated January 1, 1997 between us and Auction Business, Auction Business agreed
to provide us with all commissions generated from agent sales made on our
website from January 1, 1997 through December 31, 1998, sell us all the Auction
Business' proprietary rights related to its auction software technology and the
Auction Business brand name. As of January 1, 1999, Auction Business
discontinued its operations. We have presented our financial statements on a
combined basis because Auction-Sales.com, Inc. and Auction Business were under
common control during this period through December 31, 1998. The historical
results are not necessarily indicative of results to be expected for any future
period.
14
<PAGE> 17
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue:
Merchandise.......................... $ 2,094,034 $ 3,870,077 $ 1,849,161 $ 2,237,754
Commissions.......................... 161,603 16,340 15,930 11,431
Advertising.......................... -- 750 -- 157,750
----------- ----------- ----------- -----------
Total net revenue............ 2,255,637 3,887,167 1,865,091 2,406,935
Cost of sales.......................... 1,576,778 3,342,677 1,399,965 2,131,804
----------- ----------- ----------- -----------
Gross profit........................... 678,859 544,490 465,126 275,101
Operating expenses:
Selling and marketing................ 229,862 654,483 270,963 602,367
Product development.................. 158,095 271,896 111,572 335,353
General and administrative........... 233,343 725,584 378,809 362,233
----------- ----------- ----------- -----------
Total operating expenses..... 621,300 1,651,963 761,344 1,299,953
----------- ----------- ----------- -----------
Income (loss) from operations.......... 57,559 (1,107,473) (296,218) (1,024,852)
Other income (expense):
Interest income...................... -- 10,496 -- 4,328
Interest expense..................... (33,137) (21,046) (15,181) (21,523)
----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes......................... 24,422 (1,118,023) (311,399) (1,042,047)
Provision for income taxes............. 4,230 800 800 800
----------- ----------- ----------- -----------
Net income (loss)...................... $ 20,192 $(1,118,823) $ (312,199) $(1,042,847)
=========== =========== =========== ===========
Basic income (loss) per share.......... $ (0.00) $ (0.09) $ (0.03) $ (0.08)
=========== =========== =========== ===========
Diluted income (loss) per share........ $ (0.00) $ (0.09) $ (0.03) $ (0.08)
=========== =========== =========== ===========
Weighted average common shares
outstanding.......................... 12,438,027 12,647,945 12,456,351 12,730,000
=========== =========== =========== ===========
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales................ $ 3,548,461 $ 4,017,137 $ 1,992,531 $ 2,340,633
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1999 1999
----------- ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 571,274 $ 801,591
Working capital (deficiency)................................ 56,606 (983,035)
Total current assets........................................ 934,610 1,422,249
Total assets................................................ 1,034,729 1,509,620
Total current liabilities................................... 878,604 2,405,284
Long-term debt.............................................. 23,977 15,035
Stockholders' equity (deficit).............................. 132,148 (910,699)
</TABLE>
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an Internet retailer and distributor offering products through
public interactive business-to-business and business-to-person auctions. We
effected a reorganization on January 1, 1999, at which time we acquired all of
the assets of a company controlled by our principal shareholder.
Prior to January 1, 1999 all agent sales on our website were made by
Auction Business. Auction Business was incorporated in August, 1997. Prior to
its incorporation, Auction Business was a sole proprietorship of Mike Rafiq, our
Chief Executive Officer. Pursuant to a Sale of Rights and Affiliation Agreement
dated January 1, 1997 between us and Auction Business, Auction Business agreed
to provide us with all commissions generated from agent sales made on our
website from January 1, 1997 through December 31, 1998. As of January 1, 1999,
Auction Business discontinued its operations. We have presented our financial
statements on a combined basis because Auction-Sales.com, Inc. and Auction
Business were under common control during the periods presented.
REVENUE RECOGNITION
We obtain merchandise from vendors in one of two primary arrangements,
either through the principal sales model (merchandise revenues) or through the
agent sales model (commission revenues). Under the principal sales model, we
either purchase the merchandise or acquire the rights to sell merchandise under
consignment relationships with vendors. Under the agent sales model, we derive
fees or commissions for selling a vendor's merchandise on our website.
PRINCIPAL SALES MODEL -- PURCHASES
For sales of merchandise owned by us, we are responsible for conducting the
auction, billing the customer, shipping the merchandise to the customer and
processing merchandise returns. We recognize the full sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In this type of transaction, we bear both inventory and credit
risk with respect to sales of inventory. In instances where the credit card
authorization has been received but the merchandise has not been shipped, we
defer revenue recognition until the merchandise is shipped. The vendor is
typically responsible for merchandise returns. We allow customers to return
products in certain circumstances. Accordingly, we provide for allowances for
estimated future returns at the time of shipment based on historical experience.
PRINCIPAL SALES MODEL -- CONSIGNMENT
For sales on consignment, we either take physical possession of the
merchandise or the vendor retains physical possession of the merchandise. In
either case, we are not obligated to take title to the merchandise unless we
successfully sell the merchandise at auction. Upon completion of an auction, we
take title to the merchandise, charge the customer's credit card and either ship
the merchandise directly or arrange for a third party to complete delivery to
the customer. Subsequently, we pay the vendor any amounts due for the purchase
of the related merchandise. We record the full sales amount as revenue upon the
verification of the credit card authorization and shipment of the merchandise.
In consignment transactions, we are at risk of loss for collecting all of the
auction proceeds, delivery of the merchandise and returns from customers. In
instances where credit card authorization has been received but the merchandise
has not been shipped, we defer revenue recognition until the merchandise is
shipped. We allow customers to return products in certain circumstances.
Accordingly, we will provide for allowances for estimated future returns at the
time of shipment based on historical experience.
16
<PAGE> 19
AGENT SALES MODEL
Under this arrangement, at the conclusion of an auction we forward the
order information to the vendor, which then charges the customer's credit card
and ships the merchandise to the customer. We do not take title to or possession
of the merchandise, and the vendor bears all of the risk of credit card
chargebacks. We recognize the commissions as revenue upon completion of the
auction process and the forwarding of the auction sales information to the
vendor. The vendors are responsible for merchandise returns under the agent
sales model.
We currently derive most of our revenues from principal sales. With the
introduction of our portal solution, we expect a larger portion of our revenues
will be derived from fees and commissions earned as agent. For the six months
ended December 31, 1999, principal sales transactions represented 95.5% of our
gross merchandise sales. The gross merchandise sales amounts represent what our
total revenue would have been if all agent sales had been made as principal
sales. We believe that the information on gross merchandise sales is relevant to
a reader of our financial statements since it provides a more consistent
comparison between historical periods. Gross merchandise sales should not be
considered in isolation or as a substitute for other information prepared in
accordance with generally accepted accounting principles.
ADVERTISING
We also derive revenues from advertisements in our website. These
advertisements usually take the form of anchors, tenants, banners, e-mails and
text links that encourage each customer to click through directly to the
advertiser's website. For the six months ended December 31, 1999, 6.5% of our
net revenue was derived from advertising.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
REVENUES
Total Net Revenue. Total net revenue is comprised of the net value of
principal sales paid to us by our customers and commissions earned on agent
sales. We had $1.9 million of total net revenue for the six months ended
December 31, 1998. Gross merchandise sales for that period were $2.0 million.
For the six months ended December 31, 1999, total net revenue grew 29.0% to $2.4
million while gross merchandise sales grew to $2.3 million. Our growth in total
net revenue and gross merchandise sales for the six months ended December 31,
1999 as compared to the six months ended December 31, 1998 was due primarily to
the growth in our customer base, an expansion of merchandise offered and the
launching of our advertising program.
Gross merchandise sales for the six months ended December 31, 1998 and 1999
is derived as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Merchandise sales..................................... $1,849,000 $2,238,000
Plus: gross agent sales............................... 160,000 114,000
Less: net agent sales................................. 16,000 11,000
---------- ----------
Gross merchandise sales(1)............................ $1,993,000 $2,341,000
========== ==========
</TABLE>
17
<PAGE> 20
During the six months ended December 31, 1998 and 1999, gross merchandise
sales were comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Principal sales model -- purchased inventory.......... $1,849,000 $2,184,000
Principal sales model -- consigned inventory.......... -- 54,000
Agent sales model..................................... 144,000 103,000
---------- ----------
Gross merchandise sales(1)............................ $1,993,000 $2,341,000
========== ==========
</TABLE>
- ---------------
(1) Gross merchandise sales is a non-GAAP measure of total sales. Gross
merchandise sales represent the amount the Company's total revenue would
have been if all agent sales had been made as principal sales.
Cost of Sales. Cost of sales consists principally of the cost of
merchandise acquired under the principal sales model and the cost of shipping
(offset by customer shipping revenue), product repackaging and inbound shipping
for such merchandise. Cost of sales increased by approximately $732,000 for the
six months ended December 31, 1999 as compared to the six months ended December
31, 1998, or 52.2% as a result of growth in our overall business and as a result
of more sales under the principal sales model.
Gross Profit. Overall gross profit was $275,000 for the six months ended
December 31, 1999 and $465,000 for the six months ended December 31, 1998. Gross
profit on principal sales was $106,000 or 4.5% of gross merchandise sales for
the six months ended December 31, 1999 and $450,000 or 22.5% for the six months
ended December 31, 1998. The remainder of gross profit ($169,000 for the six
months ended December 31, 1999 and $16,000 for the six months ended December 31,
1998), which is attributable to agent sales and advertising revenue, represented
7.2% and 0.8% of gross merchandise sales for the same respective periods. For
the six months ended December 31, 1999, advertising revenues were $158,000
comprising 6.6% of net revenues. There were no advertising revenues for the six
month period ended December 31, 1998. The decrease in gross profit is a result
of competitive pricing for computer and consumer electronics products.
EXPENSES
Selling and Marketing. Selling and marketing expenses consist primarily of
advertising expenditures, payroll and related expenses for sales, marketing and
merchandise acquisition personnel, and promotional material. Selling and
marketing expenses were $602,000 for the six months ended December 31, 1999 and
$271,000 for the six months ended December 31, 1998. Selling and marketing
expenses as a percentage of gross merchandise sales were 25.7% for six months
ended December 31, 1999 and 13.6% for the six months ended December 31, 1998.
These increases were primarily attributable to expansion of our Internet
advertising activities, increases in our marketing staff and increased expenses
associated with promotion and marketing of our services. We expect selling and
marketing expenses to increase significantly and as a percentage of gross
merchandise sales as we endeavor to enhance our brand recognition.
Product Development. Product development expenses consist primarily of
payroll and related expenses for engineering personnel and consultants who
develop, operate and monitor our website and related systems, and equipment
costs. Product development expenses were $335,000 for the six months ended
December 31, 1999 and $112,000 for the six months ended December 31, 1998.
Product development costs as a percentage of gross merchandise sales were 14.3%
for the six months ended December 31, 1999 and 5.6% for the six months ended
December 31, 1998. These increases were primarily attributable to increased
staffing of product development personnel and associated costs relating to
enhancing the features and functionality of our website and related systems. To
date, all product development costs have been expensed as incurred. We expect
18
<PAGE> 21
engineering expenses to increase in the foreseeable future as we hire additional
personnel and incur expenses necessary to develop our portal solution.
General and Administrative. General and administrative expenses consist
primarily of payroll, credit card processing and related expenses for customer
service, provision for doubtful accounts, facilities expenses, merchandising,
executive, accounting and logistical personnel, and other general corporate
expenses. General and administrative expenses were $362,000 for the six months
ended December 31, 1999 and $379,000 for the six months ended December 31, 1998.
General and administrative expenses as a percentage of gross merchandise sales
were 15.5% for the six months ended December 31, 1999 and 19.0% for the six
months ended December 31, 1998. The decrease in general and administrative
expenses was due to a decrease in staffing of administrative personnel. We
expect general and administrative expenses to increase for the remainder of the
year ending June 30, 2000 and for the foreseeable future, as we expand our
officer group, staff and facilities.
Other Income (Expense) Other income (expense) for the six months ended
December 31, 1999 was ($17,000) compared to ($15,000) for the six months ended
December 31, 1998.
Provision for Income Taxes. We had a net loss for the six months ended
December 31, 1999 of $1.0 million and we recorded $800 as a provision for income
taxes for this period. For the six months ended December 31, 1998, we had a net
loss of $311,000 and recorded a provision for income taxes of $800.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
REVENUES
Total Net Revenue. We had $2.3 million of total net revenue for the year
ended June 30, 1998. Gross merchandise sales for that period were $3.5 million.
For the year ended June 30, 1999, total net revenue grew to $3.9 million,
representing a 72.3% increase and gross merchandise sales grew to $4.0 million,
representing a 13.2% increase. Our growth in total net revenue and gross
merchandise sales for the year ended June 30, 1999 as compared to the year ended
June 30, 1998 was due to the growth in our customer base and an expansion of
merchandise offered.
Gross merchandise sales for the fiscal year ended June 30, 1998 and 1999 is
derived as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Merchandise sales....................................... $2,094,000 $3,870,000
Plus: gross agent sales................................. 1,616,000 163,000
Less: net agent sales................................... 162,000 16,000
---------- ----------
Gross merchandise sales(1).............................. $3,548,000 $4,017,000
========== ==========
</TABLE>
19
<PAGE> 22
During the fiscal year ended June 30, 1998 and 1999, gross merchandise
sales were comprised of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Principal sales model -- purchased inventory............ $2,075,000 $3,870,000
Principal sales model -- consigned inventory............ 78,000 --
Agent sales model....................................... 1,395,000 147,000
---------- ----------
Gross merchandise sales................................. $3,548,000 $4,017,000
========== ==========
</TABLE>
- ---------------
(1) Gross merchandise sales is a non-GAAP measure of total sales generated by
us. Gross merchandise sales represent the amount the Company's total revenue
would have been if all agent sales had been made as principal sales.
Cost of Sales. Cost of sales increased by approximately $1.8 million for
the year ended June 30, 1999 as compared to the year ended June 30, 1998, or
112% as a result of growth in our overall business and as a result of more
revenues generated under the principal sales model.
Gross Profit. Overall gross profit was $544,000 for the year ended June 30,
1999 and $679,000 for the year ended June 30, 1998. Gross profit on principal
sales was $527,000 or 13.1% of gross merchandise sales for the year ended June
30, 1999 and $517,000 or 14.6% of gross merchandise sales for the year ended
June 30, 1998. The remainder of gross profit was $16,000 for the year ended June
30, 1999 and $162,000 for the year ended June 30, 1998. This was attributable to
agent sales and advertising revenue, represented 0.4% and 4.6% of gross
merchandise sales made under the agent sales model for the same respective
periods. For the year ended June 30, 1999 advertising revenues were $1,000
compared to $0 for the year ended June 30, 1998.
EXPENSES
Sales and Marketing. Sales and marketing expenses were $654,000 for the
year ended June 30, 1999 and $230,000 for the year ended June 30, 1998. Sales
and marketing expenses as a percentage of gross merchandise sales were 16.3% for
year ended June 30, 1999 and 6.5% for the year ended June 30, 1998. These were
primarily attributable to expansion of our Internet advertising, increases in
our marketing staff and increased expenses associated with promotion and
marketing of our services.
Product Development. Product development expenses were $272,000 for the
year ended June 30, 1999 and $158,000 for the year ended June 30, 1998. Product
development costs as a percentage of gross merchandise sales were 6.8% for the
year ended June 30, 1999 and 4.5% the year ended June 30, 1998, respectively.
The increases were primarily attributable to new systems and upgrades.
General and Administrative. General and administrative expenses were
$726,000 for the year ended June 30, 1999 and $233,000 for the year ended June
30, 1998. General and administrative expenses as a percentage of gross
merchandise sales were 18.1% for the year ended June 30, 1999 and 6.5% for the
year ended June 30, 1998. These increases were attributable to an increase in
salaries and benefits, primarily due to the hiring of additional personnel and
to facilities expenses.
Other Income (Expense). Other income (expense) for the year ended June 30,
1999 was ($11,000) compared to ($33,000) for the year ended June 30, 1998.
Provision for Income Taxes. We had a net loss before taxes of $1.1 million
for the year ended June 30, 1999 and we recorded $800 as a provision for income
taxes for this period. For the year ended June 30, 1998, we had net income
before taxes of $24,422 and recorded a provision for income taxes of $4,000,
representing an effective income tax rate of 17.3%. This effective tax rate was
below the statutory rate primarily because we utilized our net operating loss
carryforward.
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FLUCTUATION IN OPERATING RESULTS
Our operating results have fluctuated in the past, and are expected to
continue to fluctuate in the future, due to a number of factors, many of which
are outside our control. These factors include (1) our ability to attract new
customers at a steady rate, manage inventory mix and the mix of products offered
at auction, meet certain pricing targets, liquidate inventory in a timely
manner, maintain gross margins and maintain customer satisfaction, (2) the
availability and pricing of merchandise from vendors, (3) product obsolescence
and pricing erosion, (4) the amount and timing of costs relating to expansion of
our operations, including the development of our auction portal, (5) the timing,
cost and availability of advertising on other websites, (6) consumer confidence
in encrypted transactions in the Internet environment, (7) the announcement or
introduction of new types of merchandise, service offerings or customer services
by us or our competitors, (8) technical difficulties with respect to consumer
use of the auction format on our website, (9) delays in revenue recognition at
the end of a fiscal period as a result of shipping or logistical problems, (10)
delays in shipments as a result of strikes or other problems with our delivery
service providers or the loss of our credit card processor, (11) the level of
merchandise returns we experience and (12) general economic conditions and
economic conditions specific to the Internet and electronic commerce. As a
strategic response to changes in the competitive environment, we may from time
to time make certain service, marketing or supply decisions or acquisitions that
could have a material adverse effect on our quarterly results of operations and
financial condition. Due to all of the foregoing factors, in some future quarter
our operating results may not meet or exceed the expectations of securities
analysts and investors. In such event, the trading price of our common stock
would likely be adversely effected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
offerings of equity and debt securities and advances from our principal
stockholder. Net cash provided by (used in) operating activities was ($763,000)
for the year ended June 30, 1999 and $242,000 for the year ended June 30, 1998.
The increase in net cash used in operating activities for the years ended June
30, 1999 and 1998, was primarily attributable to increases in losses. The net
cash used in operating activities for the six months ended December 31, 1999 was
($690,000) and for the six months ended December 31, 1998 was ($88,000). The
increase in cash used in operating activities for the six months ended December
31, 1999 was primarily attributable to increased staffing and associated
expenses and expenses associated with enhancing our website.
Net cash used in investing activities was $409,000 for the six months ended
December 31, 1999, $39,000 for the six months ended December 31, 1998, $6,000
for the year ended June 30, 1998 and $16,000 for the year ended June 30, 1999.
Net cash used in investing activities comprised purchases of property and
equipment, certificates or deposit and payment of advances to our significant
stockholder.
As of December 31, 1999, we had approximately $802,000 of cash, cash
equivalents and certificates of deposit.
As of December 31, 1999, we had received $1.2 million from a private
placement and we had sold a total of 24 units, each unit consisting of a $50,000
convertible note and warrants to purchase 16,667 shares of our common stock at a
per share exercise price of $8.00. The proceeds of this private placement are
being used for the development of our portal solution and for working capital.
We will use a portion of the net proceeds of this offering to repay these notes.
As of December 31, 1999, our principal commitments consisted of obligations
of approximately $708,000, which were personally guaranteed by our chief
executive officer. These obligations included the costs of credit card merchant
processing, leased equipment and our operating lease. We anticipate purchasing
approximately $2.0 million of property and equipment with the proceeds
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<PAGE> 24
of this offering, primarily for computer equipment, furniture and fixtures, and
expenditures associated with our intent to relocate to new facilities. As we
continue to enter into more transactions structured as principal sales, we will
need to commit more cash to support a larger merchandise inventory. We plan to
increase our operating expenses significantly in order to increase the size of
our staff, expand our marketing efforts, enhance our brand name image, purchase
larger volumes of merchandise to be sold at auction, increase our software
development efforts and support our growing infrastructure. As a result, we
expect to experience quarterly net losses and negative cash flow through at
least December 2001. Thus, we will have to finance our capital expenditures,
increased inventory, increased accounts receivable and our growth in operating
expenses from the proceeds of this offering. We believe that the net proceeds
from this offering, together with our current cash and cash equivalents, and our
cash flows from operations, if any, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 13
months. Thereafter, if cash generated from operations is insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity or convertible
debt securities. The sale of additional equity or convertible debt securities
could result in additional dilution to our stockholders. We cannot assure you
that financing will be available to us in amounts or on terms acceptable to us.
RECENTLY ISSUED ACCOUNTING CONSIDERATIONS
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." We do not expect adoption of
SFAS No. 134 to have a material impact, if any, on our financial position or
results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years beginning
February 1999. This statement is not applicable to us.
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization of Charitable Trust that Raises or Holds
Contributions for Others." This statement is not applicable to us.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." We do not expect adoption of SFAS No. 137
to have a material impact, if any, on our financial position or results of
operation.
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BUSINESS
We are an Internet retailer and distributor offering products through
public interactive business-to-business and business-to-person auctions. Our
online auctions provide an interesting sales format and a compelling shopping
experience that enable customers to bid against each other in a friendly,
competitive marketplace. We offer new and recently introduced products as well
as excess and refurbished products. Currently, the majority of our revenues are
derived from sales of computer hardware and consumer electronics. We are
expanding our product selection and developing new revenues by offering other
types of merchandise, such as skincare products, jewelry, travel goods, sporting
goods and sports memorabilia. Products currently available through our auctions
are produced by well known, name brand manufacturers such as:
<TABLE>
<S> <C> <C> <C>
- - Compaq - Hewlett Packard - Apple - Sun Microsystems
- - Phillips - NEC - 3Com - Motorola
- - Sony - Toshiba - Panasonic - AT&T
</TABLE>
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet is a significant interactive global medium for communication,
information and commerce. We believe the primary uses of the Internet as a
medium of electronic commerce are as follows:
Business-to-Business and Business-to-Person Applications
A growing number of businesses have been using the Internet as a low-cost
sales and distribution channel. Business commerce use of the Internet revolves
around both business-to-business and business-to-person transactions. We believe
that this interest in online commerce is fueled in part by:
Online Interactivity. Businesses can use the Internet to interact with
customers in a real-time personalized shopping experience which provides them
with significant marketing flexibility. On the Internet, a business can
frequently adjust its featured selections, pricing and visual presentation.
Also, these businesses can display a larger number of products than a
traditional store-based or catalog retailer.
Global Scope of the Internet. Businesses that use the Internet as a sales
and marketing channel are able to reach and serve a large and geographically
diverse customer base electronically from a central location. Also, businesses
can easily obtain demographic and related customer data which provides
additional opportunities for direct marketing and personalized services.
Decreased Sales Costs. Businesses that use the Internet can access a global
market without the high costs associated with additional retail channels. Online
retailers and distributors do not have the burden of managing and maintaining
multiple retail stores or the significant printing and mailing costs of
catalogues.
Reduced Inventory Costs. Many businesses that use the Internet are able to
have products shipped to consumers directly by the manufacturers. This reduces
inventory costs and decreases exposure to inventory obsolescence.
Person-to-Person Applications
Person-to-person trading has traditionally been conducted directly through
classified advertisements, collectibles shows, garage sales and flea markets or
through intermediaries, such as auction houses and local dealer shops. These
markets are highly inefficient and their fragmented, regional nature makes it
difficult and expensive for buyers and sellers to meet, exchange information and
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complete transactions. Also, the localized nature of these markets results in a
limited variety and breadth of goods available in any one auction.
An Internet-based trading solution offers several advantages over
traditional person-to-person trading mediums, such as:
- facilitating the meeting of buyers and sellers, listing items for sale,
exchanging information, interacting with each other and consummating
transactions
- allowing buyers and sellers to trade directly with one another, thereby
bypassing traditional intermediaries and lowering costs for both parties
- providing a global marketplace, which gives buyers a broader selection of
goods to purchase and sellers the opportunity to sell their goods
efficiently to a wider base of buyers
- offering significant convenience, by allowing trading at all hours and
providing continually-updated information.
We plan on offering person-to-person applications with the advent of a
portal solution.
THE AUCTION-SALES.COM SOLUTION
CREATION OF AUCTION PORTAL
We plan to differentiate ourselves from other online auction sales
companies and become a leader in the global online commerce business by creating
an online auction portal. We are developing a portal to cater to the specific
needs of the auction audience by:
- providing each user access to specialized services such as message
boards, chat rooms, home pages and auction management tools
- helping each user locate, retrieve and manage information tailored to
individual interests such as news, sports, stock quotes and weather
- developing a search engine that is tailored to the interests of the
auction community.
Our goal is to develop a sense of community to draw large audiences,
encourage repeat visits and keep users engaged. A key to our goal is to
establish our website as the premier auction website. To establish this goal, we
believe we must accomplish the following steps:
- build awareness of our website as a "one-stop" auction site to expand our
user base by building customer and vendor awareness of the auction portal
concept
- increase our visibility and brand recognition to heighten vendor
awareness and boost customer traffic
- increase points of access by forming relationships and advertising on
websites similar to our existing arrangements with America Online,
Compuserve, Freei.net, Shopnow.com, Freeshop, Channel 2000 and Netscape
- participate in forums such as selected trade shows and conventions to
educate the public of the services available on our website.
FOCUS OUR AUCTION SOLUTION ON BUSINESS-TO-BUSINESS APPLICATIONS
Our auction services provide business-to-business e-commerce solutions to
small to medium sized business. Our business-to-business auction and reverse
auction services are designed to allow automated real-time bidding for a
business' existing procurement or liquidation process. Instead of purchasing
products and services at fixed prices from suppliers or selling off excess
inventory through traditional channels, our solution creates a more efficient
on-line environment. The service is designed to establish a true market price
for goods or services purchased and sold. By conducting
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online exchanges of products and services, buyers and sellers are able to arrive
at an optimum price for each particular business transaction.
In procurement, our online auction services afford corporate buyers and
procurement managers a reduction of purchasing costs and a streamlining of the
procurement process. The traditional time-consuming and costly procurement
process has been historically conducted via fax, telephone or computer through
the request-for-proposal and process. Normally such a process means creating
request-for-proposal packets, mailing, e-mailing and/or faxing them to the
suppliers and notifying the suppliers over the phone. Typically, such a process
means receiving responses reviewing them and negotiating via
phone/e-mail/mail/fax which can take several weeks. Through our reverse auction
services we are able to accelerate the procurement process to a few hours or a
few days and afford the buyer the ability to obtain a true market price for
their selected goods. Using our on-line auction service, buyers can identify
suppliers of new goods and services or find more advantageous prices for
currently purchased items. Buyers are able to obtain reductions in purchasing
costs by streamlining the procurement process online, including setting auction
parameters such as
- pre-selection or qualification of suppliers
- win parameters such as price, procurement terms and sales values
- access privileges
- the amount the buyer decides to bid
- the items the buyer decide to buy
The solution alleviates the need to internally staff a substantial
procurement department or pay any up-front equipment fees.
In liquidation, our on-line auction solution automates the often burdensome
administrative function of excess inventory disposition. Sellers can generate
revenue from new and existing customers while reducing operating costs and
controlling the entire sales process through a new channel of distribution.
Sellers also benefit not only by realizing the real-time market value of
distributed goods, but by the ability to more quickly turn inventory, which
reduces the risk of inventory obsolescence.
We realize the importance of providing not only the auctions and products
that our customers are looking for, but also all the value-added services that
will make the buying and selling process streamlined, secure and easy for both
consumers and businesses. We plan to provide financing options to all our
consumer and business customers within our auction portal. Customers will be
provided with the ability to apply for on-line financing. We will arrange with
third party credit providers to consider the application and authorize or deny
financing in real time. Customers will be provided with our AuctionBucks which
can be used anywhere within our auction portal to bid on items of interest. As
items are purchased, the amount of available AuctionBucks will be reduced
automatically.
In addition, we intend to provide a rating system of buyers and sellers
that reviews the party's track history on our site. This will help alleviate
uncertainty associated with the auction process and allow parties to know and
screen the seriousness of the other participants.
THE AUCTION PROCESS
While we currently offer public business-to-business and business-to-person
auctions, we plan to enhance our infrastructure to allow any type of Internet
auction to be conducted. We believe this capacity will provide us with a
competitive advantage over other current Internet auction companies that
currently offer only one type of auction service.
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We currently offer public business-to-business and business-to-person
auctions. We plan to introduce public person-to-person auctions as an aspect of
our auction portal solution. Public auctions are auctions that are available to
all of our users. Public auctions consist of two formats:
- Business-to-Business and Business-to-Person. In this format, businesses
offer current and excess merchandise to individual and business consumers
as well as resellers. We generate revenue either as a principal or an
agent. As a principal we buy the products directly and resell them at a
profit. As an agent we act as a sales agent for vendors and receive a fee
or a commission based upon a percentage of the sales price.
- Person-to-Person. We will offer a platform to allow users to sell
high-end products directly to other users. We believe this feature will
increase traffic to our website and further enhance our brand
recognition. In this format, we will earn revenue both from acting as an
agent and from providing certain auction management services.
We also plan to introduce private auctions as part of our auction portal
solution. Private auctions will be customized, personalized auctions for
individual businesses to allow them access to our infrastructure and traffic
flow. Private auctions will be conducted by the seller in two formats:
- Business-to-Business. Only certain identified bidders will have access to
these auctions. The seller will pre-screen the bidders and we will
provide them secured access to the customized auction site. In this way,
large companies will be able to deal directly with identified customers
to dispose of inventory in a cost-effective manner. This format may
encourage businesses that were successful at bidding for products under
the private business-to-business auction format to engage us to sell
products for them in a similar manner.
- Business-to-Person. In this private format, a business may conduct an
auction consisting of a wide range of its own merchandise to our users at
large. We will collect demographic and other related data which may be
used by us and the seller to target selected individuals to privately bid
on merchandise. Also, businesses may direct other individual buyers to
our site where they can register and bid on the seller's items.
These private auctions will look like the seller's customized private
auction site. We believe this feature will be attractive to businesses that want
to quickly and efficiently dispose of merchandise but that do not have the
ability or desire to create or manage their own auction websites. In each of
these formats, we will earn revenue both from acting as an agent and from
providing certain auction management services.
ENTERING OUR WEBSITE
While any visitor to our website can browse through our service and view
the items listed for auction, a user must first register with us in order to bid
for an item. Users register for free by completing a registration form on the
Internet. The registration form records contract information, shipping address
and validates credit card information. The bidder is then given an
identification number for use when bidding. Once registered, a customer can bid
immediately on any of the products or services we offer.
BROWSING
Our home page contains a listing of product categories that allows for easy
exploration of current auctions. Bidders can search for specific items by
browsing through a list of auctions within a category or subcategory and then
"click through" to a product page for a detailed description of a particular
item. Each auction is assigned a unique identifier so that users can easily
search for and track specific auctions. We maintain reserve pricing on most of
the products we sell with a minimum bid price of $1, as described below in
"-- Bidding on a Product."
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In March 1999, we implemented a search engine to provide our users with the
tools to find a desired product or type of product offered on our website in a
rapid manner. For example, if a user wanted to find whether we were offering any
personal computers with DVD-ROM drives, the user could simply enter "DVD" and
the search engine would create a list of products, including the product
identification number, being offered in the current auction with DVD-ROM drives.
We believe that the addition of the search engine saves our users valuable time
when they have a specific product to purchase in mind.
GETTING INFORMATION ON PRODUCTS
On our website, customers can obtain detailed product information on each
product up for bid. Each item features a specific product page containing:
- a detailed product description
- a full-color image of the product
- warranty terms
- sales tax information
- method of payment
- delivery time
- shipping and handling charges
- return policy
- a statement that the item is subject to reserve pricing
In addition, each product page contains a table at the top of the page
consisting of
- the item identification number
- the minimum bid
- the bid increments
- the quantity available
To encourage bidding, we actively create and maintain pages that are
designed to highlight certain of the product brands we offer in our different
departments. For example in our "Designer's Delectation" area we offer products
and services such as made to order dinners, collectible lithographs, denim
jackets and other products. In our "Rebates Motel" area, we offer a wide variety
of close-out products at discount rates. In our "Bulk Buys" area, you can
purchase packages of products like ZIP discs, recordable CDs, AC Adaptors and
many others.
BIDDING ON A PRODUCT
Once registered, a customer can bid or buy at will. As bids are received,
our Web page is instantly updated to display the current high bidder's initials,
city and state.
We realize that our end-users have busy schedules. Therefore, we introduced
BidCompanion, our personal bidding assistant. Our users can instruct their
BidCompanion what products they are interested in, and how much they would be
willing to pay. The BidCompanion will then monitor our auctions and place bids
accordingly. Should the user be outbid or on the contrary win the auctioned item
he/she will receive, either through e-mail or on his/her pager a confirmation
from his/her BidCompanion.
When the auction closes, typically the highest bidders bidding at or above
the minimum bid price win the available inventory at their actual bid prices,
unless we have established reserve
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pricing for that item. Reserve pricing is a mechanism employed by auction
companies to ensure that auctioned products are not sold unless the bid meets
the minimum price selected. This means that although we may set a minimum bid
price for a product, if the minimum bid price is below the reserve price we
establish, we reserve the right not to sell the product to that customer. Each
winning bidder may pay a price that is different from the prices paid by other
winning bidders. When bidders' prices are equal, bids for larger quantities are
honored first and if the quantities are equal, bids that are first in time
prevail. Using our proprietary software, we automatically determine the winning
bidders and send e-mail messages to them to confirm their purchases the same
day. If we are acting as a principal, the merchandise is shipped by us, or drop
shipped by the vendor or supplier. If we are acting as an agent, the seller
ships the merchandise.
PAYING FOR A PRODUCT
To pay for orders, a customer must use a credit card, which is authorized
during the registration process, but which is charged when the customer's
winning bid is accepted. Our website uses an encryption technology that works
with the most common Internet browsers and makes it difficult for unauthorized
parties to read information sent by our customers. Our system automatically
confirms receipt of each order via e-mail. We manually notify each customer when
we ship the order.
GETTING HELP
From every page of our website, a customer can click on a "help" button to
go to our customer service area. The customer service area of our website
contains extensive information for first-time and repeat visitors. In this area,
we assist customers in searching for, bidding for, and returning our products
and provide information on shipping charges and other policies. In addition, we
provide customers with answers to the most frequently asked questions and
encourage our visitors to send us feedback and suggestions via e-mail.
Furthermore, a limited number of customer service agents are available to answer
questions about products and the shopping process during business hours via our
toll-free number, which is displayed in the customer service area of our
website.
DIRECT PURCHASES
In addition to offering products through auction, we also offer our users
the ability to purchase products directly from our website at a fixed price.
This fixed price is typically more than the cost of a similar product subject to
a successful bid in our auction proceedings. However, by purchasing a product
directly from our website, a user can:
- receive a product immediately without having to wait for the auction to
end
- avoid uncertainty with respect to the success of the bid
- avoid uncertainty with respect to the bid quantity
VIRTUAL INVENTORY
We believe that the breadth and depth of our product selection, together
with the flexibility of our auction services and our range of value-added
services, enable us to pursue an attractive merchandising strategy. We provide
an extensive selection of products that would be economically impractical to
stock in a traditional store.
Unlike store-based retail formats, our online format provides significant
flexibility with regard to the organization and presentation of our product
selection. Our simple, easy-to-use interface allows customers to browse our
product selection by brand product category and price, as well as by
combinations of these attributes. For example, a customer can easily search for
computer products and referrals and related accessories without consulting store
personnel or walking multiple aisles within one or more traditional stores. Our
online format enables us to dynamically adjust our product mix to respond to
changing customer demand. In addition, our online format gives us
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flexibility in featuring or promoting certain products without having to alter
the physical layout of a store. We also believe that our breadth of merchandise
will make people want to "shop" in one rather than multiple websites.
We currently offer the following products in the categories below:
- HARDWARE. We offer the following products from computer hardware leaders
such as Hewlett-Packard, IBM, Acer, Toshiba, NEC, Mitsubishi, ViewSonic,
Compaq, Toshiba, Zenith, Apple and Intel:
<TABLE>
<S> <C>
- - personal computers - drives
- - laptops - controllers
- - notebooks - multimedia kits
- - palmtops - CD and DVD drives
- - motherboards - digital cameras
- - computer cases - computer accessories
- - monitors - modems
- - scanners - sound/video and TV cards
- - printers - servers
- - plotters - workstations
- - fax machines
</TABLE>
- SOFTWARE. We offer the following categories of computer software from
industry leaders such as Microsoft, Novell, Symantec, Corel, Sierra, Red
Hat and others
<TABLE>
<S> <C>
- - business - utilities
- - entertainment - educational
- - graphics - reference
</TABLE>
- SPORTS. We offer sporting goods and sporting memorabilia such as sports
cards.
- GAMING. We offer exciting games played on Nintendo 64 and Sony
Playstation and radio controlled toys.
- JEWELRY. We offer watches, rings, necklaces, bracelets, bands, earrings
and pendants.
- HEALTHCARE/SKINCARE/FASHIONCARE. We offer health and skin care products
from KMI International and Natural White products.
- OTHER PRODUCTS. We offer other products such as made-to-order dinners,
denim jackets, lithographs, travel related products, space pens and
candies, including selections of See's candies.
In addition to offering products manufactured by name brand manufacturers,
we also sell personal computers and personal computer kits bearing the Alto
brand name. These computers and computer kits are manufactured by third party
contractors and sold to us. We then place the Alto brand name on them. The
manufacturer provides all product warranties. We believe that sales of the
personal computers and computer kits bearing our own brand improves brand
recognition and allows us to give our customers access to the latest
technological advances prior to their general availability.
For the six months ended December 31, 1999, the product mix based on
merchandise net revenue consisted of approximately 88% new merchandise and 12%
refurbished products. Most merchandise sold by us is warranted by the
manufacturer or refurbisher which reduces our customer service expenses. In some
instances, the customer may purchase an extended warranty provided by a third
party, except in those states where such third-party warranties are prohibited
by law.
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VENDOR RELATIONSHIPS
We believe that our merchandising strategy provides an attractive value
proposition for our vendors. We are able to offer our vendors access to a wide
and diverse customer base regardless of the size or influence of the individual
vendor.
We obtain our merchandise directly from manufacturers and resellers. We are
entirely dependent upon vendors to supply us with merchandise for our Internet
auctions. ITM, Inc. accounted for 30.0% of our cost of sales in fiscal 1998.
Frame One accounted for approximately 17.0% of our cost of sales for the six
months ended December 31, 1999. No other vendors accounted for 10% or more of
our cost of sales for fiscal 1998 or the six months ended December 31, 1999. No
vendor accounted for 10% or more of our costs of sales for fiscal 1999. Since
merchandise availability is unpredictable, strong vendor relationships are
critical to our success. As a result, our buying staff maintains ongoing contact
with our vendors to learn when new merchandise becomes available.
We obtain merchandise from vendors through one of two primary arrangements,
either the principal sales model or the agent sales model. Currently, we act
more as a principal than as an agent. With the introduction of our portal
solution, we expect a larger portion of our revenues will be derived from fees
and commissions earned as an agent.
SELLING AND MARKETING
To achieve our objective of becoming a leader in global auctions, we have
developed a marketing strategy based on strengthening our brand name and
increasing customer traffic to our website. In addition to forming relationships
of the types described above, we employ a mix of media and promotional
activities to achieve these goals.
INTERNET ADVERTISING
These advertisements usually take the form of anchors, tenants and banners
that encourage readers to click through directly to our website announcing new
items available at each auction, special products available, site changes and
new features. We have a strict policy of sending only solicited e-mail, and
customers can remove their names from our mailing list at any time.
AUCTION-SALES AFFILIATE PROGRAM
In March 1999, we launched our Auction-Sales Affiliate Program which
provides an attractive way of advertising our website, product offerings and
services without paying traditional advertising expenses. With this program, we
permit successful applicants, who have their own websites to place our banner on
their website providing their users with a link to our website. The affiliate
earns a commission on any user bids and purchases if all of the following
conditions are satisfied:
- the user registers with us within seven days of clicking through to our
website from the affiliate's link
- the user does not, within that same seven days, click through to our
website from any other link
- the bid or purchase is made within three months after the user registers
with us
Affiliates would typically display our logo on their sites and would then
start earning revenues on the activity generated by the people clicking on our
logo on their websites. The technology is proprietary and provides affiliates
real-time up-to-date information on the activity they generate, as well as on
the commission they are earning.
If the above conditions are satisfied, the affiliate will receive a $.02
commission on any bid, and a 2% commission on any net purchase, made by one of
its users. A net purchase consists of the total amount received less any amounts
collected for shipping, taxes or duties, gift wrapping, handling,
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insurance and similar charges. We have developed proprietary software that
allows an Affiliate, on a daily basis, to track all bids and purchases made by
its users.
LINKS FROM OTHER WEB SITES
At December 31, 1999 approximately 3,000 websites had links to the
Auction-Sales.com website. We believe such links are a significant factor in
increasing brand awareness and generating customer traffic to our website.
Unlike our anchor, tenant and banner advertisements, links from other websites
are free to us. As our business expands, we expect the number of websites with
links to our website to increase, generating more customer traffic to our
website.
CUSTOMER ELECTRONIC MAIL BROADCASTS
We actively market to our base of customers through e-mail broadcasts. All
bidders in our auctions are automatically added to our electronic mailing list,
which consists of over 106,000 registrants as of December 31, 1999. We currently
send more than 125,000 e-mail messages each week announcing new items available
at action, special products available, site changes and new features. We have a
strict policy of sending only solicited e-mail, and customers can remove their
names from our mailing list at any time.
FULFILLMENT OPERATIONS
Our fully automated and integrated customer management and order
fulfillment system, SalesTrack allows each order to be automatically tracked and
fulfilled from the time of the auction closure all the way through its final
receipt by the customer. It is also fully integrated with our website, allowing
the customer to get a real-time status of his/her order through the BidExpose
section of our website. In addition, this system sends notification e-mails to
our customers advising them of shipment of their merchandise or disposition at
their requests. This system is also a powerful management tool as it provides
full real-time reporting on all aspects of fulfillment performance. The
underlying technology is proprietary and is developed in-house.
We believe SalesTrack expedites customer questions and complaints and
facilitates our timely response. In addition, SalesTrack posts and tracks UPS
order fulfillment on our website and provides us with a reporting structure to
address delivery issues.
Our fulfillment operations vary depending on whether we act as a principal
or agent.
PRINCIPAL FULFILLMENT
As a principal, we obtain products from a network of large and small
vendors, manufacturers and distributors. We carry an inventory of certain
products available for sale on our website. We currently conduct our fulfillment
operations in an approximately 3,200 square-foot facility located in Newbury
Park, California. Both the facility and the operations within it are operated by
us. We send orders from our website to our fulfillment center over a secure high
speed connection and a proprietary warehouse management system. This system
helps us optimize the pick, pack and ship process. Our system provides our
website with data on inventory receiving, shipping, inventory quantities and
inventory location, which enables us to display information about the
availability of the products on our website.
We offer three levels of shipping service: next day delivery, three-day
delivery, and ground delivery. We have developed relationships with both United
Parcel Service and the United States Postal Service to maximize our overall
service level to all 50 states. Priority orders are flagged and expedited
through our fulfillment processes.
In the case of refurbished products, the products may be held at the
refurbisher's facility and shipped directly to the customer. However, the
refurbisher is required to use our labeling and packaging standards and to
transmit shipping information to us to provide a uniform customer experience.
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AGENT FULFILLMENT
In this format, the vendor ships the merchandise directly to the purchaser.
However, the vendor uses our labeling and packaging standards and transmits
shipping information to us.
CUSTOMER SUPPORT AND SERVICE
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat visits and purchases is
dependent, in part, on the strength of our customer support and service
operations and staff. Our customer support and service personnel are responsible
for:
- handling customer inquiries
- answering customer questions about the bidding process
- tracking shipments
- investigating problems with merchandise
- acting as liaisons between customers and our vendors
Our system has been designed around industry standard architectures to
reduce downtime in the event of outages or catastrophic occurrences. Our service
provides 24 hour a day, seven day a week availability. Our website operations
staff consists of systems administrators who manage, monitor and operate our
website. The continued uninterrupted operation of our website is essential to
our business, and it is the job of the site operations staff to ensure, to the
greatest extent possible, the reliability of our website. We provide our own
connection to the Internet through Worldcom/ UUNET's backbone. We believe that
these telecommunications and Internet service facilities are essential to our
operation and we anticipate upgrading these facilities to faster, though more
costly, telecommunication services in the future.
TECHNOLOGY
We use a combination of our own proprietary technology and commercially
available licensed technology to conduct our Internet auctions.
PROPRIETARY TECHNOLOGY
We have devoted and will continue to devote significant resources to
developing our proprietary software technology. We believe that our success
depends, in part, on our internally developed proprietary auction management
software, which implements a variety of customized auctions, markdown and sales
formats.
Our scalable user interface and auction management system is based on
internally-developed proprietary software. Our system handles all aspects of the
auction process including notifying users when:
- they initially register for the service
- they place a successful bid
- an auction ends
The system maintains user registration information, billing accounts, current
auctions and historical listings. All information is regularly archived to a
data warehouse. Complete listings of all items for sale are generated every
auction. The system updates a text-based search engine in real time with the
titles and descriptions of new items, as well as pricing and bidding updates for
active items. Every time an item is listed on the service, or an auction closes
with a bid in excess of the seller-specified minimum bid, the system makes an
entry into the seller's billing account. In addition to these
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features, our service will also support a number of community bulletin board and
chat areas where users and customers can interact.
Our engineering staff consists of five software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary auction management and marketing software internally. Our
engineering strategy focuses on the development of our portal solution, which
includes the enhancement of features and functionality of our existing software
components, the development of additional new software components, and the
integration of off-the-shelf components into our systems. We are currently
investing significant resources in software development and expect to continue
to do so in the future. We believe our future success depends on our ability to
continue developing and enhancing our proprietary software.
COMMERCIALLY AVAILABLE LICENSED TECHNOLOGY
Our strategy has also been to license commercially available technology
whenever possible rather than seek a custom-made or internally-developed
solution. We believe that this strategy enables us to reduce our operating costs
and to respond to changing demands due to growth and technological shifts. This
strategy also allows us to focus our development efforts on creating and
enhancing the specialized, proprietary software that is unique to our business.
Listed below are some of our key architectural components:
- High speed links to the Internet through Worldcom/UUNET's backbone
- Hewlett Packard's HP 9000 UNIX product line is a leader in highly
scalable UNIX servers
- Netscape Commerce Web Server has been chosen for its ability to secure
sensitive customer information through SSL encryption
- Informix Software is the relational database provider. All business
information -- auctions, bids, products, customer accounts, orders,
etc. -- is stored within databases
- proprietary software was developed in-house in C++ and Java to provide a
highly flexible auction environment and to automate our order fulfillment
cycle
We are implementing a broad array of customer support, transaction
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies.
GOVERNMENT REGULATION
Federal Laws
Our industry is not currently subject to direct federal laws or regulations
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet covering issues
such as:
- user privacy
- freedom of expression
- pricing
- content and quality of products and services
- taxation
- advertising
- intellectual property rights
- information security
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The adoption of any such laws or regulations might decrease the rate of
growth of Internet use, which in turn could decrease the demand for our
services, increase the cost of doing business or in some other manner have a
material adverse effect on our business, financial condition and operating
results. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies.
California Laws
There are two primary sets of California laws that are applicable to our
operations:
- laws relating to sales made over the Internet
- laws relating to the conduct of auctions and the liability of auction
companies and auctioneers
In California, it is unlawful for a company conducting sales over the
Internet to accept payment from a buyer and then permit 30 days to elapse, or a
shorter period of time if specified in the offer, without doing one of the
following:
- shipping the goods ordered
- crediting the buyer's account
- sending the buyer written notice advising the buyer of the anticipated
duration of the delay and offering a full refund within one week if
requested
- offering substitute goods of equal or higher quality and offering full
refund within one week if requested
- shipping goods of equal or higher quality if the buyer may return the
goods and paying the return shipping costs
For sales made over the Internet to customers residing in California, it is
also unlawful for us to charge a buyer's credit card without disclosing to the
buyer either by an on screen notice or by e-mail:
- our return policy
- our refund policy
- the legal name under which we conduct business
- the address where we conduct our business
- how the buyer may receive the required information at the buyer's e-mail
address
We must also comply with California laws related to operating an auction
business, including:
- following all lawful requests of the owner or consignor of goods being
sold
- performing our duties to ensure that the most favorable offer made by a
prospective buyer is accepted
- truthfully representing the goods being auctioned
- disclosing our business name, telephone number and bond number at each
auction
- disclosing that the auction is being held in compliance with the
California Civil, Commercial and Penal Codes
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- posting the terms, conditions, restrictions and procedures pertaining to
goods being sold at the auction, including whether the item being sold is
subject to reserve pricing
- maintaining complete records of all activity for a two year period,
including the name and address of the owner/consignor and buyer of the
goods, a description of the goods, all written contracts with owners and
all money received from the purchase of the goods
- selling goods without a written contract setting forth the terms and
conditions upon which we can accept the sale of goods from the owner or
consignor
- prohibiting an owner or consignor from bidding for the goods being sold
- selling any item subject to sales tax without possessing a valid seller's
permit from the State Board of Equalization
We have in the past been cited for certain violations of applicable
California statutes, none of which we believe has had a material adverse effect
on our operations. However, violations of California law carry with it
substantial fines per violation, and if we are charged with violating any such
laws, we cannot assure you that we will be successful in defending any claims or
suits brought against us, or that the costs associated with defending or
settling such suits or claims will not materially adversely affect our business,
financial condition and operating results.
Laws of Other States
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. Changes to existing laws or the passage of new laws
intended to address these issues could create uncertainty in the marketplace
that could reduce demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery costs, adversely
affecting our business, financial condition and operating results. In addition,
because our services are accessible worldwide, and we facilitate the sale of
goods to users worldwide, other jurisdictions may claim that we are required to
comply with laws more extensive than in California, or to qualify to do business
as a foreign corporation in a particular state or foreign country.
Sales Taxes
We do not collect sales or other similar taxes for goods sold through the
Auction-Sales.com service other than for goods sold to California residents.
However, one or more states may seek to impose sales tax or similar collection
obligations on out-of-state companies, such as ours, which engage in Internet
commerce. A number of proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
online commerce, and could adversely affect our opportunity to derive financial
benefit from such activities. Moreover, a successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on the
sale of merchandise on our system could have a material adverse effect on our
operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. We cannot
assure you that this legislation will ultimately be enacted into law or that the
final version of this legislation will contain an extensive time period in which
such a tax moratorium will apply. In the event that a tax moratorium is imposed
for a limited time period, there can be no assurance that the legislation will
be renewed at the end of such period. Failure to enact or renew this legislation
could allow various states to impose taxes on Internet-based commerce and the
imposition of such taxes could have a material adverse effect on our business,
financial condition and operating results.
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COMPETITION
The online commerce market and the market for business-to-business,
business-to-person and person-to-person sales over the Internet is relatively
new, rapidly evolving and intensely competitive, and we expect competition to
intensify in the future because barriers to entry are relatively low. We compete
with a number of other companies offering similar products or providing similar
services. Our direct competitors include:
- various online business-to-business, business-to-person and
person-to-person Internet portals and online service providers, such as:
Egghead.com, First Auction, America Online, Yahoo!, Auction Universe,
Excite, uBid, Amazon.com and eBay
- a number of companies that specialize in online commerce, such as:
Buy.com and Egghead.com
- traditional store-based channels for purchasing computer hardware and
personal electronics, such as: Best Buy, CompUSA, Circuit City, Office
Depot and Staples
- personal computer manufacturers that have their own direct distribution
channels for selling excess inventory or refurbished products
- manufacturers who sell their products online, such as Dell, Gateway 2000
and Compaq
- catalog retailers
We potentially face competition from a number of large online communities
and services that have expertise in developing online commerce and in
facilitating online business-to-business, business-to-person and
person-to-person interaction. Certain of these potential competitors, offer a
variety of business-to-person trading services. Other large companies with
strong brand recognition and experience in online commerce may also seek to
compete in the online auction market. Competitive pressures created by any one
of these companies, or by our competitors collectively, could have a material
adverse effect on our business, financial condition and operating results.
We believe that the principal competitive factors affecting our market in
no particular order are:
- volume and selection of goods
- population of buyers and sellers
- community cohesion and interaction
- customer service
- reliability of delivery and payment by users
- brand recognition
- website convenience and accessibility
- price
- quality of search tools
- system reliability
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The success of our company and the integrity of our brand name depends upon
our ability to protect our proprietary technology and other intellectual
property rights. We regard the protection of our copyrights, service marks,
trademarks, trade dress and trade secrets as a critical component to our future
success and rely on a combination of copyright, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect our
proprietary rights in our products and services. We protect our proprietary
software through U.S. copyright laws, and the source code for
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our proprietary software is protected under trade secret laws. In February 1999,
we applied to the United States Patent and Trademark Office to register the
trademarks: "Auction Sales," "Bid Expose" and "Wheels and Deals!". In February,
2000 we entered into a letter of intent to enter into a license agreement with a
third party to use the names Auction-Sales.com and Go2AuctionSales.com. Under
the license agreement only our company, the third party or its wholly owned
subsidiary will be allowed to use the names.
We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business in order to limit access to and disclosure of our
proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. To date, we have
not actively policed unauthorized use of our technology. Doing so is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted.
EMPLOYEES
As of December 31, 1999, we had 18 full-time employees. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
FACILITIES
Our executive offices are presently located in Newbury Park, California,
where we lease approximately 3,200 square feet under a lease that expires in
June 2000. We are evaluating leasing new space totaling approximately 30,000
square feet and intend to move into the new space during the next six months. We
believe this new space will be adequate for our current needs. As we expand, we
expect that suitable additional space will be available on commercially
reasonable terms, although no assurance can be made in this regard. The Company
also leases an office of approximately 1,100 square feet in Santa Clara,
California pursuant to a month to month lease. We do not own any real estate.
LEGAL PROCEEDINGS
We occasionally become involved in litigation arising out of our normal
course of business. There are no material pending legal proceedings against us.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age as of January 25, 2000, and
position of all of our directors and executive officers, and certain of our key
employees:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
-------------------------------- --- --------
<S> <C> <C>
Zahid "Mike" Rafiq................ 55 Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, Treasurer and Secretary
Pierre Rafiq...................... 29 President, Chief Technology Officer and Director
KEY EMPLOYEES
- ----------------------------------
Troy Noyes........................ 36 Vice President, Information Services
Roy Stock......................... 31 Vice President, Merchandising
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
ZAHID "MIKE" RAFIQ is the founder of Auction-Sales.com and has been our
Secretary since June 1995 and our Chairman of the Board, Chief Executive
Officer, Chief Financial Officer, Treasurer and Secretary since July 1995. From
July 1995 to January 1999 Mr. Rafiq was our President. Prior to founding Auction
Sales.com, Mr. Rafiq was the President of Rafiq Consulting from January 1994 to
February 1995 and the Executive Vice President of Nuvo, Inc., from April 1992
through December 1993, a manufacturer of modems, fax machines and developer of
fax machine software. Mr. Rafiq has also worked for Arthur Andersen as an
International Manager in London and Cooper Industries as its European General
Manager. Mr. Rafiq has a B.S. in Mechanical Engineering and a Fellowship of
Chartered Accountants in Business and Accounting.
PIERRE RAFIQ has been our President, Chief Technology Officer and Director
since January 1999. Prior to joining us, from February 1998 to January 1999, Mr.
Rafiq was the worldwide Information Data Warehouse Manager for 3Com Corporation.
From March 1997 to February 1998, Mr. Rafiq worked for Informix Software Inc., a
leader in database technology software, as the Technical Account Manager for
Visa International. Prior to this assignment, from September 1994 to March 1997,
Mr. Rafiq worked for Business Objects, Inc., an industry leader in the market
for decision support software, building and managing their North American
customer support organization. Mr. Rafiq holds an M.B.A. from Carnegie-Mellon
University as well as a M.S. in Electrical Engineering.
KEY EMPLOYEES
TROY NOYES joined us in October 1995 and has served as our Vice President,
Information Services since October 1998. Prior to joining us, Mr. Noyes was a
mobile computing consultant at Mobile Planet, a wireless networking company from
June 1994 to October 1995. From June 1990 to June 1994, Mr. Noyes was the
Manager of Information at DAK Industries, where he was responsible for database
maintenance and technical support. Mr. Noyes' responsibilities include website
development, maintenance and bandwidth monitoring.
ROY STOCK joined us in April 1997 and was trained extensively on
merchandising and procurement operations. Mr. Stock was promoted Vice President,
Merchandising in August 1998. Mr. Stock's responsibilities include product and
supplier selection, product and pricing changes, development of new product
categories and product fulfillment. Prior to joining us, Mr. Stock served as a
procurement and merchandising consultant to Emfab Inc. during 1995 and 1996. Mr.
Stock also worked at Fox Weather, developing its website for meteorological
operations, including group computer hardware and software procurements and
development of weather forecasting software.
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BOARD OF DIRECTORS
Our Board of Directors currently has two members. Zahid Rafiq is the father
of Pierre Rafiq. At such time as our Board of Directors has at least three
Members, the Board of Directors will be divided into three classes. Class I
Directors will serve until the annual meeting of stockholders in 2001 and
thereafter for the terms of three years until their successors have been elected
and qualified. Class II Directors will serve until the annual meeting of
stockholders in 2002 and thereafter for terms of three years until their
successors have been elected and qualified. Class III Directors will serve until
the annual meeting of stockholders in 2003 and thereafter for terms of three
years until their successors have been elected and qualified.
BOARD OF DIRECTORS COMPENSATION
After the effective date of this offering, we intend to pay our
non-employee directors annual compensation for their services. In addition,
non-employee directors will receive a fee for each meeting attended.
Non-employee directors attending any committee meeting will receive an
additional fee for each committee meeting attended, unless the committee meeting
is held on the day of a meeting of the Board of Directors, in which case, they
will receive no additional compensation for attending the committee meeting.
Non-employee directors will also be reimbursed for reasonable costs and expenses
incurred for attending any director or committee meetings. Our directors who are
also officers will not be paid any directors fees.
BOARD OF DIRECTORS COMMITTEES
Prior to the effective date of this offering, our Board of Directors
intends to establish an Audit Committee and a Compensation Committee. The Audit
Committee will be comprised of non-employee directors and will be responsible
for making recommendations concerning the engagement of independent certified
public accountants, approving professional services provided by the independent
certified public accountants and reviewing the adequacy of our internal
accounting controls. The Compensation Committee will be comprised of Pierre
Rafiq and two non-employee directors and will be responsible for recommending to
the Board of Directors all officer salaries, management incentive programs and
bonus payments.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Our Certificate of Incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law (the "DGCL"), our directors
shall not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty. Under Delaware law, the directors have
fiduciary duties to us that are not eliminated by this provision of the
Certificate of Incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under Delaware law for breach of the director's duty of loyalty to us for acts
or omissions that are found by a court of competent jurisdiction not to be in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director and for payment
of dividends or approval of stock repurchases or redemptions that are prohibited
by Delaware law. This provision also does not affect the director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. In addition, we intend to maintain
liability insurance for, and have entered into indemnification agreements with,
our officers and directors.
Section 145 of the DGCL permits us to, and the Certificate of Incorporation
provides that we may, indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was, or has agreed to become, our
director or officer, or is or was serving, or has agreed to serve, at our
request, as a director, officer or trustee
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of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan), or by
reason of any action alleged to have been taken or omitted in such capacity,
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her or on his or
her behalf in connection with such action, suit or proceeding and any appeal
therefrom. Such right of indemnification shall inure to such individuals whether
or not the claim asserted is based on matters that antedate the adoption of the
Certificate of Incorporation. Such right of indemnification shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs and personal representatives of such person. The
indemnification provided by the Certificate of Incorporation shall not be deemed
exclusive of any other rights that may be provided now or in the future under
any provision currently in effect or hereafter adopted by the Certificate of
Incorporation, by any agreement, by vote of stockholders, by resolution of
directors, by provision of law or otherwise. Section 102(b)(7) of the DGCL
permits a corporation to eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not eliminate
or limit the liability of a director (1) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (2) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 174 of the DGCL relating to unlawful dividends, stock
purchases or redemptions or (4) for any transaction from which the director
derived an improper personal benefit. Section 102(b)(7) of the DGCL is designed,
among other things, to encourage qualified individuals to serve as directors of
Delaware corporations. We believe this provision will assist us in securing the
services of qualified directors who are not our employees. This provision has no
effect on the availability of equitable remedies, such as injunction or
rescission. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for our directors pursuant to the foregoing provision, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation earned by our Chief Executive Officer and each of our
other executive officers whose annual salary and bonus during fiscal 1999
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------
FISCAL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($)
--------------------------- ------ --------- ---------------
<S> <C> <C> <C>
Mike Rafiq.............................................. 1999 220,000(2)
Chairman of the Board, Chief
Executive Officer, Chief Financial Officer,
Treasurer and Secretary(1)
Pierre Rafiq............................................ 1999 100,000
President and Chief Technology Officer
</TABLE>
- -------------------------
(1) Mr. Rafiq resigned as our President in January 1999.
(2) Includes $159,000 accrued in fiscal 1999, but not yet paid.
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Employment Agreements
We have entered into employment agreements with Mike and Pierre Rafiq, both
of which expire on December 31, 2004, pursuant to which Mike Rafiq will receive
an annual salary of $240,000 and Pierre Rafiq will receive a salary of $200,000
for 1999 and $240,000 for each year thereafter. Both agreements require us to
maintain a $5.0 million life insurance policy payable to the estates of the
individuals and disability coverage of $20,000 per month.
STOCK OPTIONS
2000 Stock Option Plan
In January 2000, our Board of Directors and stockholders adopted the 2000
Stock Option, Deferred Stock and Restricted Stock Plan, which provides for the
grant of qualified incentive stock options ("ISOs") that meet the requirements
of Section 422 of the Internal Revenue Code, stock options not so qualified
("NQSOs"), and deferred stock and restricted stock awards. Our Stock Option Plan
is administered by our Board of Directors, which may also delegate such
administration to a committee of directors appointed by our Board of Directors
(the "Committee"). ISOs may be granted to our officers and key employees or any
of our subsidiaries. The exercise price for any option granted under our Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to an
employee who is deemed to own in excess of 10% of the outstanding common stock)
of the fair market value of the shares of common stock at the time the option is
granted. The purpose of our Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects us.
Our Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 2,000,000 shares of our common stock. The
number of shares reserved for issuance under our Stock Option Plan is subject to
anti-dilution provisions for stock splits, stock dividends and similar events.
If an option granted under our Stock Option Plan expires or terminates, or an
award is forfeited, the shares subject to any unexercised portion of such option
or award will again become available for the issuance of further options or
awards under our Stock Option Plan.
Under our Stock Option Plan, we may make loans available to stock option
holders, subject to our Board's or the Committee's approval, in connection with
the exercise of stock options granted under our Stock Option Plan. If shares of
common stock are pledged as collateral for such indebtedness, such shares may be
returned to us in satisfaction of such indebtedness. If so returned, such shares
shall again be available for issuance in connection with future stock options
and awards under our Stock Option Plan.
Unless previously terminated by our Board of Directors, we may not grant
options or awards under our Stock Option Plan after January 1, 2010.
Options granted under our Stock Option Plan will become exercisable
according to the terms of the award made by our Board or the Committee. Awards
will be subject to the terms and restrictions of the award made by our Board or
the Committee. Our Board or the Committee has discretionary authority to select
participants from among eligible persons and to determine at the time an option
or award is granted and in the case of options, whether it is intended to be an
ISO or a NQSO, and when and in what increments shares covered by the option may
be purchased. Under current law, ISOs may not be granted to any individual who
is not also an officer or employee of us or any subsidiary.
The exercise price of any option granted under our Stock Option Plan is
payable in full in cash, or if approved by our Board prior to exercise: (1) by
surrender of shares of our common stock already owned by the option holder
having a market value equal to the aggregate exercise price of all shares to be
purchased including, in the case of the exercise of NQSOs, restricted stock
subject to an award under our Stock Option Plan; (2) by cancellation of
indebtedness owed by us to the
41
<PAGE> 44
optionholder; (3) by a full recourse promissory note executed by the
optionholder; or (4) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by our Board of Directors to
comply with applicable Internal Revenue Service or SEC regulations or other
relevant pronouncements.
Our Board of Directors may from time to time revise or amend our Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding award without the participant's consent or may, without stockholder
approval, increase the number of shares subject to our Stock Option Plan or
decrease the exercise price of a stock option to less than 100% of fair market
value on the date of grant (with the exception of adjustments resulting from
changes in capitalization), materially modify the class of participants eligible
to receive options or awards under our Stock Option Plan, materially increase
the benefits accruing to participants under our Stock Option Plan or extend the
maximum option term under our Stock Option Plan.
In the event of a change of control, as defined in our Stock Option Plan,
all stock options, restricted stock and deferred stock will fully vest and any
indebtedness will be forgiven.
No options are outstanding under our Stock Option Plan as of the date
hereof. On the effective date of this offering, we expect to grant to certain of
our employees and directors options to acquire shares of common
stock at a per share exercise price equal to the initial public offering price,
vesting % on each anniversary from the date of grant.
CERTAIN TRANSACTIONS
From time to time, Auction Business, Inc. lent money to its majority
stockholder who is also our Chief Executive Officer. The amount receivable was
non-interest-bearing and had no repayment terms. In addition, from time to time,
amounts were advanced to us by our majority stockholder/ Chief Executive
Officer. The advances incurred interest at 12% per annum and had no repayment
terms. As a result of the expiration of the Sale of Rights and Affiliation
Agreement between Auction Business, Inc. and us on December 31, 1998 and the
cessation of operations by Auction Business, Inc. on January 1, 1999, the amount
advanced to related party and advanced from related party were netted against
each other, and all advances became non-interest-bearing. The amount outstanding
is subordinate to all our other debts. At each of June 30, 1999 and December 31,
1999 we owed Mr. Rafiq $30,349.
Mike Rafiq has personally guaranteed equipment and office leases and credit
processing totaling $700,000. We intend to use a portion of the proceeds of this
offering to remove these guarantees.
42
<PAGE> 45
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of January 25, 2000, as adjusted to reflect the
sale of the shares of common stock offered by us hereby, by: (1)
each of our directors; (2) each of the named executive officers; (3) each person
known to us to be beneficial owner of more than 5% of the common stock; (4) the
selling stockholders; and (5) all of our directors and executive officers us as
a group.
The 12,500,000 shares beneficially owned by Mike Rafiq are held by the PMZ
Voting Trust for the equal benefit of Mike and Pierre Rafiq, of which, Zahid
"Mike" Rafiq is the sole trustee. The voting trust expires on December 31, 2008,
unless terminated prior thereto by the trustee.
The 800,000 shares beneficially owned by Pierre Rafiq represent a vested
option to purchase up to 800,000 shares of common stock at an exercise price of
$.001 per share.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OWNED
----------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Mike Rafiq........................................ 12,500,000 98.2% --%
3543 Old Conejo Rd., #105,
Newbury Park, California 91320
Pierre Rafiq...................................... 800,000 5.9% --%
3543 Old Conejo Rd., #105,
Newbury Park, California 91320
All directors and executive officers as a group
(2 persons)..................................... 13,300,000 98.3% --%
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock
and 10,000,000 shares of preferred stock. After giving effect to this offering,
there will be shares of common stock outstanding (assuming no
exercise of the underwriter's over-allotment option) and no shares of preferred
stock outstanding. The following description of our capital stock does not
purport to be complete and is subject to and qualified in its entirety by our
Certificate of Incorporation and Bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of common stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. Upon
our liquidation, dissolution or winding up, holders of common stock share
ratably in our assets available for distribution to our stockholders, subject to
the preferential rights of any then-outstanding shares of preferred stock. No
shares of preferred stock will be outstanding immediately following the
consummation of this offering. Holders of common stock have no preemptive,
subscription, redemption, or conversion rights or any right of first refusal.
All shares of common stock outstanding upon the effective date of this
prospectus, and the shares offered hereby will, upon issuance and sale, be fully
paid and nonassessable.
43
<PAGE> 46
PREFERRED STOCK
The Board of Directors will have the authority, without further action by
the stockholders, to issue up to 10,000,000 shares of preferred stock in one or
more series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions thereof including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be superior to the rights of the
common stock. The Board of Directors, without stockholder approval, can issue
preferred stock with voting, conversion and other rights which could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms calculated to delay or
prevent a change in control or to make removal of management more difficult. In
certain circumstances, such issuance could have the effect of decreasing the
market price of our common stock. The issuance of preferred stock may have the
effect of delaying, deterring or preventing a change in control without any
further action by the stockholders including, but not limited to, a tender offer
to purchase common stock at a premium over then current market prices. We have
no present plan to issue any shares of preferred stock.
WARRANTS AND OPTIONS
We have outstanding warrants and options to purchase up to 1,600,008 shares
of common stock at an weighted average exercise price of $2.76 per share. All of
such warrants and options expire between April 1, 2003 and May 1, 2005.
REGISTRATION RIGHTS
We have entered into registration rights agreements with purchasers of
units in our recently concluded private placement, pursuant to which we have
agreed that we will register up to 400,008 shares underlying warrants owned by
such holders. We have also agreed that, if we shall cause to be filed with the
Commission a registration statement (other than a registration statement
registering shares pursuant to an employee benefit or similar plan or issued in
a transaction pursuant to Rule 145 under the Securities Act), such holders shall
have the right to include all or any number of shares beneficially owned by them
in such registration statement, subject to limitations imposed by marketing
conditions. All expenses of such registrations shall be at our expense. If such
holders, by exercising their registration rights, cause a large number of shares
to be registered and sold in the public market, such sales could have a material
adverse effect on the market price of your common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Our Bylaws provide that the Board of Directors will be divided into three
classes. Class I Directors will serve until the annual meeting of stockholders
in 2001 and thereafter for the term of three years and until their successors
have been duly elected and qualified. Class II Directors will serve until the
annual meeting of stockholders in 2002 and thereafter for term of three years
and until their successors have been elected and qualified. Class III Directors
will serve until the annual meeting of stockholders in 2003 and thereafter for
term of three years and until their successors have been elected and qualified.
Stockholders have no cumulative voting rights and stockholders representing a
majority of the shares of common stock outstanding are able to elect all of the
directors. The Bylaws provide that only the Board of Directors or the Chairman
may call a special meeting of the stockholders.
The classification of the Board of Directors and lack of cumulative voting
makes it more difficult for existing stockholders to replace the Board of
Directors as well as for any other party to obtain control of us by replacing
the Board of Directors. Since the Board of Directors has the power to retain and
discharge our officers, these provisions could make it more difficult for
existing stockholders or another party to effect a change in management.
44
<PAGE> 47
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control of management. They are intended to
enhance the likelihood of continued stability in the composition of the Board of
Directors and in the policies furnished by the Board of Directors and to
discourage certain types of actions that may involve an actual or threatened
change of control. These provisions are designed to reduce our vulnerability to
unsolicited acquisition proposals and are also intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for your shares,
which may inhibit increases in the market price of your shares that could result
from actual or rumored takeover attempts.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly-held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (1) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation, (2) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the corporation
(excluding shares owned by directors who are also officers of the corporation or
shares held by employee stock plans that do not provide employees with the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender offer or exchange offer), or (3) on or after such date on
which such person became an interested stockholder the business combination is
approved by the board of directors and authorized at an annual or special
meeting, and not by written consent, by the affirmative vote of at least 66 2/3%
of the outstanding voting stock excluding shares owned by the interested
stockholders. The restrictions of Section 203 do not apply, among other reasons,
if a corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment to the certificate of incorporation or bylaws must be approved by the
affirmative vote of a majority of the shares entitled to vote. Moreover, an
amendment so adopted is not effective until 12 months after its adoption and
does not apply to any business combination between the corporation and any
person who became an interested stockholder of such corporation on or prior to
such adoption. The Certificate of Incorporation and Bylaws do not currently
contain any provisions electing not to be governed by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of common stock. This could have the
effect of inhibiting changes in management and may also prevent temporary
increases in the market price of your common stock that often result from
takeover attempts.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADEABLE IMMEDIATELY FOLLOWING THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will
45
<PAGE> 48
have on the market price prevailing from time to time. Sales of substantial
amounts of common stock in the public market could adversely affect prevailing
market prices.
After this offering, we will have outstanding shares of common
stock. Of the outstanding shares, the shares to be sold in this offering
will be freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" as that term is defined in Rule
144 under the Securities Act, which shares, if purchased by an affiliate, will
be subject to certain of the resale limitations imposed by Rule 144.
SHARES SUBJECT TO RULE 144
The remaining shares of common stock outstanding upon completion of
this offering are "restricted securities" as that term is defined in Rule 144,
of which will be eligible for sale under Rule 144 upon completion of this
offering, subject to the lock-up described below. As described below, Rule 144
permits resales of restricted securities subject to certain restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate", would be entitled
to sell within any three-month period a number of such shares that does not
exceed the greater of 1% of the shares of our common stock then outstanding
( shares immediately after this offering) or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. A person who is not
deemed to have been an "affiliate" at any time during the three months
immediately preceding a sale and who has beneficially owned shares for at least
two years would be entitled to sell such shares under Rule 144 without regard to
the volume limitation described above.
LOCK-UP AGREEMENTS
Each of us and our executive officers, directors, stockholders, warrant
holders and optionholders have agreed that they will not, without the prior
written consent of WestPark Capital, Inc. (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, sell short, purchase
any option or contract to sell, grant any option, right or warrant to purchase,
lend or otherwise transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the common
stock, for a period commencing on the date of this prospectus and continuing to
a date 180 days after such date; provided, however, that such restrictions do
not apply to shares of common stock sold or purchased in this offering or to
shares of common stock purchased in the open market following this offering.
WestPark Capital, Inc., on behalf of the underwriters, may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, we have agreed
that, for a period of 180 days after the date of this prospectus, we will not,
without the consent of WestPark Capital, Inc., make any offering, purchase,
sale, or other disposition of any shares of common stock or other securities
convertible into or exchangeable or exercisable for shares of common stock (or
agreement for such) except for the grant of options to purchase shares of common
stock pursuant to our Stock Option Plan, provided that such options and grants
shall not vest until the end of such 180-day period.
RESALE OF SHARES UNDERLYING STOCK OPTIONS AND WARRANTS
In general, under Rule 701 under the Securities Act, any of our employees,
directors, consultants or advisors who purchase shares from us in connection
with a compensatory stock or option plan or other written compensatory agreement
is entitled to resell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of
46
<PAGE> 49
Rule 144, and is eligible to resell such shares 90 days after the effective date
of this offering in reliance on Rule 144, subject to the provisions of the
180-day lock-up arrangements discussed above.
Our Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 2,000,000 shares of the Company's common stock.
Prior to the effective date of this offering, no options were outstanding under
our Stock Option Plan. We expect to grant options to purchase shares to
our employees, officers and directors on the effective date of this offering. We
intend to file a registration statement on Form S-8 covering the shares that
have been reserved for issuance under the Stock Option Plan, permitting the
resale of such shares in the public market.
In the private placement closed in February, 2000, we granted warrants to
purchase up to shares of common stock. After expiration of the one
year lock-up period, and assuming that the underwriters do not release the
holders from the lock-up agreement, the holders will be permitted to sell,
within any three month period, a number of shares of common stock that does not
exceed the greater of one percent of the number of shares of our common stock
then outstanding or the average weekly trading volume in our common stock during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission, pursuant to Rule 144.
REGISTRATION RIGHTS
We have entered into registration rights agreements with purchasers of
units in our recently concluded private placement, pursuant to which we have
agreed that we will register up to shares underlying warrants owned
by such holders. We have also agreed that, if we cause to be filed with the
Commission a registration statement (other than a registration statement
registering shares pursuant to an employee benefit or similar plan), such
holders will have the right to include all or any number of shares beneficially
owned by them in such registration statement, subject to limitations imposed by
marketing conditions. All expenses of such registrations shall be at our
expense. If such holders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price of our common stock.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK
We are unable to estimate the number of shares that may be sold in the
future by existing security holders, or the effect, if any, that such sales will
have on the market price of the common stock prevailing from time to time. Sales
of substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of our common stock.
47
<PAGE> 50
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below (the "underwriters") with respect to all of the shares offered by this
prospectus. Subject to certain conditions, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. WestPark
Capital, Inc. is the representative of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
WestPark Capital, Inc.......................................
------
Total.............................................
======
</TABLE>
The underwriters are committed to take and pay for all of the shares
indicated in the table above, if any are taken. If the underwriters sell more
shares than the total number set forth in the table above, the underwriters have
an option to buy up to an additional shares from us to cover such
sales. They may exercise that option for 45 days. If any shares are purchased
pursuant to this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by Auction-Sales.Com, Inc. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
PAID TO AUCTION-SALES.COM, INC.
--------------------------------
NO EXERCISE FULL EXERCISE
------------ --------------
<S> <C> <C>
Per Share....................................... $ $
Total........................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per shares from
the initial public offering price. If all the shares are not sold at the initial
public offering price, the representative may change the offering price and the
other selling terms.
We and our directors, officers, employees and other securityholders have
agreed with the underwriters not to dispose of or hedge any of our common stock
or securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of the
representative.
Upon completion of this offering, we will sell to the representative for
$5.00, a warrant to purchase shares of common stock. The representative's
warrant will become exercisable one year after the effective date of this
offering at a per share exercise price equal to 120% of the initial offering
price and will expire five years from the effective date of this offering. The
representative's warrant and underlying shares of common stock will be
restricted from sale, transfer, and assignment or hypothecation for a period of
one year from the date of this prospectus, except to the representatives,
underwriters, selling group members and their officers or partners. During the
exercise period, holders of the representative's warrants are entitled to
certain demand and
48
<PAGE> 51
incidental rights with respect to the shares of common stock issuable on
exercise of the representative's warrant. The common stock issuable on exercise
of the representative's warrant is subject to adjustment upon the occurrence of
certain events to prevent dilution.
We will pay the representative a non-accountable expense allowance of .5%
of the gross proceeds of the offering, which will include proceeds from the
over-allotment option, if exercised. The representative's expenses in excess of
the nonaccountable expense allowance and in excess of the $30,000 expense
allowance for blue sky legal fees will be borne by the representative. We have
paid the representative $25,000, which will be applied against the
non-accountable expense allowance.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
negotiated between us and the representative of the underwriters. Among the
factors considered in determining the initial public offering price of the
shares, in addition to prevailing market conditions, were Auction-Sales.com,
Inc.'s historical performance, estimates of our business potential and earnings
prospects, an assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related business.
We intend to apply to have the common stock listed on the Nasdaq National
Market under the symbol "AUCT."
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative have repurchased shares sold
by or for the account of such underwriter in stabilizing or short-sale covering
transactions.
The activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Neither the underwriters nor we can predict the effect that the
transactions described above may have on the price of the common stock. In
addition, neither the underwriters nor we represent that the underwriters will
engage in such transactions. If commenced, such transactions may be discontinued
at any time without notice. It is anticipated that certain of the underwriters
will make a market in the common stock upon completion of this offering, as
permitted by applicable law. The underwriters are not obligated to make a market
in the common stock and if they do so, the underwriters may discontinue making a
market at any time. There is no assurance an active trading market will ever
develop for the common stock.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
We have agreed to retain the representative as a financial consultant for a
period of two years following the consummation of this offering for a fee of
$3,000 per month, payable in full upon completion of this offering. The
financial consulting services to be provided by the representative include
assisting us in our public equity marketing efforts, providing access to the
representative's
49
<PAGE> 52
retail sales force through roadshow stops and conference calls, advising us as
to capital structure, and advising us with regard to shareholder relations and
public relations.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain matters relating to this offering are being passed upon for Auction
Sales.com by Kirkpatrick & Lockhart LLP, Beverly Hills, California. An
investment partnership owned by certain of the partners of Kirkpatrick &
Lockhart LLP owns warrants to purchase up to 100,000 shares of common stock at a
per share purchase price of $8.00. Certain legal matters will be passed upon for
the underwriters by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California.
EXPERTS
The financial statements of Auction-Sales.com for the years ended June 30,
1998 and 1999 included in this prospectus have been audited by Singer, Lewak,
Greenbaum & Goldstein LLP, independent public accountants, as stated in their
report appearing herein and are so included herein in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, with a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
Auction-Sales.com, Inc.
3543 Old Conejo Road, #105
Newbury Park, California 91320
Telephone: (805) 376-9171
Fax: (805) 376-9181
Our fiscal year ends on June 30. We intend to furnish our stockholders with
annual reports containing audited financial statements and other appropriate
reports. In addition, we intend to become a reporting company and file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information we file
at the SEC's public reference room at 450 Fifth Street, N.W., Washington D.C.
20549 and at the SEC's regional offices located at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. You can also request copies of these documents, upon payment of a
duplicating fee, by writing the SEC at 450 Fifth Street, N.W., Washington D.C.
20549. Our SEC filings are also available to the public on the SEC Internet site
at http:\\www.sec.gov.
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<PAGE> 53
AUCTION-SALES.COM, INC.
CONTENTS
JUNE 30, 1999 AND DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Auction-Sales.com, Inc.
We have audited the accompanying balance sheet of Auction-Sales.com, Inc.
as of June 30, 1999, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the two years in the period ended
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 Auction-Sales.com, Inc. as
of June 30, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 1999 in conformity with generally
accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
December 2, 1999
F-2
<PAGE> 55
AUCTION-SALES.COM, INC.
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1999 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 571,274 $ 399,947
Certificate of deposit.................................... -- 401,644
Due from investors........................................ -- 150,000
Inventory................................................. 81,410 51,149
Deferred offering costs................................... 270,073 413,887
Prepaid expenses.......................................... 11,853 5,622
----------- -----------
Total current assets................................... 934,610 1,422,249
Furniture and equipment, net................................ 96,581 83,833
Other assets................................................ 3,538 3,538
----------- -----------
Total assets........................................... $ 1,034,729 $ 1,509,620
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Unsecured subordinated convertible debt................... $ -- $ 1,200,000
Note payable.............................................. -- 100,000
Accounts payable.......................................... 582,254 618,475
Accrued payroll and payroll taxes......................... 196,901 266,832
Advances from related party............................... 30,349 30,349
Deferred revenue.......................................... 45,622 147,861
Other accrued liabilities................................. -- 18,289
Current portion of capitalized lease obligations.......... 23,478 23,478
----------- -----------
Total current liabilities.............................. 878,604 2,405,284
Capitalized lease obligations, net of current portion....... 23,977 15,035
----------- -----------
Total liabilities...................................... 902,581 2,420,319
----------- -----------
Commitments and contingencies
Stockholders' equity (deficit)
Common stock -- Auction-Sales.com, Inc., $0.001 par value
150,000,000 shares authorized
12,730,000 and 12,730,000 (unaudited) shares issued and
outstanding............................................ 12,730 12,730
Additional paid-in capital................................ 1,559,873 1,559,873
Accumulated deficit....................................... (1,440,455) (2,483,302)
----------- -----------
Total stockholders' equity (deficit)................... 132,148 (910,699)
----------- -----------
Total liabilities and stockholders' equity (deficit)... $ 1,034,729 $ 1,509,620
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 56
AUCTION-SALES.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue
Merchandise.......................... $ 2,094,034 $ 3,870,077 $ 1,849,161 $ 2,237,754
Commissions.......................... 161,603 16,340 15,930 11,431
Advertising.......................... -- 750 -- 157,750
----------- ----------- ----------- -----------
Total net revenue................. 2,255,637 3,887,167 1,865,091 2,406,935
Cost of sales.......................... 1,576,778 3,342,677 1,399,965 2,131,834
----------- ----------- ----------- -----------
Gross profit........................... 678,859 544,490 465,126 275,101
----------- ----------- ----------- -----------
Operating expenses
Selling and marketing................ 229,862 654,483 270,963 602,367
Product development.................. 158,095 271,896 111,572 335,353
General and administrative........... 233,343 725,584 378,809 362,233
----------- ----------- ----------- -----------
Total operating expenses.......... 621,300 1,651,963 761,344 1,299,953
----------- ----------- ----------- -----------
Income (loss) from operations.......... 57,559 (1,107,473) (296,218) (1,024,852)
----------- ----------- ----------- -----------
Other income (expense)
Interest income...................... -- 10,496 -- 4,328
Interest expense..................... (33,137) (21,046) (15,181) (21,523)
----------- ----------- ----------- -----------
Total other income (expense)...... (33,137) (10,550) (15,181) (17,195)
----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes......................... 24,422 (1,118,023) (311,399) (1,042,047)
Provision for income taxes............. 4,230 800 800 800
----------- ----------- ----------- -----------
Net income (loss)...................... $ 20,192 $(1,118,823) $ (312,199) $(1,042,847)
=========== =========== =========== ===========
Basic income (loss) per share.......... $ -- $ (0.09) $ (0.03) $ (0.08)
=========== =========== =========== ===========
Diluted income (loss) per share........ $ -- $ (0.09) $ (0.03) $ (0.08)
=========== =========== =========== ===========
Weighted-average common shares
outstanding.......................... 12,438,027 12,647,945 12,456,351 12,730,000
=========== =========== =========== ===========
Supplemental financial data
Gross merchandise sales (see Note 1)... $ 3,548,461 $ 4,017,137 $ 1,992,531 $ 2,340,633
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 57
AUCTION-SALES.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
AUCTION
AUCTION-SALES.COM, INC. BUSINESS, INC.
COMMON STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- -------- ------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997.... 12,500,000 $12,500 1,500 $ 100 $ 54,400 $ (341,824) $ (274,824)
Sale of common stock...... 25,000 25 99,975 100,000
Net income................ 20,192 20,192
---------- ------- ------ ----- ---------- ----------- -----------
Balance, June 30, 1998.... 12,525,000 12,525 1,500 100 154,375 (321,632) (154,632)
Sale of common stock...... 205,000 205 1,639,795 1,640,000
Offering costs............ (234,397) (234,397)
Capital contribution upon
cessation of
operations.............. (1,500) (100) 100 --
Net loss.................. (1,118,823) (1,118,823)
---------- ------- ------ ----- ---------- ----------- -----------
Balance, June 30, 1999.... 12,730,000 12,730 -- -- 1,559,873 (1,440,455) 132,148
Net loss.................. (1,042,847) (1,042,847)
---------- ------- ------ ----- ---------- ----------- -----------
Balance, December 31, 1999
(unaudited)............. 12,730,000 $12,730 -- $ -- $1,559,873 $(2,483,302) $ (910,699)
========== ======= ====== ===== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 58
AUCTION-SALES.COM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------------- --------------------------
1998 1999 1998 1999
-------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 20,192 $(1,118,823) $ (312,199) $(1,042,847)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation........................................ 29,060 44,184 15,890 20,494
Amortization........................................ -- -- -- 68,982
(Increase) decrease in
Accounts receivable................................. 4,650 7,751 7,751 --
Inventory........................................... (63,358) (18,052) (59,019) 30,261
Prepaid expenses.................................... -- (11,853) -- 6,231
Increase (decrease) in
Accounts payable.................................... 105,932 383,459 213,161 36,221
Accrued payroll..................................... 41,882 31,549 9,482 69,931
Other accrued liabilities........................... 6,212 (6,212) 26,211 18,289
Deferred revenue.................................... 97,316 (74,856) 10,489 102,239
-------- ----------- ---------- -----------
Net cash provided by (used in) operating activities..... 241,886 (762,853) (88,234) (690,199)
-------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to related party............................. -- -- (28,471) --
Other assets.......................................... (696) -- -- --
Purchase of furniture and equipment................... (5,756) (16,124) (10,103) (7,746)
Purchase of certificate of deposit.................... -- -- -- (401,644)
-------- ----------- ---------- -----------
Net cash used in investing activities................... (6,452) (16,124) (38,574) (409,390)
-------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of advances from related party.............. $ -- $ -- $ (125,000) $ --
Net proceeds from related party....................... (38,262) (141,694) -- --
Payments on capital lease obligations................. (5,628) (16,418) (2,633) (8,942)
Proceeds from debt.................................... -- -- -- 1,300,000
Proceeds from investor................................ -- 100,000 -- (150,000)
Proceeds from sale of common stock, net of offering
costs............................................... -- 1,405,603 1,025,603 --
Payments on deferred offering costs................... -- (270,073) -- (212,796)
-------- ----------- ---------- -----------
Net cash provided by (used in) financing activities..... (43,890) 1,077,418 897,970 928,262
-------- ----------- ---------- -----------
Increase (decrease) in cash and cash equivalents........ 191,544 298,441 771,162 (171,327)
Cash and cash equivalents, beginning of year............ 81,289 272,833 272,833 571,274
-------- ----------- ---------- -----------
Cash and cash equivalents, end of year.................. $272,833 $ 571,274 $1,043,995 $ 399,947
======== =========== ========== ===========
Supplemental disclosures of cash flow information
Interest paid......................................... $ 3,040 $ 10,496 $ 3,405 $ 4,367
======== =========== ========== ===========
Income taxes paid..................................... $ 4,230 $ 800 $ 800 $ 800
======== =========== ========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended June 30, 1999 and 1998, the Company acquired
equipment valued at $11,025 and $50,600, respectively, under capitalized lease
obligations.
During the year ended June 30, 1998, the Company issued 25,000 shares of
common stock as payment for accounts payable of $100,000.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 59
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
NOTE 1 -- GENERAL
BUSINESS AND ORGANIZATION
Auction Business, Inc. (formerly known as Auction Sales, Inc.), a Delaware
corporation formed on August 18, 1997, and Alto Corporation, a Delaware
corporation formed on February 28, 1995, are Web-based distributors and
retailers offering products through public interactive business-to-business and
business-to-person auctions. Auction Business, Inc. offers product through
auction as an agent, and Alto Corporation offers product through auction as a
principal. Auction Business, Inc. was initially formed as a sole proprietorship
in October 1996 by its Chief Executive Officer.
In January 1997, Alto Corporation entered into a Sale of Rights and
Affiliation Agreement with Auction Business, Inc., whereby Auction Business,
Inc. agreed to sell Alto Corporation all its proprietary rights related to its
auction software technology and the Auction Business brand name. In the Sale of
Rights and Affiliation Agreement, Alto Corporation agreed to register all of the
intellectual property rights of Auction Business, Inc., and Auction Business,
Inc. agreed that it would deliver to Alto Corporation all of its revenue during
1997 and 1998. The Sale of Rights and Affiliation Agreement expired on January
1, 1999, and Auction Business, Inc. ceased operations as of that date. Alto
Corporation changed its name to Auction-Sales.com, Inc. (the "Company") in
February 1999.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying financial statements include the accounts of Auction
Business, Inc. and Alto Corporation on a combined basis through December 31,
1998. All intercompany transactions and balances have been eliminated in the
combination. The companies are presented on a basis since they were under common
control during this period.
REVENUE RECOGNITION
The Company obtains merchandise from vendors in either of two primary
arrangements: the Principal Sales model (merchandise revenue) and the Agent
Sales model (commission revenue). Under the Principal Sales model the Company
either purchases merchandise or sells merchandise under consignment
relationships with vendors.
PRINCIPAL SALES -- PURCHASES
For sales of merchandise owned by the Company, it is responsible for
conducting the auction, billing the customer, shipping the merchandise to the
customer, and processing merchandise returns. The Company recognizes the full
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction, the
Company bears both inventory and credit card risk with respect to sales of its
inventory. In instances where the credit card authorization has been received
but the merchandise has not been shipped, the Company defers revenue recognition
until the merchandise is shipped. Under certain circumstances, the Company will
allow customers to return products. Accordingly, the Company provides for
allowances for estimated future returns at the time of shipment based on
historical experience.
F-7
<PAGE> 60
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
PRINCIPAL SALES -- CONSIGNMENT
For sales on consignment, the Company either takes physical possession of
the merchandise or the vendor retains physical possession of the merchandise. In
either case, the Company is not obligated to take title to the merchandise
unless it successfully sells the merchandise at auction. Upon completion of an
auction, the Company takes title to the merchandise, charges the customer's
credit card, and either ships the merchandise directly or arranges for a third
party to complete delivery to the customer. Subsequently, the Company pays the
vendor any amounts due for the purchase of the related merchandise. The Company
records the full sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. In consignment transactions, the
Company is at risk of loss for delivery of the merchandise and returns from
customers. In instances where credit card authorization has been received but
the merchandise has not been shipped, the Company defers revenue recognition
until the merchandise is shipped.
AGENT SALES MODEL
Agent sales revenue includes revenue from agent sales transactions and
revenue generated from transactions on the Company's website. The Company
conducts electronic auctions and processes orders in exchange for a commission
on the sale of the vendor's merchandise. Under this arrangement, at the
conclusion of an auction, the Company forwards the order information to the
vendor, who then charges the customer's credit card for the merchandise and
ships the merchandise to the customer. The Company does not take title to or
possession of the merchandise, and the vendor bears all of the risk of credit
card chargebacks. The Company recognizes the commissions as revenue upon
completion of the auction process, the forwarding of the auction sales
information to the vendor, and receiving the commission check. The vendor is
typically responsible for merchandise returns.
ADVERTISING
The Company earns revenues from advertising on its website. These
advertisements usually take the form of anchors, tenants, and banners that
encourage each customer to click through directly to the advertiser's website.
The Company recognizes revenue when it is earned.
SUPPLEMENTAL FINANCIAL DATA
Gross merchandise sales represent the amount the Company's total revenue
would have been if all Agent Sales had been made as Principal Sales. Management
believes that the information on gross merchandise sales is relevant to a reader
of the Company's financial statements, since it provides a more consistent
comparison between historical periods and between future periods than does total
revenue. Gross merchandise sales should not be considered in isolation or as a
substitute for other information prepared in accordance with generally accepted
accounting principles.
F-8
<PAGE> 61
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
The reconciliation of total revenue in the statements of operations to
gross merchandise sales is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------ --------------------------
1998 1999 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue........................ $2,094,034 $3,870,077 $1,849,161 $2,237,754
Plus gross agent revenue............. 1,616,030 163,400 159,300 114,310
Less net agent revenue............... 161,603 16,340 15,930 11,431
---------- ---------- ---------- ----------
Gross merchandise revenue............ $3,548,461 $4,017,137 $1,992,531 $2,340,633
========== ========== ========== ==========
</TABLE>
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates affect the reported amounts of revenues and expenses
during the reported period. Actual results could materially differ from these
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments including cash and cash equivalents, accounts receivable,
accounts payable, and other accrued liabilities, the carrying amounts
approximate fair value due to their short maturities.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis and consists of finished goods.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful life of
five years. Expenditures for maintenance and repairs are charged to operations
as incurred while renewals and betterments are capitalized. Gains or losses on
the sale of furniture and equipment are reflected in the statements of
operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of
F-9
<PAGE> 62
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
assets to be held and used is measured by a comparison of the carrying amount of
the assets to future net cash flows expected to be generated by the assets. If
the assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the fair value of
the assets. To date, no impairment has occurred.
STOCK OPTIONS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which defines a fair value based method of accounting
for stock-based compensation. However, SFAS No. 123 allows an entity to continue
to measure compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of APB 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting defined in SFAS No. 123 had been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Because the Company has incurred net losses, basic and diluted loss per share
are the same.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is required when it is less likely than not that the Company will be
able to realize all or a portion of its deferred tax assets.
ADVERTISING EXPENSES
Advertising expenses are charged to expense as incurred. Advertising
expense for the years ended June 30, 1999 and 1998 and for the six months ended
December 31, 1999 and 1998 was $329,695, $39,808, $441,927 (unaudited), and
$141,054 (unaudited), respectively.
F-10
<PAGE> 63
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The Company does not expect
adoption of SFAS No. 134 to have a material impact, if any, on its financial
position or results of operations.
In February 1999, the FASB adopted SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections," which is effective for financial
statements with fiscal years beginning after February 15, 1999. This statement
is not applicable to the Company.
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others." This statement is not applicable to the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect adoption of
SFAS No. 137 to have a material impact, if any, on its financial position or
results of operations.
NOTE 3 -- CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance Corporation
up to $100,000. At times, the Company holds cash with these banks in excess of
amounts insured by federal agencies. As of June 30, 1999 and December 31, 1999,
the uninsured portions of these balances held at financial institutions
aggregated to $375,625 and $554,090 (unaudited), respectively.
NOTE 4 -- CERTIFICATE OF DEPOSIT
The Company holds a certificate of deposit in the amount of $401,644 with
an initial maturity of five months, which is due to mature on April 9, 2000.
NOTE 5 -- DUE FROM INVESTORS
These amounts represent payments due from investors for the issuance of
convertible notes with warrants. The payments were received from the investors
prior to the commencement of the audit of the financial statements.
F-11
<PAGE> 64
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
NOTE 6 -- FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and equipment..................................... $206,159 $213,905
Less accumulated depreciation............................. 109,578 130,072
-------- --------
Total furniture and equipment..................... $ 96,581 $ 83,833
======== ========
</TABLE>
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases warehouse and administrative facilities under a
non-cancelable operating lease that expires in June 2000. Rent expense was
$39,371, $31,699, $23,202 (unaudited), and $18,575 (unaudited) for the years
ended June 30, 1999 and 1998 and for the six months ended December 31, 1999 and
1998, respectively. The lease has been personally guaranteed by the Company's
Chief Executive Officer for approximately $36,000.
Future minimum lease payments under non-cancelable capital leases, which
have been personally guaranteed by the Company's Chief Executive Officer for
approximately $72,000, with initial or remaining terms of one year are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDING ENDING
JUNE 30, DECEMBER 31,
1999 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
2000...................................................... $27,500 $27,500
2001...................................................... 20,764 17,963
2002...................................................... 7,177 --
------- -------
55,441 45,463
Less amount representing interest........................... 7,986 6,950
------- -------
47,455 38,513
Less current portion........................................ 23,478 23,478
------- -------
Long-term portion...................................... $23,977 $15,035
======= =======
</TABLE>
Leased capital assets included in furniture and equipment consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and equipment..................................... $61,625 $61,625
Less accumulated amortization............................... 9,696 15,859
------- -------
Total............................................. $51,929 $45,766
======= =======
</TABLE>
F-12
<PAGE> 65
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
PRIVATE PLACEMENT EXEMPTIONS
The Company's private placements of securities have been issued in
transactions intended to be exempt from registration under the Securities Act of
1933 pursuant to the provisions of Regulation D promulgated thereunder. These
rules include factors pursuant to which one or more private placement
transactions may be integrated as part of other offerings and include rules that
limit the dollar amount that can be raised and the number of non-accredited
investors that can participate. In the event any of the Company's private
placement transactions, including private placement transactions undertaken by
the Company since the transactions referred to above, were deemed to be
integrated, it is possible that the exemption from the registration requirements
of the Securities Act of 1933 would not be available for one or more of those
offerings. In the event that one or more of such transactions are determined not
to have been exempt from such registration requirements, the purchasers may have
the right to seek recission of the sales and/or seek money damages against the
Company. Management believes that each of the Company's private offerings were
exempt from the registration requirements of the Securities Act of 1933.
EMPLOYMENT AGREEMENTS
On January 1, 1997, the Company entered into an employment agreement with
its Chief Executive Officer for a term of seven years. Under the terms of the
agreement, the Chief Executive Officer was paid $200,000 during 1997 and 1998
and will be paid $240,000 thereafter commencing January 1, 2000.
On January 25, 1999, the Company entered into an employment agreement with
its President for a term of seven years. Under the terms of the agreement, the
President is to be paid $200,000 during 1999 and $240,000 thereafter commencing
January 1, 2000.
NOTE 8 -- SHORT-TERM DEBT (UNAUDITED)
CONVERTIBLE NOTES WITH WARRANTS
During the six months ended December 31, 1999, the Company sold 24 units,
each unit consisting of a $50,000 (unaudited) unsecured subordinated convertible
promissory note, bearing interest at a rate of 8% per annum, and a five-year
warrant to purchase up to 16,667 shares of common stock, $0.001 par value, at an
exercise price of $8 per share. The principal and interest are due on the
earlier of (i) the closing of a registered initial public offering of common
stock or (ii) December 31, 2000. The notes are convertible at the option of the
holder at a conversion price of $1.00 per share if the principal and unpaid
accrued interest are not paid in full by June 30, 2001. Deferred offering costs
of $270,073 and $413,887 (unaudited) at June 30, 1999 and December 31, 1999,
respectively, related to the total unit proceeds of $1,200,000 will be amortized
over the term of the note.
NOTE PAYABLE
The Company had an unsecured note payable at December 31, 1999 due to a
third party, bearing interest at 8% per annum and dated October 21, 1999. The
principal and interest are due on the earlier of (i) the closing of a registered
initial public offering of common stock or (ii) October 31, 2000. The
outstanding balance at December 31, 1999 was $100,000.
F-13
<PAGE> 66
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
NOTE 9 -- STOCKHOLDERS' EQUITY
WARRANTS
On May 1, 1998, the Company granted warrants to purchase 100,000 shares of
the Company's common stock to a consultant for future services. The options
vested on the date of grant and will expire seven years after vesting. The
exercise price was set at $4 per share, the fair value of the underlying shares
based upon contemporaneous sales of common stock.
On January 29, 1999, the Company granted warrants to purchase 100,000
shares of the Company's common stock to a consultant for services rendered. The
warrants vested on the date of grant and expire five years from the date of
grant. The exercise price was set at $8 per share, the fair value of the
underlying shares based upon contemporaneous sales of common stock.
STOCK OPTIONS
On April 1, 1996, the Company granted options to purchase 800,000 shares of
the Company's common stock to a consultant who became the Company's President on
January 25, 1999. The options vested immediately and expire seven years from the
date of grant. The exercise price was set at $0.001 per share, the fair value of
the underlying shares. As of December 31, 1999, none of these options had been
exercised.
On May 1, 1997, the Company granted options to two employees to each
purchase 100,000 shares of the Company's common stock. The options vested on the
date of grant and will expire six years from the date of grant. The exercise
price was set at $0.05 and $0.10 per share, the fair value of the underlying
shares on the employee's date of employment of October 1, 1996 and April 15,
1997, respectively.
On May 30, 1998, the Company also established a pool of 100,000 options
with an exercise price of $0.20 each to be granted to employees at a later date.
As of December 31, 1999, none of these options had been granted.
The following summarizes the stock option and warrants transactions:
<TABLE>
<CAPTION>
WARRANTS WEIGHTED-
AND AVERAGE
STOCK OPTIONS EXERCISE
OUTSTANDING PRICE
------------- ---------
<S> <C> <C>
Outstanding, June 30, 1997........................ 1,000,000 $0.016
Granted......................................... 100,000 $ 4.00
---------
Outstanding, June 30, 1998........................ 1,100,000 $0.378
Granted......................................... 100,000 $ 8.00
---------
Outstanding, June 30, 1999................... 1,200,000 $0.987
=========
Exercisable, June 30, 1999................... 800,000 $$0.001
=========
</TABLE>
F-14
<PAGE> 67
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
The weighted-average remaining contractual life of the options outstanding
at June 30, 1999 is 3.5 years. The exercise prices for the options outstanding
at June 30, 1999 ranged from $0.001 to $4.000, and information relating to these
options is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE STOCK OPTIONS STOCK OPTIONS REMAINING
PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- -------- ------------- ------------- ----------------
<S> <C> <C> <C>
$0.001 800,000 800,000 2.9 years
$0.05 100,000 -- 3.9 years
$0.10 100,000 -- 3.9 years
$4.00 100,000 -- 6.8 years
$8.00 100,000 -- 4.8 years
--------- -------
1,200,000 800,000
========= =======
</TABLE>
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB 25 and related interpretations in accounting for its plans and does
not recognize compensation expense for its stock-based compensation options and
warrants other than for restricted stock and options issued to outside third
parties. If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans consistent with
the methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share for the years ended June 30, 1999 and 1998 would not have changed.
NOTE 10 -- SIGNIFICANT SUPPLIER
During the years ended June 30, 1999 and 1998 and the six months ended
December 31, 1999 and 1998, the Company conducted business with a vendor from
whom purchases comprised approximately 0%, 30%, 17% (unaudited), and 0%
(unaudited), respectively, of cost of sales.
F-15
<PAGE> 68
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
NOTE 11 -- INCOME TAXES
The following table presents the current and deferred income tax provision
for federal and state income taxes for the years ended June 30, 1999 and 1998
and the six months ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ --------------------------
1998 1999 1998 1999
------- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal.................................... $3,430 $ -- $ -- $ --
State...................................... 800 800 800 800
------ ---- ---- ----
4,230 800 800 800
------ ---- ---- ----
Deferred
Federal.................................... -- -- -- --
State...................................... -- -- -- --
------ ---- ---- ----
-- -- -- --
------ ---- ---- ----
Provision for income taxes.............. $4,230 $800 $800 $800
====== ==== ==== ====
</TABLE>
The tax effects of temporary differences which give rise to the deferred
tax provision (benefit) at June 30, 1999 and 1998 and December 31, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------------
1998 1999 1998 1999
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment.................. $ 1,381 $ 1,666 $ -- $ --
Accrued salaries......................... 11,139 10,898 3,224 23,360
Deferred revenue......................... (33,087) (25,451) -- 34,761
Valuation allowance...................... 20,567 12,887 (3,224) (58,121)
-------- -------- ------- --------
Total.......................... $ -- $ -- $ -- $ --
======== ======== ======= ========
</TABLE>
The provision for (benefit from) income taxes differs from the amount that
would result from applying the federal statutory rate for the years ended June
30, 1999 and 1998 and the six months ended December 31, 1999 and 1998 as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ --------------------------
1998 1999 1998 1999
------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Statutory regular federal income tax (benefit)
rate........................................ (34.0)% (34.0)% (34.0)% (34.0)%
Change in valuation allowance................. 16.7 34.0 34.0 34.0
----- ----- ----- -----
Total............................... (17.3)% --% --% --%
===== ===== ===== =====
</TABLE>
F-16
<PAGE> 69
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
The components of the deferred income tax assets (liabilities) as of June
30, 1999 and 1998 and December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------------- --------------------------
1998 1999 1998 1999
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment................ $ (2,099) $ -- $ (2,099) $ --
Accrued salaries....................... 70,837 78,434 74,899 105,803
Deferred revenue....................... 51,613 18,174 (56,106) 58,900
State taxes............................ (8,693) (32,297) (13,060) (50,469)
Net operating loss carryforwards....... 198,479 639,604 310,904 973,112
--------- --------- --------- ----------
310,137 703,915 314,538 1,087,346
Valuation allowance.................... (310,137) (703,915) (314,538) (1087,346)
--------- --------- --------- ----------
Total........................ $ -- $ -- $ -- $ --
========= ========= ========= ==========
</TABLE>
As of June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,665,000 and $832,000,
respectively. The net operating loss carryforwards begin expiring in 2017 and
2002, respectively. The utilization of net operating loss carryforwards may be
limited due to the ownership change under the provisions of Internal Revenue
Code Section 382 and similar state provisions.
NOTE 12 -- RELATED PARTY TRANSACTIONS
ADVANCES FROM RELATED PARTY
From time to time, Auction Business, Inc. lent money to its majority
stockholder who is also the Company's Chief Executive Officer. The amount
receivable was non-interest-bearing and had no repayment terms.
In addition, from time to time, amounts were advanced to Alto Corporation
by its majority stockholder/Chief Executive Officer. The advances incurred
interest at 12% per annum and had no repayment terms.
As a result of the expiration of the Sale of Rights and Affiliation
Agreement between Auction Business, Inc. and Alto Corporation on December 31,
1998 and the cessation of operations by Auction Business, Inc. on January 1,
1999, the amount advanced to related party and advanced from related party were
netted against each other, and all advances became non-interest-bearing. The
amount outstanding is subordinate to all other debts of the Company.
ACCRUED PAYROLL AND PAYROLL TAXES
As of June 30, 1999 and December 31, 1999, $159,000 and $199,000
(unaudited), respectively, is included in accrued payroll and payroll taxes as
accrued salary for the majority stockholder/Chief Executive Officer.
F-17
<PAGE> 70
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
PERSONAL GUARANTEES ON BEHALF OF THE COMPANY
The Chief Executive Officer has provided a personal guarantee for the
processing of credit card transactions in the amount of $600,000.
NOTE 13 -- YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is dependent on computer processing in the conduct
of its business activities.
The Company has reviewed the Year 2000 compliance of its internally
developed proprietary software. The Company has internally developed
substantially all of the systems for the operation of its website. These systems
include the software used to conduct auctions, provide customer interaction,
transaction processing, and some fulfillment functions. The Company recently
began replacing all of its older computers and systems with current Year 2000
compliant models. With the exception of a limited number of desktop computers,
the Company believes that its systems and applications are Year 2000 compliant.
Based on the review of the computer systems, management does not believe the
cost of implementation will be material to the Company's financial position and
results of operations.
The Company is also dependent upon the Year 2000 compliance of its vendors
and other third-party service providers. The Company has initiated communication
with third-party vendors and service providers to determine the extent to which
it may be vulnerable to their failure to address Year 2000 problems. Based on
the results of this assessment, the Company may have to develop a remediation
plan to partially insulate it from their non-compliance. The Company is unable
to control Year 2000 Issues relating to third parties. The Company cannot
guarantee that the Year 2000 problems of its vendors and service providers will
not have a material adverse impact on its systems or business.
NOTE 14 -- SUBSEQUENT EVENTS
STOCK OPTION PLAN
Subsequent to December 31, 1999, the Board of Directors adopted and the
stockholders approved the 1999 Stock Option, Deferred Stock, and Restricted
Stock Plan (the "Plan"). Under the Plan, the Board of Directors, or its
designated administrators, has the flexibility to determine the type and amount
of awards to be granted to eligible participants.
The program administrators may grant the following types of awards under
the Plan: (1) incentive stock options, (2) nonqualified stock options, (3)
deferred stock, or (4) restricted shares.
The Company has authorized and reserved for issuance an aggregate of
2,000,000 shares of common stock under the Plan. The shares of common stock
issuable under the Plan may be authorized but unissued shares, shares issued and
reacquired by the Company, or shares purchased
F-18
<PAGE> 71
AUCTION-SALES.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND 1998 IS UNAUDITED.)
by the Company on the open market. If any of the awards granted under the Plan
expire, terminate, or are forfeited for any reason before they have been
exercised, vested, or issued in full, the unissued shares subject to those
expired, terminated, or forfeited awards will again be available for purposes of
the Plan. The Plan terminates in January, 2010.
LEASES
Subsequent to December 31, 1999, the Company entered into a month-to-month
lease for administrative facilities at $1,175 per month, plus a $2,000 security
deposit.
F-19
<PAGE> 72
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[AUCTION-SALES.COM LOGO]
AUCTION-SALES.COM, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
WESTPARK CAPITAL, INC.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the Registrant
to, and Article VIII of the Certificate of Incorporation provides that the
Registrant may, indemnify each person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was, or has agreed to become, a director or officer of
the Registrant, or is or was servicing, or has agreed to serve, at the request
of the Registrant, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan), or by reason of any action
alleged to have been taken or omitted in such capacity, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
action, suit or proceeding and any appeal therefrom.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts. All of the amounts shown are estimates, except the SEC,
NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $10,058
NASD filing fee............................................. 4,310
Nasdaq National Market listing fee..........................
Underwriters' nonaccountable expense allowance..............
Printing and engraving expenses.............................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Fees and expenses (including legal fees) for qualifications
under state securities laws...............................
Transfer agent and registrar's fees and expenses............
Miscellaneous expenses......................................
-------
Total.............................................
=======
</TABLE>
- ---------------
* To be completed by amendment.
II-1
<PAGE> 74
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in the table below are the dates, the number of securities sold
and the total offering price of such securities sold by the Company within the
past three years. Unless otherwise indicated, all securities were sold to the
purchasers directly by the Company, and therefore, no underwriting discounts
were involved.
<TABLE>
<CAPTION>
TITLE OF SECURITIES SOLD DATE OF PURCHASE NUMBER OF SHARES TOTAL OFFERING PRICE($)
------------------------ ------------------ ---------------- -----------------------
<S> <C> <C> <C>
Common Stock Purchase
Warrant..................... May 1, 1998 100,000(1)
Common Stock.................. May 16, 1998 25,000 100,000
Common Stock.................. September 15, 1998 10,000 80,000
Common Stock.................. October 22, 1998 35,000 280,000
Common Stock.................. December 7, 1998 45,000 360,000
Common Stock.................. December 10, 1998 25,000 200,000
Common Stock.................. December 31, 1998 25,000 200,000
Common Stock.................. January 6, 1999 10,000 80,000
Common Stock.................. January 21, 1999 55,000 440,000
Common Stock Purchase
Warrant(2).................. January 29, 1999 100,000 800,000
Unsecured Subordinated
Convertible Promissory Notes
and Common Stock Purchase
Warrants.................... October 20, 1999- (3) 1,550,000
February 11, 2000
</TABLE>
- ---------------
(1) Represents a right to purchase 100,000 shares of common stock.
(2) Represents a right to purchase 100,000 shares of common stock.
(3) The Registrant sold 31 units to accredited investors in a private
placement, each unit consisting of a $50,000 unsecured subordinated
convertible promissory note, bearing interest at the rate of 8% per annum
and a five-year common stock purchase warrant to purchase up to 16,667
shares at an exercise price of $8.00 per share. The notes are convertible at
the option of the holder if the principal and unpaid accrued interest is not
paid in full by June 30, 2001 at a conversion price of $1.00 per share.
All of the above securities were sold by the Company either to (1)
accredited investors in reliance upon Rule 506 promulgated by the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), or to (2)
the officers and directors of the Company in reliance on Section 4(2) of the
Securities Act. The officers of the Company made the determination that all
investors purchasing under the exemption from registration provided by Rule 506
were accredited after receiving an executed: letter of investment intent;
subscription agreement; and investor and purchaser questionnaire.
II-2
<PAGE> 75
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended
and restated.
3.2 Bylaws of the Registrant, as amended and restated.
4.1* Specimen common stock certificate.
4.2* Form of Warrant Agreement between the Registrant and
WestPark Capital, Inc., including form of Representative's
Warrant.
4.3* Form of Option Agreement between the Registrant and Troy
Noyes.
4.4* Form of Option Agreement between the Registrant and Roy
Stock.
4.5 Form of Warrant Agreement between the Registrant and
Freshman, Marantz, Orlanski, Cooper & Klein.
4.6 Form of Warrant Agreement between the Registrant and the
purchasers of the Registrant's unsecured subordinated
convertible notes.
4.7 Form of Unsecured Subordinated Convertible Note sold in
private placement of units.
5.1* Opinion of Kirkpatrick & Lockhart LLP.
10.1* Form of Indemnification Agreement with officers and
directors.
10.2* Lease, as amended, dated March 13, 1995 between Zahid Rafiq
and Newbury Business Park, regarding 3543 Old Conejo Road,
Unit 105, Newbury Park, CA 91320.
10.3* 2000 Stock Option, Deferred Stock and Restricted Stock Plan.
10.4* Employment Agreement dated January 1, 1997 between the
Registrant and Zahid "Mike" Rafiq.
10.5* Employment Agreement dated January 25, 1997 between the
Registrant and Pierre Rafiq.
10.6 Form of Registration Rights Agreement between the
Registrants and the purchasers of the Registrant's unsecured
subordinated promissory notes.
10.7* Sale of Rights and Affiliation Agreement dated as of
December 31, 1998 between the Registrant and Auction
Business, Inc.
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP.
23.2* Consent of Kirkpatrick & Lockhart (contained in exhibit
5.1).
24.1 Power of Attorney (included on signature page of
registration statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the
II-3
<PAGE> 76
Commission pursuant to Rule 424(b) (sec.230.424(b) of this Chapter) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
of any material change to such information in the registration
statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 77
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newbury Park, State of California on February 11,
2000.
AUCTION-SALES.COM, INC.
By: /s/ ZAHID RAFIQ
------------------------------------
Name: Zahid Rafiq
Title: Chairman of the Board, Chief
Executive Officer and Secretary
POWER OF ATTORNEY
We, the undersigned officers and directors of Auction-Sales.com, Inc., do
hereby constitute and appoint Zahid Rafiq and Pierre Rafiq, or either of them,
our true and lawful attorneys and agents, to do any and all acts and things in
our names in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said corporation to
comply with the Securities Act of 1933, as amended (the "Securities Act"), and
any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this registration statement, including
specifically, but without limitation, power and authority to sign for us or any
of us in our names and in the capacities indicated below, any and all amendments
(including post-effective amendment) to this registration statement, or any
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act, as amended; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacity indicated on
February 11, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ ZAHID RAFIQ Chairman of the Board, Chief Executive
- ------------------------------------------- Officer, Chief Financial Officer, Treasurer
Zahid Rafiq and Secretary (Principal Executive Officer
and Principal Financial and Accounting
Officer)
/s/ PIERRE RAFIQ President, Chief Technology Officer and
- ------------------------------------------- Director
Pierre Rafiq
</TABLE>
II-5
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended
and restated.
3.2 Bylaws of the Registrant, as amended and restated.
4.1* Specimen common stock certificate.
4.2* Form of Warrant Agreement between the Registrant and
WestPark Capital, Inc., including form of Representative's
Warrant.
4.3* Form of Option Agreement between the Registrant and Troy
Noyes.
4.4* Form of Option Agreement between the Registrant and Roy
Stock.
4.5 Form of Warrant Agreement between the Registrant and
Freshman, Marantz, Orlanski, Cooper & Klein.
4.6 Form of Warrant Agreement between the Registrant and the
purchasers of the Registrant's unsecured subordinated
convertible notes.
4.7 Form of Unsecured Subordinated Convertible Note sold in
private placement of units.
5.1* Opinion of Kirkpatrick & Lockhart LLP.
10.1* Form of Indemnification Agreement with officers and
directors.
10.2* Lease, as amended, dated March 13, 1995 between Zahid Rafiq
and Newbury Business Park, regarding 3543 Old Conejo Road,
Unit 105, Newbury Park, CA 91320.
10.3* 2000 Stock Option, Deferred Stock and Restricted Stock Plan.
10.4* Employment Agreement dated January 1, 1997 between the
Registrant and Zahid "Mike" Rafiq.
10.5* Employment Agreement dated January 25, 1997 between the
Registrant and Pierre Rafiq.
10.6 Form of Registration Rights Agreement between the
Registrants and the purchasers of the Registrant's unsecured
subordinated promissory notes.
10.7* Sale of Rights and Affiliation Agreement dated as of
December 31, 1998 between the Registrant and Auction
Business, Inc.
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP.
23.2* Consent of Kirkpatrick & Lockhart (contained in exhibit
5.1).
24.1 Power of Attorney (included on signature page of
registration statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/19/1999
991153315 - 2484470
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AUCTION-SALES.COM, INC.
AUCTION-SALES.COM, INC., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is AUCTION-SALES.COM, INC. The
corporation was originally incorporated under the name Alto Corporation and the
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on February 28, 1995. The
Certificate of Incorporation was amended on August 5, 1998 and February 4, 1999.
The Certificate of Incorporation is hereby amended and restated pursuant to
Section 242 and Section 245 of the Delaware General Corporation Law. All
amendments to the Certificate of Incorporation reflected herein have been duly
authorized and adopted by the Corporation's Board of Directors and stockholders
in accordance with the provisions of Sections 242 and 245 of the Delaware
General Corporation Law.
This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of the
Corporation. The text of the Certificate of Incorporation is amended hereby to
read as herein set forth in full:
ARTICLE I
The name of this corporation is AUCTION-SALES.COM, INC.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 3422 Old Capitol Trail, Suite 700, Wilmington, Delaware, County of
New Castle, and the name of its registered agent at that address is Delaware
Business Incorporators, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
SECTION 1. NUMBER OF AUTHORIZED SHARES. The total number of shares of
stock which the Corporation shall have the authority to issue shall be One
Hundred Ten Million (110,000,000) shares. The Corporation shall be authorized to
issue two classes of shares of
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<PAGE> 2
stock, designated, "Common Stock" and "Preferred Stock." The Corporation shall
be authorized to issue One Hundred Million (100,000,000) shares of Common Stock,
each share to have a par value of $.001 per share, and Ten Million (10,000,000)
shares of Preferred Stock, each share to have a par value of $.001 per share.
SECTION 2. COMMON STOCK. The Board of Directors of the Corporation may
authorize the issuance of shares of Common Stock from time to time. The
Corporation may reissue shares of Common Stock that are redeemed, purchased, or
otherwise acquired by the Corporation unless otherwise provided by law.
SECTION 3. PREFERRED STOCK. The Board of Directors of the Corporation
may by resolution authorize the issuance of shares of Preferred Stock from time
to time in one or more series. The Corporation may reissue shares of Preferred
Stock that are redeemed, purchased, or otherwise acquired by the Corporation
unless otherwise provided by law. The Board of Directors is hereby authorized to
fix or alter the designations, powers and preferences, and relative,
participating, optional or other rights, if any, and qualifications, limitations
or restrictions thereof, including, without limitation, dividend rights (and
whether dividends are cumulative), conversion rights, if any, voting rights
(including the number of votes, if any, per share, as well as the number of
members, if any, of the Board of Directors or the percentage of members, if any,
of the Board of Directors each class or series of Preferred Stock may be
entitled to elect), rights and terms of redemption (including sinking fund
provisions, if any), redemption price and liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, and to increase or decrease the number
of shares of any such series subsequent to the issuance of shares of such
series, but not below the number of shares of such series then outstanding.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. Subject to the preferences
applicable to Preferred Stock outstanding at any time, the holders of shares of
Common Stock shall be entitled to receive such dividends, payable in cash or
otherwise, as may be declared thereon by the Board of Directors from time to
time out of assets or funds of the Corporation legally available therefor.
SECTION 5. VOTING RIGHTS. Each share of Common Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation.
ARTICLE V
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in Delaware General Corporation Law) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of directors or in the Bylaws of the Corporation.
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<PAGE> 3
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by or in the manner provided in the Bylaws of the Corporation or amendment
thereof duly adopted by the Board of Directors or by the stockholders of the
Corporation. Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
ARTICLE VII
No action, which has not been previously approved by the Board of
Directors, shall be taken by the stockholders except at an annual meeting or a
special meeting of the stockholders.
ARTICLE VIII
To the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended (provided that the effect of any
such amendment shall be prospective only) the "Delaware Law"), a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation to the fullest extent
permitted by the Delaware Law, purchase and maintain insurance on behalf of any
such person against any liability which may be asserted against such person. The
Corporation may create a trust fund, grant a security interest or use other
means (including without limitation a letter of credit) to ensure the payment of
such sums as may become necessary or desirable to effect the indemnification as
provided herein. To the fullest extent permitted by the Delaware Law, the
indemnification provided herein shall include expenses as incurred (including
attorneys' fees), judgments, finds and amounts paid in settlement and any such
expenses shall be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the person seeking indemnification to repay such amounts if it is ultimately
determined that he or she is not entitled to be indemnified. Notwithstanding the
foregoing or any other provision of this Article, no advance shall be made by
the Corporation if a determination is reasonably and promptly made by the Board
by a majority vote of a quorum of disinterested Directors, or (if such a quorum
is not obtainable or, even if obtainable, a quorum of disinterested Directors so
directs) by independent legal counsel to the Corporation, that, based upon the
facts known to the Board or such counsel at the time such determination is made,
(a) the party seeking an advance acted in bad faith or deliberately breached his
or her duty to the Corporation or its
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<PAGE> 4
stockholders, and (b) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the provisions of this
Article VIII. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such expenses
to the fullest extent permitted by the Delaware Law, nor shall it be deemed
exclusive of any other rights to which any person seeking indemnification from
the Corporation may be entitled under any agreement, the Corporation's Bylaws,
vote of stockholders or disinterested directors, or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office. The Corporation may, but only to the extent that the Board
of Directors may (but shall not be obligated to) authorize from time to time,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the provisions of
this Article VIII as it applies to the indemnification and advancement of
expenses of directors and officers of the Corporation.
ARTICLE IX
The Board of Directors is expressly authorized to amend, alter or
repeal the Bylaws of the Corporation.
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by Pierre Rafiq, President of the Corporation, and attested by Zahid
Rafiq, the Secretary of the Corporation. The signatures below shall constitute
the affirmation and acknowledgment under penalties of perjury, that the facts
herein stated are true.
Dated: April 19, 1999
By: /s/ PIERRE RAFIQ
-----------------------
Name: Pierre Rafiq
Title: President
ATTEST:
By: /s/ ZAHID RAFIQ
-----------------------
Name: Zahid Rafiq
Title: Secretary
-4-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
AUCTION-SALES.COM, INC.
A DELAWARE CORPORATION
ARTICLE I: OFFICES
SECTION 1.1 REGISTERED OFFICE.
The registered office of AUCTION-SALES.COM, INC. (the "Corporation")
shall be at 3422 Old Capitol Trail, Suite 700, Wilmington, Delaware and the name
of its registered agent at that address is Delaware Business Incorporators, Inc.
SECTION 1.2 PRINCIPAL OFFICE.
The principal office for the transaction of the business of the
Corporation shall be at 3543 Old Conejo Rd., Suite 105, Newbury Park, California
91320, or otherwise as set forth in a resolution adopted by the Board.
SECTION 1.3 OTHER OFFICES.
The Corporation may also have an office or offices at such other place
or places, either within or without the State of Delaware, as the Board may from
time to time determine or as the business of the Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS.
All annual meetings of stockholders and all other meetings of
stockholders shall be held either at the principal office of the Corporation or
at any other place within or without the State of Delaware that may be
designated by the Board pursuant to authority hereinafter granted to the Board.
1
<PAGE> 2
SECTION 2.2 ANNUAL MEETINGS.
Annual meetings of stockholders of the Corporation for the purpose of
electing directors and for the transaction of such other business as may
properly come before such meetings may be held at such time and place and on
such date as the Board shall determine by resolution.
SECTION 2.3 SPECIAL MEETINGS.
A special meeting of the stockholders for the transaction of any proper
business may be called at any time exclusively by the Board or the Chairman.
SECTION 2.4 NOTICE OF MEETINGS.
Except as otherwise required by law, notice of each meeting of
stockholders, whether annual or special, shall be given not less than ten (10)
days nor more than sixty (60) days before the date of the meeting to each
stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to such stockholder personally, or by
depositing such notice in the United States mail, in a postage prepaid envelope,
directed to such stockholder at such stockholder's post office address furnished
by such stockholder to the Secretary of the Corporation for such purpose, or, if
such stockholder shall not have furnished an address to the Secretary for such
purpose, then at such stockholder's post office address last known to the
Secretary, or by transmitting a notice thereof to such stockholder at such
address by telegraph, cable, wireless or facsimile. Except as otherwise
expressly required by law, no publication of any notice of a meeting of
stockholders shall be required. Every notice of a meeting of stockholders shall
state the place, date and hour of the meeting and, in the case of a special
meeting, shall also state the purpose for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
to whom notice may be omitted pursuant to applicable Delaware law or who shall
have waived such notice, and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
SECTION 2.5 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
other change, conversion or exchange of stock or for the purpose of any other
lawful action other than to consent to corporate action in writing without a
meeting, the Board
2
<PAGE> 3
may fix, in advance, a record date, which shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting, nor more than sixty
(60) days prior to any such other action. If in any case involving the
determination of stockholders for any purpose other than notice of or voting at
a meeting of stockholders the Board shall not fix such a record date, then the
record date for determining stockholders for such purpose shall be the close of
business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
SECTION 2.6 QUORUM.
Except as otherwise required by law, the holders of record of a majority
in voting interest of the shares of stock of the Corporation entitled to be
voted thereat, present in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting of stockholders of the Corporation or any
adjournment thereof. Subject to the requirement of a larger percentage vote, if
any, contained in the Certificate of Incorporation, these Bylaws or by statute,
the stockholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding any
withdrawal of stockholders that may leave less than a quorum remaining, if any
action taken (other than adjournment) is approved by the vote of at least a
majority in voting interest of the shares required to constitute a quorum. In
the absence of a quorum at any meeting or any adjournment thereof, a majority in
voting interest of the stockholders present in person or by proxy and entitled
to vote thereat or, in the absence therefrom of all the stockholders, any
officer entitled to preside at, or to act as secretary of, such meeting may
adjourn such meeting from time to time. At any such adjourned meeting at which a
quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called.
SECTION 2.7 VOTING.
(A) Each stockholder shall, at each meeting of stockholders, be entitled
to vote, in the manner prescribed by the Corporation's Certificate of
Incorporation, in person or by proxy each share of the stock of the Corporation
that has voting rights on the matter in question and that shall have been held
by such stockholder and registered in such stockholder's name on the books of
the Corporation:
(i) on the date fixed pursuant to Section 2.5 of these Bylaws as the
record date for the determination of stockholders entitled to notice of
and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at the
close of business on the business day next preceding the day upon which
notice of the meeting shall
3
<PAGE> 4
be given or (b) if notice of the meeting shall be waived, at the close
of business on the business day next preceding the day upon which the
meeting shall be held.
(B) Shares of the Corporation's own stock belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
the pledgor shall have expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or the pledgee's proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or with respect to
which two or more persons have the same fiduciary relationship, shall be voted
in accordance with the provisions of the Delaware General Corporation Law, as
the same exists or may hereafter be amended (the "DGCL").
(C) Subject to the provisions of the Corporation's Certificate of
Incorporation, any such voting rights may be exercised by the stockholder
entitled thereto in person or by such stockholder's proxy appointed by an
instrument in writing, subscribed by such stockholder or by such stockholder's
attorney thereunto authorized and delivered to the secretary of the meeting. The
attendance at any meeting of a stockholder who may theretofore have given a
proxy shall not have the effect of revoking the same unless such stockholder
shall in writing so notify the secretary of the meeting prior to the voting of
the proxy. At any meeting of stockholders at which a quorum is present, all
matters, except as otherwise provided in the Certificate of Incorporation, in
these Bylaws or by law, shall be decided by the vote of a majority in voting
interest of the stockholders present in person or by proxy and entitled to vote
thereat and thereon. The vote at any meeting of stockholders on any question
need not be by ballot, unless so directed by the chairman of the meeting. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, if there be such proxy, and it shall state the number
of shares voted.
SECTION 2.8 INSPECTORS OF ELECTION.
Prior to each meeting of stockholders, the Chairman of such meeting
shall appoint an inspector(s) of election to act with respect to any vote. Each
inspector of election so appointed shall first subscribe an oath faithfully to
execute the duties of an inspector of election at such meeting with strict
impartiality and according to the best of such inspector of election's ability.
Such inspector(s) of election shall decide upon the qualification of the voters
and shall certify and report the number of shares represented at the meeting and
entitled to vote on any question, determine the number of votes entitled to be
cast by each share, shall conduct the vote and, when the voting is completed,
accept the votes and ascertain and report the number of shares voted
4
<PAGE> 5
respectively for and against each question, and determine, and retain for a
reasonable period a record of the disposition of, any challenge made to any
determination made by such inspector(s) of election. Reports of inspector(s) of
election shall be in writing and subscribed and delivered by them to the
Secretary of the Corporation. The inspector(s) of election need not be
stockholders of the Corporation, and any officer of the Corporation may be an
inspector(s) of election on any question other than a vote for or against a
proposal in which such officer shall have a material interest. The inspector(s)
of election may appoint or retain other persons or entities to assist the
inspector(s) of election in the performance of the duties of the inspector(s) of
election.
SECTION 2.9 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS.
(A) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.9(A). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than ninety (90) days in advance of such
meeting. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting (1) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (2) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (3) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, and (4) any material interest of the
stockholder in such business. In addition, the stockholder making such proposal
shall promptly provide any other information reasonably requested by the
Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Section 2.9. The Chairman of
any such meeting shall direct that any business not properly brought before the
meeting shall not be considered.
(B) Nominations for the election of directors may be made by the Board
or by any stockholder entitled to vote in the election of directors; provided,
however, that a stockholder may nominate a person for election as a director at
a meeting only if written notice of such stockholder's intent to make such
nomination has been given to the Secretary of the Corporation not later than
ninety (90) days in advance of such meeting. Each such notice shall set forth:
(i) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated; (ii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting and
nominate the person or persons specified in the notice; (iii) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the stockholder; (iv) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement
5
<PAGE> 6
filed pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board; and (v) the consent of each nominee to serve as a director of the
Corporation if so elected. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 2.9(B). The Chairman of any meeting of stockholders shall direct that
any nomination not made in accordance with these procedures be disregarded.
SECTION 2.10 ACTION WITHOUT MEETING.
Any action required to be taken at any annual or special meeting of
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may, if such action has been earlier
approved by the Board, be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 GENERAL POWERS.
Subject to any requirements in the Certificate of Incorporation, these
Bylaws, or of the DGCL as to action which must be authorized or approved by the
stockholders, any and all corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be under the
direction of, the Board to the fullest extent permitted by law. Without limiting
the generality of the foregoing, it is hereby expressly declared that the Board
shall have the following powers, to wit:
(A) to select and remove all the officers, agents and employees of the
Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Certificate of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the
Corporation, and to make such rules and regulations therefor not inconsistent
with law, the Certificate of Incorporation or these Bylaws, as it may deem best;
(C) to change the location of the registered office of the Corporation
in Section 1.1
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<PAGE> 7
hereof; to change the principal office and the principal office for the
transaction of the business of the Corporation from one location to another as
provided in Section 1.2 hereof; to fix and locate from time to time one or more
offices of the Corporation within or without the State of Delaware as provided
in Section 1.3 hereof; to designate any place within or without the State of
Delaware for the holding of any meeting or meetings of stockholders; and to
adopt, make and use a corporate seal, and to prescribe the forms of certificates
of stock, and to alter the form of such seal and of such certificates from time
to time, and in its judgment as it may deem best, provided such seal and such
certificate shall at all times comply with the provisions of law;
(D) to authorize the issuance of shares of stock of the Corporation from
time to time, upon such terms and for such considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust and
securities therefor; and
(F) by resolution adopted by a majority of the whole Board to designate
an executive and other committees of the Board, each consisting of one or more
directors, to serve at the pleasure of the Board, and to prescribe the manner in
which proceedings of such committee or committees shall be conducted.
SECTION 3.2 NUMBER AND TERM OF OFFICE.
(A) Until this Section 3.2 is amended by a resolution duly adopted by
the Board or by the stockholders of the Corporation, the number of directors
constituting the entire Board shall be not less than two (2) members nor more
than nine (9) members and shall initially consist of two (2) members. Directors
need not be stockholders. Each of the directors of the Corporation shall hold
office until his successor shall have been duly elected or until he shall resign
or shall have been removed in the manner hereinafter provided.
(B) At such time as the Board is comprised of at least three members,
the Board shall be divided into three classes: Class I, Class II and Class III.
Each Director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first elected to Class I shall serve for a
term ending on the date of the next annual meeting of stockholders, the
directors first elected to Class II shall serve for a term ending on the first
annual meeting of stockholders following the next annual meeting, and the
directors first elected to Class III shall serve for a term ending on the second
annual meeting of stockholders following the next annual meeting.
Notwithstanding the foregoing provisions of this Article, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of an incumbent director. Until such
time as the Board is comprised of three members, directors shall be elected
annually
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<PAGE> 8
and shall serve until their respective successors are duly elected or appointed
and shall qualify.
SECTION 3.3 CHAIRMAN OF THE BOARD.
The Chairman of the Board, when present, shall preside at all meetings
of the Board and all meetings of stockholders. The Chairman of the Board shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors shall
designate from time to time.
SECTION 3.4 ELECTION OF DIRECTORS.
The directors shall be elected by the stockholders of the Corporation,
and at each election, the persons receiving the greater number of votes, up to
the number of directors then to be elected, shall be the persons then elected.
The election of directors is subject to any provision contained in the
Certificate of Incorporation relating thereto, including any provision regarding
the rights of holders of preferred stock to elect directors.
SECTION 3.5 RESIGNATIONS.
Any director of the Corporation may resign at any time by giving written
notice to the Board or to the Secretary of the Corporation. Any such resignation
shall take effect at the time specified therein, or, if the time is not
specified, it shall take effect immediately upon receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 3.6 VACANCIES.
Except as otherwise provided in the Certificate of Incorporation, any
vacancy in the Board, whether because of death, resignation, disqualification,
an increase in the number of directors, removal, or any other cause, may be
filled by vote of the majority of the remaining directors, although less than a
quorum. Increases in the number of directors shall be filled in accordance with
the rule that each class of directors shall be as nearly equal in number of
directors as possible. Notwithstanding such rule, in the event of any change in
the authorized number of directors each director then continuing to serve as
such will nevertheless continue as a director of the class of which he is a
member, until the expiration of his current term or his earlier death,
resignation or removal. If any newly created directorship or vacancy on the
Board, consistent with the rule that the three classes shall be as nearly equal
in number of directors as possible, may be allocated to one or two or more
classes, the Board shall allocate it to that of the available class whose term
of office is due to expire at the earliest date following such allocation. When
the Board fills a vacancy, the director chosen to fill that vacancy shall be of
the same class as the director he succeeds and shall hold office until such
director's successor shall have been elected and shall qualify or until such
director shall resign or shall have been removed. No
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reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
SECTION 3.7 PLACE OF MEETING.
The Board or any committee thereof may hold any of its meetings at such
place or places within or without the State of Delaware as the Board or such
committee may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver of notice of any such meeting. Directors may participate in any regular
or special meeting of the Board or any committee thereof by means of conference
telephone or similar communications equipment pursuant to which all persons
participating in the meeting of the Board or such committee can hear each other,
and such participation shall constitute presence in person at such meeting.
SECTION 3.8 REGULAR MEETINGS.
Regular meetings of the Board may be held at such times as the Board
shall from time to time by resolution determine.
SECTION 3.9 SPECIAL MEETINGS.
Special meetings of the Board for any purpose or purposes shall be
called at any time by the Chairman of the Board or, if the Chairman of the Board
is absent or unable or refuses to act, by the Chief Executive Officer or the
President, and may also be called by any two members of the Board. Except as
otherwise provided by law or by these Bylaws, written notice of the time and
place of special meetings shall be delivered personally or by facsimile to each
director, or sent to each director by mail or by other form of written
communication, charges prepaid, addressed to such director at such director's
address as it is shown upon the records of the Corporation, or, if it is not so
shown on such records and is not readily ascertainable, at the place in which
the meetings of the directors are regularly held. In case such notice is mailed
or telegraphed, it shall be deposited in the United States mail or delivered to
the telegraph company in the County in which the principal office for the
transaction of the business of the Corporation is located at least 48 hours
prior to the time of the holding of the meeting. In case such notice is
delivered personally or by facsimile as above provided, it shall be delivered at
least 24 hours prior to the time of the holding of the meeting. Such mailing,
telegraphing, delivery or facsimile transmission as above provided shall be due,
legal and personal notice to such director. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not be
given. Notice of any meeting of the Board shall not be required to be given to
any director who is present at such meeting, except a director who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
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SECTION 3.10 QUORUM AND MANNER OF ACTING.
Except as otherwise provided in these Bylaws, the Certificate of
Incorporation or by applicable law, the presence of a majority of the authorized
number of directors shall be required to constitute a quorum for the transaction
of business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors,
provided any action taken is approved by at least a majority of the required
quorum for such meeting. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
SECTION 3.11 ACTION BY UNANIMOUS WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
or of any committee thereof may be taken without a meeting if consent in writing
is given thereto by all members of the Board or of such committee, as the case
may be, and such consent is filed with the minutes of proceedings of the Board
or of such committee.
SECTION 3.12 COMPENSATION.
Directors, whether or not employees of the Corporation or any of its
subsidiaries, may receive an annual fee for their services as directors in an
amount fixed by resolution of the Board plus other compensation, including
options to acquire capital stock of the Corporation, in an amount and of a type
fixed by resolution of the Board, and, in addition, a fixed fee, with or without
expenses of attendance, may be allowed by resolution of the Board for attendance
at each meeting, including each meeting of a committee of the Board. Nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
SECTION 3.13 COMMITTEES.
The Board may, by resolution passed by a majority of the whole Board,
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. Any such committee, to the extent provided in
the resolution of the Board and subject to any restrictions or limitations on
the delegation of power and authority imposed by applicable law, shall have and
may exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Any such committee
shall keep written minutes of its meetings and report the same to the Board at
the next regular meeting of the Board. Unless the Board or these Bylaws shall
otherwise prescribe the manner of proceedings of any such
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committee, meetings of such committee may be regularly scheduled in advance and
may be called at any time by the chairman of the committee or by any two members
thereof; otherwise, the provisions of these Bylaws with respect to notice and
conduct of meetings of the Board shall govern.
SECTION 3.14 AFFILIATED TRANSACTIONS.
Notwithstanding any other provision of these Bylaws, each transaction,
or, if an individual transaction constitutes a part of a series of transactions,
each series of transactions, proposed to be entered into between the
Corporation, on the one hand, and any affiliate of the Corporation, on the other
hand, must be approved by the Board. For the purposes of this Section 3.14, (a)
"affiliate" shall mean (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with the Corporation, (ii) any other
person that owns, beneficially, directly or indirectly, twenty percent (20%) or
more of the outstanding capital shares, shares or equity interests of the
Corporation, or (iii) any officer or director of the Corporation; (b) "person"
shall mean and include individuals, corporations, general and limited
partnerships, stock companies or associations, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
entities and governments and agencies and political subdivisions thereof; and
(c) "control" (including the correlative meanings of the terms "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, through the ownership
of voting securities, partnership interests or other equity interests.
ARTICLE IV: OFFICERS
SECTION 4.1 OFFICERS.
The officers of the Corporation shall be a Chief Executive Officer, a
President, one or more Vice Presidents (the number thereof and their respective
titles to be determined by the Board), a Secretary, a Chief Financial Officer,
and such other officers as may be appointed at the discretion of the Board in
accordance with the provisions of Section 4.3 hereof.
SECTION 4.2 ELECTION.
The officers of the Corporation, except such officers as may be
appointed or elected in accordance with the provisions of Sections 4.3 or 4.5
hereof, shall be chosen annually by the Board at the first meeting thereof after
the annual meeting of stockholders, and each officer shall hold office until
such officer shall resign or shall be removed or otherwise disqualified to
serve, or until such officer's successor shall be elected and qualified.
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SECTION 4.3 OTHER OFFICERS.
In addition to the officers chosen annually by the Board at its first
meeting, the Board also may appoint or elect such other officers as the business
of the Corporation may require, each of whom shall have such authority and
perform such duties as are provided in these Bylaws or as the Board may from
time to time specify, and shall hold office until such officer shall resign or
shall be removed or otherwise disqualified to serve, or until such officer's
successor shall be elected and qualified.
SECTION 4.4 REMOVAL AND RESIGNATION.
Except as provided by DGCL Section 141(k), any officer may be removed,
either with or without cause, by resolution of the Board, at any regular or
special meeting of the Board, or, except in case of an officer chosen by the
Board, by any officer upon whom such power of removal may be conferred by the
Board. Any officer or assistant may resign at any time by giving written notice
of his resignation to the Board or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time is
not specified, upon receipt thereof by the Board or the Secretary, as the case
may be; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4.5 VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause may be filled by the vote of the majority of
the directors present at any meeting in which a quorum is present, or pursuant
to Section 3.11 of these Bylaws.
SECTION 4.6 CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors, unless the Chairman
of the Board has been appointed and is present. The Chief Executive Officer
shall be the chief executive officer of the Corporation and shall, subject to
the control of the Board of Directors, have general supervision, direction and
control of the business and affairs of the Corporation. The Chief Executive
Officer shall also perform such other duties and have such other powers as the
Board of Directors may designate from time to time.
SECTION 4.7 PRESIDENT.
The President shall preside at all meetings of the stockholders and at
all meetings of the Board of Directors, unless the Chairman of the Board has
been appointed and is present or, in the absence of the Chairman of the Board,
the Chief Executive Officer has been appointed and is present. Subject to the
provisions of these Bylaws and to the direction of the Board of Directors and
Chief Executive Officer, the President shall have the responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all
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duties and have all powers which are commonly incident to the office of
President or which are delegated to him by the Board of Directors. The President
shall have the power to sign all stock certificates, contracts and other
instruments of the Corporation which are authorized and shall have general
supervision and direction of all the other officers, employees and agents of the
corporation.
SECTION 4.8 VICE PRESIDENT.
Each Vice President shall have such powers and perform such duties with
respect to the administration of the business and affairs of the Corporation as
are commonly incident to their office or as may from time to time be assigned to
such Vice President by the Chairman of the Board, or the Board, or the Chief
Executive Officer, or the President, or as may be prescribed by these Bylaws. In
the absence or disability of the Chairman of the Board, the Chief Executive
Officer and the President, the Vice Presidents in order of their rank as fixed
by the Board, or if not ranked, the Vice President designated by the Board,
shall perform all of the duties of the Chairman of the Board, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
Chairman of the Board.
SECTION 4.9 SECRETARY.
(A) The Secretary shall attend all meetings of the stockholders and of
the Board of Directors and shall record all acts and proceedings thereof in the
minute book of the Corporation. The Secretary shall give notice in conformity
with these Bylaws of all meetings of the stockholders and of all meetings of the
Board of Directors and any committee thereof requiring notice. The Secretary
shall perform all other duties given him in these Bylaws and other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board shall designate from time to time.
(B) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation or such other place as the Board may order, a book of
minutes of all meetings of directors and stockholders, with the time and place
of holding, whether regular or special, and if special, how authorized and the
notice thereof given, the names of those present at meetings of directors, the
number of shares present or represented at meetings of stockholders, and the
proceedings thereof.
(C) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation's transfer agent, a share register, or a duplicate
share register, showing the name of each stockholder, the number of shares of
each class held by such stockholder, the number and date of certificates issued
for such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
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SECTION 4.10 CHIEF FINANCIAL OFFICER.
The Chief Financial Officer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors or the Chief Executive Officer. The Chief
Financial Officer, subject to the order of the Board, shall have the custody of
all funds and securities of the Corporation. The Chief Financial Officer shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board or the Chief Executive
Officer shall designate from time to time.
ARTICLE V: CORPORATE INSTRUMENTS, CHECKS,
DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.1 EXECUTION OF CORPORATE INSTRUMENTS.
The Board of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other person or persons, to
execute on behalf of the Corporation the corporate name without limitation, or
enter into contracts on behalf of the Corporation, except where otherwise
provided by law or these Bylaws, and such execution or signature shall be
binding upon the Corporation. Such authority may be general or confined to
specific instances, and unless so authorized by the Board or by these Bylaws, no
officer, agent, or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
SECTION 5.2 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for payment of money, notes or other
evidence of indebtedness, issued in the name of or payable to the Corporation,
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the Board. Each such
officer, assistant, agent or attorney shall give such bond, if any, as the Board
may require.
SECTION 5.3 DEPOSITS.
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in such banks, trust
companies or other depositories as the Board may select, or as may be selected
by any officer or officers, assistant or assistants, agent or agents, or
attorney or attorneys of the Corporation to whom such power shall have been
delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President (or any other officer
or officers, assistant or assistants, agent or agents, or attorney or attorneys
of the Corporation who shall from time to time be determined by the Board) may
endorse, assign and deliver checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation.
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SECTION 5.4 GENERAL AND SPECIAL BANK ACCOUNTS.
The Board may from time to time authorize the opening and keeping of
general and special bank accounts with such banks, trust companies or other
depositories as the Board may select or as may be selected by any officer or
officers, assistant or assistants, agent or agents, or attorney or attorneys of
the Corporation to whom such power shall have been delegated by the Board. The
Board may make such special rules and regulations with respect to such bank
accounts, not inconsistent with the provisions of these Bylaws, as it may deem
expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 CERTIFICATES FOR STOCK.
Every owner of stock of the Corporation shall be entitled to have a
certificate or certificates, to be in such form as the Board shall prescribe,
certifying the number and class or series of shares of the stock of the
Corporation owned by such owner. The certificates representing shares of such
stock shall be numbered in the order in which they shall be issued and shall be
signed in the name of the Corporation by the Chairman of the Board, the Chief
Executive Officer, the President or any Vice President, and by the Secretary.
Any or all of the signatures on the certificates may be a facsimile. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate, shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been placed thereupon, were such an officer, transfer agent
or registrar at the date of issue. A record shall be kept of the respective
names of the persons, firms or corporations owning the stock represented by such
certificates, the number and class or series of shares represented by such
certificates, respectively, and the respective dates thereof, and in case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled, and
no new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled, except
in cases provided for in Section 6.4 hereof.
SECTION 6.2 TRANSFERS OF STOCK.
Transfers of shares of stock of the Corporation shall be made only on
the books of the Corporation by the registered holder thereof, or by such
holder's attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary, or with a transfer clerk or a transfer agent appointed
as provided in Section 6.3 hereof, and upon surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes
thereon. The person in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation. Whenever any transfer of shares shall be
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made for collateral security, and not absolutely, such fact shall be so
expressed in the entry of transfer if, when the certificate or certificates
shall be presented to the Corporation for transfer, both the transferor and the
transferee request the Corporation to do so.
SECTION 6.3 REGULATIONS.
The Board may make such rules and regulations as it may deem expedient,
not inconsistent with these Bylaws, concerning the issue, transfer and
registration of certificates for shares of the stock of the Corporation. It may
appoint, or authorize any officer or officers to appoint, one or more transfer
clerks or one or more transfer agents and one or more registrars, and may
require all certificates for stock to bear the signature or signatures of any of
them.
SECTION 6.4 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES.
In any case of loss, theft, destruction, or mutilation of any
certificate of stock, another may be issued in its place upon proof satisfactory
to the Board of such loss, theft, destruction, or mutilation and upon the giving
of a bond of indemnity to the Corporation in such form and in such sum as the
Board may direct; provided, however, that a new certificate may be issued
without requiring any bond when, in the judgment of the Board, it is proper so
to do.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
To the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended (provided that the effect of any
such amendment shall be prospective only) (the "Delaware Law"), a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation may, to the fullest
extent permitted by the Delaware Law, purchase and maintain insurance on behalf
of any such person against any liability which may be asserted against such
person. The Corporation may create a trust fund, grant a security interest or
use other means (including without limitation a letter of credit) to ensure the
payment of such sums as may become necessary or desirable to effect the
indemnification as provided herein. To the fullest extent
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permitted by the Delaware Law, the indemnification provided herein shall include
expenses as incurred (including attorneys' fees), judgments, fines and amounts
paid in settlement and any such expenses shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the person seeking indemnification to repay
such amounts if it is ultimately determined that he or she is not entitled to be
indemnified. Notwithstanding the foregoing or any other provision of this
Section 7.1, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested Directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested Directors so directs) by independent legal
counsel to the Corporation, that, based upon the facts known to the Board or
such counsel at the time such determination is made, (a) the party seeking an
advance acted in bad faith or deliberately breached his or her duty to the
Corporation or its stockholders, and (b) as a result of such actions by the
party seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
provisions of this Section 7.1. The indemnification provided herein shall not be
deemed to limit the right of the Corporation to indemnify any other person for
any such expenses to the fullest extent permitted by the Delaware Law, nor shall
it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, the
Corporation's Bylaws, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office. The Corporation may, but only to
the extent that the Board of Directors may (but shall not be obligated to)
authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Section 7.1 as it applies to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.2 INDEMNIFICATION OF EMPLOYEES AND AGENTS.
Subject to Section 7.1, the Corporation may, but only to the extent that
the Board may (but shall not be obligated to) authorize from time to time, grant
rights to indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent of the provisions of this Article
VII as they apply to the indemnification and advancement of expenses of
directors and officers of the Corporation.
SECTION 7.3 ENFORCEMENT OF INDEMNIFICATION.
The rights to indemnification and the advancement of expenses conferred
above shall be contract rights. If a claim under this Article VII is not paid in
full by the Corporation within 60 days after written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of such claim. If successful in whole or in part in any such suit, or in a suit
brought by the
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Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expenses of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the DGCL.
Neither the failure of the Corporation (including its Board, independent legal
counsel or stockholders) to have made a determination prior to the commencement
of such suit that indemnification of the indemnitee is proper in the
circumstances because the indemnitee has met the applicable standard of conduct
set forth in the DGCL, nor an actual determination by the Corporation (including
its Board, independent legal counsel or stockholders) that the indemnitee has
not met such applicable standard of conduct, shall either create a presumption
that the indemnitee has not met the applicable standard of conduct or, in the
case of such a suit brought by the indemnitee, be a defense to such suit. In any
suit brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article VII or otherwise shall be on the
Corporation.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 SEAL.
The Board shall adopt a corporate seal, which shall be in the form set
forth in a resolution approved by the Board.
SECTION 8.2 WAIVER OF NOTICES.
Whenever notice is required to be given by these Bylaws or the
Certificate of Incorporation or by law, the person entitled to said notice may
waive such notice in writing, either before or after the time stated therein,
and such waiver shall be deemed equivalent to notice.
SECTION 8.3 AMENDMENTS.
Except as otherwise provided herein, by law, or in the Certificate of
Incorporation, these Bylaws or any of them may be altered, amended, repealed or
rescinded and new Bylaws may be adopted by the Board or by the stockholders at
any annual or special meeting of stockholders, provided that notice of such
proposed alteration, amendment, repeal, rescission or adoption is given in the
notice of such meeting of stockholders.
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CERTIFICATE OF SECRETARY OF ADOPTION OF BYLAWS
I, the undersigned, do hereby certify:
That I am the Secretary of AUCTION SALES.COM, INC. a Delaware
corporation, that the foregoing Bylaws, comprising 18 pages, constitute the
Bylaws of said corporation as duly adopted by the Board of Directors of the
corporation on April 19, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said corporation on this 19th day of April, 1999.
By: /s/ ZAHID RAFIQ
-------------------------
Zahid Rafiq
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EXHIBIT 4.5
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W-2 WARRANT TO PURCHASE
100,000 SHARES OF
COMMON STOCK
ISSUED AS OF: JANUARY 29, 1999 ("DATE OF THE INITIAL ISSUANCE")
AUCTION-SALES.COM, INC.
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT for value received, Freshman, Marantz, Orlanski,
Cooper & Klein 1999 Investments, a general partnership, the registered holder
hereof (the "Holder") is entitled to purchase from Auction-Sales.com, Inc. (the
"Corporation"), at the purchase price of eight dollars ($8.00) per share (the
"Exercise Price"), within five years (60 months) from the date of the initial
issuance of this Warrant (the "Exercise Period"), up to 100,000 shares of Common
Stock, $.001 par value per share, of the Corporation ("Common Stock"). The
Exercise Price per share shall be subject to adjustment from time to time as set
forth herein.
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<PAGE> 2
This Warrant evidences the right to purchase an aggregate of up to
100,000 shares of Common Stock. The shares of Common Stock to be issued upon
exercise of the Warrant are referred to herein as "Warrant Shares."
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. PDT on the last day of the
sixty (60) consecutive month period beginning on the date of the initial
issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 3543 Old Conejo Road #105, Newbury Park, California 91320, or upon
such other location designated by the Corporation, upon presentation and
surrender hereof, together with the Warrant Purchase Form at the end hereof,
duly completed and signed, and upon payment to the Corporation of the Exercise
Price (subject to adjustment in accordance with the provisions of Section 8
hereof), for the number of full Warrant Shares in respect of which such Warrants
are then exercised. Payment of the aggregate Exercise Price may be: (i) in cash
or cash equivalents, (ii) in the form of unrestricted Stock already owned by the
Holder (based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price of the Common Stock on the date the Warrant is exercised),
(iii) by cancellation of any indebtedness owed by the Corporation to the Holder,
(iv) by requesting that the Corporation withhold whole shares of Common Stock
then issuable upon exercise of the Warrant (based on the Fair Market Value of
the Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price of the Common Stock
on the date the Warrant is exercised), (v) in the event the Corporation's Common
Stock is registered under the Securities Exchange Act of 1934, as amended, by
arrangement with a broker which is acceptable to the Corporation where payment
of the Exercise Price is made pursuant to an irrevocable direction to the broker
to deliver all or part of the proceeds from the sale of the shares underlying
the Warrant to the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price of the
Common Stock on the date the Warrant is exercised) multiplied by such fraction.
When Warrants are presented for exercise as to a specified portion, only full
Warrant Shares shall be issuable and a new Warrant bearing the original initial
issuance date shall be issuable evidencing the remaining Warrant or Warrants.
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<PAGE> 3
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 3543 Old Conejo Road #105, Newbury Park, California
91320, upon delivery thereof duly endorsed with signatures properly guaranteed
by a commercial bank or securities brokerage firm or accompanied by proper
evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY
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<PAGE> 4
SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
4. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
5. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
6. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
7. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
8. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
8.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Common Stock of the Corporation, an adjustment will be
made in (i) the aggregate number of shares reserved for issuance under
the Warrants, and (ii) the kind, number and exercise price of shares
subject to the Warrants, provided that the number of shares subject to
the Warrants shall always be a whole number. The number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder of each Warrant shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Corporation which the Holder would have owned or have
been entitled to receive after the
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<PAGE> 5
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 8.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 8.2 through 8.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
8.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise of the Warrants or extend the Expiration
Date to any time deemed appropriate by the Board of Directors of the
Corporation.
8.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting
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<PAGE> 6
forth the computation by which such adjustment was made. Any failure by the
Corporation to give notice to the Holder or any defect therein shall not affect
the validity of such adjustment or of the event resulting in the adjustment, nor
of the Holder's rights to such adjustment.
8.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 8.1 and 8.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
8.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or
merger of the Corporation into another corporation or in case of any
sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety ("Sale"),
such successor or purchasing corporation may assume the obligations
hereunder, and may execute with the Corporation an agreement that each
Holder shall have the right thereafter upon payment of the Exercise
Price to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which he would
have owned or have been entitled to receive after the consummation of
such Sale had such Warrant been exercised immediately prior to the Sale.
The Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 8.
The provisions of this Subsection 8.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not
execute an agreement with the Corporation as provided in paragraph (a)
above, then each Holder shall be entitled to exercise outstanding
Warrants upon the payment of the Exercise Price during a period of at
least thirty (30) days (or such lesser number of days then remaining in
the Exercise Period) which period shall terminate not less than ten (10)
days prior to consummation of the Sale, and thereby receive
consideration in the transaction on the same basis as other previously
outstanding shares of the same class as the Warrant Shares acquired upon
exercise. Warrants not exercised in accordance with this paragraph (b)
before consummation of the Sale will be canceled and become null and
void. The Corporation shall mail by first class mail, postage prepaid,
to each Holder, at least ten (10) days prior to the first date on which
the Warrants are exercisable pursuant to this paragraph (b), notice of
the proposed transaction setting forth the first and last date on which
the Holder may exercise outstanding Warrants and a description of the
terms of this Warrant providing for cancellation of the Warrants in the
event the Warrants are not exercised by the prescribed date.
(c) The Corporation's failure to give any notice required by
this Subsection 8.5 or any defect therein shall not affect the validity
of any Sale.
8.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs
-6-
<PAGE> 7
(other than in connection with a Sale); or (iii) an involuntary liquidation
occurs, then the Corporation shall cause to be mailed to each Holder, by first
class mail, at least twenty (20) days prior to the applicable record date, a
notice stating the date on which such distribution, liquidation, dissolution or
winding up is expected to become effective, and the date on which it is expected
that holders of shares of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property or assets
(including cash) deliverable upon such distribution, liquidation, dissolution or
winding up. The Corporation's failure to give the notice required by this
Subsection 8.6 or any defect therein shall not affect the validity of such
distribution, liquidation, dissolution or winding up.
8.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
9. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders called for the election of directors of the Corporation
or any other matter, or any rights whatsoever as stockholders of the
Corporation.
10. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 3543 Old Conejo Road #105, Newbury Park, California 91320, or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law without giving effect to principles of conflict of laws.
12. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
13. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
14. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
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<PAGE> 8
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
AUCTION-SALES.COM, INC.
a Delaware corporation
By: /s/ Pierre Rafiq
----------------------
Pierre Rafiq
President
By: /s/ Zahid Rafiq
----------------------
Zahid Rafiq
Secretary
Initial Date of Issuance:
January 29, 1999
(Corporate Seal)
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<PAGE> 9
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
-------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED DOWN TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
-9-
<PAGE> 1
EXHIBIT 4.6
THIS WARRANT MAY BE TRANSFERRED ONLY
IN ACCORDANCE WITH SECTION 3 HEREOF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT BE (1) SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR CONSIDERATION, BY THE
HOLDER, EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL AND/OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT
THAT ANY SUCH TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR
RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT CONSIDERATION BY
THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION OF A FAVORABLE OPINION OF
ITS COUNSEL OR THE SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL TO THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT
ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS WARRANT IS ONLY EXERCISABLE
WITHIN FIVE YEARS OF THE DATE
OF ITS INITIAL ISSUANCE.
W- Warrant to Purchase
16,667 Shares of
Common Stock
Issued as of: October 20, 1999 ("date of the initial issuance")
AUCTION-SALES.COM, INC.
Organized Under the Laws of the State of Delaware
THIS CERTIFIES THAT for value received, _________, the registered holder
hereof (the "Holder") is entitled to purchase from Auction-Sales.com, Inc. (the
"Corporation"), at the purchase price of eight dollars ($8.00) per share (the "
Exercise Price"), within five years (60 months) from the date of the initial
issuance of this Warrant (the "Exercise Period"), up to 16,667 shares of Common
Stock, $.001 par value per share, of the Corporation ("Common Stock"). The
Exercise Price per share shall be subject to adjustment from time to time as set
forth herein.
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<PAGE> 2
This Warrant evidences the right to purchase an aggregate of up to
16,667 shares of Common Stock. The shares of Common Stock to be issued upon
exercise of the Warrant are referred to herein as "Warrant Shares."
1. EXPIRATION DATE. The Warrant represented hereby will expire in its
entirety and no longer be exercisable after 5:00 p.m. PDT on the last day of the
sixty (60) consecutive month period beginning on the date of the initial
issuance of the Warrant, unless extended ("Expiration Date").
2. MANNER OF EXERCISE. The Warrant may be exercised at the Corporation's
Office at 3543 Old Conejo Road #105, Newbury Park, California 91320, or upon
such other location designated by the Corporation, upon presentation and
surrender hereof, together with the Warrant Purchase Form at the end hereof,
duly completed and signed, and upon payment to the Corporation of the Exercise
Price (subject to adjustment in accordance with the provisions of Section 8
hereof), for the number of full Warrant Shares in respect of which such Warrants
are then exercised. Payment of the aggregate Exercise Price may be: (i) in cash
or cash equivalents, (ii) in the form of unrestricted Stock already owned by the
Holder (based upon the Fair Market Value of the Stock on the date the Warrant is
exercised, as determined by the Board of Directors of the Corporation in its
sole discretion. However, if the Common Stock is traded on a national securities
exchange or on Nasdaq, the Fair Market Value of the Stock shall be based on the
closing sales price of the Common Stock on the date the Warrant is exercised, or
the closing bid price, if no closing sales price is available), (iii) by
cancellation of any indebtedness owed by the Corporation to the Holder, (iv) by
requesting that the Corporation withhold whole shares of Common Stock then
issuable upon exercise of the Warrant (based on the Fair Market Value of the
Stock on the date the Warrant is exercised, as determined by the Board of
Directors of the Corporation in its sole discretion. However, if the Common
Stock is traded on a national securities exchange or on Nasdaq, the Fair Market
Value of the Stock shall be based on the closing sales price of the Common Stock
on the date the Warrant is exercised, or the closing bid price, if no closing
sales price is available), (v) in the event the Corporation's Common Stock is
registered under the Securities Exchange Act of 1934, as amended, by arrangement
with a broker which is acceptable to the Corporation where payment of the
Exercise Price is made pursuant to an irrevocable direction to the broker to
deliver all or part of the proceeds from the sale of the shares underlying the
Warrant to the Corporation, or (vi) by any combination of the foregoing.
The Corporation shall not be required to issue fractional Warrant Shares
on the exercise of Warrants. When Warrants are presented for exercise in full at
the same time by the same Holder, the number of full Warrant Shares which shall
be issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the exercise
of any Warrants in full, the Corporation shall pay an amount in cash equal to
the then current market price per Warrant Share (as determined in the sole
discretion of the Corporation's Board of Directors, unless the Common Stock is
traded on a national securities exchange or Nasdaq, in which case, the Fair
Market Value of the Stock shall be based on the closing sales price of the
Common Stock on the date the Warrant is exercised, or the closing bid price, if
no closing sales price is available) multiplied by such fraction. When Warrants
are presented for exercise as to a
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<PAGE> 3
specified portion, only full Warrant Shares shall be issuable and a new Warrant
bearing the original initial issuance date shall be issuable evidencing the
remaining Warrant or Warrants.
Upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Corporation shall issue and cause to be delivered with all
reasonable speed to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate or certificates for the number
of full Warrant Shares so purchased together with payment for any fractional
shares as provided above in this Section 2, and any person so designated to be
named therein shall be deemed to have become a holder of record of such Warrant
Shares as of the date of the surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and payment of the Exercise Price, the transfer books
for the Warrant Shares or other class of stock purchasable upon the exercise of
such Warrants shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date, the Corporation shall be under no duty to
deliver any certificate for such Warrant Shares. The rights of purchase
represented by the Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that a
Warrant is exercised in respect of less than all of the Warrant Shares
purchasable on such exercise at any time prior to the Expiration Date of the
Warrants, a new Warrant evidencing the remaining Warrant or Warrants will be
issued; provided, however, the Corporation shall not be required to issue
fractional Warrants. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be canceled by the Corporation.
3. LIMITATIONS ON THE TRANSFERABILITY OF WARRANTS. The Warrants shall
not be transferable unless the Holder complies with this paragraph. Any
purported transfer not in compliance with this paragraph shall be null and void.
The Warrants shall be transferable only on the books of the Corporation
maintained at its office at 3543 Old Conejo Road #105, Newbury Park, California
91320, or at such other address as the Corporation may designate to the Holder
in writing, upon delivery thereof duly endorsed with signatures properly
guaranteed by a commercial bank or securities brokerage firm or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Corporation shall deliver a new Warrant or
Warrants to the persons entitled thereto bearing the following or similar legend
if such Warrant or Warrants are not registered under the Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SHALL NOT
BE (1) SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED FOR
CONSIDERATION, BY THE HOLDER, EXCEPT UPON THE ISSUANCE TO THE
CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL AND/OR THE SUBMISSION
TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO
COUNSEL FOR THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH
TRANSFER FOR CONSIDERATION SHALL NOT BE IN VIOLATION OF THE ACT OR RULE
144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE ACT
AND
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<PAGE> 4
APPLICABLE STATE SECURITIES LAWS; OR (2) TRANSFERRED WITHOUT
CONSIDERATION BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE CORPORATION
OF A FAVORABLE OPINION OF ITS COUNSEL OR THE SUBMISSION TO THE
CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL TO
THE CORPORATION, IN EITHER CASE TO THE EFFECT THAT ANY SUCH TRANSFER
SHALL NOT BE IN VIOLATION OF THE ACT AND APPLICABLE STATE SECURITIES
LAWS.
4. PAYMENT OF TAXES. The Corporation will pay all documentary stamp
taxes, if any, attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Corporation shall not be
required to pay any other tax or taxes which may be payable in respect of any
transfers involved in the issuance or delivery of any Warrants or certificates
for Warrant Shares in a name other than that of the registered Holder of the
Warrants in respect of which such Warrant Shares are issued, and in such case
the Corporation shall not be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Corporation the amount of such tax or has established to the
Corporation's satisfaction that such tax has been paid.
5. MUTILATED, LOST, STOLEN OR DESTROYED. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Corporation may at its
discretion issue, upon cancellation of the mutilated Warrant, or in lieu of and
in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Corporation of such loss, theft or destruction of
such Warrant, and indemnity, if requested, also satisfactory to the Corporation.
An applicant for such a substitute Warrant shall also comply with such other
reasonable regulations as the Corporation may prescribe.
6. RESERVATION OF WARRANT SHARES. The Corporation shall at all times,
while the Warrants are exercisable, keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. Immediately
after the Expiration Date, however, no shares shall be subject to reservation in
respect of such Warrants.
7. CANCELLATION OF WARRANTS. The Corporation shall cancel any Warrants
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
8. ADJUSTMENTS. The Warrant Shares purchasable hereunder and the
Exercise Price shall be subject to adjustments from time to time upon the
happening of certain events, as hereinafter defined:
8.1. MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price shall be subject to
adjustment as follows:
(a) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Common Stock of the
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<PAGE> 5
Corporation, an adjustment will be made in (i) the aggregate number of
shares reserved for issuance under the Warrants, and (ii) the kind,
number and exercise price of shares subject to the Warrants, provided
that the number of shares subject to the Warrants shall always be a
whole number. The number of Warrant Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Corporation which the
Holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (b) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations shall be made to the
nearest one-hundredth of a share.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Exercise
Price payable upon the exercise of each Warrant shall be adjusted by
multiplying the Exercise Price immediately prior to the adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to the
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(d) For the purpose of this Subsection 8.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common
Stock of the Corporation at the date of this Warrant, or (ii) any other
class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value
to no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any shares of the
Corporation other than shares of Common Stock, thereafter the number of
such other shares so purchasable upon exercise of each warrant and the
Exercise Price of such shares shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in
paragraphs (a) through (c) above, and the provisions of Sections 1 and 2
and Subsections 8.2 through 8.4, with respect to the Warrant Shares,
shall apply on like terms to any such other shares.
8.2. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation may at any
time during the term of the Warrants, reduce the then current Exercise Price to
any amount deemed appropriate by the Board of Directors of the Corporation,
approve additional periods for exercise
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<PAGE> 6
of the Warrants or extend the Expiration Date to any time deemed appropriate by
the Board of Directors of the Corporation.
8.3. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Corporation shall cause to
be mailed by first class mail, postage prepaid, to each Holder notice of such
adjustment or adjustments setting forth the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Any failure by the Corporation to give notice to the Holder or any defect
therein shall not affect the validity of such adjustment or of the event
resulting in the adjustment, nor of the Holder's rights to such adjustment.
8.4. NO ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS. Except as provided in
Subsections 8.1 and 8.6, no adjustments in respect of any dividends or
distributions shall be made during the term of a Warrant or upon the exercise of
a Warrant.
8.5. RIGHTS UPON CONSOLIDATION, MERGER, ETC.
(a) In case of any consolidation of the Corporation with or
merger of the Corporation into another corporation or in case of any
sale or conveyance to another corporation of the property of the
Corporation as an entirety or substantially as an entirety ("Sale"),
such successor or purchasing corporation may assume the obligations
hereunder, and may execute with the Corporation an agreement that each
Holder shall have the right thereafter upon payment of the Exercise
Price to purchase upon exercise of each Warrant the kind and amount of
shares and other securities and property (including cash) which he would
have owned or have been entitled to receive after the consummation of
such Sale had such Warrant been exercised immediately prior to the Sale.
The Corporation shall mail by first class mail, postage prepaid, to each
Holder notice of the execution of any Sale agreement. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 8.
The provisions of this Subsection 8.5 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) In the event that such successor corporation does not
execute an agreement with the Corporation as provided in paragraph (a)
above, then each Holder shall be entitled to exercise outstanding
Warrants upon the payment of the Exercise Price during a period of at
least thirty (30) days (or such lesser number of days then remaining in
the Exercise Period) which period shall terminate not less than ten (10)
days prior to consummation of the Sale, and thereby receive
consideration in the transaction on the same basis as other previously
outstanding shares of the same class as the Warrant Shares acquired upon
exercise. Warrants not exercised in accordance with this paragraph (b)
before consummation of the Sale will be canceled and become null and
void. The Corporation shall mail by first class mail, postage prepaid,
to each Holder, at least ten (10) days prior to the first date on which
the Warrants are exercisable pursuant to this
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<PAGE> 7
paragraph (b), notice of the proposed transaction setting forth the
first and last date on which the Holder may exercise outstanding
Warrants and a description of the terms of this Warrant providing for
cancellation of the Warrants in the event the Warrants are not exercised
by the prescribed date.
(c) The Corporation's failure to give any notice required by
this Subsection 8.5 or any defect therein shall not affect the validity
of any Sale.
8.6. RIGHTS UPON LIQUIDATION. In case (i) the Corporation shall make any
distribution of its assets to holders of its shares of Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital; or
(ii) the Corporation shall liquidate, dissolve or wind up its affairs (other
than in connection with a Sale); or (iii) an involuntary liquidation occurs,
then the Corporation shall cause to be mailed to each Holder, by first class
mail, at least twenty (20) days prior to the applicable record date, a notice
stating the date on which such distribution, liquidation, dissolution or winding
up is expected to become effective, and the date on which it is expected that
holders of shares of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property or assets (including
cash) deliverable upon such distribution, liquidation, dissolution or winding
up. The Corporation's failure to give the notice required by this Subsection 8.6
or any defect therein shall not affect the validity of such distribution,
liquidation, dissolution or winding up.
8.7. STATEMENT ON WARRANTS. Irrespective of any adjustments in the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same price as is stated in the Warrants initially issued.
9. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to receive
dividends or to consent or to receive notice as stockholders in respect of any
meeting of stockholders called for the election of directors of the Corporation
or any other matter, or any rights whatsoever as stockholders of the
Corporation.
10. NOTICES. Any notice pursuant to this Warrant by any Holder to the
Corporation or by the Corporation to any Holder, shall be in writing and shall
be mailed first class, postage prepaid, or delivered: (i) to the Corporation, at
its office at 3543 Old Conejo Road #105, Newbury Park, California 91320, or such
other address as the Corporation may designate in writing to the Holder; or (ii)
to the Holder, at the Holder's address on the books of the Corporation. The
Corporation's failure to give any notice required by this Warrant or any defect
therein shall not affect the validity of the action taken by the Corporation in
connection therewith.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, to the extent not preempted
by federal law, without giving effect to principles of conflict of laws.
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<PAGE> 8
12. SECURITIES LAWS. The exercise of Warrants is prohibited unless the
issuance of the Warrant Shares has been registered or qualified under applicable
federal and state laws or unless there is an exemption available from such
requirements.
13. CAPTIONS. The captions of the sections and subsections of this
Warrant have been inserted for convenience only and shall have no substantive
effect.
14. FORUM DESIGNATION. Any action or proceeding against any of the
parties hereto relating in any way to this Warrant or the subject matter hereof
shall be brought and enforced exclusively in the competent courts of California,
and the parties hereto consent to the exclusive jurisdiction of such courts in
respect of such action or proceeding.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
AUCTION-SALES.COM, INC.
a Delaware corporation
By:
-------------------------
President
By:
-------------------------
Secretary
Initial Date of Issuance:
October 20, 1999
(Corporate Seal)
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<PAGE> 9
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF THE WARRANT PURSUANT TO SECTION 2)
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF
PURCHASE REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE
THEREUNDER ______________ SHARES OF COMMON STOCK, AS PROVIDED FOR THEREIN, AND
TENDERS HEREWITH PAYMENT OF THE PURCHASE PRICE IN FULL IN THE FORM OF CASH OR A
CERTIFIED OR OFFICIAL BANK CHECK IN THE AMOUNT OF $____________, OR OTHERWISE
EXERCISES THIS WARRANT IN ACCORDANCE WITH SUBSECTION ___ OF SECTION 2 OF THIS
WARRANT.
PLEASE ISSUE A CERTIFICATE OR CERTIFICATES FOR SUCH COMMON STOCK IN THE
NAME OF:
NAME:
-----------------------------
-----------------------------------
-----------------------------------
-----------------------------------
(PLEASE PRINT NAME, ADDRESS AND
SOCIAL SECURITY NUMBER)
SIGNATURE
---------------------------
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FIRST
PAGE OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN
THE ASSIGNMENT FORM BELOW.
IF SAID NUMBER OF SHARES SHALL NOT BE ALL OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE, A NEW WARRANT CERTIFICATE IS TO BE ISSUED
IN THE NAME OF AFOREMENTIONED FOR THE BALANCE OF THE REMAINING SHARES
PURCHASABLE THEREUNDER, ROUNDED DOWN TO THE NEAREST WHOLE NUMBER OF SHARES, IF
APPLICABLE.
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<PAGE> 1
EXHIBIT 4.7
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
$__________ UNSECURED SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$___________ October ___, 1999
Note __ Newbury Park, California
FOR VALUE RECEIVED, AUCTION-SALES.COM, INC., a Delaware corporation
("Company"), promises to pay to __________ ("Holder"), or ___ registered
assigns, the principal sum of __________ Dollars ($________), or such lesser
amount as shall equal the outstanding principal amount hereof, together with
interest from the date of this Note on the unpaid principal balance at a rate
equal to eight percent (8.00%) per annum, computed on the basis of the actual
number of days elapsed and a year of 365 days (366 days in the event of a leap
year).
The following is a statement of the rights of Holder and the conditions
to which this Note is subject, and to which Holder, by the acceptance of this
Note, agrees:
1. DEFINITIONS. As used in this Note, the following capitalized terms
have the following meanings:
(a) "Company" includes the corporation initially executing this Note
and any Person which shall succeed to or assume the Obligations of Company under
this Note.
(b) "Common Stock" shall mean the common stock, $.001 par value per
share of Company.
(c) "Event of Default" has the meaning given in Section 3 hereof.
(d) "Holder" shall mean the Person specified in the introductory
paragraph of this Note or any Person who shall at the time be the registered
holder of this Note.
(e) "Maturity Date" shall mean the earlier to occur of December 31,
2000 or three business days following the effective date of a registered initial
public offering of Company's Common Stock.
<PAGE> 2
(f) "Obligations" shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Company to Holder of
every kind and description (whether or not evidenced by any note or instrument
and whether or not for the payment of money), now existing or hereafter arising
under or pursuant to the terms of this Note, including all interest, fees,
charges, expenses, attorneys' fees and costs and accountants' fees and Costs
chargeable to and payable by Company hereunder and thereunder, in each case,
whether direct or indirect absolute or contingent, due or to become due, and
whether or not arising after the commencement of a proceeding under Title 11 of
the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to
time (including post-petition interest) and whether or not allowed or allowable
as a claim in such proceeding.
(g) "Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.
2. PAYMENTS. The principal amount outstanding, plus any accrued but
unpaid interest, shall be paid on the Maturity Date, but is payable at Company's
option at any time prior to the Maturity Date without any prepayment penalty or
premium.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Note and the other Transaction
Documents:
(a) Failure to Pay. Company shall fail to pay the principal amount
outstanding, plus any accrued but unpaid interest on the Maturity Date and such
payment shall not have been made within five (5) business days of the Maturity
Date.
(b) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i)
apply for or consent to the appointment of a receiver, trustee, liquidator or
custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term
may be defined or interpreted under any applicable statute), (vi) commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or consent to any such relief or to
the appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vii) take any
action for the purpose of effecting any of the foregoing; or
(c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of Company or of
all or a substantial part of the property thereof or an involuntary case or
other proceedings seeking liquidation, reorganization or other relief with
respect to Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and
2
<PAGE> 3
an order for relief entered or such proceeding shall not be dismissed or
discharged within thirty (30) days of commencement.
4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
any Event of Default and at any time thereafter during the continuance of such
Event of Default, the rate of interest equal to the maximum rate permitted by
law shall be imposed on the unpaid principal balance under the Note. To the
extent permitted by applicable law, the maximum rate of interest permitted by
law shall also be imposed on all accrued but unpaid interest existing under the
Note on the date of an Event of Default.
5. CONVERSION. If the principal and unpaid accrued interest is not paid
in full by June 30, 2001, Holder may convert this Note into one share of Common
Stock for every dollar of principal and accrued but unpaid interest owing under
the Note on the date of conversion. No fractional share shall be issued by
Company and any fractional share owing as a result of the conversion of the Note
shall be paid by Company in cash. Upon conversion of this Note, the Note shall
be delivered to Company for cancellation and all Company indebtedness to Holder
as a result of this Note shall upon delivery of this Note and delivery of such
shares of Common Stock, be discharged.
6. SECURITY AND SUBORDINATION. This Note shall be an unsecured
obligation of Company and shall be subordinated to any bank debt or subsequent
bank debt, or debt similar to bank debt.
7. RESERVATION OF SHARES. Until the Obligations arising under this Note
are discharged, Company shall reserve a sufficient number of shares of Common
Stock for delivery to Holder upon conversion of this Note in accordance with
Section 5.
8. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
described in Sections 10 and 11 below, the rights and Obligations of Company and
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
9. WAIVER AND AMENDMENT. Any provision of this Note may be amended,
waived or modified upon the written consent of Company and Holder.
10. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF.
With respect to any offer, sale or other disposition of this Note or securities
into which such Note may be converted, Holder will give written notice to
Company prior thereto, describing briefly the manner thereof, together with a
written opinion of Holder's counsel, to the effect that such offer, sale or
other distribution may be effected without registration or qualification (under
any federal or state law then in effect). Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested, Company, as
promptly as practicable, shall notify Holder that Holder may sell or otherwise
dispose of this Note or such securities in accordance with the
3
<PAGE> 4
terms of the notice delivered to Company. If a determination has been made
pursuant to this Section 10 that the opinion of counsel for Holder is not
reasonably satisfactory to Company, Company shall so notify Holder promptly
after such determination has been made. Each Note thus transferred and each
certificate representing the securities thus transferred shall bear a legend as
to the applicable restrictions on transferability in order to ensure compliance
with any federal or state securities laws, unless in the opinion of counsel for
Company such legend is not required in order to ensure compliance with such
securities laws. Company may issue stop transfer instructions to its transfer
agent in connection with such restrictions. Subject to the foregoing transfers
of this Note shall be registered upon registration books maintained for such
purpose by or on behalf of Company. Prior to presentation of this Note for
registration of transfer, Company shall treat the registered holder hereof as
the owner and holder of this Note for the purpose of receiving all payments of
principal and interest hereon and for all other purposes whatsoever, whether or
not this Note shall be overdue and Company shall not be affected by notice to
the contrary.
11. ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights,
interests or Obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by Company without the prior written consent of
Holder except in connection with an assignment in whole to a successor
corporation to Company, provided that such successor corporation acquires all or
substantially all of Company's property and assets and Holder's rights hereunder
are not impaired.
12. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth on the register maintained by
Company. Any party hereto may by notice so given change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when
received.
13. PAYMENT. Payment shall be made in lawful tender of the United
States.
14. EXPENSES; WAIVERS. If action is instituted to collect this Note,
Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fee, and costs, incurred in connection with such action.
Company hereby waives notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor and all other notices or demands
relative to this instrument.
15. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
4
<PAGE> 5
16. WAIVER OF JURY TRIAL. To the fullest extent permitted by applicable
law, Company and the Secured Party hereby irrevocably and expressly waive all
right to a trial by jury in any action, proceeding, counterclaim (whether based
upon contract, tort or otherwise) arising out of or relating to this Agreement,
or other documents entered in connection herewith or the transactions
contemplated hereby.
17. HEADINGS. The headings of the sections and subsections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
18. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall be deemed invalid, illegal, or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
[the remainder of this page is intentionally left blank]
5
<PAGE> 6
IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.
AUCTION-SALES.COM, INC.
By:
-----------------------------------
Name: Zahid Rafiq
Title: Chief Executive Officer
6
<PAGE> 1
EXHIBIT 10.6
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, is entered into as of October 20,
1999 by and between AUCTION-SALES.COM, INC. (the "Company") and those parties
whose signatures are listed on Schedule A hereto, as such schedule may be
amended and supplemented from time to time ("Holders"), in connection with a
private placement by the Company of up to 60 units (the "Units"), each Unit
consisting of a $50,000.00 unsecured subordinate convertible promissory note
(the "Note") and a warrant to purchase up to 16,667 shares of the Company's
common stock, $.001 par value per share, at an exercise price of $8.00 per share
(the "Warrant"). Collectively, the Notes, the Warrants and the Units are
sometimes collectively referred to hereinafter as the "Securities" and the
Common Stock and shares of Common Stock underlying, or convertible for, the
Warrants is sometimes collectively referred to herein as the "Holders Shares."
1. Piggy Back Registration Rights. Following the effective date of the
Company's initial public offering registered under the Securities Act of 1933,
as amended (the "IPO"), except for the registration of securities underlying an
employee benefit plan or issued in a transaction pursuant to Rule 145 of the
Securities Act of 1933, as amended (the "Securities Act"), if the Company
proposes to make a registered offering of its Common Stock (an "Offering"), the
Company will give prompt written notice to each Holder of its intention to do so
and of each Holder's rights under this Section 1. Except as otherwise provided
for herein, upon the written request of any Holder made within 10 days after the
receipt of any such notice (which request shall specify the number of Holders
Shares intended to be disposed of by each Holder), the Company will include all
Holders Shares that the Company has been requested to include by each Holder;
provided, that if at any time after giving written notice under this Section 1
the Company shall determine for any reason not to proceed with the proposed
Offering, the Company may, at its election, give notice of such determination to
each Holder and thereupon shall be relieved of its obligations to each Holder
with respect to such proposed Offering under this Section 1. Except as otherwise
provided for herein, each Holder shall be entitled to withdraw its request for
the inclusion of Holders Shares in an Offering and withdraw from the Offering at
any time before the time that the Registration Statement is declared effective
by the Securities and Exchange Commission (the "SEC") and the Offering has
commenced.
2. Continuous Offering. If the Company intends to effect a continuous
offering pursuant to Rule 415 of the Securities Act pursuant to a registration
statement on Form S-3 or any successor form (a "Continuous Offering"), the
Company will give written notice thereof to each Holder and include in such
Offering all of the Holders Shares which each Holder elects to include in such
Offering. During the period in which a Registration Statement with respect to a
Continuous Offering is effective, if any Holder desires to sell Holders Shares
in a transaction covered by such Registration Statement, it shall give notice to
the Company of the proposed date of such sale at least 30 days before such
proposed date of sale, and the Company shall take all actions necessary to
permit such sale. Within 15 days of receipt of notice of a proposed sale by
1
<PAGE> 2
any Holder, the Company will advise such Holder either that it has no objection
to such a registered sale or that such a registered sale should be delayed for
up to three months on the basis either that the Company is involved in a
confidential proposed transaction or negotiations therefor (which have been
previously disclosed to the Company's Board of Directors) which would require
the Company to make or amend any public filings under the securities laws at
that time, or that such sale would have a material adverse effect upon the
Company's ability to access the capital markets. If the Company has not objected
to such proposed registered sale as permitted in this Section 2 within such 15
day period, the Company shall take all actions necessary to permit such sale on
the proposed date of sale pursuant to such Registration Statement.
3. Underwritten Offerings. In the case of an underwritten Offering
initiated by the Company under this Section 3, including underwritten Offerings
effected as part of a Continuous Offering, the underwriter(s) and the managing
underwriter shall be selected by the Company. If the managing underwriter
advises the Company in writing that, in its opinion, the number of Holders
Shares and securities of the Company, if any, being sold exceeds the number that
can be sold in such Offering, so as to be likely to have an adverse effect on
the price at which the Company can sell securities for its own account, then
there shall be included in such Offering (and in the Registration Statement)
first, securities of the Company being sold for its own account, and second, the
maximum number of Holders Shares (allotted on a pro rata basis between the
requesting Holders based upon the number of shares each Holder desires to sell
and the percentage of outstanding shares each holds or will hold upon conversion
or exchange) requested to be included in such Offering which, in the opinion of
such managing underwriter, can be sold without such an adverse effect on such
price.
4. Expenses. The Company shall bear all expenses of registration in
connection with any election by a Holder to register Holders Shares pursuant to
Sections 1-3.
5. Demand Registration Rights. Following the 12th calendar month from
the effective date of the Company's initial public offering registered under the
Securities Act, Holders, except as set forth herein, shall be entitled to
dispose of any or all of the Holders Shares then held by them in accordance with
the provisions of this Section 5.
(a) Requests by Holders. Upon the receipt by the Company of written
notice from Holders holding in excess of 50%of the aggregate Holders Shares of
their intent to sell all or part of their Holders Shares in an Offering subject
to this Section 5 at least 60 days before such proposed date of sale, and
specifying both the number of Holders Shares to be sold and the intended method
of disposition, the Company will use its best efforts to register such Holders
Shares so as to permit, as soon as practicable, the requested sale of Holders
Shares. Within 15 days of receipt of notice of a proposed sale by Holders, the
Company will advise Holders either that it has no objection to such a registered
sale or that such a registered sale should be delayed for up to three months on
the basis that the Company is involved in a confidential proposed transaction or
negotiations (which have been previously disclosed to the Company's Board of
2
<PAGE> 3
Directors) which would not permit the Company to make or amend any public
filings under the securities laws at that time. If the Company has not objected
to such proposed registered sale as permitted in this Section 5(a) within such
15 day period, the Company shall take all actions necessary to permit such sale
on the proposed date of sale pursuant to such Registration Statement. If, at any
time after giving 60 days written notice under this Section 5(a), Holders
holding in excess of 50% of the aggregate Holders Shares shall notify the
Company in writing that they have determined for any reason not to proceed with
the proposed Offering, then the Company shall terminate such Offering, but
Holders so choosing not to proceed shall be jointly and severally responsible
for any expenses incurred by the Company from the date that notice is received
by the Company of Holders request for Demand Registration (as defined below)
until the date that notice of Holder's determination not to proceed with the
proposed Offering is received. Such an aborted request to register shares shall
not constitute a Demand Registration.
(b) Selection of Underwriters. If Holders specify in the notice
delivered to the Company pursuant to this Section 5 that they intend to sell
Holders Shares in an underwritten Offering pursuant to this Section 5, Holders
shall be entitled to select the underwriter(s) and managing underwriter. If the
Company issues and sells securities of the same class as the Holders Shares
contemporaneously with any Offering pursuant to this Section 5, the Company
shall (i) sell such securities to the underwriter(s) selected by Holders
pursuant to this Section 5 on the same terms and conditions as apply to Holders
and (ii) execute and deliver a copy of the underwriting agreement relating to
such Offering. If the managing underwriter advises Holders and the Company in
writing that, in its opinion, the number of securities requested to be included
in such Offering exceeds the number that can be sold in such Offering, so as to
be likely to have an adverse effect on the price at which the Holders Shares or
securities being offered by the Company can be sold, then there shall be
included in such Offering (and in the Registration Statement relating to such
Offering) first, the maximum number of Holders Shares requested to be included
in such Offering by Holders and second, the maximum number of securities, if
any, proposed to be sold by the Company for its own account or for the account
of any other holder of the Company's securities, which in the opinion of the
managing underwriter can be sold without having such adverse effect.
(c) Registration on Form S-3. Holders shall have the right to require
the Company to register any or all of its shares on Form S-3, or any successor
form (or on Form S-1, or any successor forms, if Form S-3, or any successor form
is not available).
(d) Limitation on Requests and Payment of Registration Expenses.
Holder shall be entitled to register Holders Shares pursuant to the provisions
of this Section 5 twice (each a "Demand Registration"). The Company shall not be
required to register Holders Shares in accordance with the provisions of Section
5(a) if there is outstanding at the time of the request an effective
Registration Statement for a Continuous Offering and Holders can dispose of
their Holders Shares in accordance with Section 2, or if Holders can sell all of
their Holders Shares pursuant to Rule 144 of the Securities Act within any three
month period. The Company will pay all registration expenses (except
underwriting discounts and selling commissions) in connection
3
<PAGE> 4
with the Offering of the Holders Shares requested by Holders pursuant to this
Section 5 for the first Demand Registration, but Holders shall pay all expenses
for a second Demand Registration.
6. The Company's Duties. If and whenever the Company is required to
permit Holders to effect any Offering as provided in Sections 1-5, the Company
covenants and agrees that it will, as expeditiously as possible (but not later
than sixty (60) days after receipt of a request from Holders to include Holders
Shares in a given Offering):
(a) prepare all offering documents in accordance with all applicable
requirements of the Securities Act, including, if requested by Holder and if
permitted by the rules and regulations of the SEC, a Registration Statement
pursuant to Rule 415 of the Securities Act or any successor rule of the SEC,
with respect to such Offering to permit the disposition of the Holders Shares by
Holders in accordance with the intended method of disposition (and, in the case
of an underwritten Offering, consistent in form, substance, and scope with
customary practice for the offering of securities of corporations by nationally
recognized investment banking firms);
(b) file with the SEC a Registration Statement required to permit the
disposition thereof; provided, that before filing any such Registration
Statement (including any documents incorporated by reference therein), the
Company will furnish to counsel(s) designated by Holders and to the
underwriter(s), if any, copies of all such Registration Statements, which
Registration Statements shall be subject to the review of such counsel(s) and
the underwriter(s), if any, and, where feasible, the Company shall make such
changes in such Registration Statements as are reasonably requested by such
counsel(s) or underwriter(s); and
(c) use its reasonable efforts to have such Registration Statement
declared effective by, and obtain all approvals from the SEC to the extent
necessary to permit the Offering; provided, however, that the Company may
discontinue any Offering that is being effected pursuant to Sections 1-3 at any
time before the effective date of the related Registration Statement;
(d) thereafter, prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement continuously effective (if filed pursuant to
Rule 415) and cause the Registration Statement to be supplemented by any
required supplement, and as so supplemented to be filed, if required, with the
SEC during the period ending on the later of (A) such time as all of the Holders
Shares covered by such Registration Statement have been disposed of in
accordance with the intended method of disposition set forth in such
Registration Statement, (B) such time as all of the Holders Shares may be sold
pursuant to Rule 144 of the Securities Act, or (C) so long as a dealer is
required to deliver a Prospectus in connection with the Offering;
(e) furnish to Holders and to the underwriter(s), if any, such number
of copies of the Registration Statement or Prospectus contained therein
(including each amendment and
4
<PAGE> 5
supplement thereto) as they may reasonably request in order to facilitate the
disposition of the Holders Shares included in such Offering;
(f) register or qualify, or cooperate with Holders, the
underwriter(s), if any, and their respective counsel in registering or
qualifying, all Holders Shares covered by the Registration Statement for offer
and sale under the applicable securities or blue sky laws of such jurisdictions
as Holders and the underwriter(s), if any, shall reasonably request in writing,
and do any and all other acts and things which may be reasonably necessary or
advisable to enable Holders and the underwriter(s), if any, to consummate the
disposition in such jurisdictions of the Common Stock covered by the
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any tax in any such jurisdiction where it is not then so subject;
(g) use its reasonable efforts to cause such Common Stock covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable Holders and
the underwriter(s), if any, to consummate the disposition of such Common Stock;
(h) cooperate reasonably with any managing underwriter to effect the
sale of any Holders Shares, including but not limited to attendance of the
Company's executive officers at any planned "road show" presentations;
(i) notify Holders and the underwriter(s), if any, at any time when
the Registration Statement includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and at the request of any Holder or any underwriter, prepare and
furnish to such Person(s), such reasonable number of copies of any amendment or
supplement to the Prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Common Stock, such Prospectus shall not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and to deliver to
purchasers of any other securities of the Company included in the Offering
copies of such Prospectus as so amended or supplemented;
(j) keep Holders informed of the Company's best estimates of the
earliest date on which the Registration Statement will become effective, and
promptly notify Holders of (A) the effectiveness of such Registration Statement,
(B) a request by the SEC for an amendment or supplement to such Registration
Statement, (C) the issuance by the SEC of an order suspending the effectiveness
of the Registration Statement, or of the threat of a proceeding for that
purpose, and (D) the suspension of the qualification of any securities included
in the Registration Statement for sale in any jurisdiction or the initiation or
threat of any proceeding for that purpose;
5
<PAGE> 6
(k) comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement in
accordance with the intended method of distribution of the Holders thereof set
forth in such Registration Statement;
(l) use its reasonable efforts to list the securities proposed to be
sold in such Offering on the Nasdaq National Market, or on such other securities
exchange or over the counter trading market on which the Common Stock is then
listed, not later than the closing of the Offering contemplated thereby;
(m) enter into such customary agreements (including but not limited
to an underwriting agreement in customary form) and take such other reasonable
actions as Holders or the underwriter(s), if any, reasonably request in order to
expedite or facilitate the disposition of such Common Stock;
(n) obtain such "cold comfort" letter(s) from the Company's
independent public accountants, in customary form and covering matters of the
type customarily covered by "cold comfort" letter(s), as Holders or the
underwriter(s), if any, shall reasonably request; and
(o) upon prior notice, make available for reasonable inspection by
any underwriter(s) participating in any disposition to be effected pursuant to
the Registration Statement and by any attorney, accountant, or other agent
retained by any such Person(s), its financial and other records, pertinent
corporate documents and properties of the Company, and such opportunities to
discuss the business of the Company with its officers, directors, and employees
and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinions of such underwriters'
respective counsels, to conduct a reasonable investigation; provided, that any
records, information, or documents that are designated by the Company in writing
as confidential shall be kept confidential by each such Person, unless
disclosure of such records, information, or documents is required by law, by
judicial or administrative order, or in order to defend a claim asserted against
such Person in connection with such Offering.
7. Information from Holder.
(a) Information. The Company may require Holders to furnish it with
such information regarding Holders and regarding the method of distribution as
is pertinent to the disclosure requirements relating to the Offering of such
Common Stock as the Company may from time to time reasonably request in writing.
(b) Use of Registration Statement Upon Notice of Defects. Holders
agree, and shall cause underwriter(s), if any, acting on their behalf to agree,
that upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 6(i), they will immediately discontinue the use
of the Registration Statement and Prospectus covering such Common Stock until
the receipt by Holders and any such underwriter(s) of the copies of the
6
<PAGE> 7
supplemented or amended Registration Statement or Prospectus contemplated by
such clause and, if so directed by the Company, Holders will deliver and cause
each underwriter, if any, to deliver to the Company all copies, other than
permanent file copies then in the possession of Holders or any such underwriter,
of the Registration Statement and Prospectus covering such Common Stock at the
time of receipt of such notice.
8. Resales; Reports Under Exchange Act. In order to permit Holders to
sell the Holders Shares, if they so desire, pursuant to any applicable resale
exemption under the Securities Act, the Company will:
(a) comply with all rules and regulations of the SEC in connection
with the use of any such resale exemption;
(b) make and keep available adequate and current public information
regarding the Company;
(c) file with the SEC in a timely manner, all reports and other
documents required to be filed under the Securities Act and the Securities
Exchange Act of 1934, as amended;
(d) furnish to Holders, upon request, copies of annual reports
required to be filed under the Exchange Act; and
(e) furnish to Holders, upon request, with (A) a copy of the most
recent quarterly report of the Company and such other reports and documents
filed by the Company with the SEC and (B) such other information as may be
reasonably requested to permit Holders pursuant to any applicable resale
exemption under the Securities Act, if any.
9. Indemnification. The obligations of indemnification of the Parties
set forth in this Section 9 shall be in addition to any liability which any
Party may otherwise have to any other party.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless, to the fullest extent permitted by law, Holders, each Person
who participates as an underwriter in an Offering, each officer, director,
employee or agent of such an underwriter, and each Person who controls (within
the meaning of the Securities Act) such an underwriter against any and all
losses, claims, damages, liabilities, expenses, joint or several, including
without limitation reasonable legal or other expenses incurred in connection
with investigating or defending against any loss, claim, damage, or liability,
or action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement relating to such Offering, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under
7
<PAGE> 8
which they were made, except insofar as the same are (i) made in reliance on and
in conformity with any information about Holders or any underwriter furnished in
writing to the Company by Holders or any underwriter specifically for inclusion
in the Registration Statement relating to such Offering or (ii) the result of
the fact that Holders or any underwriter sold Common Stock subject to an
Offering to a Person to whom there was not sent or given, at or before the
written configuration of such sale, a copy of the final Prospectus, if the
Company has previously furnished copies thereof to Holders or underwriter and
such final Registration Statement or Prospectus corrected such untrue statement
or alleged untrue statement or omission or alleged omission.
(b) Indemnification by Holders. Each Holder, jointly and severally,
agrees to indemnify and hold harmless, to the fullest extent permitted by law,
the Company, its officers, directors, employees, and agents, each Person who
participates as an underwriter in an Offering, each officer, director, employee
or agent of such an underwriter, and each Person who controls (within the
meaning of the Securities Act) the Company and such underwriter against any and
all losses, claims, damages, liabilities, and expenses, joint or several,
including without limitation reasonable legal or other expenses incurred in
connection with investigating or defending against any loss, claim, damage, or
liability, or action or proceeding (whether commenced or threatened) in respect
thereof, caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement relating to such Offering
or any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, but only to the extent
that such untrue statement or omission is made in reliance on and in conformity
with any information furnished in writing by Holders concerning Holders to the
Company specifically for inclusion in the Registration Statement relating to
such Offering.
(c) Notices of Claims; Procedures. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any action
or proceeding with respect to which a claim for indemnification may be made
pursuant to this Section 9, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action; provided, that the
failure of the indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Section 9, except
to the extent that the indemnifying party is actually materially prejudiced by
such failure to give notice. If any such action is brought against an
indemnified party (unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim) the indemnifying party will be entitled to participate
in and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that any Person entitled to indemnification hereunder shall have the
right to
8
<PAGE> 9
employ separate counsel and to participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such Person unless
(A) the indemnifying party has agreed to pay such fees or expenses or (B) the
indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such Person or (C) in the reasonable
judgment of any such Person based upon advice of its counsel, a conflict of
interest may exist between such Person and the indemnifying party with respect
to such claims (in which case, if the Person notifies the indemnifying party in
writing that such Person elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such claim on behalf of such Person). If such defense is not
assumed by the indemnifying party, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent will
not be unreasonably withheld). No indemnifying party will consent to entry of
any judgment or enter into any settlement which does not include, as an
unconditional term thereof, the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel in each jurisdiction for all parties indemnified by
such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels.
(d) Contribution. If the indemnification provided for this in this
Section 9 from the indemnifying party is unavailable to an indemnified party
hereunder (other than pursuant to the terms hereof) in respect of any losses,
claims, damages, liabilities, or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities, or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
indemnified parties in connection with the actions that resulted in such losses,
claims, damages, liabilities, or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such indemnifying
party or indemnified parties, and the parties' relative intent, knowledge,
access to information, and opportunity to correct or prevent such action. The
amount paid or payable by a Party as a result of the losses, claims, damages,
liabilities, and expense referred to above shall be deemed to include, subject
to the limitations set forth in this Section 9(d) any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding. The Parties agree that it would not be just and equitable if
contributions pursuant to this Section 9(d) were determined by a pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to above. No Person guilty of fraudulent
misrepresentation shall be entitled to contribution from any Person who was not
9
<PAGE> 10
guilty of such fraudulent misrepresentation.
(e) This Section 9 shall apply to each Registration Statement filed
by the Company pursuant to this Agreement that includes Holders Shares.
10. Miscellaneous.
(a) Amendments and Waivers. This Agreement may be amended, and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent of Holders to such amendment, action or omission to act.
(b) Successors, Assigns and Transferees. This Agreement shall be
binding upon the parties hereto and their respective successors and assigns.
(c) Notices. Any notice, request, demand, consent, approval or other
communication permitted or required to be given to any of the parties hereunder
shall be deemed given when received, shall be in writing, and shall be delivered
in person or sent by certified mail, postage prepaid, or by private courier
service or by telecopy or telex, to such party at its address set forth below or
at such other address as such party may hereunder furnish in writing to the
other parties.
(d) Entire Agreement. This Agreement, and the exhibits hereto,
constitute the entire agreement among the Parties and supersedes any prior
understandings, agreements or representations by or among the Parties, written
or oral, that may have related in any way to the subject matter hereof.
(e) Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of such Party's rights, interests or obligations hereunder without the prior
written approval of the other Party.
(f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Governing Law. This Agreement shall be governed by, construed,
interpreted and enforced in accordance with the internal substantive laws of the
State of California applicable to agreements to be made and performed solely
within such State, without
10
<PAGE> 11
giving effect to any conflicts or choice of law principles which otherwise might
be applicable.
(i) Specific Performance. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of any State having jurisdiction over the Parties and the matter, in
addition to any other remedy to which they may be entitled, at law or in equity.
(j) Waiver of Jury Trial. To the fullest extent permitted by
applicable law, the Parties hereby irrevocably and expressly waive all right to
a trial by jury in any action, proceeding, counterclaim (whether based upon
contract, tort or otherwise) arising out of or relating to this Agreement, or
other documents entered in connection herewith or the transactions contemplated
hereby.
(k) Forum Designation. Any action or proceeding against any of the
parties hereto relating in any way to this Agreement or the subject matter
hereof shall be brought and enforced exclusively in the competent courts of
California, and the parties hereto consent to the exclusive jurisdiction of such
courts in respect of such action or proceeding.
(l) Authorization. By executing this Agreement, the Company and
Holders hereby respectively represent that they have all requisite legal power
and capacity to execute and deliver this Agreement and to perform his
obligations under this Agreement.
(m) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, the legality, validity and enforceability of the remaining
provisions of this Agreement shall not be affected thereby, and in lieu of such
illegal, invalid, or unenforceable provision, there shall be added automatically
as a part of this Agreement a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be legal, valid and enforceable.
11
<PAGE> 12
The foregoing Registration Rights Agreement is hereby executed as of the
date first written above.
AUCTION-SALES.COM, INC.
By:
-------------------------------
Name: Zahid Rafiq
Title: Chief Executive Officer
12
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report, dated December 2, 1999, relating to the financial statements of
Auction-Sales.com, Inc. We also consent to the reference to our Firm under the
caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 571,274
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 81,410
<CURRENT-ASSETS> 934,610
<PP&E> 206,159
<DEPRECIATION> 109,578
<TOTAL-ASSETS> 1,034,729
<CURRENT-LIABILITIES> 878,604
<BONDS> 0
12,730
0
<COMMON> 0
<OTHER-SE> 119,418
<TOTAL-LIABILITY-AND-EQUITY> 1,034,729
<SALES> 3,870,077
<TOTAL-REVENUES> 3,887,167
<CGS> 3,342,677
<TOTAL-COSTS> 3,342,677
<OTHER-EXPENSES> 1,651,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,046
<INCOME-PRETAX> (1,118,023)
<INCOME-TAX> 800
<INCOME-CONTINUING> (1,118,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,118,823)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
