Filed pursuant to Rule 424(b)(2)
SEC File No. 333-68826
September 7, 2001.
PROSPECTUS
SALES ONLINE DIRECT, INC.
20,392,792 Shares of Common Stock
This prospectus relates to the offer and sale by the selling
shareholders identified in this prospectus of a maximum of 20,392,792 shares of
common stock of Sales Online Direct, Inc. The shares include up to (i)
19,692,792 shares issuable upon the conversion of and payment of interest on a
$3,000,000 convertible note and (ii) 700,000 shares issuable upon the exercise
of warrants issued in connection with the purchase of the convertible note. The
number of shares covered by this prospectus represent 200% of the number of
shares issuable upon conversion of the convertible note, if converted on October
25, 2000, plus 200% of the number of shares issuable upon the exercise of one of
the warrants and 100% of the number of shares issuable upon exercise of another
warrant. The number of shares covered by this prospectus represents
approximately 32% of the number of outstanding shares of our common stock. The
number of shares covered by this prospectus does not represent the total number
of shares that would have been received had the convertible note been converted
on August 29, 2001. Had the convertible note been converted on August 29, 2001,
the holder of the note would have received 146,771,037 shares of common stock,
or 69% of the number of outstanding shares of our common stock, assuming full
conversion of the convertible note and the issuance of all such shares.
We are not offering to sell any of our securities. The selling
shareholders may offer and sell some, all or none of the common stock covered
under this prospectus. We will not receive any of the proceeds from the offer
and sale of the shares; however, 400,000 of the shares offered by the selling
shareholders are issuable upon the exercise of outstanding warrants at an
exercise price of $2.70 per share. If these warrants were exercised in full, we
would receive aggregate gross proceeds of $1,080,000. We will issue these shares
only to the extent that the selling shareholders convert the convertible note
and exercise their warrants.
Shares of our common stock are currently quoted and traded on the NASD
over-the-counter bulletin board under the symbol "PAID." On August 29, 2001 the
last sale price of the common stock as reported on the OTC Bulletin Board was
$.02 per share.
Investing in our common stock involves risks. You should not purchase
our common stock unless you can afford to lose your entire investment. See "Risk
Factors" beginning on page 5 for certain information that should be considered
by prospective shareholders.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
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The date of this Prospectus is September 7, 2001
We have not authorized any dealer, salesperson or other person to give
any information or to make any representations other than those contained or
incorporated by reference in this prospectus in connection with the offer
contained in this prospectus and, if given or made, you should not rely on such
unauthorized information or representations. Neither we nor the selling
shareholders are making an offer to sell or a solicitation of any offer to buy
securities in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. You should not assume that the information provided in
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
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TABLE OF CONTENTS
Page
SUMMARY........................................................................3
RISK FACTORS...................................................................5
DESCRIPTION OF OUR SECURITIES.................................................24
REGISTRATION RIGHTS...........................................................26
SELLING SHAREHOLDERS..........................................................28
USE OF PROCEEDS...............................................................30
PLAN OF DISTRIBUTION..........................................................30
LEGAL PROCEEDINGS.............................................................31
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES...............................33
EXECUTIVE COMPENSATION........................................................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................36
DESCRIPTION OF BUSINESS.......................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................47
DESCRIPTION OF PROPERTY.......................................................53
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................53
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................................54
LEGAL MATTERS.................................................................54
EXPERTS.......................................................................54
WHERE YOU CAN FIND MORE INFORMATION...........................................54
FINANCIAL STATEMENTS.........................................................F-1
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SUMMARY
This summary only highlights the more detailed information appearing
elsewhere in this prospectus or incorporated in this prospectus by reference. As
this is a summary, it may not contain all information that is important to you.
As used in this prospectus, the terms "we," "us," "our" and "Sales
Online" mean Sales Online Direct, Inc. and its subsidiaries (unless the context
indicates another meaning), and the term "common stock" means our common stock,
par value $0.001 per share.
Our Company
Our primary business is to maintain a collectibles portal, offering
integrated information and services to the collectibles community, and to
operate an online auction site that provides a full range of services to sellers
and buyers. A portal is an Internet website that enables visitors to search for
and visit other related sites, access related services and obtain relevant data.
The collectibles industry includes every person that collects items having
either economic or sentimental value, such as antiques, sports and entertainment
memorabilia, stamps, coins, figurines, dolls, collector plates, plush and die
cast toys, cottage/village reproductions other decorative or limited edition
items that are intended for collecting and other memorabilia.
Currently, substantially all (98%) of our revenues are derived from our
Rotman Auction operations. Rotman Auction is an auction house which provides a
full range of services to sellers and buyers, including live online bidding of
premier collectibles, authentication of merchandise, digital photography,
fulfillment of orders and the purchase and sale of authentic memorabilia. The
auctions consist of sports and non-sports cards, collectibles, autographed
items, movie memorabilia and more from the 1800's to the present day. Rotman
Auction also maintains a substantial inventory of memorabilia with popular and
historical significance that allows customers to directly purchase the
memorabilia without the competition from bidders in an auction format. We obtain
our inventory in the ordinary course of our business from a number or various
companies and individuals and we generally turn around inventory on an average
of 14 days after we have purchased it. Merchandise is also auctioned by Rotman
Auction under consignment-type arrangements with the public where we receive a
15% fee that is paid to us from the final sale price of the merchandise. Of the
revenues generated by our Rotman Auction operations, approximately 96% are
derived from sales of our own inventory and approximately 4% are derived from
sales of merchandise under consignment.
We also design, host and maintain client websites primarily in the
sports and collectibles industry. We currently host approximately 15 websites,
for which we have received to date minimal fees. Our software also allows our
clients to operate online stores, set prices and sell directly to online
shoppers. To attract collectors of sports memorabilia, our websites include
access to live sports scores, live internet chat rooms, and a full listing of
stadiums and arenas with seating charts, directions, team schedules, addresses
and telephone numbers of major league professional sports teams. We charge a
fixed monthly fee for our web hosting services. For consulting services, our
customers are billed monthly at an hourly rate based on the number of hours of
service performed for the customer.
In January 2000, we launched our collectibles portal under the name
Collecting Exchange that contained a search engine devoted to collectibles and
other information and services. Later that year we acquired the site
CollectingChannel.com, an online and broadcast destination targeting consumers,
dealers and manufacturers in the collecting marketplace. By combining our
Collecting Exchange portal with the Collecting Channel information libraries, we
have created a comprehensive collectibles site offering such services as web
searching, broadcast services, appraisal and valuation information, auction site
sign-ins, price guides, shopping and classified ads. The library contains over
150,000 items archived in various collecting categories. Currently, only the
appraisal services have generated revenues on the CollectingChannel.com, and
such revenues have been minimal. As the number of visitors to our site
increases, we plan to impose monthly/annual membership fees for using certain
services on the site. We hope to begin charging membership fees by January 2002.
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We believe that our current number of unique visitors to the site
represents approximately 25% of the number of visitors we will need to begin
charging membership fees.
Our main web address is located at www.paid.com, which offers updated
information on various aspects of our operations, as well as access to our three
primary collectibles sites: www.rotmanauction.com, www.collectingexchange.com,
and www.collectingchannel.com. We also maintain a website called World Wide
Collectors Digest ("WWCD") at www.wwcd.com, which provides sports information,
listings of stadiums and arenas, live chat rooms and other sports-related
information. We own each of these websites.
We are organized under the laws of the State of Delaware. Our
executive office is located at 4 Brussels Street, Worcester, Massachusetts
01610, (508) 791-6710.
Losses and Competition
We have a history of significant losses and we anticipate incurring
substantial operating losses and negative operating cash flow in the foreseeable
future. We incurred a net loss of $2,030,000 for the six months ended June 30,
2001, a net loss of $5,493,000 for the year ended December 31, 2000 and a net
loss of $2,183,000 in the year ended December 31, 1999. As of June 30, 2001, we
had an accumulated deficit of $9,730,000. See "Risk Factors," page 5.
Additionally, the market for Internet products and services is highly
competitive with low barriers to entry and we expect that competition will
continue to intensify. See "Risk Factors," page 16.
Securities to be Offered
On March 23, 2000, we entered into a Securities Purchase Agreement,
whereby we sold an 8% convertible note in the amount of $3,000,000, due March
31, 2002 to Augustine Fund, L.P. The note is convertible into common stock at a
conversion price equal to the lesser of: (1) $2.48, 110% of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
March 23, 2000, or (2) 75% of the average of the closing bid price for the
common stock for the five (5) trading days immediately preceding the conversion
date. Currently, the conversion rate is based on the second of these two
options. Because the conversion rate is based on a discount to the market price
of our common stock, our shareholders will experience significant dilution upon
the conversion of the convertible note. (See "Risk Factors", page 19).
Furthermore, a conversion price that is a discount of the market price could
result in market manipulation through short selling (See "Risk Factors," page
21).
In connection with the Securities Purchase Agreement, we also issued
warrants to Augustine Fund, L.P. and Delano Group Securities, LLC (as the
placement agent in the financing) to purchase 300,000 and 100,000 shares of
common stock, respectively. The exercise price per share of common stock is
$2.70 per share, which is 120% of the lowest of the closing bid prices for the
common stock during the five (5) trading days prior to the closing date. The
warrants expire on March 31, 2005.
We have granted registration rights to the selling shareholders
pursuant to which we will register common stock acquired by them upon conversion
of the convertible note and exercise of the warrants. The registration statement
of which this prospectus is a part registers 20,392,792 shares of common stock
that may be issued upon conversion of the convertible note and exercise of the
warrants.
CAUTIONARY NOTE CONCERNING FORWARD LOOKING STATEMENTS
Some discussions in this prospectus may contain forward looking
statements under the federal securities laws. We caution you to be aware of the
speculative nature of "forward-looking statements". Statements that are not
historical in nature, including the words "anticipate," "estimate," "should,"
"expect," "believe," "intend," and similar expressions, are intended to identify
forward-looking statements. Although these statements reflect our good faith
belief based on current expectations, estimates and projections about (among
other things) the industry and the markets in which we operate, they are not
guarantees of future performance. Whether actual results will conform to our
expectations and predictions is subject to a number of known and unknown risks
and uncertainties, including the risks and uncertainties discussed in this
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prospectus; general economic, market, or business conditions; the opportunities
that may be presented to and pursued by us; competitive actions by other
companies; changes in laws or regulations; and other circumstances, many of
which are beyond our control. Consequently, all of the forward-looking
statements made in this prospectus are qualified by these cautionary statements
and there can be no assurance that the actual results anticipated by us will be
realized or, even if substantially realized, that they will have the expected
consequences to, or effects on, us or our business or operations. Except as
required by applicable laws, we do not intend to publish updates or revisions of
any forward-looking statements we make to reflect new information, future events
or otherwise.
RISK FACTORS
Before purchasing any of the shares of common stock being offered,
prospective investors should carefully consider the following factors in
addition to the other information contained in this prospectus or incorporated
by reference into it.
Risks Relating to the Company
We have a limited operating history and have experienced development stage
losses.
Our company was formed in stages and put together as a single entity
in February, 1999. Prior to that time, our company (then Securities Resolution
Advisors, Inc.) was engaged in an unrelated business, and the web hosting and
auction services were conducted separately by our current officers informally as
entrepreneurial businesses. Accordingly, there is an extremely limited operating
history upon which to base an evaluation of the company and our business and
prospects. Our business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as electronic commerce. Such risks include:
o our ability to anticipate and adapt to a developing market;
o dependence upon the level of hits to our sites; and
o development of equal or superior Internet portals, auctions and related
services by competitors;
To address these risks, we must, among other things, increase traffic
to our websites, maintain our customer base, attract significant numbers of new
customers, respond to competitive developments, implement and execute
successfully our business strategy and continue to develop and upgrade our
technologies and customer services. We cannot offer any assurances that we will
be successful in addressing these risks.
We incurred a net loss of $1,051,000 for the three months ended March
31, 2001, a net loss of $5,493,000 for the year ended December 31, 2000 (which
includes an interest expense of $1,597,000 in connection with the sale of the 8%
convertible note) and a net loss of $2,183,000 in the year ended December 31,
1999. There can be no assurance that we will be profitable in the future.
There is substantial doubt as to our ability to continue as a going concern, and
our business has a high risk of failure.
Due to our recurring losses from operations and a working capital
deficiency, our independent auditors have raised substantial doubt as to our
ability to continue as a going concern. As stated above, the success of our
business operations will depend upon our ability to obtain further financing. If
we are unable to obtain an infusion of additional capital, then our business
will fail and our stock will be worthless.
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Our capital is limited and we need additional financing to implement our
business plan and continue operations.
We require substantial working capital to fund our business. Additional
funds are necessary for our company to implement its business plan and continue
our operations. If we are unable to obtain financing in the amounts desired and
on acceptable terms, or at all, we will be required to reduce significantly the
scope of our presently anticipated advertising and other expenditures, which
could have a material adverse effect on our growth prospects and the market
price of our common stock. If we raise additional funds by issuing equity
securities, our shareholders will be further diluted. Based on our current cash
position, we currently need an infusion of $700,000 of additional capital to
fund our anticipated marketing costs and operating expenses over the next 12
months. Although we have secured a commitment for financing in the aggregate
amount of $751,000 from the holder of our 8% convertible note, the financing is
subject to the parties negotiating and executing final documents and, therefore,
we may not be successful in completing this financing on favorable terms. The
holder of our 8% convertible note has advanced us funds from this financing so
that we could sustain our operations and pay some of our debts. These funds
should last us through December 2001. If we do not complete the financing by
then, we will not be able to continue our operations.
We have only recently introduced the collectibles portal and we are unable to
guarantee that the marketplace will accept our services and products.
The collectibles portal was only launched in January 2000. When the
portal was initially launched, it had the capability to search and collect
information from every collectibles site on the Internet and store this
information. When we acquired the Collecting Channel in November 2000, we added
the following features to the portal: (1) providing information on a variety of
collectible topics including price guides, show calendars, auction listings,
library information, grading and authentication, publications restoration
services, collecting software, dealers, and classifieds; and (2) serving as a
gatekeeper by linking collectors immediately to selected websites. During 2001,
we plan on adding new features to the website to enhance our customers'
experience. These enhancements may include a broadcast and broadband video
archive, a members only area for certain archived articles and pricing data, and
an interactive tradeshow and events calendar. However, we are unable to provide
any assurances that the marketplace will accept the new direction the company
has taken and the services it is offering, or that we will be able to provide
such services at a profit. To date, the portal has generated minimal revenue.
We expect to incur additional losses as a result of the anticipated significant
increase in marketing and promotional expenses.
Subject to our obtaining the necessary financing, we intend to expend
significant financial and management resources on brand development, research
site development, marketing and advertising, website development, and technology
and operating infrastructure. Primarily as a result of the anticipated
significant marketing and promotional expenses, we expect to incur additional
losses, and such losses are expected to increase significantly from current
levels. Depending upon the amount of financing that we may be able to obtain in
the near term, we expect to expend a significant percentage of those funds on
marketing and promotional expenses. In addition, we plan to continue to increase
our operating expenses significantly in order to increase our customer base,
increase the size of our staff, expand our marketing efforts to enhance our
brand image, increase our visibility on other companies' high-traffic websites,
increase our software development efforts, support our growing infrastructure,
and acquire complementary businesses and technologies. Of course, any capital
expenditures will be contingent upon securing the required financing.
Moreover, to the extent that increases in such operating expenses
precede or are not subsequently followed by increased revenues, our business,
results of operations and financial condition will be materially adversely
affected. We cannot provide any assurances that our revenues will increase, or
even continue at their current level, or that we will achieve or maintain
profitability or generate positive cash flow from operations in future periods.
We have made, and expect in the future to continue to make, significant
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investments in infrastructure and personnel in advance of levels of revenue
necessary to offset such expenditures. We may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Our operating results are unpredictable and are expected to fluctuate in the
future.
You should not rely on the results for any period as an indication of
future performance. Our operating results are unpredictable and are expected to
fluctuate in the future due to a number of factors, many of which are outside
our control. These factors beyond our control include:
o our ability to significantly increase our customer base and traffic to
our websites, manage our inventory mix and the mix of products
offered, liquidate our inventory in a timely manner, maintain gross
margins, and maintain customer satisfaction;
o the availability and pricing of merchandise from vendors;
o consumer confidence in encrypted transactions in the Internet
environment;
o the timing, cost and availability of advertising on our websites and
other entities' websites;
o temporary popularity of some collectibles;
o the amount and timing of costs relating to expansion of our
operations;
o the announcement or introduction of new types of merchandise, service
offerings or customer services by our competitors;
o technical difficulties with respect to consumer use of our websites;
o our ability to make acquisitions of complementary business and
technologies;
o governmental regulation by federal or local governments; and
o general economic conditions and economic conditions specific to the
Internet and electronic commerce.
As a strategic response to changes in the competitive environment, we
may from time to time make certain service, marketing or supply decisions or
acquisitions that could have a material adverse effect on our results of
operations and financial condition.
We will increase our reliance on our relationships with online companies for
advertising.
Achieving our goal of successfully implementing our business and
creating the collectibles portal will require increased dependence on
relationships with other online companies. Our current relationships include,
but are not limited to, agreements for promotional placements, sponsorships and
banner advertisements. We are currently not paying for any advertising on the
Internet. We will become increasingly dependent on sales of advertising to
online companies. We have an interactive services agreement with AOL Canada
pursuant to which we handle the content and maintenance of the website
www.tartans.com, and we sell advertising and products on the site. Generally,
our agreements are not exclusive and do not provide for guaranteed renewal. We
have been unable to establish any material relationships with online companies
and have, as a result, generated minimal revenues from advertisements placed by
online companies. We will also need to expand our advertising arrangements with
auction sites and other companies in the sports and collectibles arena. These
website advertising arrangements will include mutual linking arrangements, such
as other companies linking to our site and our site linking to the sites of
those companies. This increased dependence on online advertising relationships
includes the following risks:
o a competitor could purchase exclusive rights to attractive space on
one or more key sites;
o it is uncertain that significant spending on these relationships will
increase our revenues substantially or at all;
o the expected revenue increases resulting from such spending may not
occur within the time periods that we are expecting;
o space on other websites or the same sites may increase in price or
cease to be available on reasonable terms or at all;
o even if these relationships are successful, we may not be able to
obtain adequate amounts of merchandise to meet the increased demand
that is generated;
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o online companies will be unable to deliver a sufficient number of
customer visits or impressions; and
o online companies may compete with our company for limited online
auction revenues.
Any termination of our arrangements with other online companies could
have a material adverse effect on our business, results of operations and
financial condition.
The successful operation of our business depends upon the supply of critical
technology elements from other third parties, including our Internet service
provider and technology licensors.
Our operations depend on a number of third parties for
Internet/telecom access, delivery services, and software services. We have
limited control over these third parties and no long-term relationships with any
of them. We do not own a gateway onto the Internet, but instead rely on an
Internet service provider to connect our websites to the Internet. We have an
Internet service provider agreement with Exodus Communications. From time to
time, we have experienced temporary interruptions in our websites' connection
and also our telecommunications access. We license technology and related
databases from third parties for certain elements of our properties, including,
among others, technology underlying the delivery of news, stock quotes and
current financial information. Furthermore, we are dependent on hardware
suppliers for prompt delivery, installation, and service of servers and other
equipment to deliver our products and services. Our internally-developed auction
software depends on an operating system, database and server software that was
developed and produced by and licensed from third parties. We have from time to
time discovered errors and defects in the software from these third parties and,
in part, rely on these third parties to correct these errors and defects in a
timely manner. Any errors, failures, interruptions, or delays experienced in
connection with these third-party technologies and information services could
negatively impact our relationship with users and adversely affect our brand and
our business, and could expose us to liabilities to third parties.
We rely on third parties for our order fulfillment, and failures on the part of
these third parties could harm our business.
We use overnight courier and delivery services for substantially all
of our auction products. Should these services be unable to deliver our products
for a sustained time period as a result of a strike or other reason, our
business, results of operations and financial condition would be adversely
affected. If, due to computer systems failures or other problems related to
these third-party service providers, we experience any delays in shipment, our
business, results of operations and financial condition would be adversely
affected.
Our success will depend, in part, on our ability to enter into distribution
agreements with Web browser providers, operators of online networks and
websites, software developers and computer manufacturers.
To increase traffic for our online properties and make them more
available and attractive to advertisers and consumers, we hope to have
distribution agreements and informal relationships with leading Web browser
providers, operators of online networks and leading Web sites, software
developers and computer manufacturers. These distribution arrangements typically
are not exclusive and do not extend over a significant amount of time. Potential
distributors may not offer distribution of our properties and services on
reasonable terms. Third parties that provide distribution typically charge fees
or otherwise impose additional conditions on the listing of our online
properties. Any failure to cost-effectively obtain distribution or to obtain
distribution on terms that are reasonable, could have a material adverse effect
on our business, results of operations, and financial condition.
Our failure to attract advertising revenue in quantities and at rates that are
satisfactory to us could harm our business.
We expect in the future to derive a portion of our net revenue from
advertisements displayed on our websites, and we will become increasingly
dependent on sales of advertising to online companies. Currently, we generate
minimal revenues from website advertising and our ability to achieve any
substantial advertising revenue depends upon:
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o the development of a large base of users possessing demographic
characteristics attractive to advertisers;
o the level of traffic on our websites;
o our ability to derive better demographic and other information from
our users;
o acceptance by advertisers of the Web as an advertising medium; and
o our ability to transition and expand into other forms of advertising.
No standards have yet been widely accepted for the effectiveness of
Web-based advertising. Advertising filter software programs are available that
limit or remove advertising from an Internet user's desktop. Such software, if
generally adopted by users, may have a materially adverse effect upon the
viability of advertising on the Internet. If we are unsuccessful in sustaining
or increasing advertising sales levels, it could have a material adverse effect
on our business, operating results and financial condition.
Our failure to manage growth could place a significant strain on our management,
operational and financial resources.
We have rapidly and significantly expanded our operations and
anticipate that significant expansion of our operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on our
management, operational and financial resources. Increases in the number of
employees and the volume of merchandise sales have placed significant demands on
our management, which currently includes only three executive officers. In order
to manage the expected growth of our operations, we will be required to expand
existing operations, particularly with respect to customer service and
merchandising, to improve existing and implement new operational, financial and
inventory systems, procedures and controls.
If our company's growth continues, we will experience a significant
strain on our resources because of:
o the need to manage relationships with various technology licensors,
advertisers, other Websites and services, Internet service providers
and other third parties;
o difficulties in hiring and retaining skilled personnel necessary to
support our businesses;
o the need to train and manage a growing employee base; and
o pressures for the continued development of our financial and
information management systems.
Difficulties we may encounter in dealing successfully with the above
risks could seriously harm our operations. We cannot offer any assurance that
our current personnel, systems, procedures and controls will be adequate to
support our future operations or that management will be able to identify, hire,
train, retain, motivate and manage required personnel.
If our acquisitions are not successful, or if we are not able to structure
future acquisitions in a financially efficient manner, there could be an adverse
effect on our business and operations.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe will help us
develop and expand our business. The process of integrating an acquired
business, technology, service or product may result in operating difficulties
and expenditures which we cannot anticipate and may absorb significant
management attention that would otherwise be available for further development
of our existing business. Moreover, the anticipated benefits of any acquisition
may not be realized. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which might not be available to us on favorable terms or at all, and
might be dilutive. Additionally, we may not be able to successfully identify,
negotiate or finance future acquisitions or to integrate acquisitions with our
current business.
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Our company's success still depends upon the continued services of Gregory
Rotman, Richard Rotman and John Martin.
At present, our company employs 18 full-time personnel. We are
substantially dependent on the continued services of members of our senior
management: Gregory Rotman, our President and Chief Executive Officer; Richard
Rotman, our Chief Financial Officer, Vice President, and Secretary, and John
Martin, our Vice President and Chief Technical Officer. Each of these
individuals has acquired specialized knowledge and skills with respect to our
company and our operations. As a result, if any of these individuals were to
leave our company, we could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any such successor
obtains the necessary training and experience. We do not have a long-term
employment agreements with any of our key personnel and we do not maintain any
key person life insurance.
Our company's success will depend on our ability to attract and retain qualified
personnel.
We believe that our future success will depend upon our ability to
identify, attract, hire, train, motivate and retain other highly-skilled
managerial, merchandising, engineering, technical consulting, marketing and
customer service personnel. We cannot offer assurances that we will be
successful in attracting, assimilating or retaining the necessary personnel, and
the failure to do so could have a material adverse effect on our business.
Our success is dependent upon our ability to purchase inventory at attractive
prices and to liquidate inventory rapidly.
Although we have shifted our focus to our collectibles site, at the
present time Rotman Auction is still a distinct operating entity and is our
primary source of revenue. Our Rotman Auction operations presently comprise
approximately 98% of our revenues. In addition to auctioning collectibles on
consignment, currently approximately 80% of the aggregate sales prices of
collectibles sold at our auctions are from our own inventory. We purchase these
collectibles from dealers and collectors and assume the inventory and price
risks of these items until they are sold. Due to the inherently unpredictable
nature of auctions, it is impossible to determine with certainty whether an item
will sell for more than the price we paid. Further, because minimum opening bid
prices for the merchandise listed on our websites generally are lower than our
acquisition costs for such merchandise, we cannot offer any assurance that we
will achieve positive gross margins on any given sale. If we are unable to
resell our purchased collectibles when we want or need to, or at prices
sufficient to generate a profit on their resale, or if the market value of our
inventory of purchased collectibles were to decline, our operating results would
be negatively affected.
Our success is dependent upon market awareness of our brand.
We believe that the importance of brand recognition will increase as
more companies engage in commerce over the Internet. Development and awareness
of our company will depend largely on our success in increasing our customer
base. If vendors do not perceive us as an effective marketing and sales channel
for their merchandise, or consumers do not perceive our company as offering an
entertaining and desirable way to purchase merchandise, we may be unsuccessful
in promoting and maintaining our brand. Depending upon the amount of financing
that we may be able to obtain in the near term, we expect to expend a
significant percentage of those funds on marketing and promotional expenses. We
also intend enter into reciprocal advertising agreements with other companies.
Furthermore, in order to attract and retain customers and to promote
and maintain our company in response to competitive pressures, we may find it
necessary to increase our marketing and advertising budgets and otherwise to
increase substantially our financial commitment to creating and maintaining
brand loyalty among vendors and consumers. We will need to continue to devote
substantial financial and other resources to increase and maintain the awareness
of our online brands among website users, advertisers and e-commerce entities
that we have advertising relationships with through:
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o Web advertising and marketing;
o traditional media advertising campaigns; and
o providing a high quality user experience.
Our results of operations could be seriously harmed if our investment of
financial and other resources, in an attempt to achieve or maintain a leading
position in Internet commerce or to promote and maintain our brand, does not
generate a corresponding increase in net revenue, or if the expense of
developing and promoting our online brands becomes excessive.
Our competitors often provide Internet access or computer hardware to our
customers and they could make it difficult for our customers to access our
services.
Our users must access our services through an Internet access
provider, or ISP, with which the user establishes a direct billing relationship
using a personal computer or other access device. To the extent that an access
provider, such as America Online, or a computer or computing device manufacturer
offers online services or properties that are competitive with those of our
company, the user may find it more convenient to use the services or properties
of that access provider or manufacturer. In addition, the access provider or
manufacturer may make it difficult to access our services by not listing them in
the access provider's or manufacturer's own directory. Also, because an access
provider gathers information from the user in connection with the establishment
of the billing relationship, an access provider may be more effective than our
company in tailoring services and advertisements to the specific tastes of the
user. To the extent that a user opts to use the services offered by his or her
access provider or those offered by computer or computing device manufacturers
rather than the services provided by our company, our business, operating
results and financial condition will be materially adversely affected.
System failures could result in interruptions in our service, which could harm
our business.
A key element of our strategy is to generate a high volume of traffic
to, and use of, our websites. A portion of our revenues depend on the number of
customers who use our websites to purchase merchandise. Accordingly, the
satisfactory performance, reliability and availability of our websites,
transaction-processing systems, network infrastructure and delivery and shipping
systems are critical to our operating results, as well as our reputation and our
ability to attract and retain customers and maintain adequate customer service
levels.
We periodically have experienced minor systems interruptions,
including Internet disruptions. Some of the interruptions are due to upgrading
our equipment to increase speed and reliability. During these upgrades the
outages have generally lasted for a few hours. During the past year we had one
system failure on September 20, 2000 when our Sun E450 server's motherboard had
a failure that disrupted our web hosting service for approximately eight hours.
We have a service agreement with Sun, but the website was still down for
approximately eight hours. Any systems interruptions, including Internet
disruptions, that result in the unavailability of our websites or reduced order
fulfillment performance would reduce the volume of goods sold, which could harm
our business. In addition to placing increased burdens on our engineering staff,
these outages create a flood of user questions and complaints that need to be
responded to by our personnel. Although we have been taking steps to increase
the reliability and redundancy of our system, these steps are expensive, reduce
our margins, and may not be successful in reducing the frequency or duration of
unscheduled downtime. We cannot offer assurances that:
o we will be able to accurately project the rate or timing of increases
if any, in the use of our websites;
o we will be able to timely expand and upgrade our systems and
infrastructure to accommodate increases in the use of our websites;
o we will have uninterrupted access to the Internet;
o our users will be able to reach our Web sites;
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o communications via our Web sites will be secure;
o we or our suppliers' network will be able to timely achieve or
maintain a sufficiently high capacity of data transmission, especially
if the customer usage of our websites increases.
Any disruption in the Internet access to our Websites or any systems failures
could significantly reduce consumer demand for our services, diminish the level
of traffic to our websites, impair our reputation and reduce our commerce and
advertising revenue.
We do not have redundant systems, a disaster recovery plan or alternate
providers with respect to our communications hardware and computer hardware.
In June 2000, we moved all of our communications hardware and computer
hardware from our leased facility in Owings Mills, Maryland to our corporate
headquarters in Massachusetts. We then relocated our main servers to Exodus
Communications, located 45 minutes from our corporate headquarters. Our
Worcester facilities are not protected from fire, flood, power loss,
telecommunication failure, break-in and similar events. We do not presently have
fully redundant systems, a formal disaster recovery plan or alternative
providers of hosting services. A substantial interruption in these systems would
have a material adverse effect on our business, results of operations and
financial condition.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, attempts by third parties to deliberately exceed the
capacity of our systems and similar disruptive problems. Computer viruses,
break-ins or other problems caused by third parties could lead to interruptions,
delays, loss of data or cessation in service to users of our services and
products and could seriously harm our business and results of operations.
Our future revenues will depend upon the continued consumer interest in the
collectibles industry and demand for the types of collectibles that are listed
for sale.
We obtain some of our revenues from fees from sellers for listing
products for sale on our service and fees from successfully completed auctions.
Demand for collectibles is influenced by the popularity of certain themes,
cultural and demographic trends, marketing and advertising expenditures and
general economic conditions. The popularity of certain categories of items, such
as toys, dolls and memorabilia, among consumers may vary over time due to
perceived scarcity, subjective value, and societal and consumer trends in
general. Because these factors can change rapidly, customer demand also can
shift quickly. Some collectibles appeal to customers for only a limited time.
The success of new product introductions depends on various factors, including
product selection and quality, sales and marketing efforts, timely production
and delivery and consumer acceptance. We may not always be able to respond
quickly and effectively to changes in customer taste and demand due to the
amount of time and financial resources that may be required to bring new
products to market. A decline in the popularity of, or demand for, certain
collectibles or other items sold through our service could reduce the overall
volume of transactions on our service, resulting in reduced revenues. In
addition, certain consumer "fads" may temporarily inflate the volume of certain
types of items listed on our service, placing a significant strain upon our
infrastructure and transaction capacity. These trends may also cause significant
fluctuations in our operating results from one quarter to the next. Any decline
in demand for the goods or services offered through our collectibles portal as a
result of changes in consumer trends could have a material adverse effect on our
business.
There are certain provisions of Delaware law that could have anti-takeover
effects.
Certain provisions of Delaware law and our Certificate of
Incorporation, as amended, and Amended and Restated Bylaws could make more
difficult our acquisition by means of a tender offer, a proxy contest or
otherwise and the removal of our incumbent officers and directors. Our
Certificate of Incorporation and Amended and Restated Bylaws do not do not
provide for cumulative voting in the election of directors. Our Bylaws include
advance notice requirements for the submission by stockholders of nominations
for election to the Board of Directors and for proposing matters that can be
acted upon by stockholders at a meeting.
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We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which will prohibit us from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless the business combination is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the interested stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior
to the determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders. Section 203 could adversely affect the ability of stockholders to
benefit from certain transactions which are opposed by the Board or by
stockholders owning 15% of our common stock, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
Our success is dependent in part on our ability to obtain and maintain
proprietary protection for our technologies and processes.
Our most important intellectual property relates to the software for
our web-hosting services and our research center. We do not have any patents for
our designs or innovations and we may not be able to obtain copyright, patent or
other protection for our proprietary technologies or for the processes developed
by our employees. Legal standards relating to intellectual property rights in
computer software are still developing and this area of the law is evolving with
new technologies. Our intellectual property rights do not guarantee any
competitive advantage and may not sufficiently protect us against competitors
with similar technology.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation and other proprietary information.
We cannot offer assurances that the steps we have taken will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we have taken, it
might be possible for a third party to copy or otherwise obtain and use our
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford our company little or
no effective protection of its intellectual property. Because our success in
part relies upon our technologies, if proper protection is not available or can
be circumvented, our business may suffer.
Intellectual property infringement claims would harm our business.
We may in the future receive notices from third parties claiming
infringement by our software or other aspects of our business. Any future claim,
with or without merit, could result in significant litigation costs and
diversion of resources, including the attention of management, and require us to
enter into royalty and licensing agreements, which could have a material adverse
effect on our business, results of operations and financial condition. Such
royalty and licensing agreements, if required, may not be available on terms
acceptable to the company or at all. In the future, we may also need to file
lawsuits to enforce our intellectual property rights, to protect our trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on our business, results of operations and financial condition.
Our success is dependent on licensed technologies.
We rely on a variety of technologies that we license from third
parties. We license most of our software from third party vendors. We license
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our portal technology from Verity, Inc. Our principal web server's software is
Apache, a free web server software. When we acquired the assets of
CollectingChannel.com we were granted two perpetual licenses for the proprietary
software eCMS and acquired the source codes for the software. This is the
content management system primarily used by the CollectingChannel.com. We also
rely on encryption and authentication technology licensed from VeriSign through
an online user agreement to provide the security and authentication necessary to
effect secure transmission of confidential information.
We cannot make any assurances that these third-party technology
licenses will continue to be available to our company on commercially reasonable
terms. Although no single software vendor licensor provides us with
irreplaceable software, the termination of a license and the need to obtain and
install new software on our systems would interrupt our company's operations.
Our inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our proprietary software enhancements and
new developments until equivalent technology could be identified, licensed or
developed and integrated. Any such delays would materially adversely affect our
business, results of operations and financial condition.
We may be exposed to liability for content retrieved from our websites.
We may be exposed to liability for content retrieved from our
websites. Our exposure to liability from providing content on the Internet is
currently uncertain. Due to third party use of information and content
downloaded from our websites, we may be subject to claims relating to:
o the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
o copyright, trademark or patent infringement and wrongful action due to
the actions of third parties; and
o other theories based on the nature and content of online materials
made available through our websites.
Our exposure to any related liability could result in us incurring
significant costs and could also be a drain on our financial and other
resources. We do not maintain insurance specifically covering such claims.
Liability or alleged liability could further harm our business by diverting the
attention and resources of our management and by damaging our reputation in our
industry and with our customers.
We are involved in litigation.
We are currently involved in a dispute with Marc Stengel and Hannah
Kramer, each of whom is a substantial shareholder of our company, and with Whirl
Wind Collaborative Design, Inc. ("Whirl Wind") and Silesky Marketing, Inc., two
entities affiliated with Marc Stengel. Mr. Stengel and Ms. Kramer are former
directors of the company. Mr. Stengel is also a former officer and employee.
The lawsuit was initially filed against Mr. Stengel alone in June
2000. It remains pending in the US District Court for the District of Maryland.
A First Amended Complaint was filed on October 11, 2000, which added the three
additional defendants identified above. The First Amended Complaint seeks
rescission of the transactions pursuant to which Mr. Stengel and Ms. Kramer
obtained their substantial stock interests in the company, and seeks damages
against Mr. Stengel and Ms. Kramer, in both cases, for misrepresentations and
omissions under the common law of fraud, the Maryland Securities Act and certain
contractual warranties and representations. The First Amended Complaint also
seeks damages and remedies against Mr. Stengel for breach of his contractual
duties as an employee of the company and for misrepresentations he made to the
company while acting as an employee; these claims relate to businesses operated
by Mr. Stengel in competition with our company and using our company's
resources. The First Amended Complaint also seeks to recover damages from Mr.
Stengel and the two corporate defendants for conversion of certain of Sales
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Online's assets, resources and employee services, and for unjust enrichment. All
defendants have filed answers to the First Amended Complaint. Mr. Stengel has
filed a counterclaim seeking $500,000 in damages against Sales Online for
alleged interference with his ability to sell shares of common stock of Sales
Online. Whirl Wind has filed a counterclaim against Sales Online for conversion
of a small quantity of computer equipment alleged to be owned by Whirl Wind.
On or about June 16, 2000, Marc Stengel commenced an action in the
Delaware Chancery Court pursuant to Section 225 of the Delaware General
Corporation Law (the "Delaware 225 Action") seeking a determination from the
Court that he was improperly removed as an officer and director of the Company,
should be reinstated as such, and that Gregory Rotman and Richard Rotman be
ordered to dismiss the Maryland action. The Delaware 225 Action was stayed
pending the outcome of a special meeting of shareholders, discussed below.
Following the results of that meeting, we moved for summary judgment and asked
that the Delaware litigation be dismissed. On February 26, 2001, the Court
issued a decision in which it granted our motion for summary judgment and
dismissed the Delaware 225 Action. The Court concluded that (1) the special
meeting of the our stockholders held on September 19, 2000 to elect directors
(discussed below) was authorized by our bylaws and as a result, the new board
was properly elected and had the authority to terminate Mr. Stengel as an
officer; (2) Marc Stengel's post-election challenge to the special meeting was
barred by his own inequitable conduct; and (3) his claim for back pay could not
be pursued in the Court of Chancery action. Mr. Stengel has appealed the Court
of Chancery's decision to the Delaware Supreme Court, which appeal is now
pending.
On July 20, 2000, in accordance with our Amended and Restated Bylaws,
Gregory Rotman, called a special meeting of the stockholders to be held on
September 19, 2000 for the election of directors. Gregory Rotman and Richard
Rotman nominated themselves, Andrew Pilaro and John Martin for election to our
Board of Directors and filed soliciting materials with the SEC. No proxy
soliciting materials were filed by any other party. The meeting was held on
September 19, 2000 and the nominated slate of directors were elected as our
Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19, 2000.
At that meeting, the new Board removed Marc Stengel as an officer of Sales
Online, formally ratified and approved the initiation and prosecution of the
Maryland action against Marc Stengel and authorized Gregory Rotman, as president
and CEO to take all actions necessary to prosecute Sales Online's claims against
Marc Stengel and others.
On or about October 3, 2000, Mr. Stengel submitted to Sales Online a
demand for advancement of certain expenses (including attorneys' fees) he
allegedly incurred in connection with the Delaware 225 Action and the Maryland
action. In his advancement request, Mr. Stengel claimed to have incurred
approximately $96,800 in legal expenses in the Delaware 225 Action and the
Maryland action through August, 2000. On October 20, 2000, we notified Mr.
Stengel that the Board of Directors had denied Mr. Stengel's advancement
request.
On or about October 24, 2000, Mr. Stengel filed a second action in the
Delaware Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that, pursuant to our
Bylaws, he is entitled to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
action (the "Delaware 145 Action"). Sales Online and Mr. Stengel each moved for
summary judgment in the Delaware 145 Action. A hearing on the Delaware 145
Action was held on January 2, 2001, at which time the Court of Chancery granted
our motion for summary judgment and denied Mr. Stengel's motion. Mr. Stengel
appealed this decision to the Delaware Supreme Court. On June 27, 2001,
following briefing and oral argument, a three judge panel of the Delaware
Supreme Court issued an Order affirming the judgment of the Court of Chancery.
On July 11, 2001, Mr. Stengel filed a motion for rehearing en banc by all five
members of the Delaware Supreme Court of the Court's June 27, 2001 Order. On
August 23, 2001 the Court denied Mr. Stengel's motion.
On November 1, 2000, we filed with the Maryland Court a Motion for a
Preliminary Injunction requesting that the Court enjoin Mr. Stengel and Ms.
Kramer from selling, attempting to sell, or otherwise disposing of their shares
of the Company's stock pending resolution of the merits of our claim for
rescission. On November 9, 2000, Mr. Stengel filed an Opposition to our Motion
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for a Preliminary Injunction. On November 9, 2000, Mr. Stengel also filed a
Motion for Preliminary Injunction requesting that the Court (i) order Sales
Online to instruct its transfer agent to implement and complete all measures
necessary to sell his restricted stock in compliance with Rule 144 and (ii)
enjoin Sales Online from interfering with or preventing the sale of stock by Mr.
Stengel in accordance with Rule 144. The District Court conducted an extensive
evidentiary hearing on both motions, which concluded on January 23, 2001. The
parties briefed the issues and the Court heard final arguments on February 22,
2001. On March 19, 2001, the Court (1) denied our motion for the preliminary
injunction against Marc Stengel and Hannah Kramer, (2) granted in part Marc
Stengel's motion for a preliminary injunction insofar as we are enjoined from
interfering with any sale of stock by Marc Stengel that complies with SEC Rule
144, (3) determined that the evidence supported a finding that Marc Stengel and
Hannah Kramer are acting in concert in the disposition of their shares and (4)
denied Marc Stengel's and Hannah Kramer's motions to dismiss our lawsuit against
them. The Court has scheduled the case for trial in December, 2001.
We cannot give any assurance with respect to the positions asserted by
Sales Online in the Maryland lawsuit, and substantial costs, including attorneys
fees, are being incurred in connection with this dispute.
Risks Associated With Our Industry
The market for online services is intensely competitive with low barriers to
entry.
The market for Internet products and services is new, rapidly evolving
and intensely competitive, and we expect competition to intensify in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software. We
currently or potentially compete with a variety of other companies depending on
the type of merchandise and sales format offered to customers. These competitors
include:
o various Internet auction houses such as eBay, ONSALE, uBID, Yahoo!
Auctions, First Auction (the auction site for Internet Shopping
Network, a wholly-owned subsidiary of Home Shopping Network Inc.),
Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.),
WebAuction (the auction site for MicroWarehouse, Inc.), Insight
Auction (the auction site for Insight Enterprises, Inc.) and others;
o a number of indirect competitors that specialize in electronic
commerce or derive a substantial portion of their revenue from
electronic commerce, including Internet Shopping Network, AOL,
Shopping Com and Cendant Corp.;
o a variety of other companies that offer merchandise similar to ours
but through physical auctions and with which we compete for sources of
supply; and
o other companies that have combined a variety of services under one
brand in a manner similar to ours including CMGI (Alta Vista), the
Walt Disney Company (The GO Network), Excite and Lycos.
We believe that the principal competitive factors affecting our market
are the ability to attract customers at favorable customer acquisition costs,
operate the websites in an uninterrupted manner and with acceptable speed,
provide effective customer service and obtain merchandise at satisfactory
prices. We cannot offer any assurances that we can maintain our competitive
position against current and potential competitors, especially those with
greater financial, marketing, customer support, technical and other resources.
Current competitors have established or may establish cooperative
relationships among themselves or directly with vendors to obtain exclusive or
semi-exclusive sources of merchandise. Accordingly, it is possible that new
competitors or alliances among competitors and vendors may emerge and rapidly
acquire market share. Increased competition is likely to result in reduced
operating margins, loss of market share and a diminished brand franchise, any
one of which could materially adversely affect our business, results of
operations and financial condition. Many of our current and potential
competitors have significantly greater financial, marketing, customer support,
technical and other resources than the company. As a result, such competitors
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may be able to secure merchandise from vendors on more favorable terms than we
can, and they may be able to respond more quickly to changes in customer
preferences or to devote greater resources to the development, promotion and
sale of their merchandise than we can.
With respect to our new collectibles portal, several other companies
have combined a variety of services under one brand in a manner similar to our
portal, including Yahoo!, Microsoft (MSN), Excite, Lycos and CMGI (Alta Vista).
Although our portal is focused specifically on the collectibles industry, we run
the risk of other sites entering into this sector and there can be no assurance
that we can maintain our competitive position against potential competitors,
especially those with greater financial, marketing, customer support, technical
and other resources than our company. Increased competition is likely to result
in reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect our business,
results of operations and financial condition.
Market consolidation has created and continues to create companies that are
larger and have greater resources than us.
As the online commerce market continues to grow, other companies may
enter into business combinations or alliances that strengthen their competitive
positions. In the recent past, there have been a number of significant
acquisitions and strategic plans announced among and between companies that have
divisions offering services that compete with our company, including:
o CMGI's acquisition of 83% of AltaVista;
o Disney's acquisition of the remaining interest in Infoseek not already
owned by Disney;
o @Home Network's acquisition of Excite;
o Yahoo!'s acquisition of GeoCities and Broadcast.com; and
o FairMarket's new alliance network comprised of Microsoft Corp.,
Excite@home, Ticketmaster Online and many others.
The effects of these completed and pending acquisitions and strategic
plans may have on us cannot be predicted with accuracy, but some of these
companies that maintain divisions that compete with us are aligned with
companies that are larger or better established than us. Even though some of the
competitive services offered by these companies may comprise a small amount of
their business, their potential access to greater financial, marketing and
technical resources would put them in a stronger competitive position as
compared to our company. In addition, these companies include television
broadcasters with access to unique content and substantial marketing resources
that may not be available to our company.
Security breaches and credit card fraud could harm our business.
We rely on encryption and authentication technology licensed from
VeriSign through an online user agreement to provide the security and
authentication necessary to effect secure transmission of confidential
information. We believe that a significant barrier to electronic commerce and
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communications is the secure transmission of confidential information over
public networks. We cannot give assurances that advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments will not result in a compromise or breach of the algorithms we use
to protect customer transaction data. If any such compromise of our security
were to occur, it could have a material adverse effect on our business, results
of operations and financial condition. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. To the extent that activities of our company or
third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. We may be required to expend
significant capital and other resources to protect against the threat of such
security breaches or to alleviate problems caused by such breaches. We cannot
offer assurances that our security measures will prevent security breaches or
that failure to prevent such security breaches will not have a material adverse
effect on our business.
Our industry may be exposed to increased government regulation.
Our company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
laws applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to, or commerce on, the Internet. Today there are
relatively few laws specifically directed towards online services. However, due
to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, freedom of expression, pricing, content
and quality of products and services, fraud, taxation, advertising, intellectual
property rights and information security. Compliance with additional regulation
could hinder our growth or prove to be prohibitively expensive.
Furthermore, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business over the
Internet. The adoption of any additional laws or regulations may decrease the
growth of the Internet, which, in turn, could decrease the demand for our
Internet auctions and increase our cost of doing business or otherwise have an
adverse effect on our business, results of operations and financial condition.
Several recently passed federal laws could have an impact on our
business. The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to third-party
websites that include materials that infringe copyrights or other rights of
others. The Children's Online Protection Act and the Children's Online Privacy
Protection Act are intended to restrict the distribution of certain materials
deemed harmful to children and impose additional restrictions on the ability of
online services to collect user information from minors. Such legislation may
impose significant additional costs on our business or subject us to additional
liabilities.
Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, auction
regulation, sales tax, libel and personal privacy is uncertain and may take
years to resolve. In addition, because our service is available over the
Internet in multiple states, and we sell to numerous consumers resident in such
states, such jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each such state. Our failure to qualify as
a foreign corporation in a jurisdiction where it is required to do so could
subject our company to taxes and penalties for the failure to qualify. Any such
new legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the our business, could have
a material adverse effect our business, results of operations and financial
condition.
Risks Associated with our Common Stock
Our stock price has been and may continue to be very volatile.
The market price of the shares of our common stock has been, and is
likely to be, highly volatile. During the 12 months prior to August 29, 2001,
our stock price as traded on the OTC Bulletin Board has ranged from a high of
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$.70 per share to a low of $.02 per share. The variance in our share price makes
it extremely difficult to forecast with any certainty the stock price at which
you may might be able to buy or sell your shares of our common stock. The market
price for our stock could be subject to wide fluctuations in response to factors
that are out of our control such as:
o actual or anticipated variations in our results of operations,
o announcements of new products or technological innovations by our
competitors;
o developments with respect to patents, copyrights or proprietary
rights;
o developments in Internet and auction regulation; and
o general conditions and trends in the Internet, collectibles and
electronic commerce industries.
The trading prices of many technology companies' stock have
experienced extreme price and volume fluctuations in recent months. These
fluctuations often have been unrelated or disproportionate to the operating
performance of these companies. The valuation of many Internet stocks are
extraordinarily high based on conventional valuation standards such as price to
earnings and price to sales ratios. We cannot offer any assurance that these
trading prices and price earnings ratios will be sustained. These broad market
factors may adversely affect the market price of our common stock. These market
fluctuations, as well as general economic, political and market conditions such
as recessions or interest rate fluctuations, may adversely affect the market
price of our common stock. Any negative change in the public's perception of the
prospects of Internet or e-commerce companies could depress our stock price
regardless of our results.
We have issued options, warrants and a convertible note that could have a
dilutive effect on our shareholders.
We have issued numerous options, warrants, and convertible securities
to acquire our common stock that could have a dilutive effect on our
shareholders. As of December 31, 2000, we had issued employee stock options to
acquire 557,000 shares of our common stock, exercisable at prices ranging from
$.01 to $1.625 per share, with a weighted average exercise price of
approximately $.24 per share. In addition to these options, we have reserved
18,000,000 shares of common stock, or such greater or lesser number of shares
that we may be required to issue upon the conversion of and payment of interest
on our 8% convertible note and the exercise of the 400,000 warrants issued in
connection with the 8% convertible note.
The note is convertible at a floating rate equal to the lesser of (1)
$2.48, which is 110% of the lowest closing bid price for the common stock for
the five trading days prior to March 23, 2000, or (2) 75% of the average of the
closing bid price for the common stock for the five trading days immediately
preceding the conversion date. The number of shares of common stock that may
ultimately be issued upon conversion is presently undeterminable and could
fluctuate. If the applicable conversion price is 110% of the lowest of the
closing bid price for the common stock for the five (5) trading days prior to
March 23, 2000, which is $2.48, then the number of shares that may be issued
upon conversion of the note is approximately 1,210,000 shares, subject to
adjustment pursuant to stock splits, dividends or similar events. Because the
registration statement was not declared effective by December 15, 2000, the
applicable conversion percentage has decreased to 73% of the average of the
closing bid price for the common stock for the five (5) trading days immediately
preceding the conversion date. (See "Risk Factors", page 20). If the convertible
note would have been converted as of August 29, 2001, the applicable conversion
price would have been $.02044 per share (73% of the average of the closing bid
price for the common stock for the five (5) trading days immediately preceding
the conversion date) and the number of shares issuable upon conversion would
have been approximately 146,771,037. If the note is converted on its current
terms, we will have to increase our total number of authorized shares that we
may issue under our charter. Any such increase will have to be approved by our
stockholders, and such approval is not guaranteed.
It is likely that the conversion price will be a percentage of the
market price, and as a result, the lower the common stock price at the time the
holder converts, the more common shares the holder will receive upon conversion.
Due to the conversion ratio, there is no limit on the aggregate number of shares
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of common stock into which the note can be converted. To the extent the holder
converts a portion of the convertible note and sells its shares of common stock,
the price of our stock may decrease due to the additional shares in the market.
This could allow the holder to subsequently covert an additional portion of the
convertible note into greater amounts of common stock, the sale of which would
further decrease the stock price. Purchasers of our common stock could therefore
experience substantial dilution upon conversion of the convertible note.
The following table describes the amount of shares of our common stock
into which the convertible note is convertible at various percentages of the
market price as of August 29, 2001 and the percentage of our total outstanding
common stock represented by conversion of the convertible note:
Percentage of Market Conversion Price Number of Shares of Percentage of our
Price per Shares of our (based on a Common Stock Issuable Outstanding Common
Common Stock at August conversion price upon Conversion of the 8% Stock Represented by the
29, 2001 that is 73% of Convertible Note Shares of Common Stock
the market price) Issuable upon Conversion
of the Convertible Note
---------------------------------------------------------------------------------------------------------------
At $.028 per share, $.02044 per share 146,771,037 69%
market price)
At $.021 per share (75% $.01533 per share 195,694,716 75%
of market)
At $.014 per share (50% $.01022 per share 293,542,074 82%
of market)
At $.007 per share (25% $.00511 per share 587,084,149 90%
of the market)
However, the selling shareholder may only convert the convertible note
to the extent the selling shareholder's ownership interest in the company does
not exceed 4.99 percent. This 4.99% limit, however, may not prevent any holder
from converting all of its convertible note or exercising its warrants, because
the holder can convert the convertible note or exercise warrants into 4.99% of
our outstanding common stock, then to the extent it liquidates some or all of
these shares, the holder can convert additional amounts of the convertible note
As a result, the 4.99% limit does not prevent selling shareholders from selling
more than 4.99% of our common stock. Although we have secured a commitment for
additional financing from the holder of our 8% convertible note, the financing
is subject to the parties negotiating and executing final documents. Although
the final documents have not been executed yet, the parties have agreed that any
additional convertible equity the holder may receive will also be subject to the
4.99% total ownership cap, and therefore the holder's equity position will not
be affected.
During the terms of these securities, the holders will have the
opportunity to profit from either an increase or, in the case of the convertible
note, decrease in the market price of our common stock followed by a subsequent
increase, with resulting dilution to the holders of shares who purchased shares
for a price higher than the respective exercise or conversion price. In
addition, the increase in the outstanding shares of our common stock as a result
of the exercise or conversion of these securities could result in a significant
decrease in the percentage ownership of our common stock by the purchasers of
our common stock. Furthermore, the Company has received an oral commitment for
financing in the amount of $751,000 from the holder of the covertible note.
Although the terms of the financing have not been determined yet, to the extent
the financing is in the form of convertible equity with a conversion price
linked to a percentage discount to the market price of the common stock at the
time of conversion, our shareholders will experience substantial dilution upon
conversion.
Additionally, we have filed a registration statement that has not been
declared effective by the SEC for the registration of approximately 711,000
shares to be issued to CSEI in connection with our purchase of assets.
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We may have difficulty obtaining additional financing as a result of the
significant number of shares that may be acquired upon conversion of the
convertible note.
The potentially significant number of shares issuable upon conversion
of our 8% convertible note could make it difficult to obtain additional
financing. Due to the significant number of shares of our common stock which
could result from a conversion of our 8% convertible note, new investors may
either decline to make an investment in our company due to the potential
negative effect this additional dilution could have on their investment or
require that their investment be on terms at least as favorable as the terms of
the 8% convertible note. If we are required to provide similar terms to obtain
required financing in the future, the potential adverse effect of these existing
financings could be perpetuated and significantly increased.
We have been penalized for failing to register shares underlying our 8%
convertible note and the warrants issued in connection with the 8% convertible
note that we issued in March, 2000.
Because we were unable to register the shares of common stock issuable
upon the conversion of the 8% convertible note and the exercise of the warrants
by December 15, 2000, we have incurred penalties and costs under the terms of
registration rights agreement and the 8% convertible note and the warrants
issued in connection with the purchase of the 8% convertible note, all issued in
the private placement in March, 2000. The registration rights agreement was
modified in May 2001, effective as of January 1, 2001, and on July 15, 2001 and
August 30, 2001, and contains a provision that extended the reduced conversion
percentage of 73% of the average market price of the common stock until
September 30, 2001. The modified registration rights agreement also contains
provisions that decrease the conversion percentage to fifty percent (50%) of the
average market price of the common stock if the registration statement is not
declared effective by the SEC on or before September 30, 2001. The modified
registration statement also provides for cash penalties equal to $60,000 (two
percent (2%) of the purchase price ($3,000,000) of the convertible note and
warrant) for each thirty day period, on a pro rated based, beyond September 30,
2001 until the registration statement is declared effective. Because the
registration statement was not declared effective by December 15, 2000, we have
incurred $30,000 in penalties due to the holder of the convertible note. As
consideration for the accommodations under the modification agreement, we agreed
to grant to Augustine Fund, LP a security interest in our assets as security for
our obligations under the Securities Purchase Agreement.
Conversion of the convertible note and exercise of the warrants and subsequent
public sale of our common stock while its market price is declining may result
in further decreases in the price.
The number of shares of common stock issuable upon conversion of our
convertible note will increase as the price of our common stock decreases, which
may adversely affect the price of our common stock. On August 29, 2001, we had
issued and outstanding $3,000,000 principal amount of an 8% convertible note. If
the convertible note were converted in full on August 29, 2001, the number of
shares of common stock issuable to the holder would be 146,771,037. The number
of shares of common stock that may ultimately be issued upon conversion of these
securities is presently indeterminable and could fluctuate significantly (See
"Description of Securities"). Purchasers of common stock could therefore
experience substantial dilution upon conversion of the convertible note. In
addition, the significant downward pressure on the market price of our common
stock could develop as the holders convert/exercise and sell material amounts of
common stock which could encourage market manipulation through short sales by
the holders or others, placing further downward pressure on the market price of
our common stock.
Future sales of our common stock in the public market could adversely affect the
price of our common stock.
Sales of substantial amounts of common stock in the public market that
are not currently freely tradable, or even the potential for such sales, could
have an adverse effect on the market price for shares of our common stock and
could impair the ability of purchasers of our common stock to recoup their
investment or make a profit. As of August 29, 2001, these shares consist of:
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o 18,464,456 shares of our outstanding common stock owned by Gregory
Rotman and Richard Rotman, two of our executive officers and directors
("Rotman Shares");
o 14,760,456 shares of our outstanding common stock owned by two former
directors, Hannah Kramer and Marc Stengel (together with the Rotman
Shares, the "Affiliate Shares");
o 7,350,000 shares of our common stock issued to CSEI pursuant to the
Asset Purchase Agreement, dated November 8, 2000, that are subject to
an escrow agreement (the "Escrow Shares"); and
o approximately 557,000 shares issuable to option holders.
The Escrow Shares are subject to an escrow agreement for the purposes
of complying with the Rule 144 holding period and securing certain indemnity
obligations made by CSEI in the acquisition documents. Additionally, until
November 8, 2002, the number of Escrow Shares that may be released from the
escrow in any one calendar month may not exceed ten percent (10%) of the
reported aggregate monthly trading volume in our common stock.
Unless the Affiliate Shares and the shares issuable to option holders
are further registered under the securities laws, they may not be sold except in
compliance with Rule 144 promulgated by the SEC, or some other exemption from
registration. Rule 144 does not prohibit the sale of these shares but does place
conditions on their resale which must be complied with before they can be
resold.
Future sales of our common stock in the public market could limit our ability to
raise capital.
Sales of substantial amounts of our common stock in the public market
pursuant to Rule 144, upon exercise or conversion of derivative securities or
otherwise, or even the potential for such sales, could also affect our ability
to raise capital through the sale of equity securities.
The issuance of the convertible note and warrants required us to record non-cash
expenses.
As a result of the issuance of our 8% convertible note, we recorded
non-cash interest expense attributable to the beneficial conversion feature and
amortization of the related debt acquisition costs and the fair value of the
related warrants of approximately $1,382,000 during the year ended December 31,
2000. From January 1, 2001 through March 23, 2002 we will record additional
non-cash interest expense attributable to amortization of the related debt
acquisition costs and the fair value of the related warrants of approximately
$428,000.
Present management and former directors may control the election of our
directors and all other matters submitted to the stockholders for approval.
Our executive officers and directors, in the aggregate, beneficially
own approximately 30% of our outstanding common stock. Additionally, Marc
Stengel and Hannah Kramer, each a former director of our company, own
approximately 23% of our outstanding common stock. As a result, each group, by
joining forces with the holders of 21-28% our outstanding common stock, may be
able to exercise control over all matters submitted to our stockholders for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets). Accordingly,
such concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the company, impede a merger, consolidation,
takeover or other business combination involving the company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the company, which in turn could have an adverse effect on the market
price of our common stock.
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"Penny stock" regulations may impose certain restrictions on marketability of
securities.
The SEC adopted regulations which generally define "penny stock" to be
an equity security that has a market price of less than $5.00 per share. Our
common stock may be subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's prior written consent to the
transaction.
Additionally, for any transaction, other than exempt transactions,
involving a penny stock, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the SEC relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability to sell our common stock in the secondary market.
The market for our company's securities is limited and may not provide adequate
liquidity.
Our common stock is currently traded on the OTC Bulletin Board
("OTCBB"), a regulated quotation service that displays real-time quotes,
last-sale prices, and volume information in over-the-counter equity securities.
As a result, an investor may find it more difficult to dispose of, or obtain
accurate quotations as to the price of, our securities than if the securities
were traded on the Nasdaq Stock market, or another national exchange. As of
August 29, 2001 the OTCBB reports that there are 15 active market makers of our
common stock. Seven of the 15 market makers have accounted for approximately 72%
of the trading of our common stock year to date. In order to trade shares of our
common stock you must use one of these 15 market makers unless you trade your
shares in a private transaction. In the 120 days prior to August 29, 2001 the
actual trading volume ranged from a low of 1,300 shares of common stock to a
high of 927,000 shares of common stock. This low trading volume means there is
limited liquidity in our shares of common stock. Selling our shares is more
difficult because smaller quantities of shares are bought and sold and news
media coverage about us is limited. These factors result in a limited trading
market for our common stock and therefore holders of our company's stock may be
unable to sell shares purchased should they desire to do so.
-23-
DESCRIPTION OF OUR SECURITIES
The summary of the terms of our capital stock set forth below does not
purport to be complete. For a detailed, complete description, please see our
Certificate of Incorporation, as amended, and our Amended and Restated Bylaws,
copies of which were filed with the SEC as exhibits to our Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999.
General
Our certificate of incorporation authorizes us to issue up to 100,000,000
shares of common stock, par value $.001 per share.
The transfer agent and registrar for the common stock is the Olde Monmouth
Stock Transfer Company, Inc., Atlantic Heights, New Jersey.
Common Stock
As of August 29, 2001, we had 65,546,310 shares of common stock
outstanding. All outstanding shares of our common stock are fully paid and
nonassessable and the shares of our common stock offered by this prospectus will
be, upon issuance, fully paid and nonassessable. The following is a summary of
the material rights and privileges of our common stock.
Voting. Holders of our common stock are entitled to cast one vote for each
share held at all shareholder meetings for all purposes, including the election
of directors. The holders of more than 50% of the voting power of our common
stock issued and outstanding and entitled to vote and present in person or by
proxy constitute a quorum at all meetings of our shareholders. The vote of the
holders of a majority of our common stock present and entitled to vote at a
meeting will decide any question brought before the meeting, except when
Delaware law, our certificate of incorporation, or our bylaws require a greater
vote. Holders of our common stock do not have cumulative voting for the election
of directors.
Dividends. Holders of our common stock are entitled to dividends when, as
and if declared by the board of directors out of funds available for
distribution.
Preemptive Rights. The holders of our common stock have no preemptive
rights to subscribe for any additional shares of any class of our capital stock
or for any issue of bonds, notes or other securities convertible into any class
of our capital stock.
Liquidation. If we liquidate or dissolve, the holders of each outstanding
share of our common stock will be entitled to share equally in our assets
legally available for distribution to our shareholders after payment of all
liabilities.
8% Convertible Note
On March 23, 2000, we issued $3,000,000 principal amount of an 8% two year
convertible note pursuant to a Securities Purchase Agreement. The following is a
summary of the material terms of the 8% convertible note.
Conversion Price. The note is convertible into common stock at a conversion
price equal to the lesser of: (1) one hundred ten percent (110%) of the lowest
of the closing bid price for the common stock for the five (5) trading days
prior to March 23, 2000, or (2) seventy-five percent (75%) of the average of the
closing bid price for the common stock for the five (5) trading days immediately
preceding the conversion date.
-24-
The number of shares of common stock that may ultimately be issued upon
conversion is presently undeterminable and could fluctuate. If the applicable
conversion price is 110% of the lowest of the closing bid price for the common
stock for the five (5) trading days prior to March 23, 2000, which is $2.48,
then the number of shares that may be issued upon conversion of the note is
approximately 1,210,000 shares, subject to adjustment pursuant to stock splits,
dividends or similar events. If the convertible note would have been converted
in its entirety as of August 29, 2001, the applicable conversion price would
have been $.02044 per share (73% of the average of the closing bid price for the
common stock for the five (5) trading days immediately preceding the conversion
date--See "Registration Rights Agreement--Failure to File Registration
Statement") and the number of shares issuable upon conversion would have been
approximately 146,771,037. Purchasers of common stock could therefore experience
substantial dilution upon conversion of the convertible note.
The convertible note includes a restriction that the convertible note is
convertible by any holder only to the extent that the number of shares thereby
issuable, together with the number of shares of common stock owned by such
holder, but not including unconverted portions of the convertible note or
unexercisable or warrants, would not exceed 4.99% of the then outstanding shares
of our common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934. This 4.99% limit may not prevent any holder
from converting all of its convertible note or exercising its warrants, because
the holder can convert the convertible note or exercise warrants into 4.99% of
our outstanding common stock, then to the extent it liquidates some or all of
these shares, the holder can convert additional amounts of the convertible note.
As a result, the 4.99% limit does not prevent selling shareholders from selling
more than 4.99% of our common stock, while never holding more than 4.99% at any
one time.
The holder of the convertible note cannot vote any of the shares of common
stock it acquired upon conversion of the note in a subsequent stockholder vote
to authorize or ratify the convertible note.
Interest. The convertible note bears interest at the rate of 8% per annum.
Interest is payable in quarterly installments in arrears. Interest may at our
option be paid in common stock, with the number of shares of common stock to be
delivered in payment of the interest to be determined by dividing the amount of
interest being paid by the applicable conversion price.
Default. An "event of default" under the convertible note will occur if,
among other things, we (1) fail to pay interest or principal when due or fail to
timely honor any notice of conversion of the convertible note, or (2) fail to
perform in any material respect an agreement or obligation, or materially breach
any of our representations or warranties, under the convertible note or the
Securities Purchase Agreement. Upon an event of default, the entire indebtedness
and accrued interest may become immediately due and payable. The convertible
note may not be prepaid without the prior written consent of the holder.
Adjustment. The conversion price and the number of shares received upon
conversion may be adjusted in the event of a stock split, stock dividend,
reorganization, merger, consolidation or sale of our assets and other similar
transactions.
Effect on Common Stock. The variable conversion price of the 8% convertible
note could affect the common stock as follows:
o Reduction in Stock Price. The number of shares of common stock
issuable upon conversion of the convertible note will be inversely
proportional to the market price of the common stock at the dates upon
which the holder of the convertible note converts the convertible
note.
o Effect of Additional Shares in Market. To the extent that the holder
of the convertible note converts and then sells its common stock in
accordance with the 4.99% limitation, the common stock price may
decrease due to the additional shares in the market, possibly
-25-
allowing the holder to convert the convertible note into greater
amounts of common stock, further depressing the stock price.
o Impact of Dilution. The additional shares issued upon conversion of
the convertible note would dilute the percentage interest of each of
our existing common shareholders, and this dilution would increase as
more shares of common stock are issued due to the impact of the
variable conversion price. Each additional issuance of shares upon
conversion would increase the supply of shares in the market and, as a
result, may cause the market price of our common stock to decline. The
effect of this increased supply of common stock leading to a lower
market price may be magnified if there are sequential conversions of
the convertible note into shares of common stock. Specifically, the
selling shareholders could convert a portion of the convertible note
and then sell the common stock issued upon conversion, which could
result in a drop in our stock price. If the stock price were to
decrease, then the selling shareholders could convert the convertible
note at a lower conversion price, and be issued a greater number of
shares of common stock due to the lower conversion price. The increase
in the aggregate number of shares of common stock issued upon
conversion of the convertible note above what it would otherwise be
could place significant downward pressure on our stock price. This
downward pressure on our stock price might encourage market
participants to sell our stock short, which would put further downward
pressure on our stock price. On the other hand, in issuing the
additional shares, we will avoid repaying a $3,000,000 debt.
Warrants Issued with Convertible Note
In connection with the issuance of the convertible note the holder of the
convertible note also was granted a five-year warrant to purchase 300,000 shares
exercisable at $2.70 per share per share (120% of the lowest of the closing bid
prices for the common stock for the five trading days prior to March 24, 2000).
This warrant is also subject to anti-dilution protection in the event of the
issuance of our common stock at a prices less than the then current price for
our common stock and for stock splits, stock dividends, reorganization, merger,
consolidation or sale of our assets and other similar transactions. The
anti-dilution protection does not apply to shares issued to the holder of the
convertible note upon conversion of the note at a price that is below the
current market price of our stock.
We also issued a five-year warrant to purchase 100,000 shares of our common
stock to the Delano Group Securities, LLC for acting as the placement agent in
the financing. The exercise price is $2.70 per share (120% of the lowest of the
closing bid prices for the common stock for the five trading days prior to March
23, 2000). This warrant is subject to adjustment in the event of stock splits,
stock dividends, reorganization, merger, consolidation or sale of our assets and
other similar transactions.
Upon exercise of all of the outstanding warrants, we will receive aggregate
gross proceeds of $1,080,000.
REGISTRATION RIGHTS
Shelf Registration
In the Registration Rights Agreement and Securities Purchase Agreement
relating to the sale of the 8% convertible note, we agreed to file with the SEC
a registration statement for the resale of the shares issuable upon conversion
of the convertible note, the payment of interest on the convertible note and the
exercise of the warrants issued in connection with the convertible note and to
use our best efforts to keep such registration statement effective until all of
the shares have been resold or can be sold immediately without
-26-
compliance with the registration requirements of the Securities Act of 1933,
pursuant to Rule 144 or otherwise.
Pursuant to the Registration Rights Agreement, we are obligated to register
no less than the greater of (i) 2,000,000 shares of common stock or (ii) 200% of
the maximum number of shares of common stock that would have been issuable upon
conversion of the convertible note and upon exercise of the warrants, assuming
that the conversion and exercise occurred just prior to the initial filing of
the registration statement on October 25, 2000.
Piggyback Registration
If at any time when there is not an effective registration statement
covering the shares issuable upon conversion of the convertible note, as payment
of interest on the convertible note, or the exercise of the warrants, we propose
to file a registration statement under the Securities Act with respect to a
primary offering of our shares for our own account or the account of others,
excluding registration statements in connection with employee or director
benefit or compensation plans or any acquisition of any entity or business, then
we will give written notice of the proposed offering to the selling shareholders
as soon as practicable and we will use our best efforts to include in the
proposed offering the shares issuable upon conversion of the convertible note,
as payment of interest on the convertible note, or the exercise of the warrants,
unless we determine not to register or to delay the registration of our
securities. We will not be required to register any shares that are eligible for
resale pursuant to Rule 144(k) of the Securities Act.
Indemnification
We have agreed to indemnify the holder of the convertible note, and any
person controlling it against certain liabilities incurred or arising out of any
untrue or alleged untrue statement of a material fact contained in the
registration statement of which this prospectus is a part, or any omission of a
material fact that is required to be stated or necessary to make the statements
contained in the registration statement not misleading, except to the extent
that the untrue statements or omissions are based upon information about the
holder of the note that was furnished by the holder to us and that we reasonably
relied upon. The holder of the convertible note has agreed to indemnify us and
certain related persons against certain liabilities incurred or arising out of
any untrue or alleged untrue statement of a material fact contained in the
registration statement of which this prospectus is a part, or any omission of a
material fact that is required to be stated or necessary to make the statements
contained in the registration statement not misleading, only to the extent that
the untrue statements or omissions are based upon information about the holder
of the note that was furnished by the holder to us and that we reasonably relied
upon.
Failure to File Registration Statement
Because the Registration Statement was not declared effective by the
SEC by December 15, 2000, the conversion percentage had declined to 50% of the
average market price of the common stock. The Registration Rights Agreement was
modified in May 2001, effective as of January 1, 2001, and amended on July 15,
2001 and August 30, 2001, and contains a provision that extended the reduced
conversion percentage of 73% until September 30, 2001. The modified Registration
Rights Agreement also contains provisions that decrease the conversion
percentage to fifty percent (50%) if the registration statement is not declared
effective by the SEC on or before September 30, 2001. The decrease in the
conversion percentage means that the holder of the convertible note will be able
to convert the note at an even lower price because the conversion price per
share will be a smaller percentage of the market price, and thus, the holder
will receive more shares of common stock upon the conversion. The modified
Registration Rights Agreement also provides for cash penalties, as liquidating
damages, equal to two percent (2%) of the amount of the $3,000,000 purchase
price of the convertible note and warrant for each thirty day period, on a pro
rated basis, beyond September 30, 2001 until the registration statement is
declared effective. Because the registration statement was not declared
effective by December 15, 2000, we have incurred $30,000 in penalties due to the
holder of the convertible note. Finally, as consideration for the January 1,
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2001 modifications, we agreed to grant a security interest in all of our assets
as security for our obligations under the Securities Purchase Agreement.
SELLING SHAREHOLDERS
On March 23, 2000, we issued an 8% convertible note to the Augustine Fund,
L.P. for a cash investment of $3,000,000. In connection with the issuance of the
note, we also issued to the Augustine Fund, L.P. and the Delano Group
Securities, LLC (as the placement agent in the financing) warrants to purchase
300,000 and 100,000 shares of common stock, respectively, for an exercise price
of $2.70 per share. As described elsewhere herein, this prospectus covers shares
of common stock that may be acquired by the selling shareholders upon the
conversion of the convertible note, as interest on the convertible note, and
upon exercise of the warrants.
Under the Registration Rights Agreement, we are required to register for
resale by the selling shareholders 20,392,792 shares of our common stock. This
amount is based upon:
o The number of shares issuable upon conversion of and payment of
interest on the convertible note and exercise of the warrants; and
o The potential increase in the number of shares issuable with respect
to the convertible note if the conversion price declines due to a
decline in the market price for our common stock.
In accordance with the terms of the Registration Rights Agreement with
the holder of the convertible note, this prospectus covers the resale of 200% of
the number of shares of common stock issuable upon conversion of the convertible
note, determined as if the convertible note was converted in full on October 25,
2000 at the assumed conversion price of $.39, plus 200% of the number of shares
issuable upon exercise of the warrant issued to the Augustine Fund, L.P. and
100% of the number of shares issuable upon the exercise of warrants issued to
the Delano Group Securities, LLC. If the warrants were exercised in full and the
entire convertible note was converted at the conversion price of $.39 per share,
only 8,092,307 shares of common stock would be issued and available for resale
under this prospectus. However, we cannot determine the exact number of shares
of common stock that we will ultimately issue upon exercise of the warrants and
conversion of the convertible note if the conversion price declines and
anti-dilution adjustments occur with respect to the warrants or the convertible
note. If the convertible note had been converted on August 29, 2001, 146,771,037
shares would have been issuable.
Pursuant to its terms, the convertible note is convertible by any
holder only to the extent that the number of shares thereby issuable, together
with the number of shares of common stock owned by such holder, but not
including unconverted portions of the convertible note or unexercisable or
warrants, would not exceed 4.99% of the then outstanding shares of our common
stock as determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934. Accordingly, the number of shares of common stock set forth in the
third and fourth columns in the table below for the selling shareholders exceeds
the number of shares of common stock that the selling shareholders beneficially
own in accordance with Section 13(d) as of August 29, 2001. This 4.99% limit may
not prevent any holder from converting all of its convertible note or exercising
its warrants, because the holder can convert the convertible note or exercise
warrants into 4.99% of our outstanding common stock, then to the extent it
liquidates some or all of these shares, the holder can convert additional
amounts of the convertible note. As a result, the 4.99% limit does not prevent
selling shareholders from selling more than 4.99% of our common stock.
The following table provides information as of August 29, 2001, with
respect to the common stock beneficially owned by the selling shareholders. The
information presented is based on data furnished to us by the selling
shareholders and assumes a conversion price for the convertible note of $.02044
per share. The actual number of shares of common stock issuable upon conversion
of the convertible note is subject to adjustment and
-28-
could be materially more than the amounts set forth in the table below,
depending on factors which we cannot predict at this time, including, among
other factors, the future market price of the common stock.
During the past three years no selling shareholder has been an officer,
director or affiliate of ours, nor has any selling shareholder had any material
relationship with us during that period.
The 20,392,792 shares of common stock offered by this prospectus may be
offered from time to time to the selling shareholders named below.
Number of Shares
Shares of Common That Can Be Maximum Number
Stock Owned Acquired Over Life of Shares Offered Shares Beneficially
Name of Selling Beneficially Before of the Securities Under This Owned After
Shareholder Offering (1) Owned Registration Offering (2)
----------- ------------ ----- Statement ------------
---------
Augustine Fund, L.P.(3) 3,204,675 (4.99%) 146,771,037 20,292,792 126,478,245
Delano Group Securities, LLC (4) 100,000 100,000 100,000 0
------- ------- ------- -----------
TOTAL 3,304,675 146,871,037 20,392,792 126,478,245
-------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. The rules also provide that beneficial
ownership includes shares of common stock, underlying options, warrants and
convertible securities that can be exercised or converted within 60 days. To
that extent, the number of shares underlying the convertible securities
presented in the table may not represent the actual beneficial ownership from
time to time of selling shareholders in accordance with those rules because of
any adjustable rate of conversion. Unless otherwise indicated, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned.
(2) Assumes that all of the selling shareholders will sell all of the shares
registered for sale hereby. Because the selling shareholders may offer all, some
or none of the shares pursuant to this prospectus, because the number of shares
covered by this prospectus does not represent the total number of shares that
would have been received had the convertible note been converted in full on
August 6, 2001, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares, no estimate can be
given as to the number of shares that will be held by the selling shareholders
after completion of the sale of shares hereunder.
(3) Augustine Fund, L.P. is an Illinois limited partnership and Augustine
Capital Management LLC is its general partner. The natural person principals of
Augustine Fund, L.P. that have voting and/or investment control over the
securities to be sold are John T. Porter, Brian D. Porter, Thomas F. Duszynski
and David R. Asplund. Augustine Fund. L.P. may be deemed an affiliate of a
registered broker-dealer due to a minority equity ownership by the principals of
Augustine Fund of a registered broker-dealer.
(4) Delano Group Securities, LLC is a Delaware limited liability company and a
registered broker dealer. The natural person that has voting and/or investment
control over the securities held by Delano Group Securities, LLC is David R.
Asplund.
-29-
USE OF PROCEEDS
The selling shareholders will receive all of the proceeds of the shares
offered hereby. We will not receive any of the proceeds from the sale of such
shares. However, 400,000 of the shares offered hereby are issuable upon the
exercise of outstanding warrants to purchase shares of common stock (subject to
adjustments). If all of the warrants are exercised by the selling shareholders,
we estimate that we would receive gross cash proceeds of $1,080,000 in the
aggregate (assuming none of the warrants were exercised pursuant to the cashless
exercise provisions contained therein). Holders of the warrants have the right
to exercise the warrants held by them by delivering shares of common stock as
payment for the exercise price pursuant to the terms of the warrants. We will
bear the expenses of this offering. No selling shareholder has held any position
or office or had any other material relationship with our company.
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale by the selling shareholders
of up to 20,392,792 shares of common stock par value $.001 per share, assuming a
conversion of the convertible note and an exercise of the warrants.
The shares covered by this prospectus may be offered and sold from time to
time by the selling shareholders. The selling shareholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling shareholders may sell the shares being offered
hereby on the OTC Bulletin Board, or otherwise, at prices and under terms then
prevailing, at prices related to the then current market price, or at negotiated
prices. Registration of the shares does not necessarily mean that any of the
shares will be offered by the selling shareholders.
Augustine Fund, L.P. has advised us that it purchased the shares in the
ordinary course of its business and at the time the selling stockholder
purchased the shares it was not a party to any agreement or other understanding
to distribute the securities, directly or indirectly.
Shares may be sold by one or more of the following means of distribution:
o block trades in which the broker-dealer so engaged will attempt to sell
such shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such broker-dealer
for its own account pursuant to this prospectus;
o over-the-counter distributions in accordance with the rules of the NASD;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o privately negotiated transactions
The selling shareholders and any persons who participate in the sale of the
securities offered in this registration statement may be deemed to be
"underwriters" within the meaning of the Securities Act and any commissions paid
or discounts or concessions allowed to any person and any profits received on
resale of the securities offered may be deemed to be underwriting compensation
under the Securities Act.
We will not receive any of the proceeds from the sale of shares by the
selling shareholder. We will bear all expenses of the offering, except that the
selling shareholders will pay all underwriting commissions, brokerage fees and
transfer taxes as well as fees of its counsel.
In connection with distributions of the shares, pursuant to the Securities
Purchase Agreement, the selling shareholders may not enter into hedging
transactions with broker-dealers or other financial institutions
-30-
who may engage in short sales of our common stock in the course of hedging the
positions they assume with the selling shareholders. The selling shareholders
also may not (i) sell our common stock short and redeliver the shares to close
out such short positions; (ii) enter into option or other transactions with
broker-dealers or other financial institutions which require the delivery
thereto of the shares offered hereby, which shares such broker-dealer or other
financial institutions may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction); or (iii) pledge such shares to a
broker-dealer or other financial institution, and, upon a default, such
broker-dealer or other financial institution, may affect sales of such pledged
shares pursuant to this prospectus (as supplemented or amended to reflect such
transaction). In addition, any such shares that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
shareholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling shareholders in amounts to be negotiated prior to the sale. Such brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales, and any such commissions,
discounts or concessions may be deemed to be underwriting discounts or
commissions under the Securities Act.
In order to comply with the securities laws of certain states, the shares
must be sold in such states only through registered or licensed brokers or
dealers. In addition, in certain states shares may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirements is available and has been
complied with.
The rules and regulations in Regulation M under the Exchange Act provide
that during the period that any person is engaged in the distribution (as
defined therein) of our common stock, such person generally may not purchase
shares of our common stock. The selling shareholders are subject to such
regulation which may limit the timing of its purchases and sales of shares of
our common stock.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
We have agreed to indemnify the selling shareholders, and any person
controlling them against certain liabilities, including liabilities under the
Securities Act. The selling shareholders haves agreed to indemnify us and
certain related persons against certain liabilities, including liabilities under
the Securities Act.
We have agreed with the selling shareholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of the sale of all the shares or the date on which shares may be sold
without any restriction pursuant to Rule 144(k).
LEGAL PROCEEDINGS
We are currently involved in a dispute with Marc Stengel and Hannah Kramer,
each of whom is a substantial shareholder of our company, and with Whirl Wind
Collaborative Design, Inc. ("Whirl Wind") and Silesky Marketing, Inc., two
entities affiliated with Marc Stengel. Mr. Stengel and Ms. Kramer are former
directors of the Company. Mr. Stengel is also a former officer and employee.
-31-
The lawsuit was initially filed against Mr. Stengel alone in June 2000. It
remains pending in the US District Court for the District of Maryland. A First
Amended Complaint was filed on October 11, 2000, which added the defendants
other than Stengel identified above. The First Amended Complaint seeks
rescission of the transactions pursuant to which Mr. Stengel and Ms. Kramer
obtained their substantial stock interests in the company, and seeks damages
against Mr. Stengel and Ms. Kramer, in both cases, for misrepresentations and
omissions under the common law of fraud, the Maryland Securities Act and certain
contractual warranties and representations. The First Amended Complaint also
seeks damages and remedies against Mr. Stengel for breach of his contractual
duties as an employee of the company and for misrepresentations he made to the
company while acting as an employee; these claims relate to businesses operated
by Mr. Stengel in competition with our company and using our company's
resources. The First Amended Complaint also seeks to recover damages from Mr.
Stengel and the two corporate defendants for conversion of certain of our
assets, resources and employee services, and for unjust enrichment. All
defendants have filed answers to the First Amended Complaint. Mr. Stengel has
filed a counterclaim seeking $500,000damages against Sales Online for alleged
interference with his ability to sell shares of common stock of Sales Online.
Whirl Wind has filed a counterclaim against Sales Online for conversion of a
small quantity of computer equipment alleged to be owned by Whirl Wind.
On or about June 16, 2000, Marc Stengel commenced an action in the Delaware
Chancery Court pursuant to Section 225 of the Delaware General Corporation Law
(the "Delaware 225 Action") seeking a determination from the Court that he was
improperly removed as an officer and director of Sales Online, should be
reinstated as such, and that Gregory Rotman and Richard Rotman be ordered to
dismiss the Maryland action. The Delaware 225 Action was stayed pending the
outcome of a special meeting of shareholders, discussed below. Following the
results of that meeting, we moved for summary judgment and asked that the
Delaware 225 Action be dismissed. On February 26, 2001, the Court issued a
decision in which it granted our motion for summary judgment and dismissed the
Delaware 225 Action. The Court concluded that (1) the special meeting of our
stockholders held on September 19, 2000 to elect directors (discussed below) was
authorized by our bylaws and as a result, the new board was properly elected and
had the authority to terminate Mr. Stengel as an officer; (2) Marc Stengel's
post-election challenge to the special meeting was barred by his own inequitable
conduct; and (3) his claim for back pay could not be pursued in the Court of
Chancery action. Mr. Stengel has appealed the Court of Chancery's decision to
the Delaware Supreme Court which appeal is now pending.
On July 20, 2000, in accordance with our Amended and Restated Bylaws,
Gregory Rotman, called a special meeting of the stockholders to be held on
September 19, 2000 for the election of directors. Gregory Rotman and Richard
Rotman nominated themselves, Andrew Pilaro and John Martin for election to our
Board of Directors and filed soliciting materials with the SEC. No proxy
soliciting materials were filed by any other party. The meeting was held on
September 19, 2000 and the nominated slate of directors were elected as our
Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19, 2000.
At that meeting, the new Board removed Marc Stengel as an officer of Sales
Online, formally ratified and approved the initiation and prosecution of the
Maryland action against Marc Stengel and authorized Gregory Rotman, as president
and CEO to take all actions necessary to prosecute Sales Online's claims against
Marc Stengel and others.
On or about October 3, 2000, Mr. Stengel submitted to Sales Online a demand
for advancement of certain expenses (including attorneys' fees) he allegedly
incurred in connection with the Delaware 225 Actions and the Maryland action. In
his advancement request, Mr. Stengel claimed to have incurred approximately
$96,800 in legal expenses in the Delaware 225 Action and the Maryland action
through August, 2000. On October 20, 2000, we notified Mr. Stengel that the
Board of Directors had denied Mr. Stengel's advancement request.
-32-
On or about October 24, 2000, Mr. Stengel filed a second action in the
Delaware Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that he is entitled to
pursuant to our Bylaws to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
Action (the "Delaware 145 Action"). Sales Online and Mr. Stengel each moved for
summary judgment in the Delaware 145 Action. A hearing on the Delaware 145
Action was held on January 2, 2001, at which time the Court of Chancery granted
our motion for summary judgment and denied Mr. Stengel's motion. Mr. Stengel
appealed this decision to the Delaware Supreme Court. On June 27, 2001,
following briefing and oral argument, a three judge panel of the Delaware
Supreme Court issued an order affirming the judgment of the Court of Chancery.
On July 11, 2001, Mr. Stengel filed a motion for rehearing en banc by all five
members of the Delaware Supreme Court of the Court's June 27, 2001 order. On
August 23, 2001, the Court denied Mr. Stengel's motion.
On November 1, 2000, we filed with the Maryland Court a Motion for a
Preliminary Injunction requesting that the Court enjoin Mr. Stengel and Ms.
Kramer from selling, attempting to sell, or otherwise disposing of their shares
of our stock pending resolution of the merits of our claim for rescission. On
November 9, 2000, Mr. Stengel filed an Opposition to our Motion for a
Preliminary Injunction. On November 9, 2000, Mr. Stengel also filed a Motion for
Preliminary Injunction requesting that the Court (i) order Sales Online to
instruct its transfer agent to implement and complete all measures necessary to
sell his restricted stock in compliance with Rule 144 and (ii) enjoin Sales
Online from interfering with or preventing the sale of stock by Mr. Stengel in
accordance with Rule 144. The District Court conducted an extensive evidentiary
hearing on both motions, which concluded on January 23, 2001. The parties
briefed the issues and the Court heard final arguments on February 22, 2001. On
March 19, 2001, the Court (1) denied our motion for the preliminary injunction
against Marc Stengel and Hannah Kramer, (2) granted in part Marc Stengel's
motion for a preliminary injunction insofar as we are enjoined from interfering
with any sale of stock by Marc Stengel that complies with SEC Rule 144, (3)
determined that the evidence supported a finding that Marc Stengel and Hannah
Kramer are acting in concert in the disposition of their shares and (4) denied
Marc Stengel's and Hannah Kramer's motions to dismiss the Company's lawsuit
against them. The court has scheduled the case for trial in December, 2001.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors
and executive officers of Sales Online:
Name Age Position
---- --- --------
Gregory Rotman* 35 Director, Chief Executive Officer
& President
Richard Rotman* 31 Director, Chief Financial Officer, Vice President,
Treasurer & Secretary
John Martin 36 Director, Chief Technology Officer &
Vice President
Andrew Pilaro 31 Director
----------------------
*Gregory Rotman and Richard Rotman are brothers.
The following is a description of the current occupation and business
experience for the last five years for each director and executive officer.
-33-
Gregory P. Rotman has served as a Director and the Chief Executive Officer
and President of Sales Online since February 1999. From 1995 to 1998, he served
as a Partner of Teamworks, Inc., LLC , which was responsible for the design,
financing and build-out of MCI National Sports Gallery.
Richard S. Rotman has served as a Director and the Chief Financial Officer,
Vice President, Treasurer and Secretary of Sales Online since February 1999.
Prior to joining Sales Online, he was involved in the management and day-to-day
operations of Rotman Auction, which he formed in February 1997. From 1995 until
February 1997, Mr. Rotman worked for the family business, Rotman Collectibles,
where he began in sales and distribution in the new product division. As the
industry was changing, Rotman Collectibles began focusing on auctions as a more
permanent division and during 1996, he began to create a presence on the
Internet. Mr. Rotman's primary expertise is in management and daily operations.
From 1994 to 1995, Mr. Rotman served as the director of an art gallery in
Jackson, Wyoming, selling original artwork to high-end clientele.
John Martin has served as a Director and the Vice President of Sales Online
since September 2000, and our Chief Technology Officer since May 2000. From May
1999 until May 2000, he served as vice president-technology. From June 1997 to
May 1998, Mr. Martin was an instructor at Clark University Computer Career
Institute. From August 1996 to May 1999, he served as a Software Engineer with
Sybase, Inc., a software development company. From prior to 1995 to August 1996,
Mr. Martin was the Senior Programmer at Presidax, which manufactures barcoded
labels and is a division of Avery Dennison. From prior to 1995 to May 1999, he
was also a software consultant.
Andrew Pilaro has served as a Director of Sales Online since September
2000. Since August, 1996, he has served as the Assistant to the Chairman of CAP
Advisors Limited, an investment management company, with responsibility for
asset management. From August, 1995 to August, 1996, Mr. Pilaro was a clerk at
Fowler, Rosenau & Geary, L.P., a stock specialist firm.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Article Tenth of our Certificate of Incorporation provides that, to the
fullest extent permitted by Delaware law, a director shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability: (1) for any breach of
their duty of loyalty to the corporation or its stockholders, (2) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (3) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (4) for any transaction from which the director derived an
improper personal benefit.
Our Bylaws provide that, to the fullest extent permitted by Delaware
General Corporation Law our directors and officers shall be indemnified, and
employees and agents may be indemnified, against expenses, including attorneys'
fees, judgments, fines, and settlements actually and reasonably incurred in
connection with any proceeding arising out of their status as such. Section 145
of the Delaware General Corporation Law provides that a corporation may
indemnify an director, officer, and agent if such director, officer or agent
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the company, and, with the respect to any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted of directors and officers of Sales Online pursuant to
the foregoing provisions or otherwise, we have been advised that, although the
validity and scope of the governing statute has not been tested in court, in the
opinion of the SEC, such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In addition, indemnification may
be limited by state securities laws.
-34-
EXECUTIVE COMPENSATION
The following table presents the compensation paid, on a cash basis, to the
Chief Executive Officer of Sales Online and those executive officers of Sales
Online as of who received compensation in excess of $100,000 during any of the
last three fiscal years of Sales Online ended December 31, 2000, 1999 and 1998.
Summary Compensation Table
Name and Fiscal
Principal Position Year (1) Salary
------------------ -------- ------
Gregory P. Rotman 2000 $ 98,928
President and 1999 $124,519
Chief Executive Officer 1998 $ 0
Richard S. Rotman 2000 $ 98,771
Chief Financial Officer, 1999 $126,194
Vice President and Secretary 1998 $ 0
Marc Stengel 2000(2) $ 41,803
Executive Vice President 1999 $126,194
1998 $ 0
---------------
(1) Gregory P. Rotman, Richard S. Rotman and Marc Stengel assumed their
positions as of February 25, 1999.
(2) On June 7, 2000, Marc Stengel was terminated as an employee of the
company. On September 19, 2000, Mr. Stengel was terminated as the Executive Vice
President of the company.
None of the named executive officers received, holds or exercised any
options or stock appreciation rights with respect to our securities, and none of
such persons was granted any awards under any long-term incentive plan of Sales
Online.
None of our directors receives any compensation from Sales Online for
serving as directors
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 25, 1999, we purchased all of the outstanding common stock
of Internet Auction, Inc., a Massachusetts corporation ("Internet Auction"),
which was wholly owned by Gregory Rotman, Richard Rotman, Marc Stengel and
Hannah Kramer, in exchange for the issuance to these individuals of an aggregate
of 36,928,912 shares, representing approximately 78.4%, of our common stock. At
the time that the transaction was agreed upon the by then current management of
the Company, the average price of the common stock was approximately $.28 per
share, or a total value of approximately $10,463,295, assuming no discounts for
the restricted nature of the stock. As a result of this transaction, the
principal business of Internet Auction became the business of Sales Online and
Gregory Rotman, Richard Rotman, Marc Stengel and Hannah Kramer became directors
of Sales Online. We believe that the stock for stock transaction with Internet
Auction was on terms that were fair and reasonable to our company and no less
favorable than could have been obtained by a third party.
Following the transaction with Internet Auction, John Martin was granted
options to purchase 471,000 shares of our common stock at an exercise price of
$.01 per share, of which 265,375 are currently exercisable. We granted these
options to Mr. Martin as an incentive for joining our company and leaving his
position as a software engineer with Sybase, Inc., a prominent software
development company. As our Chief Technology
-35-
Officer, Mr. Martin has become an integral part of our company's operations and
we rely very heavily on his services. See "Risk Factors," page 10.
In September 1999, we purchased certain computer equipment, Internet
research technology and coding material for a purchase price of $70,000 from
Timeline, Inc., a corporation owned by Gregory Rotman and Richard Rotman. We
believe that the terms of the purchase were fair and reasonable and on terms
that were fair and reasonable to our company and no less favorable than could
have been obtained by an unaffiliated party.
In February 1999 prior to the transaction with Internet Auction, Rotman
Productions, an entity owned by Steven Rotman, the father of Gregory Rotman and
Richard Rotman, contributed an inventory of collectibles with an estimated value
of $629,000 to Internet Auction. The inventory was contributed in exchange for
236 shares of Internet Auction common stock (which in the transaction converted
to 220,000 shares of our common stock) and additional consideration consisting
of a call option to purchase from a third party, Universal Funding Inc., 700,000
shares of our common stock owned by Universal Funding, Inc., at an exercise
price of $.50 per share, subject to the closing of the Internet Auction
transaction. These options were exercised by Steven Rotman. We believe that this
purchase of collectibles inventory was fair and reasonable to the company and on
terms no less favorable than could have been obtained by a third party.
On March 7, 2000, we acquired Internet Collectible Awards
(www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles web sites in a variety of categories. As
consideration for the acquisition, we recorded accounts payable of $50,000 and
issued 200,000 shares of our common stock valued at $237,500 (based on our stock
price at the date of acquisition). At the time of the transaction, we believed
this was purchase was made from an unaffiliated third party. In the lawsuit we
filed against Marc Stengel and others described above, we allege that this
acquisition was an undisclosed related party transaction.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the management of Sales Online the following table
set forth the beneficial ownership of our common stock as of August 29, 2001 of
each of our directors and executives officers, and all of our directors and
executive officers as a group. The address of each person named below is the
address of Sales Online.
Name and Address of Number of Shares % of
Beneficial Owner Beneficially Owned Class
---------------- ------------------ -----
Gregory Rotman 8,309,005 12.68%
Richard Rotman 10,155,451 15.49%
John Martin 1,199,292 (1) 1.83
Andrew Pilaro 51,500 *
All directors and 19,715,248 30.08%
officers as a group
---------------------------
* Represents less than 1%
(1) Includes 265,375 currently exercisable options to purchase shares of our
common stock.
-36-
To the knowledge of Management, as of August 29, 2001, there are no
persons and/or companies who or which beneficially own, directly or indirectly,
shares carrying more than 5% of the voting rights attached to all outstanding
shares of Sales Online, other than Gregory Rotman and Richard Rotman, as set
forth above, and the following persons:
Name and Address of Number of Shares % of
Beneficial Owner Beneficially Owned Class
---------------- ------------------ -----
Marc Stengel 9,621,119 (1) 14.68%
3743 Birch Lane
Owings Mills, MD 21117
Hannah Kramer 5,139,337 7.84%
673 Korisa Drive
Huntingdon Valley, PA 19006
-----------------------
(1) Based solely upon the Form 4 filed with the SEC by Mr. Stengel on
August 7, 2001.
DESCRIPTION OF BUSINESS
History of the Company
After its formation on August 9, 1995 as Rose International Ltd., our
company acted primarily as a non-operating holding company overseeing the
operations of its subsidiaries and joint ventures.
On June 5, 1998, the company acquired 82.02% of the issued and outstanding
common stock of the Accord Group, Inc., a Delaware corporation, located in Port
Washington, New York and on July 8, 1998, changed its name to Securities
Resolution Advisors, Inc. ("SRAD"). Accord, through its operating subsidiary
Securities Resolution Advisors, Inc., a New York corporation ("SRA"), served
members of the investing community who had lost money due to the advice, lack of
fiduciary responsibility or fraudulent practices of brokers and broker dealers.
The acquisition was accounted for utilizing the purchase method of accounting,
wherein the assets of the company were recorded at fair value and the operations
of Accord have become the historical operations of the company. The company
issued 8,000,000 shares common stock to three individuals in exchange for
8,000,000 shares (82.02%) of the common stock of Accord. In December 1998, as a
part of a restructuring, SRA became a wholly owned subsidiary of SRAD, and the
company sold Accord, which had no other assets, for $40,000.
On February 24, 1999, the company sold its then existing business to
Richard Singer, the former president of the company and a principal beneficial
owner of the common stock, in exchange for 8,000,000 shares of common stock, all
of which were cancelled. On February 25, 1999, the company purchased the
outstanding common stock of Internet Auction, Inc., a Massachusetts corporation
("Internet Auction") principally from Gregory Rotman, Richard Rotman, Marc
Stengel and Hannah Kramer, stockholders of Internet Auction. The purchase was in
exchange for the issuance to the shareholders of Internet Auction of an
aggregate of 37,368,912 unregistered shares, representing approximately 80%, of
our common stock. At the time that the transaction was agreed upon by the then
current management of the company, the average price of the common stock was
approximately $.28 per share, or a total value of approximately $10,463,295,
assuming no discounts for the restricted nature of the stock. As a result of the
transaction, Internet Auction became a wholly-owned subsidiary of Sales Online,
the principal shareholders of Internet Auction own approximately 80% of our
issued and outstanding common stock, and the principal business of Sales Online
became the business of Internet Auction. After the transaction, the company
changed its name to Sales Online Direct, Inc.
In accordance with the transaction agreement, after the transaction, the
Internet Auction shareholders were appointed to our Board of Directors, and the
previously serving directors resigned from the Board.
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The following is a description of the company's business after the
transaction with Internet Auction and its evolution into its current business.
Our Business
Our primary business is to maintain a collectibles portal, offering
integrated information and services to the collectibles community, and to
operate an online auction site that provides a full range of services to sellers
and buyers. A portal is an Internet website that enables visitors to search for
and visit other related sites, access related services and obtain relevant data.
The collectibles industry includes every person that collects items having
either economic or sentimental value, such as antiques, sports and entertainment
memorabilia, stamps, coins, figurines, dolls, collector plates, plush and die
cast toys, cottage/village reproductions and other decorative or limited edition
items that are intended for collecting and other memorabilia.
Currently, substantially all (98%) of our revenues are derived from our
auction services, conducted through our Rotman Auction operation. Rotman Auction
is an auction house that has provided a full range of services to sellers and
buyers, including live online bidding of premier collectibles, authentication of
merchandise, digital photography, fulfillment of orders and the purchase and
sale of authentic memorabilia. Our auctions consist of sports and non-sports
cards, collectibles, autographed items, movie memorabilia and more from the
1800's to the present day. This division also maintains a substantial inventory
of memorabilia with popular and historical significance which allows customers
to directly purchase the memorabilia without the competition from bidders in an
auction format. We have acquired this inventory in the ordinary course of our
business from a number of various companies and individuals and we generally
turn around inventory on an average of 14 days after we have purchased it. We
also list some of our collectibles inventory for sale at auction on eBay.com, a
person-to-person auction service. Merchandise is also auctioned by Rotman
Auction under consignment-type arrangements with the public where we receive a
15% fee that is paid to us from the final sale of the merchandise. Of the
revenues generated by our Rotman Auction operations, approximately 96% are
derived from sales of our own inventory and approximately 4% are derived from
sales of merchandise under consignment.
We also design, host and maintain client websites primarily in the
sports and collectibles industry. Our software allows clients to operate online
stores, set prices and sell directly to online shoppers. To attract collectors
of sports memorabilia, our websites include live sports scores, live internet
chat rooms, and a full listing of stadiums and arenas with seating charts,
directions, team schedules, addresses and telephone numbers of major league
professional sports teams. We also offer online appraisals, online realized
pricing and an online antiques and collectibles resource directory. We charge a
fixed monthly fee for our web hosting services. For consulting services, our
customers are billed monthly at an hourly rate based on the number of hours of
service performed for the customer.
Immediately following the transaction with Internet Auction, our mission
was to offer a branded network of comprehensive shopping services to buyers and
sellers of collectibles. This was accomplished through our four main business
divisions: Rotman Auction, World Wide Collectors Digest (web design, web hosting
and sports and collectibles information), Internet Auction (an online
person-to-person auction site), and Internet Collectibles (a wholesale and
retail collectibles business that maintained a substantial inventory of
memorabilia). We then decided to streamline our operations, clarify our business
model and focus on the creation of a multi-faceted internet collectibles
marketplace. As a result, the inventory from Internet Collectibles was
consolidated into our Rotman Auction operation, and, because of intense
competition in the person-to-person auction market, we eventually eliminated
this form of auction service provided by the Internet Auction division.
In order to create a comprehensive Internet collectibles community, in
January 2000 we launched a collectibles portal under the name Collecting
Exchange. The Collecting Exchange contains a search engine devoted specifically
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to collecting, memorabilia, antiques, collectibles and other information and
services. The portal searches and collects information from every collectible
site on the Internet and stores it in site's database. The Collecting Exchange
also contains dealer and storefront databases, stadiums and arenas information,
sports events and dates, and other services and information of interest to the
collecting industry. In February 2000, we launched the resource area, a place
for consumers to locate websites on experts, museums, insurance, appraisers,
galleries, and dealers. With the installation of the resource area, we had
completed the first phase of the Collecting Exchange.
In November 2000, we acquired certain assets from ChannelSpace
Entertainment, Inc., a Virginia corporation ("CSEI") and Discribe, Ltd.,
("Discribe") a Canadian corporation wholly owned by CSEI. CSEI and Discribe are
Internet content providers and producers of affinity portals, including the
CollectingChannel.com and the CelticChannel.com websites. The
CollectingChannel.com is an online and broadcast destination targeting
consumers, dealers and manufacturers in the collecting marketplace. Television
is a particular type of broadcast media. When we refer to "online and broadcast
destinations," consumers or viewers will be coming to the CollectingChannel.com
to view the 19,000 minutes of video archives that we acquired. Therefore, the
Collecting Channel is not only an online destination for content such as
articles and news, but also a broadcast destination to view video archives.
Currently, visitors can view some video on the collectingchannel.com, but they
do not have complete access to the full video archive library yet.
The Collecting Channel features extensive coverage of all aspects of
collecting from its eight micro-channels devoted to Antiques, Entertainment,
Jewelry/Gems, Stamps/Coins, Collectibles, Glass/Pottery, Toys/Dolls and Sports.
By combining our Collecting Exchange portal with the Collecting Channel
information libraries, we have created a comprehensive collectibles site,
offering such services as web searching, broadcast services, appraisal and
valuation information, auction site sign-ins, price guides, shopping and
classified ads. The CollectingChannel has approximately 15,000 articles, 6,000
minutes of video, and 150,000 items in the realized pricing database archived in
various collecting databases and available on the website. The consideration we
paid for the acquired assets was 7,350,000 unregistered shares of our common
stock, valued at $4,648,996, and $300,000 worth of our common stock which is to
be registered. On February 6, 2001, the Company filed a registration statement
on Form SB 2 covering 716,435 shares of common stock. That registration
statement has not been declared effective by the SEC.
Our new combined collectibles marketplace has now evolved into a
"collectibles community," which was introduced at the end of 2000. Through this
community, we make available to visitors a number of service and amenities
consisting primarily of (1) the collectibles portal, (2) online appraisal
services and (3) a research center.
Portal. Visitors to our new website at "www.collectingchannel.com" will be
able to use the collectibles portal as a source for obtaining collectibles
information to help them make informed decisions about price, authenticity and
trading sites. The site is also intended to provide users with a comprehensive,
one-stop shopping collectible experience, linking top collectible sites to
buyers and sellers around the world to facilitate the purchase and sale of
collectibles. We believe that as a result, our site not only meets the needs of
the collector, but also the needs of dealers and manufacturers.
Appraisal Services. As part of the services we make available on our site,
we also offer a completely interactive and dynamic appraisal service to our
customers. The appraisal area permits visitors to send us an image in order to
obtain an online appraisal of their item for a fee of $19.95 per appraisal. This
service enables visitors to make informed decisions regarding their purchases,
and helps sellers define the prices for their goods.
Research Center. Our research center enables users to obtain historical
pricing information, view actual images, access experts on authentication and
visit websites regarding the collectibles articles they are researching. Our
site will allow a visitor to validate that a particular collectible item exists,
and provide access to services that can authenticate that the item is genuine.
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As a means of preventing the purchases of fraudulently sold items, we have
designed this site to provide visitors with the research tools to complete
transactions based on the most accurate, verified material available. The
research center enables users to validate the authenticity of items by
researching the history of a particular item and validating the existence of
that item. Further, to the extent that the user desires to validate the
authenticity of that particular item, the user could trace the ownership of the
item or the previous sales history. Authenticity can further be determined by
searching dealer sites for similar items or communicating directly with dealers
regarding the origin, price, and history of the item. Finally, by enabling the
user to verify prices of that item or other similar items, the user will be able
to obtain information necessary to strike a realistic bargain.
Other Amenities. The website also includes a shopping area (cMart), which
currently lists approximately 1,000 items for sale, and other amenities such as
chat rooms, message boards, a classified posting area, and an information area
regarding auctions. The My Collecting(TM) area of the website enables users to
create and customize their own collecting pages, with personalized news, video,
chat capability, wish lists and access to an extensive database of reference
materials. The website also includes MaloneysOnline, a clearinghouse for hard to
find information that contains the searchable Internet version of the book
Maloney's Antiques and Collectibles Resource Directory.
We recently made significant improvements to our website by optimizing our
own proprietary software to permit the search engine to obtain faster results
with greater accuracy. By the end of the third quarter, we plan to update our
video archives to include all old videos. Our users were not very receptive to
our beta test of the charting of historical data. We are seeking a new
alternative and are hoping we will have a solution in place by the end of the
third quarter. Such improvements will be contingent upon available financing.
As set forth above, we currently generate substantially all (98%) of our
revenues from Rotman Auction. We are generating minimal revenue from website
hosting and the appraisal services on the CollectingChannel.com. As our
structure evolves and our site becomes more popular and attracts more visitors,
we expect that our revenue model will change, with increased revenues from web
hosting and appraisal services, as well as earning revenue from banner
advertising, product listings in our shopping area and charging membership fees
for using certain aspect of the Collecting Channel. See "Business Strategy,"
page 41.
Our main web address is located at www.paid.com, which offers updated
information on various aspects of our operations, as well as access to our three
primary collectibles sites: www.rotmanauction.com, and
www.collectingexchange.com and www.collectingchannel.com. We also maintain a
website called World Wide Collectors Digest ("WWCD") at www.wwcd.com, which
provides sports information, listings of stadiums and arenas, live chat rooms
and other sports-related information.
Industry Background
Growth of the Internet and the Web
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation ("IDC") has estimated that the number of Web
users worldwide will grow from approximately 142 million in 1998 to
approximately 502 million by the end of 2003. The growth in the number of Web
users is being driven by the increasing importance of the Internet as a
communications medium, an information resource, and a sales and distribution
channel. The Internet has also evolved into a unique marketing channel. Unlike
the traditional marketing channels, Internet retailers do not have many of the
overhead costs borne by traditional retailers. The Internet offers the
opportunity to create a large, geographically dispersed customer base more
quickly than traditional retailers. The Internet also offers customers a broader
selection of goods to purchase, provides sellers the opportunity to sell their
goods more efficiently to a broader base of buyers and allows business
transactions to occur at all hours.
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Growth of the Collectibles and Online Auction Industries
Sales Online serves both the collectibles and online auction industries.
Collectibles Industry Report, 2000, published by Unity Marketing, a collectible
industry market research firm, recently reported that the total market of
collectors grew to 40 million adult collectors in 1999, up from 37 million in
the previous year. In Internet Collector Market: Latest Trends in How Collectors
Are Using the Internet, Unity Marketing reveals that in the past year, 17.5
million American collectors used the Internet, which is an increase of 75% from
the 10 million who had used it by the end of 1998. Additionally, Unity Marketing
expects that the number of collectors that use the Internet to increase by 50%
by year-end 2001. Unity Marketing currently estimates that women between the
ages of 35 and 64, with a median age of 51, encompass the majority of
collectors. This group is projected by the U.S. Census Bureau to grow
approximately 12% from 1998 to 2005. Unity Marketing expects that growth in the
collectibles industry will be driven by the increased number of middle-aged
female collectors and higher spending habits of the baby boom generation. The
new demographics have also created a shift in interest from traditional
collectibles to products that meet the demands of this generation of collectors.
Collectibles Industry Report, 2000 reports that the two largest categories of
collectibles, figurines and dolls, experienced a significant drop in sales. This
decrease in sales suggests that collectors are satisfying their collecting
passion with other type of collectibles. In 1999, collectible-type ornaments,
boxes and musicals were the fastest growing product categories.
The online auction industry is also large and rapidly growing and is
expected to become a permanent player in e-commerce. The IDC, in Online
Auctions: The New E-Commerce Enabler, explained how online auctions resolve the
weaknesses of traditional auctions (i.e. limited geographical coverage, a dearth
of product variety, high transaction costs and information inefficiency). The
Internet overcomes these issues because it can handle large quantities of data
and support an infinite number of products and services. It also allows buyers
and sellers to trade on a global basis.
Business Strategy
We believe that the collectibles market will continue to grow as a result
of increased nostalgia for memorabilia, an increase in leisure and disposable
income, the desirability of owning collectibles and investor confidence that
collectibles will appreciate in value. It is our view that this growth in the
Internet collectibles market is dependent upon the availability of reliable
authentication and grading services, authoritative information necessary to
value collectibles and trading forums or venues that enable buyers and sellers
of collectibles to maximize the value of their collectibles. We have therefore
designed our Collecting Channel website to accommodate these concerns for
collectors and auction participants.
Our goal is to become the premier Internet collectibles site. In order to
achieve this goal, we are planning steps to implement the following business
strategy:
o Continue producing revenue from sales through Rotman Auction, but reducing
the number of auctions held per year through Rotman Auction and increasing
the amount of collectibles inventory sold on eBay in order to obtain higher
profit margins by reducing the costs of producing and mailing catalogs and
advertising for our own auctions. Items we sell through eBay have a much
quicker turnaround time than those sold through our catalog auctions, and
because the eBay sales are highly automated, the sales require less
personnel to complete the sale;
o Increase the volume of our online appraisals through more effective and
efficient advertising and promotions;
o Sell banner advertising by charging a fee for every thousand clicks per
banner, with the fee varying depending on the placement of the banner
(i.e., a banner on our site's homepage would cost more per 1000 hits than a
banner placed throughout the site);
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o Increase our web hosting services, charging a one time set up fee plus
monthly maintenance fees, and an hourly fee for any design or feature
enhancements we make;
o Impose annual fees for dealers and stores listing products on our shopping
area;
o As the number of visitors to our site increases, impose monthly/annual
membership fees.
As we evolve into a membership based site, we intend to provide
unlimited search capability and access to our realized price guides to our
members only. While visitors will still be permitted limited use of our research
center, extensive searches and comprehensive pricing data will be available only
to those who pay our monthly/annual membership fees. For example, we may permit
visitors to search data that covers only the past 30 days; however, if a visitor
wanted to obtain further historical pricing information, he or she would have to
join the site and pay the membership fee to access this data. We hope to begin
charging membership fees by January 2002. We believe that our current number of
unique visitors to the site represents approximately 25% of the number of
visitors we will need to begin charging membership fees.
We expect that the above approach will provide us with the ability to
continue to produce revenues through our Rotman Auction operations while we
begin growing our business through the Collecting Channel site. This will also
provide sufficient time for our website enhancements. During this research and
development period, we expect to implement an innovative marketing and sales
campaign. This campaign will focus on building our advertising and sponsorship
base as well as implementing a more traditional media buying strategy.
The business strategy described above is intended to enhance our
opportunities in the collectibles market. However, there are a number of factors
that may impact our plans and inhibit our success. See "Risk Factors" beginning
on page 5. Therefore, we have no guarantees an can provide no assurances, that
our plans will be successful.
Marketing and Sales
The success of the Collecting Channel is contingent upon the visibility it
will receive on the Internet and the revenues generated by advertising and
services. Successful branding of our corporate identity and services is the key
to our success.
Our marketing will be designed to position Sales Online as the premier
collectibles site on the Internet. We will target both traditional collectors as
well as the new generation of collectors (as previously described in "Industry
Background"). We will also target dealers, licensors, licensees, distributors
and others to host collectible pavilions and other e-commerce sites and
storefronts.
Marketing Internet companies is a relatively new phenomenon. Whereas
earlier Internet advertising was mostly accomplished through banner advertising,
the industry is now marketing websites through a combination of online
advertising and more traditional media and direct mail advertisement. We are
adopting this approach in our marketing campaign.
Our advertising to date has been limited to very selective collectibles
trade magazines. We believe that by advertising in a broader range of these
magazines that we will be able to increase our exposure substantially. We will
also need to expand our advertising arrangements with auction sites and other
companies in the sports and collectibles arena. These website advertising
arrangements will include mutual linking arrangements, such as other companies
linking to our site and our site linking to the sites of those companies.
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Although we believe that this marketing strategy will attract more users to
our site, we have no commitments that our marketing will be successful or our
sales will increase. There are a number of factors that may impact our plans and
inhibit our success. See "Risk Factors" beginning on page 5. Therefore, we have
no guarantees an can provide no assurances, that our plans will be successful.
Revenue Sources
Following the transaction with Internet Auction on February 25, 1999, we
primarily generated revenue from sales of our purchased inventory and from fees
and commissions on sales of merchandise under consignment arrangements. We
charge a 15% fee for listing items on consignment. Currently, 98% of our
revenues are derived from our Rotman Auction operations. Of these revenues,
approximately 96% are attributable to sales of our purchased inventory and 4%
are attributable to fees and commissions generated on sales of merchandise under
consignment. However, we anticipate that future sources of revenue generation
will include advertising revenue and service revenue, particularly through the
sale of pavilion spots and referral links. Pavilion spots are company
sponsorships that we will sell. These sponsorships give companies exclusive
storefront rights for their collectible category. For example, if Sony were to
purchase a pavilion, it would host the only area on collectingchannel.com
dealing with music and music videos. In the Sony pavilion, visitors would be
able to research the history of these items, the historical pricing of these
collectibles, read articles and communicate with experts on authentication.
Visitors would also be provided with referral links to Sony and other sites for
purchase of merchandise.
It is anticipated that referral links may also become a source of
advertising income for the company. Sellers of merchandise will pay us for
listing their storefronts on www.collectingchannel.com. When a site visitor
requests a search for a collectible item, we will provide the visitor with a
direct link to the seller's pavilion area or website, thus driving the sale.
This referral link is the manner in which the seller can obtain visibility for
their collectible item. In addition to pavilions and referral links, advertising
revenues may also come from targeted banner advertising and general banner
advertising.
In terms of services, we currently provide web hosting and have recently
added appraisal services. To date, we have generated minimal revenues from these
services, but we expect that once we secure additional financing and can
increase our advertising and marketing efforts, we will attract more visitors
that will utilize these services on our site. As discussed in "Business
Strategy," page 41 we also expect to derive revenues from membership fees
charged for accessing certain aspects of the Collecting Channel and fees from
stores listing merchandise in our shopping area. In addition to web hosting, we
expect to increase revenues through the development and design of third party
websites. We have an interactive services agreement with AOL Canada pursuant to
which we handle the content and maintenance of the website www.tartans.com (AOL
keyword: clans) and we are trying to capitalize on that agreement by promoting
our products and services on www.tartans.com selling advertising space and
company owned product.
We also have an agreement with Krause Publications, pursuant to which
Krause Publications prints Maloney's Antiques and Collectibles Resource
Directory and we will receive a percentage of the sales revenues from the book
sales. We own "www.MaloneysOnline.com," a clearinghouse for hard to find
information that contains the searchable Internet version of the resource
directory.
Although we expect that this revenue model will generate increased revenue,
if we are not successful in implementing this model, if the collectibles
community is not accepting of the services we provide, if costs are higher than
anticipated, or if revenues do not increase as rapidly as anticipated, we may
not be able to achieve profitability. There are a number of factors that may
impact our plans and inhibit our success. See "Risk Factors" beginning on page
5. Therefore, we have no guarantees and can provide no assurances, that our
plans will be successful.
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Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive. Furthermore, we expect competition to intensify in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software. Our
Rotman Auction operation competes with a variety of other companies depending on
the type of merchandise and sales format offered to customers. These competitors
include: (i) various Internet auction houses such as eBay, Amazon, ONSALE, uBID,
Yahoo! Auctions, First Auction, Surplus Auction, WebAuction and Insight Auction;
(ii) a number of indirect competitors that specialize in electronic commerce or
derive a substantial portion of their revenue from electronic commerce,
including Internet Shopping Network, AOL, Shopping.com and Cendant Corp.; and
(iii) a variety of other companies that offer merchandise similar to that of our
company but through physical auctions.
In addition, several large companies sell specialty consumer products,
including collectibles through interactive electronic media, including
broadcast, cable and satellite television and, increasingly, the Internet. These
companies include QVC, Home Shopping Network and Shop At Home. They generally
have substantial financial resources and, while their current collectible
offerings tend to be less focused than our collectible offerings, there can be
no guarantee that they will not become significant competitors in the future.
Because our collectibles portal structure is not a buyer or seller of
collectibles, it is not in direct competition with existing collectible or
online auction sites. The portal will not compete with either the giants or the
small players in the collectibles auction and e-commerce industries; rather, we
will work in collaboration with these companies. Further, because the research
capacity of the new website will be able to validate the authenticity of
collectible items by providing visitors with the research tools to complete
transactions based on the most accurate, verified material available, we believe
other sites will value its services. We will, however, compete for banner
advertisements with other portals that offer shopping search engines, including
MySimon.com, Yahoo! Shopping and IWon.com.
Since the launch of the collectingexchange.com website in January of 2000
we have been building a micro-portal, which is a portal specific to a particular
subject. As a micro-portal we are specific to the collecting industry. By
acquiring the assets of CSEI and Discribe, we believe we have created an
extremely comprehensive and informative website for collecting on the Internet
and have eliminated a strong source of competition as a search engine. However,
our Rotman Auction operations will still continue to face the competition
discussed above. As our model evolves and revenues increase from our other
services provided on the Collecting Channel, we intend to decrease our reliance
on Rotman Auction for revenues. Additionally, we have reduced the number of
auctions hosted by Rotman Auction, limiting them to significant dates or events,
and sell more inventory on other auction sites so we are not directly competing
with those companies in the industry that are utilizing our Collecting Channel
services.
There can be no assurance that we can maintain our competitive position
against potential competitors, especially those with greater financial,
marketing, customer support, technical and other resources than us. Increased
competition is likely to result in reduced operating margins, loss of market
share and a diminished brand franchise, any one of which could materially
adversely affect the our business, results of operations and financial
condition.
Intellectual Property
Our web hosting and research center software programs are proprietary. We
do not have any patents for our designs or innovations and we may not be able to
obtain copyright, patent or other protection for our proprietary technologies or
for the processes developed by our employees. Legal standards relating to
intellectual property rights in computer software are still developing and this
area of the law is evolving with new
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technologies. Our intellectual property rights do not guarantee any competitive
advantage and may not sufficiently protect us against competitors with similar
technology.
To protect our interest in our intellectual property, we also have
non-disclosure agreements with our employees and we restrict access by others to
our proprietary software.
We believe that our products and other proprietary rights do not infringe
on the proprietary rights of third parties. However, we are a recent entrant in
the sale of merchandise on the Internet, and there can be no assurance that
third parties will not assert infringement claims against us in the future with
respect to current or future products or other works of ours. Such an assertion
may require us to enter into royalty arrangements or result in costly
litigation.
We are also dependent upon existing technology related to our operations
that we license from third parties. We license our portal technology from
Verity, Inc. When we acquired the assets of the Collecting Channel we were
granted two perpetual licenses for the proprietary software eCMS and we acquired
the source codes for the software. This technology replaced our portal
technology from Verity. Therefore, we have eliminated our dependency on Verity's
license for future updates. eCMS is the content management system primarily used
by www.collectingchannel.com We rely on encryption and authentication technology
licensed from VeriSign through an online user agreement to provide the security
and authentication necessary to effect secure transmission of confidential
information.
We cannot make any assurances that these third-party technology licenses
will continue to be available to the company on commercially reasonable terms.
Our inability to maintain or obtain upgrades to any of these technology licenses
could result in delays in completing our proprietary software enhancements and
new developments until equivalent technology could be identified, licensed or
developed and integrated. Any such delays would materially adversely affect our
business, results of operations and financial condition.
We also utilize free open-source technology in certain areas. Unlike
proprietary software, open-source software has publicly available source code
and can be copied, modified and distributed with minimal restrictions. Our
principal web servers' software is Apache, a free web server software. We are
using PHPShop for our e-commerce to provide highly customizable storefronts. In
addition to PHPShop we develop a substantial portion of our websites with the
language PHP.
Research and Development
Over the past 18 months we invested approximately $350,000 into the
Collecting Exchange web site for design, graphics, labor and various software
components. We licensed Shopzone, an e-commerce software system, for $30,000
that will allow our merchant customers to create and manage their own storefront
on the web. An additional $10,000 was paid to Breakthrough for the source code.
We spent $200,000 to design and install a highly scalable, reliable and secure
network/communications infrastructure to sustain our anticipated web traffic
going forward. Other labor and consulting fees amounted to $250,000 for system
security and integrity.
Employees
We currently employ 18 full-time personnel. We believe that our future
success will depend in part on our continued ability to attract, hire and retain
qualified personnel.
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Government Regulation
We are not currently subject to direct federal, state or local regulation,
and laws or regulations applicable to access or commerce on the Internet, other
than regulations applicable to businesses generally. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our financial statements and notes thereto included elsewhere in this
prospectus contain detailed information that should be referred to in
conjunction with the following discussion.
OVERVIEW
Our primary business, based on our revenues, is the purchase and sale of
collectibles and memorabilia. We operate an online auction site that provides a
full range of services to sellers and buyers, and maintain multiple collectibles
portals, offering integrated information and services to the collectibles
community. The collectibles industry includes every person that collects items
having either economic or sentimental value, such as antiques, sports and
entertainment memorabilia, stamps, coins, figurines, dolls, collector plates,
plush and die cast toys, cottage/village reproductions and other decorative or
limited edition items that are intended for collecting and other memorabilia. A
portal is an Internet website that enables visitors to search for, and visit,
other related sites, access related services, and obtain relevant data. Over the
past two years, we have been working on the development and technology of
building portals. Our main focus was portal development in our own industry of
collectibles; to that end, we acquired assets from ChannelSpace Entertainment,
Inc. ("CSEI") that include www.CollectingChannel.com. We plan to converge our
multiple sites into one integrated site in 2001. We also plan to build other
portals, some that will charge fees to access their services, and others to
leverage company-owned technology and websites.
QUARTER ENDED JUNE 30, 2001
Results of Operations for Three Months Ended June 30, 2001
The following discussion compares our results of operations for the three
months ended June 30, 2001 with those for the three months ended June 30, 2000.
Our financial statements and notes thereto included elsewhere in this report
contain detailed information that should be referred to in conjunction with the
following discussion.
Revenue. For the three months ended June 30, 2001, revenue was $189,700,
97% of which is attributable to sales of our own product and fees from buyers
and sellers through the Rotman Auction operations. Gross sales of our own
product were approximately $160,800; gross sales on items on consignment were
approximately $15,900, of which we received approximately $2,400 as fees for
listing the merchandise. Sales of our own product represented 79%, and sales of
consignment merchandise represented 8%, of gross sales, but, because we only
receive a fee for sales on consignment sales, sales of our own product
represented 85%, and sales on consignment represented 1%, of our revenue. Web
hosting and advertising fees were approximately $26,500.
Our 2001 second quarter revenues represent an increase of $46,300 from the
three-month period ended June 30, 2000, in which revenue was approximately
$144,000. For the three month period ended June 30, 2000, sales of our own
product were approximately $100,900 and sales of items on consignment were
approximately $227,100, of which we received approximately $34,000 as fees. For
that quarter, sales of our own product represented 31%, and sales of consignment
merchandise represented 69%, of gross sales, but, because we only receive a fee
for sales on consignment sales, sales of our own product represented 75% and
sales on consignment represented 25% of our revenue. There were no web hosting
or advertising revenues during the quarter ended June 30, 2000.
The reason for the increase in revenues was a combination of higher sales
of company owned product of approximately $60,000 from the same period in 2000
and an increase of $26,500 in web hosting and advertising revenues, offset by
lower sales of consignment goods which decreased revenues by $31,700.
-47-
We had more quality items available for sale. Gross profit from company owned
product sales for the three months ended June 30, 2001 was $93,900, representing
an increase of $156,600 from the comparable quarter in 2000, in which gross
profit (loss) from company owned product sales was $(62,700). Gross margin
percentages on company owned product were substantially higher primarily because
of higher quality product and more selective purchasing.
Operating Expenses. Total operating expenses for the three months ended
June 30, 2001 were approximately $955,800, compared to $883,800 for the
corresponding period in 2000. Selling, general and administrative ("SG&A")
expenses for the three months ended June 30, 2001 were approximately $750,000,
compared to $736,300 for the three months ended June 30, 2000. Administrative
and non-technical payroll related costs increased by approximately $32,900 over
the quarter ended June 30, 2000. Depreciation and amortization increased by
approximately $249,700 due to intangible and tangible assets acquired
principally with the transaction with CSEI. Professional fees decreased by
$153,700, primarily attributable to a decrease in costs associated with our
ongoing litigation. Marketing and advertising costs decreased by approximately
$28,100 from the three months ended June 30, 2000. Marketing expenses were
primarily attributable to print and online marketing and advertising programs
designed to create brand awareness for our online sites. We decreased our
marketing expenses in an effort to conserve cash. We plan to seek additional
financing that will enable us to increase our marketing and advertising
activities to attract more visitors to our websites.
Costs associated with planning, maintaining and operating our websites for
the three months ended June 30, 2001 increased approximately $58,400 from the
corresponding period in 2000. This increase is due primarily to increases in
payroll and related costs of approximately $99,400, professional fees of
approximately $22,200 and depreciation of $15,200, offset by a decrease in
computer expenses of $58,400.
Interest Expense. For the quarter ended June 30, 2001, we incurred interest
charges of approximately $146,000 associated with the issuance of a $3,000,000
convertible note and warrants, and the loan payable to Augustine Fund, L.P.,
compared to interest charges of $147,500 for the corresponding period in 2000.
Net Loss. We realized a net loss for the three months ended June 30, 2001
of approximately $979,000, or ($.02) per share, as compared to a loss of
$1,043,000, or ($.02) per share, for the three months June 30, 2000.
Inflation. We believe that inflation has not had a material effect on its
results of operations.
Results of Operations for Six Months Ended June 30, 2001
The following discussion compares our results of operations for the six
months ended June 30, 2001, with those for the six months ended June 30, 2000.
Our financial statements and notes thereto included elsewhere in this report
contain detailed information that should be referred to in conjunction with the
following discussion.
Revenue. For the six months ended June 30, 2001, revenue was $576,600, 91%
of which is attributable to sales of our own product and fees from buyers and
sellers through the Rotman Auction operations. Gross sales of our own product
were approximately $510,100; gross sales on items on consignment were
approximately $96,600, of which we received approximately $14,500 as fees for
listing the merchandise. Sales of our own product represented 77%, and sales of
consignment merchandise represented 15%, of gross sales, but, because we only
receive a fee for sales on consignment sales, sales of our own product
represented 88%, and sales on consignment represented 3%, of our revenue. Web
hosting and advertising fee revenues were approximately $52,000.
Our revenues for the six months ending June 30, 2001 represent an increase
of $30,000 from the six-month period ended June 30, 2000, in which revenue was
approximately $546,100. For the six month period ended June 30, 2000, sales of
our own product were approximately $496,600 and sales of items on consignment
were approximately $273,700, of which we received approximately $41,100 as fees.
-48-
For that period, sales of our own product represented 64%, and sales of
consignment merchandise represented 36%, of gross sales, but, because we only
receive a fee for sales on consignment sales, sales of our own product
represented 92% and sales on consignment represented 8% of our revenue. There
were no web hosting or advertising revenues during the six months ended June 30,
2000.
The reason for the increase in revenues was a combination of higher sales
of company owned product of $13,500 from the same period in 2000 and an increase
of approximately $52,000 in web hosting and advertising revenues, offset by
lower sales of consignment goods which decreased revenue by approximately
$26,600. We had a higher number of quality items available for sale. Gross
profit from company owned product sales for the six months ended June 30, 2001
was $280,900, representing an increase of $136,800 from the comparable period in
2000, in which gross profit from company owned product sales was $144,100. Gross
margin percentages on company owned product were substantially higher primarily
because of higher quality product and more selective purchasing.
Operating Expenses. Total operating expenses for the six months ended June
30, 2001 were approximately $2,085,900, compared to $1,570,700 for the
corresponding period in 2000. SG&A expenses for the six months ended June 30,
2001 were approximately $1,709,500, compared to $1,222,800 for the six months
ended June 30, 2000. The increase in SG&A costs includes an increase in
professional fees of $63,820, which are primarily attributable to our ongoing
litigation. Administrative and non-technical payroll related costs increased by
approximately $75,200 over the six month period ended June 30, 2000.
Depreciation and amortization increased by approximately $535,700 due to
intangible and tangible assets acquired principally in the transaction with
CSEI. Marketing and advertising costs decreased by approximately $86,100 from
the six months ended June 30, 2000. Marketing expenses were primarily
attributable to print and online marketing and advertising programs designed to
create brand awareness for our online sites. We decreased our marketing expenses
in an effort to conserve cash. We plan to seek additional financing that will
enable us to increase our marketing and advertising activities to attract more
visitors to our websites.
Costs associated with planning, maintaining and operating our websites for
the six months ended June 30, 2001 increased approximately $28,400 from the
corresponding period in 2000. This increase is due primarily to increase in
payroll and related costs of approximately $174,700 and depreciation of $28,400,
offset by decreases of $79,000 in computer fees, $38,400 in consulting fees, and
$35,000 in professional fees.
Interest Expense. For the six months ended June 30, 2001, we incurred
interest charges of approximately $293,800 associated with the issuance of a
$3,000,000 convertible note and warrants, and the loan payable to Augustine
Fund, L.P., compared to interest charges of $1,162,400 for the corresponding
period in 2000.
Net Loss. We realized a net loss for the six months ended June 30, 2001 of
approximately $2,030,000, or ($.04) per share, as compared to a loss of
$2,519,700, or ($.05) per share, for the six months ended June 30, 2000.
Inflation. We believe that inflation has not had a material effect on its
results of operations.
-49-
YEAR ENDED DECEMBER 31, 2000
Results of Operations
The following discussion compares our results of operations for the year
ended December 31, 2000, with those for the year ended December 31, 1999.
Revenue. For the year ended December 31, 2000 revenue was approximately
$1,298,000, 98% of which is attributable to sales of our own product and fees
from buyers and sellers through the Rotman Auction operations. Gross sales of
our own product were approximately $1,211,000; gross sales of items on
consignment totaled approximately $576,000, of which we received $86,000 as fees
for listing the merchandise. Sales of our own product represented 68%, and sales
of consignment merchandise represented 32%, of gross sales, but, because we only
receive a fee for sales on consignment, sales of our own product represented 93%
and sales on consignment represented 7% of our revenue.
Our 2000 revenues reflect an increase of approximately $295,000, or 29%,
from the year ended December 31, 1999 in which revenue was $1,003,000. For the
year ended December 31, 1999, sales of our own product were approximately
$890,000 and sales of items on consignment were approximately $754,000, of which
we received approximately $113,000 as fees. For that year, sales of our own
product represented 54% and sales of consignment merchandise represented 46% of
all sales, but sales of our own product represented 89% and sales on consignment
represented 11% of our revenue.
The primary reason for the increase in revenues is that we are focused on
selling higher end, more expensive auction lots at a quicker turnover rate. More
of our sales now consist of product owned by our company rather than consignment
sales. Gross loss from company owned product sales for the year ended December
31, 2000 was ($177,000), which represents a decrease of $361,000 from the year
ended December 31, 1999. In addition, we generated commissions on consignment
sales of $86,000, resulting in a total gross loss of ($91,000), compared to
$113,000 in commissions on consignment sales and a gross profit of $297,000 for
the year ended December 31, 1999. The decrease in gross profit is a result of
our attempt to achieve a higher turnover of our inventory by selling more
products in bulk as well as a write down or inventory of $200,000 due to excess
quantities and changes in market conditions.
While we plan to continue to enhance our web properties, we will do so
gradually over time so that we minimize the need for capital investment. Until
the Collecting Channel and our other web sites become revenue generating, our
revenues will continue to be derived almost entirely from Rotman Auction,
particularly sales of our own product. In the future, it is likely that we will
continue to focus more of our resources on our Rotman Auction.
Operating Expenses. Operating expenses during the year ended December 31,
2000 were $3,849,000 compared to $2,460,000 for the year ended December 31,
1999. The increase in operating expenses includes an increase in professional
fees of $633,000, which is primarily attributable to our ongoing litigation.
Marketing and advertising costs decreased by approximately $122,000 from the
year ended December 31, 1999. Marketing expenses were primarily attributable to
print and online marketing and advertising programs designed to create brand
awareness for our online sites. We decreased our marketing expenses in an effort
to conserve cash. We plan to seek additional financing that will enable us to
increase our marketing and advertising activities to attract more visitors to
our websites. See "Working Capital and Liquidity." Costs associated with
planning, maintaining, and operating our web sites increased $133,000,
principally in payroll costs. This increase includes an increase in option
compensation of $46,000, as the year ended December 31, 2000 contained a full
year for this expense compared to a partial year in 1999. Also, in the last
fiscal year, we incurred significant expenses relating to closing of our
Maryland office and moving of our Internet infrastructure to Massachusetts in
June 2000 including $146,000 in connection with the termination of the lease for
the Maryland office. In addition, we made significant investments in product
development in the amount of approximately $40,000 that we believe are required
-50-
to be competitive and handle increased growth. These expenses included an
advanced internal order processing system, called SBT, for expediting orders and
reducing labor costs. We also invested substantial time in evaluating an open
source storefront system, PHPShop, for third party hosting. This has enabled us
to reduce labor and provide a better system to our customers.
Administrative and non-technical payroll and related costs increased by
$129,000 over the year ended December 31, 1999. Depreciation and amortization
increased by $431,000 due to intangible and tangible assets acquired principally
in the transaction with CSEI and the fact that in 1999 the Company acquired
$664,000 of fixed assets on which there was only a partial year of depreciation,
compared with a full year of depreciation on these assets for the year ended
December 31, 2000. Travel and entertainment expenses increased by $110,000 due
to the travel involved in (i) the litigation against Marc Stengel in Maryland
and (ii) the transaction with CSEI.
Interest expense. For the year ended December 31, 2000 we incurred interest
charges associated with the issuance of a $3,000,000 convertible note and
warrants in the amount of $1,597,000, while no such charges were incurred in the
year ended December 31, 1999. See "Working Capital and Liquidity" below.
Net Loss. We realized a loss for the year ended December 31, 2000 of
$5,493,000, or ($.11) per share (which includes an interest expense of
$1,597,000 in connection with the sale of the $3,000,000 convertible note and
related warrants), compared to $2,183,000, or ($.05) per share for the twelve
months ended December 31, 1999.
Inflation. We believe that inflation has not had a material effect of its
results of operations.
Acquired Assets
At December 31, 2000, total assets of the company were $6,494,000 compared
to $1,666,000 at December 31, 1999 The increase was primarily due to the
acquisition of the CSEI assets. The assets acquired consist principally of
software licenses, a video library, a library of articles, a user list, Domain
names, furniture, and fixtures and equipment. These assets are carried in
"Property and equipment" and "Other intangible assets" in the accompanying
financial statements at values determined by an independent valuation.
Management believes that the main components of the acquisition that will help
generate revenues in the future are the web properties
(www.collectingchannel.com, www.tartans.com (AOL keyword 'clan'),
www.maloneysonline.com) and the Maloney's book. Most significantly, management
places significant value in the licenses to the electronic content management
software (ECMS) and source-code the company acquired.
WORKING CAPITAL AND LIQUIDITY
Cash and cash equivalents were $32,000 at June 30, 2001, compared to
$1,467,200 at June 30, 2000. The strong cash position on June 30, 2000 was
attributable to the fact that we had just obtained the proceeds of the
convertible note discussed below. Cash and cash equivalents were approximately
$103,000 at December 31, 2000, compared to $221,200 at December 31, 1999.
On March 23, 2000 we entered into a Securities Purchase Agreement (the
"Agreement"), whereby the Company sold an 8% convertible note in the amount of
$3,000,000, due March 31, 2002 to Augustine Fund, L.P. (the "Buyer"). The note
is convertible into common stock at a conversion price equal to the lesser of:
(1) one hundred ten percent (110%) of the lowest of the closing bid price for
the common stock for the five (5) trading days prior to March 23, 2000, or (2)
seventy-five percent (75%) of the average of the closing bid price for the
common stock for the five (5) trading days immediately preceding the conversion
date. Had the Buyer converted the note on March 23, 2000, the Buyer would have
received $4,000,000 in aggregate value of our common stock upon conversion.
Because the debt was convertible at the date of issuance, the intrinsic value of
-51-
the beneficial conversion feature of $1,000,000 has been charged to interest
expense with an offsetting increase in additional paid in capital during the
thee months ended March 31, 2000.
In connection with the Agreement, we also issued warrants to the Buyer and
Delano Group Securities to purchase 300,000 and 100,000 shares of common stock,
respectively. The purchase price per share of common stock is $2.70, one hundred
and twenty percent (120%) of the lowest of the closing bid prices for the common
stock during the five (5) trading days prior to the closing date. The warrants
expire on March 31, 2005.
In addition, we entered into a Registration Rights Agreement
("Registration Agreement"), whereby we agreed to file a Registration Statement
with the Securities and Exchange Commission (SEC) on or before October 25, 2000,
covering the common stock to be issued upon the conversion of the convertible
note and the stock purchase warrants. Because the Registration Statement was not
declared effective by the SEC by December 15, 2000, the applicable conversion
percentage decreased to fifty percent (50%) of the average market value of the
common stock. The Registration Agreement was modified most recently on August
30, 2001, and contains a provision that extended the reduced coversion
percentage of 73% until September 30, 2001. The modified Registration Agreement
also contains provisions that decrease the conversion percentage to fifty
percent (50%) if the Registration Statement is not declared effective by the SEC
on or before September 30, 2001 and provides for cash penalties, as liquidating
damages, equal to two percent (2%) for each thirty day period beyond that date.
Finally, as consideration for the January 1, 2001 modifications, we agreed to
grant a security interest in all of our assets as security for our obligations
under the Agreement.
Our independent auditors have issued a going concern opinion on our
financial statements. Although we have begun to receive revenue from advertising
sales and have reduced costs by (i) eliminating personnel and expenses related
to the auctions, (ii) closing the Maryland office, and (iii) eliminating the
salary that was paid to Mr. Stengel, management believes that presently we do
not have sufficient cash to fund operations for the next 10 months. Based on our
current cash position, we currently need an infusion of $700,000 of additional
capital to fund our anticipated marketing costs and operating expenses over the
next 10 months. We have secured a commitment for additional financing from the
holder of the convertible note to fund our operations for the next 10 months of
approximately $751,000, pending negotiation and execution of final documents.
The parties orally agreed that the funds would be loaned on an as needed basis,
and would accrue at a interest rate of 8%, to be paid quarterly. Although the
terms of the financing have not been determined yet, it is anticipated that the
financing will be in the form of a convertible note on terms similar to the
existing 8% convertible note, with registration rights. To the extent the
financing is in the form of convertible equity with a conversion price linked to
a percentage discount to the market price of our common stock at the time of
conversion, our shareholders will experience substantial dilution upon such
conversion. While management believes that these documents will be executed in
the near future, there can be no assurances that the financing will be concluded
on reasonably acceptable terms. The holder of our convertible note has advanced
us funds in the amount of $440,750 to sustain our operations and pay some of our
debts. These funds should last us through December 31, 2001. If the financing is
not completed by then, management will be required to find alternative sources
of capital to support our operations. Although we can offer no assurances, in
the long term, we believe that if we are successful in concluding the
litigation, having our Augustine registration statement declared effective by
the SEC, and obtaining our needed capital, we are likely to be profitable by the
end of the first quarter 2002 as a result of our efforts in greatly decreasing
expenses and increasing product and advertising sales. We do not expect to incur
the same level of litigation costs in the long term that we have sustained in
the past year because of the substantial discovery and hearings conducted
through December 2000. However, our ability to become profitable may be
adversely affected as a result of a number of factors that could thwart our
efforts. These factors include our inability to successfully implement our
business and revenue model described in this document; the collectibles
community not accepting the services we offer; higher costs than anticipated;
our inability to sell our products and services to a sufficient number of
customers; our failure to attract sufficient interest in and traffic
-52-
to our sites; our inability to complete development of our sites in the manner
described in this document; the failure of our operating systems; and our
inability to increase our revenues as rapidly as anticipated. For a more
complete listing and description of factors that will affect our ability to
become profitable, see "Risk Factors" beginning on page 5. If we are not
profitable, we will not be able to continue our business operations.
DESCRIPTION OF PROPERTY
Our corporate headquarters are presently located at 4 Brussels Street,
Worcester, Massachusetts 01610. We pay rent on the Brussels Street, Worcester
location in the amount of approximately $2,500 per month on a tenant-at-will
basis. In July, 1999, we leased second office located at 100 Painters Mill Road
in Owings Mills, Maryland 21117 under a five year lease with a monthly rent of
$7,494.67. In June 2000, we moved the operations in the Maryland office to our
corporate headquarters in Worcester, Massachusetts. In December 2000, we vacated
the premises and since that time have attempted to release that space. On
February 14, 2001, we received notice that we would be evicted on February 23,
2001 for non-payment of rent and that we may be liable to the extent any
subsequent lease fails to provide a rental equal to the rent payable under our
lease. We have recorded a potential liability of $100,000 in connection with any
future charges associated with the lease.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $.001 per share, began trading on August 11,
1995 and is presently traded on the Over-the-Counter Bulletin Board ("OTCBB")
under the symbol, "PAID".
The following table sets forth the high and low bid prices for our common
stock as reported by OTCBB for the ten quarters ended June 30, 2001. The
quotations from the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down, or commissions and may not represent actual transactions.
2001 High Low
---- ---
Quarter ended March 31, 2001 5/8 1/8
Quarter ended June 30, 2001 3/16 1/32
2000 High Low
---- ---
Quarter ended March 31, 2000 2 9/16 17/32
Quarter ended June 30, 2000 2 7/32 21/32
Quarter ended September 30, 2000 23/32 5/16
Quarter ended December 31, 2000 33/64 7/32
1999 High Low
---- ---
Quarter ended March 31, 1999 2 1/2 1/4
Quarter ended June 30, 1999 8 3/16 1 1/16
Quarter ended September 30, 1999 3 1/16 1 3/16
Quarter ended December 31, 1999 1 3/8 13/32
As of August 29, 2001, there were approximately 185 holders of record of
our common stock.
We have not previously paid cash dividends on our common stock, and intend
to utilize current resources to expand the business; thus, it is not anticipated
that cash dividends will be paid on our common stock in the foreseeable future
-53-
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 15, 1999, our former Board of Directors approved the
appointment of Stephen P. Higgins, C.P.A. ("Higgins") as Sales Online's
independent certified public accountants to provide accounting and auditing
services for Sales Online for the year ended December 31, 1998 and also approved
the dismissal of Guest & Company as Sales Online's independent auditors.
Guest & Company's report on the annual financial statements of Sales
Online for the prior fiscal years ending December 31, 1997 and 1996 did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles. In addition,
during the years ended December 31, 1997 and 1996 and for the subsequent interim
period preceding the dismissal of Guest & Company, there were no disagreements
between the Sales Online and Guest & Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Guest &
Company, would have caused it to make reference to the subject matter of the
disagreement in connection with its report on the annual financial statements of
Sales Online.
On March 28, 2000, our Board of Directors formally approved the termination
of the accounting services provided by Stephen P. Higgins, C.P.A., as the Sales
Online's independent auditors. We had previously, on March 24, 2000, engaged
Wolf & Company, P.C. as Sales Online's independent certified accountants to
provide accounting and auditing services for the year ended December 31, 1999.
Higgins' report on the annual financial statements of Sales Online for the
prior fiscal year ending December 31, 1998 did not contain an adverse opinion or
a disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. In addition, during the year ended
December 31, 1998 and for the subsequent interim period preceding the dismissal
of Higgins, there were no disagreements between Sales Online and Higgins on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Higgins, would have caused it to make reference to the subject
matter of the disagreement in connection with its report on the annual financial
statements of Sales Online.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Gordon, Feinblatt,
Rothman, Hoffberger & Hollander, LLC, Baltimore, Maryland.
EXPERTS
Wolf & Company, PC, independent certified public accountants, have audited
our financial statements as of December 31, 2000 and for each of the years in
the two-year period ended December 31, 2000, as set forth in their report. We've
included our financial statements in this prospectus in reliance upon Wolf &
Company, PC's report, upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act, and
in accordance with the Exchange Act we file reports, proxy statements and other
information with the SEC. The reports, proxy statements and other information on
-54-
file can be inspected and copied at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the SEC's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies may be obtained at the prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC. The address of the site is http:\\www.sec.gov.
We have filed a registration statement with the SEC on Form SB-2 under
the Securities Act, with respect to the securities offered by this prospectus.
This prospectus, which constitutes part of the registration statement, omits
some information contained in the registration statement and the exhibits to the
registration statement on file with the SEC pursuant to the Securities Act and
the rules and regulations of the SEC under the Securities Act. For further
information with respect to us and the common stock, reference is made to the
registration statement. We will describe the material provisions of any contract
or other document referred to in this document.
-55-
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-2
Balance Sheet at December 31, 2000 and 1999..................................F-3
Statements of Operations -
Years ended December 31, 2000 and 1999.......................................F-4
Statements of Changes in Stockholders' Equity -
Years ended December 31, 2000 and 1999.......................................F-5
Statements of Cash Flows -
Years ended December 31, 2000 and 1999...................................F-6-F-7
Notes to Financial Statements
Years ended December 31, 2000 and 1999..................................F-8-F-23
INTERIM FINANCIAL STATEMENTS
Interim Balance Sheets -
June 30, 2001 and December 31, 2000 (unaudited).............................F-24
Interim Statements of Operations--
Six months ended June 30, 2001 and
2000 (unaudited)............................................................F-25
Interim Statements of Cash Flows -
Six months ended June 30, 2001 and 2000 (unaudited).........................F-26
Interim Statement of Changes in Stockholders' Equity -
Six months ended June 30, 2001 (unaudited)..................................F-27
Notes to Interim Financial Statements
Six months ended June 30, 2001 and 2000................................F-28-F-35
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sales OnLine Direct, Inc.
Worcester, Massachusetts
We have audited the accompanying balance sheets of Sales OnLine Direct, Inc. as
of December 31, 2000 and 1999, and the related statements of operations, changes
in stockholders' equity and cash flows for years in then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with audit standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sales OnLine Direct, Inc. as of
December 31, 2000 and 1999 and the results of their operations and their cash
flows for years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred recurring losses from operations
and a working capital deficiency at December 31, 2000. These circumstances raise
substantial doubt as to the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Wolf & Company, P.C.
May 7, 2001
Boston, Massachusetts
F-2
SALES ONLINE DIRECT, INC
BALANCE SHEET
DECEMBER 31,
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 102,534 $ 221,213
Accounts receivable -- 48,682
Marketable securities 17,196 --
Inventory 385,973 629,729
Prepaid expenses 125,975 72,992
Other current assets 18,089 11,236
----------- ---------
Total current assets 649,767 983,852
Property and equipment, net 1,490,247 613,365
Goodwill 26,797 49,765
Other intangible assets 4,162,211 18,667
Debt financing costs, net 165,000 --
----------- ----------
Total assets $ 6,494,022 $1,665,649
=========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 137,277 $ 348,504
Accrued expenses 1,003,564 81,483
----------- ----------
Total current liabilities 1,140,841 429,987
----------- ----------
Convertible Debt 2,737,196 --
Commitments and Contingencies -- --
Temporary equity (200,000 shares of common stock, $.001 par value) 237,500 --
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized; 54,763,281 and 46,711,140 shares issued and 54,763 46,711
outstanding at December 31, 2000 and 1999, respectively
Additional paid-in capital 10,448,176 4,010,033
Accumulated deficit (7,700,307) (2,207,171)
Unearned compensation (424,147) (613,911)
----------- -----------
Total stockholders' equity 2,378,485 1,235,662
----------- -----------
Total liabilities and stockholders' equity $ 6,494,022 $ 1,665,649
=========== ===========
See accompanying notes to financial statements
F-3
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2000 1999
---- ----
Revenues $ 1,297,595 $ 1,003,200
Cost of revenues 1,388,455 706,488
------------ -----------
Gross profit (loss) (90,860) 296,712
Operating expenses
Selling, general and administrative expenses 3,064,024 1,807,958
Website development costs 785,406 651,785
----------- -----------
Total operating expenses 3,849,430 2,459,743
----------- -----------
Loss from operations (3,940,290) (2,163,031)
Other income (expense)
Interest expense (1,597,045) --
Other income 43,232 92,701
Unrealized loss on marketable securities (40,132)
Gain (loss) on sale of securities 41,099 (112,710)
----------- ----------
Total other expense (1,552,846) (20,009)
----------- ----------
Loss before income taxes (5,493,136) (2,183,040)
Provision for taxes on income -- --
----------- ----------
Net loss $ (5,493,136) $(2,183,040)
============ ===========
Loss per share (Basic) $ (0.11) $ (0.05)
============ ===========
Weighted average shares 48,117,453 45,277,812
============ ===========
See accompanying notes to financial statements
F-4
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock
-----------------
Additional Stock
Paid-in Accumulated Subscriptions Unearned
Shares Amount Capital Deficit Receivable Compensation Total
------ ------ ------- ------- ---------- ------------ -----
Balance, January 1, 1999 37,368,912 $37,369 - $ (24,131) $ (1,000) - $ 12,238
Collection of stock subscriptions
receivable - - - - 1,000 - 1,000
Contribution of assets of World
Wide Collectors Digest - - 33,229 - - - 33,229
Contribution of collectibles
Inventories - - 769,764 - - - 769,764
Acquisition of Securities Resolution
Advisors, Inc. 9,342,228 9,342 (8,854) - - - 488
Proceeds from assignment of options - - 2,450,000 - - - 2,450,000
Compensatory stock options granted - - 757,848 - - (757,848) -
Amortization of stock-based
compensation - - - - - 143,937 143,937
Issuance of stock options to consultant
for services - - 8,046 - - - 8,046
Net loss - - - (2,183,040) - - (2,183,040)
--------- ------- -------- ---------- -------- ---------- -----------
Balance, December 31, 1999 46,711,140 $46,711 $4,010,033 $(2,207,171) $ - $ (613,911) $1,235,662
Acquisition of assets of
ChannelSpace Entertainment, Inc. 7,530,000 7,530 4,641,466 - - - 4,648,996
Common stock issued in connection
with call option agreement 110,000 110 (110) - - - -
Issuance of common stock to
consultant for services 35,000 35 44,800 - - - 44,835
Common stock issued in payment of
interest on convertible debt 377,141 377 125,211 - - - 125,588
Proceeds from assignment of options - - 87,188 - - - 87,188
Beneficial conversion discount- - - 1,109,588 - - - 1,109,588
Issuance of warrant - - 430,000 - - - 430,000
Amortization of stock-based compensation - - - - - 189,764 189,764
Net loss - - - (5,493,136) - - (5,493,136)
----------- ------- ----------- ------------ ------ --------- ----------
Balance, December 31, 2000 54,763,281 $54,763 $10,448,176 $(7,700,307) $ - $ (424,147) $2,378,485
========== ======= =========== ============ ====== ========= ==========
See accompanying notes to financial statements
F-5
SALES ONLINE DIRECT, INC
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2000 1999
---- ----
Operating activities:
Net (loss) $(5,493,136) $(2,183,040)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 524,499 92,667
Amortization of unearned compensation 189,764 143,937
Amortization of debt discount 167,196 -
Beneficial conversion feature 1,109,588 -
Stock issued in payment of interest 125,588 -
Stock options issued for compensation 44,835 8,046
Net gain on marketable securities (967) 112,710
Loss on abandonment of leasehold improvements 46,745
Changes in assets and liabilities:
Accounts receivable 48,682 (36,841)
Inventory 243,756 171,489
Accounts payable (211,227) 218,144
Accrued expenses 622,081 76,483
Income taxes payable - (2,160)
Other, net (59,836) (95,358)
---------- ----------
Net cash used in operating activities (2,642,432) (1,493,923)
Investing activities:
Purchase of securities (401,203) (3,247,091)
Proceeds from sale of securities 384,974 3,134,381
Acquisition of other intangible asset (50,000) -
Cash received from Rotman Auction, Inc. acquisition - 9,864
Cash received from Securities Resolution Advisors, Inc. acquisition - 488
Property and equipment additions (227,206) (633,506)
--------- ---------
Net cash used in investing activities (293,435) (735,864)
--------- ---------
Financing activities:
Proceeds from assignment of common stock call options 87,188 2,450,000
Net proceeds from convertible debt 2,300,000 -
Proceeds from sale of warrants 430,000 -
Proceeds from stock subscriptions - 1,000
--------- ---------
Net cash provided by financing activities 2,817,188 2,451,000
--------- ---------
Net increase (decrease) in cash and equivalents (118,679) 221,213
Cash and equivalents, beginning 221,213 -
----------- -----------
Cash and equivalents, ending $ 102,534 $ 221,213
=========== ===========
See accompanying notes to financial statements
F-6
SALES ONLINE DIRECT, INC
STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
2000 1999
---- ----
Cash paid during the period for:
Income taxes $ - $ 2,432
========= ==========
Interest $ - $ -
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contributions of inventories $ - $ 769,764
========= ==========
Contribution of the net assets of World Wide Collectors Digest, Inc. were
recorded at their fair values as follows:
Due from shareholder $ - $ 2,737
Other current assets - 1,000
Property and equipment - 29,877
Liabilities assumed - (385)
Additional paid-in capital - 33,229
Merger of Rotman Auction, Inc. accounted for utilizing the purchase
method of accounting. The assets were recorded at their fair values
as follows:
Cash received in the transaction - 9,864
Accounts receivable - 11,841
Inventory - 31,454
Due from affiliate - 10,919
Other current assets - 7,115
Property and equipment - 1,697
Due to shareholder - (11,820)
Other liabilities assumed - (129,975)
Goodwill - 68,905
Acquisition of Internet Collectible Awards for stock
Recorded as other intangible asset $ 237,500
Acquisition of certain assets of ChannelSpace Entertainment, Inc.
Property and equipment $ 906,890
Other intangible assets $ 4,042,106
Accrued expenses recorded $ (300,000)
See accompanying notes to financial statements
F-7
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 1. Organization
On February 25, 1999, Securities Resolution Advisors, Inc. ("SRAD") purchased
all of the outstanding common stock of Internet Auction, Inc. ("Internet
Auction"). The acquisition was made pursuant to an Agreement and Plan of
Reorganization (the "Agreement") dated January 31, 1999 between SRAD and the
principal shareholders ("IA Shareholders") of Internet Auction. Pursuant to the
Agreement, SRAD acquired the business and all of the issued and outstanding
shares of the capital stock of Internet Auction in exchange for the issuance to
the IA Shareholders of an aggregate of 37,368,912 shares, representing
approximately 80%, of SRAD's issued and outstanding common stock, and SRAD's
principal business became the business of Internet Auction. In accordance with
the Agreement, after the transaction described above, the IA Shareholders were
appointed to SRAD's Board of Directors and became officers of SRAD. The
previously serving directors resigned from the Board. SRAD subsequently changed
its name to Sales OnLine Direct, Inc. (the "Company").
For accounting purposes, the transaction described above is considered, in
substance, a capital transaction rather than a business combination. It is
equivalent to the issuance of common stock by Internet Auction for the net
assets of the Company, accompanied by a recapitalization. This accounting
treatment is identical to that resulting from a reverse acquisition, except that
no goodwill or other intangible asset had been recorded. Accordingly, the
accompanying financial statements reflect the acquisition by Internet Auction of
the net assets of the Company and the recapitalization of Internet Auction's
common stock based on the exchange ratio in the Agreement.
On March 7, 2000, the Company acquired Internet Collectible Awards ("ICA")
(www.collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles Web sites in a variety of categories. As
consideration for the acquisition, the Company recorded accounts payable of
$50,000 and issued 200,000 shares of the Company's common stock valued at
$237,500 (based on the Company's stock price at the date of acquisition). The
value of these shares is included in temporary equity due to the litigation
discussed below. The acquisition has been accounted for under the purchase
method of accounting. The excess of the purchase price, $287,500, over the fair
value of the assets acquired, a web site, has been allocated to other intangible
assets. As indicated in Note 12, the Company is involved in litigation.
Subsequent to this acquisition management obtained information that caused it to
believe, unbeknownst to the Company, the beneficial owner of ICA was an officer
and director and significant shareholder of the Company at the time of the
acquisition. Upon resolution of the litigation, any necessary accounting
adjustments will be made.
On November 8, 2000, the Company acquired certain assets of ChannelSpace
Entertainment, Inc., a Virginia corporation (CSEI") and Discribe, Ltd.,
("Discribe") a Canadian corporation wholly owned by CSEI. CSEI and Discribe are
converged Internet content providers and producers of affinity portals,
including the CollectingChannel.com and the CelticChannel.com websites. The
consideration paid by the Company for the acquired assets was 7,530,000
unregistered shares of the Company's common stock valued at $4,648,996 and
$300,000 worth of the Company's common stock to be registered, 711,136 shares
based upon the average closing bid price of the stock on the five trading days
prior to February 6, 2001, the date of filing the registration statement.
Included in accrued expenses at December 31, 2000 is $300,000 related to this
transaction. The assets acquired - consisting principally of software licenses,
a video library, a library of articles, a user list, Domain names, furniture,
fixtures and equipment, had an estimated fair value of approximately $4,974,000.
The fair values of the individual assets acquired, and the consideration paid,
have been determined by independent appraisal. The excess of the fair value of
the assets acquired over the purchase price, approximately $25,000, has been
allocated pro-rata to the intangible assets acquired.
F-8
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 2. Management's Plans
The Company has incurred significant losses for the last two years and has a
limited operating history. For the years ended December 31, 2000 and 1999 the
Company reported losses of $5,493,136 and $2,183,040, respectively. In addition,
at December 31, 2000, the Company had negative working capital of $491,074.
To date we have met our cash needs from the proceeds of the convertible debt and
related warrants and the assignment of call options discussed in Note 7.
The Company has increased revenue from auctions and reduced costs by (i)
eliminating personnel and expenses related to the auctions, (ii) eliminated our
expenses associated with the operations of the Maryland office, and (iii)
eliminated the salary that was paid to a former officer.
Management is currently in discussions with the holder of the convertible debt
to obtain additional financing to fund operations for the next 12 months with
approximately $1,500,000 upon the effectiveness of the Augustine registration
statement. While management believes that these discussions will result in the
proposed financings, there can be no assurances that they will be concluded on
reasonably acceptable terms. If the financings are not so completed, management
will seek alternative sources of capital to support operations. Based on current
cash positions, the Company needs an infusion of $750,000 of additional capital
to fund anticipated marketing costs and operating expenses over the next 12
months. If management does not receive this capital or at least an infusion of
$50,000 per month, then the Company will only be able to continue operations
through the end of June.
Finally, the Company does not expect to incur the same level of legal costs in
the long term that it has sustained in the past year because of the substantial
discovery and hearings conducted through December 2000 for the litigation.
Although there can be no assurances, the Company believes that the above cost
reductions and anticipated financings will be sufficient to meet the Company's
working capital requirements through the end of 2001.
Note 3. Summary Of Significant Accounting Policies
Basis of presentation
The accompanying 1999 financial statements reflect the operations of
Internet Auction since January 1, 1999 and those of Rotman Auction Inc.
(Rotman Auction) and the assets of World Wide Collectors Digest, Inc.
("WWCD") for periods after February 25, 1999, the date of the merger
between Internet Auction and Rotman Auction, the acquisition of the WWCD
assets, and the capital transactions with SRAD. Prior to the transaction
described above the business conducted by Internet Auction was through
three related companies: Internet Auction and its Internet Collectibles
division, Rotman Auction and WWCD. In anticipation of the transaction with
the Company, the companies and the assets of WWCD were combined and their
operations integrated as follows:
F-9
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Summary Of Significant Accounting Policies (continued)
Auction operations, generating approximately 98% of revenues, which
include:
A full service auction house providing a full range of services to
sellers and buyers including live online bidding, consignment
services, authentication of merchandise, digital photography as well
as purchases and sales of authentic memorabilia.
A person-to-person auction site offering sellers a vehicle for listing
items for sale and allows buyers to bid on items of interest.
Buying, warehousing, distribution, marketing and selling collectibles.
Internet Collectibles maintains inventory of memorabilia with popular
and historical significance that allows customers to directly purchase
the memorabilia without the competition from bidders in an auction
format.
Web hosting service:
An e-commerce website for dealers in the collectibles community that
designs, hosts, and maintains dealer websites allowing clients to
create online storefronts, set prices, and sell directly to online
shoppers.
Inventory Purchase Agreements
On February 12, 1999, Internet Auction acquired collectibles,
collectors items and memorabilia from Rotman Production, a related
party, with an estimated fair value of approximately $629,000 in
exchange for 236 shares of the Internet Auction's common stock
received from a stockholder of Internet Auction. In addition, the
seller was assigned the right to acquire 700,000 option shares of SRAD
common stock from Universal Funding, Inc. at $.50 per share. (see Note
7).
On February 25, 1999, Internet Auction acquired collectibles,
collectors items and memorabilia from Kim Stengel, a related party,
with an estimated value of approximately $140,000 in exchange for 236
shares of the Internet Auction's common stock received from a
stockholder of Internet Auction.
Purchase of Assets of World Wide Collectors Digest, Inc.
On February 25, 1999, Internet Auction acquired the assets of WWCD, a
related party, with an estimated value of approximately $34,000 in
exchange for 3,835 shares of Internet Auction's common stock received
from a stockholder of Internet Auction.
Merger with Rotman Auction, Inc.
Effective February 25, 1999, Internet Auction merged with Rotman
Auction, a related party. Under the terms of the merger agreement, the
shareholder of Rotman received 870 shares of the Internet Auction's
common stock in exchange for the Rotman shares owned by the
shareholder. Internet Auction was the surviving corporation in the
merger. The merger was recorded using the purchase method of
accounting. The operations of Rotman are included in the financial
statements from the date of merger.
F-10
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Summary Of Significant Accounting Policies (continued)
In connection with the acquisition, the Company recognized goodwill in the
amount of $68,905. Amortization of goodwill for 2000 and 1999 amounted to
$22,968 and $19,140, respectively.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company classifies its marketable equity securities as trading
securities in accordance with Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Consequently, unrealized gains and losses are recognized in earnings for
the period.
Inventory
Inventory consists of collectible merchandise for sale and is stated at the
lower of average cost or market on a first-in, first-out (FIFO) method.
On a periodic basis management reviews inventories on hand to ascertain if
any is slow moving or obsolete. In connection with this review, at December
31, 2000 the Company has provided a $200,000 reserve.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the double declining balance method over the estimated useful life of 5
years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the estimated useful life of the asset or the term of the
related lease.
Goodwill
Goodwill is being amortized on a straight-line basis over an estimated
useful life of three years.
Other Intangible Assets
Other intangible assets are being amortized on a straight-line basis over
an estimated useful life of five years.
Debt Financing Costs
Debt financing costs are being amortized on a straight-line basis over the
life of the related debt, two years.
F-11
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Summary Of Significant Accounting Policies (continued)
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and from
fees and commissions on sales of merchandise under consignment type
arrangements.
For sales of merchandise owned and warehoused by the Company, the Company
is responsible for conducting the auction, billing the customer, shipping
the merchandise to the customer, processing merchandise returns and
collecting accounts receivable. The Company recognizes the gross sales
amount as revenue upon verification of the credit card transaction and
shipment of the merchandise, discharging all obligations of the Company
with respect to the transaction.
For sales of merchandise under consignment-type arrangements, the Company
takes physical possession of the merchandise, but is not obligated to and
does not take title to or ownership of the merchandise. When an auction is
completed, consigned merchandise which has been sold is shipped upon
receipt of payment. The Company recognizes the net commission and service
revenues relating to the consigned merchandise upon receipt of the gross
sales proceeds and shipment of the merchandise. The Company then releases
the net sales proceeds to the Consignor, discharging all obligations of the
Company with respect to the transaction.
Advertising Costs
Advertising costs totaling approximately $237,000 in 2000 and $346,000 in
1999, are charged to expense when incurred.
Income Taxes
Deferred tax asset and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities
using the enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for
net operating loss, capital loss and tax credit carry forwards to the
extent their realization is more likely than not. The deferred tax expense
for the period represents the change in the deferred tax asset or liability
from the beginning to the end of the period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the amounts reported of assets and liabilities as
of the date of the balance sheet and reported amounts of revenue and
expenses during the reporting period. Material estimates that are
particularly susceptible to significant change in the near term relate to
inventory, intangible assets and deferred tax asset valuation. Although
these estimates are based on management's knowledge of current events and
actions, they may ultimately differ from actual results.
F-12
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Summary Of Significant Accounting Policies (continued)
Stock Compensation Plans
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages all entities to adopt a fair
value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No.
25, " Accounting for Stock Issued to Employees," whereby compensation cost
is the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under the Company's stock option
plan typically have no intrinsic value at the grant date, and under Opinion
No. 25 no compensation cost is recognized for them. The Company has elected
to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of
accounting had been applied.
Earnings Per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company
relate to convertible debt and outstanding stock options and warrants. The
number of common shares that would be issued upon conversion of the
convertible debt would have been 16,438,356 shares as of December 31, 2000.
The number of common shares that would be included in the calculation of
outstanding options and warrants is determined using the treasury stock
method. The assumed conversion of outstanding dilutive stock options and
warrants would increase the shares outstanding but would not require an
adjustment of income as a result of the conversion. Stock options and
warrants applicable to 957,000 shares and 579,000 shares at December 31,
2000 and 1999, respectively, have been excluded from the computation of
diluted earnings per share, as have the common shares that would be issued
upon conversion of the convertible debt, because they were antidilutive.
Diluted earnings per share have not been presented as a result of the
Company's net loss for each year.
F-13
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Summary Of Significant Accounting Policies (continued)
Asset Impairment
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," long lived
assets to be held and used by the Company are reviewed to determine whether
any events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For long-lived assets to be held and
used, the Company bases its evaluation on such impairment indicators as the
nature of the assets, the future economic benefits of the assets, any
historical or future profitability measurements, as well as other external
market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash
flow analysis of assets at the lowest level for which identifiable cash
flow exist. If impairment has occurred, the Company recognizes a loss for
the difference between the carrying amount and the estimated value of the
asset. The fair value of the asset is measured using an estimate of
discounted cash flow analysis.
Web Site Development Costs
The Company has adopted, effective January 1, 2000, the provisions of EITF
00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), which
requires that costs incurred in planning, maintaining, and operating stages
that do not add functionality to the site be charged to operations as
incurred. External costs incurred in the site application and
infrastructure development stage and graphic development are capitalized.
During the year ended December 31, 2000, the Company capitalized
approximately $155,200 of Web site development costs. Such capitalized
costs are included in "Property and equipment".
Had the Company applied EITF 00-2 in 1999, the pro forma net loss would
have been reduced by $75,437, which would have had no effect on earnings
per share.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company is required to adopt
effective January 1, 2001. SFAS No. 133 will require the Company to record
all derivatives on the balance sheet at fair value. The Company does not
have any derivative instruments, nor does the Company engage in any hedging
activities. Consequently, the adoption of SFAS 133 is not expected to have
an impact on the Company's financial position or results of its operations.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation with no effect on previously reported
net loss, loss per share, or accumulated deficit.
F-14
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 4. Property and Equipment
At December 31, 2000 and 1999 property and equipment consisted of the following:
2000 1999
---- ----
Computer equipment and software $ 825,583 $ 518,434
Office Furniture 120,000 56,075
Leasehold Improvements - 54,995
Video and article archives 449,283 -
Video equipment 158,513 -
Web site development costs 155,226 -
Purchased software 70,000 70,000
----------- ---------
1,778,605 699,504
Accumulated depreciation (288,358) (86,139)
----------- ---------
$ 1,490,247 $ 613,365
=========== =========
Depreciation and amortization expense of property and equipment for the years
ended December 31, 2000 and 1999 amounted to $210,469 and $ 72,194,
respectively.
The Company leases its former technology location under an operating lease
commencing on January 1, 2000 and expiring on December 31, 2004. Prior to
December 31, 2000, the Company abandoned this facility and ceased payments
required under the lease. The Company is currently negotiating a settlement with
the landlord and has recorded an estimated liability of $100,000 in connection
with any future charges associated with the lease. This expense, along with the
net book value of the related leasehold improvements, has been included in
selling, general and administrative expenses in the accompanying statement of
operations.
The Company leases offices and warehouse facilities for approximately $2,500 per
month on a tenant-at-will basis.
Rent expense for the years ended December 31, 2000 and 1999 totaled $99,277 and
$29,265, respectively.
Note 5. Other Intangible Assets
At December 31, 2000 and 1999 other intangible assets are comprised of the
following:
2000 1999
---- ----
Software licenses $3,091,760 $ -
Domain Names 77,025 20,000
Acquired Web Sites 796,801 -
Customer and User lists 350,857 -
Other 33,163 -
---------- ---------
4,349,606 20,000
Accumulated amortization (187,395) (1,333)
---------- ---------
$4,162,211 $ 18,667
========== =========
F-15
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 6. Accrued Expenses
At December 31, 2000 and 1999 accrued expenses are comprised of the following:
2000 1999
---- ----
General operating expenses $ 92,171 $ 35,013
Professional fees 421,721 46,470
Common shares to be issued
in connection with CSEI
transaction (Note 1) 300,000 -
Lease termination costs 100,000 -
Interest 89,672 -
--------- --------
Total 1,003,564 81,483
========= ========
Note 7. Common Stock
Call Option Agreement
In connection with the agreement described in Note 1, on February 25, 1999,
SRAD entered into a Call Option Agreement ("Option Agreement") with
Universal Funding, Inc. ("Universal"), a shareholder of SRAD and a
beneficial owner of 3,000,000 shares of SRAD's common stock. Under the
Agreement, Universal agreed to grant certain options to SRAD to acquire
2,000,000 shares of SRAD's common stock owned by Universal. The options
consist of 1,000,000 shares at $.50 per share exercisable through February
25, 2000 and 1,000,000 shares at $.75 per share exercisable through
February 25, 2001. The exercise price was reduced to $.375 per share
through April 30, 1999.
In addition, the Company assigned options to purchase 160,000 shares of
stock from Universal to Richard Singer, the former President of SRAD, for
services rendered to SRAD in connection with the acquisition of Internet
Auction, Inc. These services were provided to SRAD prior to the date of the
acquisition of Internet Auction, Inc. and, as a result, have not been
reflected in the financial statements of the acquirer, Sales Online Direct,
Inc. Also, the Company assigned options to purchase 700,000 shares of stock
from Universal in connection with the acquisition of certain inventories,
resulting in an increase in additional paid in capital of approximately
$629,000 which represents the fair value of the inventories contributed.
(See Note 3).
In April 1999, the Company assigned options to purchase 500,000 shares of
stock from Universal to certain individuals in exchange for $2,450,000,
which was added to the paid-in capital of the Company.
In March 2000, the Company assigned options to purchase 142,500 shares of
stock from Universal to certain individuals in exchange for $87,188, which
was added to the paid in capital of the Company.
At December 31, 2000, the Company had a balance of 497,500 shares remaining
under the agreement with an exercise price of $.75. These remaining options
expired on February 25, 2001.
F-16
Stock Options
In June 1999, the Company's Board of Directors adopted the 1999 Stock
Option Plan (the "1999 Plan") which provided for the issuance of options to
directors, officers, employees and consultants of the Company to purchase
up to 1,000,000 shares of the Company's common stock. Options granted under
the plan may be either incentive stock options ("ISO") or nonqualified
stock options ("NSO").
The 1999 Plan provides that each option be granted at a price determined by
the Board of Directors on the date such option is granted and have a
maximum option term of ten years. The options granted become exercisable
during a period of time as specified by the Board of Directors at the date
such option is granted.
In July 1999, the Company granted an option to an employee to purchase
471,000 shares of common stock at $.01 per share. The option is exercisable
over a four-year period. The Company recorded unearned compensation of
$757,848, based on the difference between the fair market value of the
common stock at the grant date and the exercise price. The unearned
compensation is being amortized over the vesting period of the option.
Amortization expense related to unearned compensation amounted to $189,764
and $143,937 for the years ended December 31, 2000 and 1999, respectively.
There were no options granted under the plan in 2000.
An analysis of the activity in the 1999 Plan is as follows:
Weighted
Average
Exercise
Shares Price
------ --------
Shares under option:
Outstanding at January 1, 1999 - $ -
Granted 597,000 0.33
Exercised - -
Expired/Cancelled (18,000) 1.63
-------
Outstanding at December 31, 1999 579,000 $ .29
Granted - -
Expired/Cancelled (22,000) 1.63
-------
Outstanding at December 31, 2000 557,000 $ 0.24
-------
Options exercisable at year end 227,575 $ 0.15
=======
Weighted average fair value of
options granted during the year
1999 $1.62 $ 0.33
======= ========
2000 - $ -
======= ========
F-17
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Information pertaining to options outstanding at December 31, 2000 is as
follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$ .01 471,000 8 years $ 0.010 206,625 $ 0.010
.812 14,000 8 0.812 2,550 0.812
1.625 72,000 8 1.625 18,400 1.625
-------- ------
Outstanding at end
of year 557,000 $ 0.240 227,575 $ 0.150
======= =======
During July 1999, the Company's Board of Directors adopted, subject to
stockholders' approval, the 1999 Omnibus Share Plan (the "Omnibus Plan")
which provides for both incentive and non-qualified stock options, stock
appreciation rights and other awards to directors, officers and employees
of the Company to purchase or receive up to 1,000,000 shares of the
Company's stock. A committee of the Board of Directors ("Committee")
establishes the option price at the time each option is granted, which
price may, in the discretion of the Committee, be less than 100% of the
fair market value of the shares on the date of the grant. The options
granted will have a maximum term of ten years and shall be exercisable
during a period as specified by the Committee. There were no incentive
options granted under the Omnibus Plan during 1999.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
compensation cost has been recognized only to the extent described above.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the
Company's net income and earnings per share would have been adjusted to the
pro forma amounts indicated below:
Years Ended December 31,
------------------------
2000 1999
---- ----
Loss
As reported $ (5,493,136) $(2,183,040)
Pro forma $ (5,518,862) $(2,197,613)
Basic loss per share
As reported $ (0.11) $ (0.05)
Pro forma $ (0.11) $ (0.05)
F-18
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31,
2000 1999
---- ----
Expected life N/A 4 years
Risk-free interest rate N/A 6.00%
Dividend yield N/A None
Volatility N/A 254%
Note 8. Income Taxes
There was no provision for income taxes for the years ended December 31, 2000
and 1999 due to the Company's net operating loss and its valuation reserve
against deferred income taxes.
The difference between the provision for income taxes from amounts computed by
applying the statutory federal income tax rate of 34% and the Company's
effective tax rate is due primarily to the net operating loss incurred by the
Company and the valuation reserve against the Company's deferred tax asset.
The tax effects of temporary differences and carry forwards that give rise to
deferred taxes are as follows:
2000 1999
---- ----
Federal net operating loss
carry forwards $2,257,000 $625,000
State net operating loss
carry forwards 699,000 195,000
Stock-based compensation
recognized for financial
statement purposes 136,000 60,000
---------- ----------
3,092,000 880,000
Valuation reserve (3,092,000) (880,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The valuation reserve applicable to net deferred tax asset for the years ended
December 31, 2000 and 1999 is due to the likelihood of the deferred tax not
expected to be utilized.
At December 31, 2000, the Company has federal and state net operating loss carry
forwards of approximately $7,350,000 available to offset future taxable income
which will expire in 2020.
Note 9. Related Party Transaction
During September 1999, the Company purchased certain computer equipment and
internet research technology and coding material from Timeline, Inc.
("Timeline") in the amount of $70,000. Timeline is a related party, owned by
Gregory Rotman and Richard Rotman, officers of the Company. See Note 3.
F-19
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 10. Convertible Debt Financing
On March 23, 2000, the Company entered into a Securities Purchase Agreement (the
"Agreement"), whereby the Company sold an 8% convertible note in the amount of
$3,000,000, due March 31, 2002 to Augustine Fund, L.P. (the "Buyer").
The note is convertible into common stock at a conversion price equal to the
lesser of: (1) one hundred ten percent (110%) of the lowest of the closing bid
price for the common stock for the five (5) trading days prior to March 23,
2000, or (2) seventy-five percent (75%) of the average of the closing bid price
for the common stock for the five (5) trading days immediately preceding the
conversion date.
Had the Buyer converted the note on March 23, 2000, the Buyer would have
received $4,000,000 in aggregate value of the company's common stock upon the
conversion of the $3,000,000 convertible note. As a result, the intrinsic value
of the beneficial conversion feature of $ 1,000,000 has been charged to interest
expense with an offsetting increase in additional paid in capital during 2000.
In connection with the Agreement, the Company also issued warrants to the Buyer
and Delano Group Securities to purchase 300,000 and 100,000 shares of common
stock, respectively. The purchase price per share of common stock is equal to
one hundred and twenty percent (120%) of the lowest of the closing bid prices
for the common stock during the five (5) trading days prior to the closing date.
The warrants, which expire on March 31, 2005, have been valued based upon the
Black-Scholes option-pricing model at $430,000. The value of the warrants is
being amortized over two years, the term of the related convertible debt.
In addition, the Company entered into a Registration Rights Agreement, whereby
the Company agreed to file a Registration Statement with the Securities and
Exchange Commission (SEC), on or before October 25, 2000 covering the common
stock to be issued upon the conversion of the convertible note and stock
purchase warrants. The Registration Rights Agreement contains a provision which
decreases the conversion percentage by two percent (2%) for each thirty day
period after December 15, 2000 that the Registration Statement is not declared
effective by the SEC, as well as cash penalties, as liquidating damages, equal
to two percent (2%) for each thirty day period beyond that date.
As of December 31, 2000 the SEC had not declared the Registration Statement
effective. Consequently, the Company has recorded $30,000 in liquidating
damages, as additional interest expense, during the year ended December 31,
2000. In addition, the applicable conversion percentage has been reduced to 73%,
and the additional intrinsic value of the beneficial conversion feature of
$109,588 has been charged to interest expense with an offsetting increase in
additional paid in capital during 2000.
The Registration Statement was not declared effective by March 23, 2001;
accordingly, the applicable conversion percentage became 50%, resulting in an
additional intrinsic value of the beneficial conversion feature of $1,890,412 as
of March 23, 2001. The Company is in discussions with the holder of the
convertible note regarding the possible renegotiation of the terms of the
convertible note.
All fees and expenses related to the registration of the common stock will be
paid by the Company.
F-20
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Note 11. Issuance of Common Stock
On February 17, 2000, the Company issued 75,000 shares of its common stock to
Universal Funding, Inc. for payment of certain fees due in connection with the
granting of the common stock call options and temporary reduction of the call
option exercise price. In addition, the Company issued 35,000 shares of its
common stock to an investment consultant for service rendered in connection with
the common stock option grant transactions.
Also, on February 17, 2000, the Company issued 35,000 shares to a consultant for
services rendered in the first quarter of 2000. The value of the common shares
at the date of issuance of the shares described above was $1.28 per share.
The Company issued 377,141 shares of common stock in connection with the payment
of $125,588 of interest due on its convertible debt.
Note 12. Litigation
The Company is currently involved in a dispute with Marc Stengel ("Stengel") and
Hannah Kramer ("Kramer"), each of whom is a substantial shareholder of the
Company, and with Whirl Wind Collaborative Design, Inc. ("Whirl Wind") and
Silesky Marketing, Inc. ("Silesky"), two entities affiliated with Stengel.
Stengel and Ms. Kramer are former directors of the Company. Stengel is also a
former officer and employee.
The lawsuit was initially filed against Stengel alone in June 2000. It remains
pending in the US District Court for the District of Maryland. A First Amended
Complaint was filed on October 11, 2000, which added the defendants other than
Stengel identified above. The First Amended Complaint seeks rescission of the
transactions pursuant to which Stengel and Kramer obtained their substantial
stock interests in the Company, and seeks damages against Stengel and Kramer, in
both cases, for misrepresentations and omissions under the common law of fraud,
the Maryland Securities Act and certain contractual warranties and
representations. The First Amended Complaint also seeks damages and remedies
against Stengel for breach of his contractual duties as an employee of the
Company and for misrepresentations he made to the Company while acting as an
employee; these claims relate to businesses operated by Stengel in competition
with the Company and using the Company's resources. The First Amended Complaint
also seeks to recover damages from Stengel and the two corporate defendants for
conversion of certain of Company assets, resources and employee services, and
for unjust enrichment. All defendants have filed answers to the First Amended
Complaint. Stengel has filed a counterclaim seeking damages against the Company
for alleged interference with his ability to sell shares of our common stock.
Whirl Wind has filed a counterclaim against Sales Online for conversion of a
small quantity of computer equipment alleged to be owned by Whirl Wind.
On or about June 16, 2000, Stengel commenced an action in the Delaware Chancery
Court pursuant to Section 225 of the Delaware General Corporation Law (the
"Delaware 225 Action") seeking a determination from the Court that he was
improperly removed as an officer and director of the Company, should be
reinstated as such, and that Gregory Rotman and Richard Rotman be ordered to
dismiss the Maryland action. The Delaware 225 Action was stayed pending the
outcome of a special meeting of shareholders discussed below. Following the
results of that meeting, the Company moved for summary judgment and asked that
the Delaware 225 Action be dismissed. Oral argument on this motion was presented
on January 18, 2001. The Court granted the Company's motion for summary judgment
and dismissed the Delaware 225 Action. The Court concluded that (1) the special
F-21
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
meeting of stockholders held on September 19, 2000 to elect directors (discussed
below) was authorized by the Company's bylaws and as a result, the new board was
properly elected and had the authority to terminate Stengel as an officer; (2)
Stengel's post-election challenge to the special meeting was barred by his own
inequitable conduct; and (3) his claim for back pay could not be pursued in the
Court of Chancery action.
On July 20, 2000, in accordance with the Company's Amended and Restated Bylaws,
Gregory Rotman, called a special meeting of the stockholders to be held on
September 19, 2000 for the election of directors. Gregory Rotman and Richard
Rotman nominated themselves, Andrew Pilaro and John Martin for election to the
Board of Directors and filed soliciting materials with the SEC. No proxy
soliciting materials were filed by any other party. The meeting was held on
September 19, 2000 and the nominated slate of directors was elected as the
Company's Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman immediately
following the special meeting of stockholders on September 19, 2000. At that
meeting, the new Board removed Stengel as an officer of the Company, formally
ratified and approved the initiation and prosecution of the Maryland action
against Stengel and authorized Gregory Rotman, as president and CEO to take all
actions necessary to prosecute the Company's claims against Stengel and others
and authorized the reimbursement of approximately $75,000 of the Rotmans'
expenses in connection with the aforementioned solicitation.
On or about October 3, 2000,. Stengel submitted to the Company a demand for
advancement of certain expenses (including attorneys' fees) he allegedly
incurred in connection with the Delaware 225 Action and the Maryland action. In
his advancement request, Stengel claimed to have incurred approximately $96,800
in legal expenses in the Delaware 225 Action and the Maryland action through
August, 2000. On October 20, 2000, the Company notified Stengel that the Board
of Directors had denied his advancement request.
On or about October 24, 2000, Stengel filed a second action in the Delaware
Court of Chancery pursuant to Section 145 of the Delaware General Corporation
Law seeking a determination from the Court that he is entitled, pursuant to the
Company's Bylaws, to be advanced his expenses, including attorneys' fees,
incurred by him in connection with the Delaware 225 Action and the Maryland
Action (the "Delaware 145 Action"). The Company and Stengel each moved for
summary judgment in the Delaware 145 Action. A hearing on the Delaware 145
Action was held on January 2, 2001, at which time the Court of Chancery granted
the Company's motion for summary judgment and denied Stengel's motion. Stengel
has appealed this decision to the Delaware Supreme Court.
On November 1, 2000, the Company filed with the Maryland Court a Motion for a
Preliminary Injunction requesting that the Court enjoin Stengel and Kramer from
selling, attempting to sell, or otherwise disposing of their shares of the
company's stock pending resolution of the merits of our claim for rescission. On
November 9, 2000, Stengel filed an Opposition to our Motion for a Preliminary
Injunction. On November 9, 2000, Stengel also filed a Motion for Preliminary
Injunction requesting that the Court (i) order the Company to instruct its
transfer agent to implement and complete all measures necessary to sell his
restricted stock in compliance with Rule 144 and (ii) enjoin the Company from
interfering with or preventing the sale of stock by Stengel in accordance with
Rule 144. The District Court conducted an extensive evidentiary hearing on both
motions, which concluded on January 23, 2001. The parties briefed the issues and
the Court heard final arguments on February 22, 2001. On March 19, 2001, the
Court (1) denied the Company's motion for the preliminary injunction against
Stengel and Kramer, (2) granted in part Stengel's motion for a preliminary
injunction insofar as the Company is enjoined from interfering with any sale of
stock by Stengel that complies with SEC Rule 144, (3) determined that the
evidence supported a finding that Stengel and Kramer are acting in concert in
F-22
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
the disposition of their shares and (4) denied Stengel and Kramer's motions to
dismiss the Company's lawsuit against them. The Court has scheduled the case for
trial in December, 2001.
The Company is unable to predict the ultimate outcome of the litigation
described above. The Company's financial statements do not include any
adjustments related to these matters.
Note 13 Subsequent Event
On February 1, 2001, the Company adopted the 2001 Non-Qualified Stock Option
Plan (the "2001 Plan") and filed a Registration Statement on Form S-8 to
register 3,000,000 shares of its common stock. Under the 2001 Plan employees may
elect to receive their gross compensation in the form of options to acquire the
number of shares of the Company's common stock equal to their gross compensation
divided by the fair value of the stock on the date of grant at $.001 per share.
As of April 1, 2001 approximately 566,500 shares have been issued in connection
with this plan.
F-23
SALES ONLINE DIRECT, INC.
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 31,984 $ 102,534
Accounts receivable 34,401 -
Marketable securities 620 17,196
Inventory 264,578 385,973
Prepaid expenses 125,975 125,975
Other current assets 52,083 18,089
---------- ----------
Total current assets 509,641 649,767
Property and equipment, net 1,347,439 1,490,247
Goodwill 15,313 26,797
Other intangible assets 3,727,251 4,162,211
Debt financing costs, net 97,500 165,000
---------- ----------
Total assets $5,697,144 $6,494,022
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable $ 206,220 $ -
Accounts payable 397,324 137,277
Accrued expenses 1,403,010 1,003,564
---------- ----------
Total current liabilities 1,646,554 1,140,841
---------- ----------
Convertible debt 2,844,696 2,737,196
---------- ----------
Temporary equity ($.001 par value, 200,000 shares) 237,500 237,500
---------- ----------
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares authorized;
59,914,979 and 54,763,281 shares issued and outstanding
at June 30, 2001 and December 31, 2000, respectively 59,915 54,763
Additional paid-in capital 10,968,028 10,448,176
Accumulated deficit (9,730,284) (7,700,307)
Unearned compensation (329,265) (424,147)
----------- ----------
Total stockholders' equity 968,394 2,378,485
---------- ----------
Total liabilities and stockholders' equity $5,697,144 $6,494,022
========== ==========
See accompanying notes to financial statements
F-24
SALES ONLINE DIRECT, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2001 June 30, 2000 June 30, 2001
------------- ------------- ------------- -------------
Restated Restated
-------- --------
Revenues $ 189,734 $ 576,632 $ 143,394 $ 546,138
Cost of revenues 66,915 229,185 171,999 360,939
---------- ---------- ---------- ----------
Gross profit 122,819 347,447 (28,605) 185,199
---------- ---------- ---------- ----------
Operating expenses:
Selling general and administrative expenses 750,022 1,709,481 736,339 1,222,759
Web site development costs 205,813 376,392 147,436 347,964
---------- ---------- ---------- ----------
Total operating expenses 955,835 2,085,873 883,775 1,570,723
---------- ---------- ---------- ----------
Loss from operations (833,016) (1,738,426) (912,380) (1,385,524)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (146,020) (293,848) (147,501) (1,162,456)
Other income (expense) 39 2,297 17,033 28,326
---------- ---------- ---------- ----------
Total other expense (145,981) (291,551) (130,468) (1,134,130)
---------- ---------- ---------- ----------
Loss before income taxes (978,997) (2,029,977) (1,042,848) (2,519,654)
Provision for income taxes - - - -
---------- ---------- --------- ----------
Net loss $ (978,997) $(2,029,977) $(1,042,848) $
========== ========== ========== ==========
Loss per share (basic) $ (0.02) $ (0.04) (0.02) $ (0.05)
========== ========== ========== ==========
Weighted average shares 57,035,229 56,044,504 47,056,140 46,946,167
========== ========== ========== ==========
See accompanying notes to financial statements
F-25
SALES ONLINE DIRECT, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
2001 2000
---- ----
Restated
--------
Operating activities:
Net loss $ (2,029,977) $ (2,519,654)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 736,722 142,606
Amortization of unearned compensation 94,882 92,066
Amortization of debt discount 107,500 59,696
Beneficial conversion feature - 1,000,000
Stock issued in payment of interest 118,520 -
Stock issued in payment of legal and consulting fees 77,607 -
Stock options issued for compensation 328,877 -
Unrealized loss on marketable securities (2,171) (8,160)
Changes in assets and liabilities:
Accounts receivable (34,401) (20,188)
Inventory 121,395 (97,020)
Accounts payable 260,047 (306,381)
Accrued expenses 39,446 338,918
Other, net (33,994) (60,062)
Net cash used in operating activities (215,547) (1,337,803)
-------------- -------------
Investing activities:
Purchase of securities - (382,575)
Proceeds from sale of securities 18,747 263,557
Property and equipment additions (79,970) (114,400)
-------------- -------------
Net cash used in investing activities (61,223) (233,418)
-------------- -------------
Financing activities:
Proceeds from assignment of stock call options - 87,188
Net proceeds from convertible debt - 2,300,000
Proceeds from loan payable 206,220 -
Proceeds from sale of warrants - 430,000
-------------- -------------
Net cash provided by financing activities 206,220 2,817,188
-------------- -------------
Net increase (decrease) in cash and equivalents (70,550) 1,245,967
Cash and equivalents, beginning 102,534 221,213
-------------- -------------
Cash and equivalents, ending $ 31,984 $ 1,467,180
============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ - $ 5,185
============== =============
Interest $ - $ -
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Internet Collectible Awards for
temporary equity recorded as other intangible asset $ - $ 237,500
============== =============
See accompanying notes to financial statement
F-26
SALES ONLINE DIRECT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)
Common stock Additional
-------------- Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
------ ------ ------- ------- ------------ -----
Balance, December 31, 2000 54,763,281 $54,763 $ 10,448,176 $(7,700,307) $ (424,147) $ 2,378,485
Amortization of stock-based
compensation - - - - 94,882 94,882
Common stock issued in payment of
interest on convertible debt 620,169 620 117,900 - - 118,520
Issuance of stock options to
employees for services 3,867,599 3,868 325,009 - - 328,877
Common stock issued in payment of
legal and consulting services 663,930 664 76,943 - - 77,607
Net loss - - - (2,029,977) - (2,209,977)
---------- ------- ------- ----------- ---------- ------------
Balance, June 30, 2001 59,914,979 $59,915 $ 10,968,028 $(9,730,284) $ (329,265) $ 968,394
========== ======= ============ =========== ========== ============
See accompanying notes to financial statements
F-27
SALES ONLINE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
Note 1 Organization
The Company operates and maintains an Internet portal dedicated to
collectibles in a variety of categories. The Company conducts online
person-to-person auctions of its own inventory of collectibles and items
posted under consignment arrangements by third party sellers.
On March 7, 2000, the Company acquired Internet Collectible Awards ("ICA")
(collectiblenet.com), an internet business that polls consumers and reports
on the best Internet collectibles web sites in a variety of categories. As
consideration for the acquisition, the Company recorded accounts payable of
$50,000 and issued 200,000 shares of the Company's common stock valued at
$237,500 (based upon the Company's stock price on the date of acquisition).
The acquisition has been accounted for under the purchase method of
accounting. The excess of the purchase price, $287,500, over the fair value
of the assets acquired, a web site, has been allocated to other intangible
assets. As indicated in Note 9, the Company is involved in litigation.
Subsequent to this acquisition, management obtained information that caused
it to believe that, unbeknownst to the Company, the beneficial owner of ICA
was an officer and significant shareholder of the Company at the time of
the acquisition. As a result of the pending litigation, the common stock
issued in connection with this transaction has been recorded as temporary
equity on the balance sheet. Upon resolution of the litigation, any
necessary accounting adjustments will be made.
On November 8, 2000, the Company acquired certain assets of ChannelSpace
Entertainment, Inc. (CSEI), a Virginia corporation, and Discribe, Ltd
(Discribe), a Canadian corporation wholly owned by CSEI. CSEI and Discribe
are converged internet content providers and producers of affinity portals,
including the CollectingChannel.com and the CelticChannel.com web sites.
The consideration paid by the Company for the acquired assets was 7,530,000
unregistered shares of the Company's common stock valued at $4,648,996, and
$300,000 worth of the Company's common stock to be registered (711,136
shares based upon the average closing bid price of the stock on the five
trading days prior to filing the registration statement, February 6, 2001).
Included in accrued expenses at June 30, 2001 is $300,000 related to this
transaction. The assets acquired - consisting principally of software
licenses, a video library, a library of articles, a user list, Domain
names, furniture, fixtures and equipment - had a fair value of
approximately $4,974,000. The fair value of the of the assets acquired, and
the consideration paid, have been determined by independent appraisal. The
excess of the fair value of the assets acquired over the purchase price,
approximately $25,000, has been allocated pro-rata to the intangible assets
acquired.
Note 2 Summary of Significant Accounting Policies
General
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the United States
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation. These
financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes the disclosures
contained herein are adequate to make the information presented not
misleading. However, these financial statements should be read in
F-28
conjunction with the financial statements and notes thereto included in the
Company's annual report for the year ended December 31, 2000, which is
included in the Company's Form 10-KSB.
Inventory
Inventory consists of collectible merchandise for sale and is stated at the
lower of cost or market on a first-in, first-out (FIFO) method.
On a periodic basis management reviews inventories on hand to ascertain if
any is slow moving or obsolete. In connection with this review, at June
30, 2001 and December 31, 2000 the Company has provided a $200,000 reserve.
Revenue Recognition
The Company generates revenue on sales of its purchased inventory and from
fees and commissions on sales of merchandise under consignment type
arrangements.
For sales of merchandise owned and warehoused by the Company, the Company
is responsible for conducting the auction, billing the customer, shipping
the merchandise to the customer, processing customer returns and collecting
accounts receivable. The Company recognizes revenue upon verification of
the credit card transaction and shipment of the merchandise, discharging
all obligations of the Company with respect to the transaction.
For sales of merchandise under consignment-type arrangements, the Company
takes physical possession of the merchandise, but is not obligated to, and
does not, take title or ownership of merchandise. When an auction is
completed, consigned merchandise that has been sold is shipped upon receipt
of payment. The Company recognizes the net commission and service revenues
relating to the consigned merchandise upon receipt of the gross sales
proceeds and shipment of the merchandise. The Company then releases the net
sales proceeds to the Consignor, discharging all obligations of the Company
with respect to the transaction.
The Company charges a fixed monthly amount for web hosting services. This
revenue is recognized on a monthly basis as the services are provided.
Advertising revenues are recognized at the time the advertisement is
initially displayed on the Company's web site.
Advertising Costs
Advertising costs, totaling approximately $39,200 in 2001 and $125,300 in
2000, are charged to expense when incurred.
Income taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities
using enacted income tax rates expected to be in effect when the taxes are
actually paid or recovered. A deferred tax asset is also recorded for net
operating loss, capital loss, and tax credit carry forwards to the extent
their realization is more likely than not. The deferred tax expense for the
period represents the change in the deferred tax asset or liability from
the beginning to the end of the period.
F-29
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the amounts reported of assets and liabilities as
of the date of the balance sheet and reported amounts of revenue and
expenses during the accounting period. Material estimates that are
particularly susceptible to significant change in the near term relate to
inventory, intangible assets and deferred tax asset valuations. Although
these estimates are based upon management's knowledge of current events and
actions, they may ultimately differ from actual results.
Earnings per Common Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that could have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the Company
relate to convertible debt and outstanding stock options and warrants. The
number of common shares that would be issued upon conversion of the
convertible debt would have been 136,986,301 shares as of June 30, 2001.
The number of common shares that would be included in the calculation of
outstanding options and warrants is determined using the treasury stock
method. The assumed conversion of outstanding dilutive stock options and
warrants would increase the shares outstanding but would not require an
adjustment of income as a result of the conversion. Stock options and
warrants applicable to 937,000 shares and 957,000 shares at June 30, 2001
and 2000, respectively, have been excluded from the computation of diluted
earnings per share because they were anti-dilutive. Diluted earnings per
share have not been presented as a result of the Company's net loss for
each period.
Asset Impairment
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", long lived
assets to be held and used by the Company are reviewed to determine whether
any events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For long-lived assets to be held and
used, the Company bases its evaluation on such impairment indicators as the
nature of the assets, the future economic benefits of the assets, any
historical or future profitability measurements, as well as other external
market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash
flow analysis of assets at the lowest level for which identifiable cash
flows exist. If impairment has occurred, the Company recognizes a loss for
the difference between the carrying amount and the estimated value of the
asset. The fair value of the asset is measured using an estimate of
discounted cash flow analysis.
Web Site Development Costs
The Company adopted the provisions of EITF 00-2, "Accounting for Web Site
Development Costs" ("EITF 00-2"), which requires that costs incurred in
planning, maintaining, and operating stages that do not add functionality
to the site be charged to operations as incurred. External costs incurred
in the site application and infrastructure development stage and graphic
development are capitalized. The Company has implemented the provisions of
EITF 00-2 retroactively to January 1, 2000 and, accordingly, has restated
operations for the six months ended June 30, 2000 to give affect to this
change. During the six months ended June 30, 2001 and 2000, the Company
capitalized approximately $78,600 and $53,400 of Web site development
costs. Such capitalized costs are included in "Property and equipment".
F-30
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Tangible Assets." SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted
for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addressed the initial recognition and measurement
of intangible assets subsequent to acquisition SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but
rather will be tested at least annually for impairment. The Company is
required to adopt SFAS Nos. 141 and 142 on January 1, 2002. Upon adoption
of SFAS Nos. 141 and 142 the Company will stop amortization of goodwill
that resulted from business combinations completed prior to the adoption of
SFAS No. 141. The Company currently has goodwill and other intangible
assets on its balance sheet and management is in the process of evaluating
the impact of adopting these standards.
Reclassifications
Certain amounts in the 2000 financial statements have been reclassified to
conform with the 2001 presentation. The effect of these reclassifications
was to reduce the loss from operations by $49,600 and $19,148 for the six
and three months ended June 30, 2000, respectively, which had no effect on
earnings per share.
Note 3. Loan Payable
As of June 30, 2001 Augustine Fund, L.P. had advanced the Company $206,220
as a loan. The Company is negotiating final terms, as of June 30, 2001 has
recorded interest at 8% per annum on balances outstanding from time to
time.
Note 4. Accrued expenses
Accrued expenses are comprised of the following:
June 30, June 30,
2001 2000
---- ----
General operating expenses $ 115,510 $ 92,171
Professional fees 437,500 421,721
Common shares to be issued
in connection with CSEI
transaction (Note 1) 300,000 300,000
Lease termination costs 100,000 100,000
Interest 90,000 89,672
------- -------
Total $1,043,010 $1,003,564
========== ==========
F-31
Note 5 - Common Stock
Call Option Agreement
In connection with the transaction with Securities Resolution Advisors,
Inc. ("SRAD") on February 25,1999, SRAD entered into a Call Option
Agreement ("Option Agreement") with Universal Funding, Inc. ("Universal"),
a shareholder of SRAD and a beneficial owner of 3,000,000 shares of SRAD's
common stock. Under the Option Agreement, Universal agreed to grant options
to SRAD to acquire 2,000,000 shares of SRAD's common stock owned by
Universal. The options consist of 1,000,000 shares at $.50 per share
exercisable through February 25, 2000 and 1,000,000 shares at $.75 per
share exercisable through February 25, 2001. The exercise price was reduced
to $.375 per share through April 30, 1999. All unexercised options expired
on February 25, 2001.
Stock Options
In July 1999, the Company granted an option to an employee to purchase
471,000 shares of common stock at $.01 per share under the 1999 Stock
Option Plan (the "1999 Plan"). The option is exercisable over a four year
period. The Company recorded unearned compensation of $757,848, based upon
the difference between the fair market value of the common stock at the
grant date and the exercise price. The unearned compensation is being
amortized over the vesting period of the option. Amortization expense
related to unearned compensation amounted to $94,882 for each of the six
-month periods ended June 30, 2001 and 2000.
On February 1, 2001, the Company adopted the 2001 Non-Qualified Stock
Option Plan (the "2001 Plan") and has filed Registration Statements on Form
S-8 to register 10,000,000 shares of its common stock. Under the 2001 Plan,
employees may elect to receive their gross compensation in the form of
options to acquire the number of shares of the Company's common stock equal
to their gross compensation divided by the fair value of the stock on the
date of grant at $.001 per share. During the six months ended June 30,
2001, the Company granted options for 3,867,599 shares at various dates
aggregating $325,009 under this plan. All options granted during the period
were exercised.
Note 6 - Income Taxes
There were no provisions for income taxes for the six months ended June
30, 2001 and 2000 due to the Company's net operating loss and its valuation
reserve against deferred income taxes
The difference between the provision for income taxes from the amounts
computed by applying the statutory federal income tax rate of 34% and the
Company's effective tax rate is primarily due to the net operating loss
incurred by the Company and the valuation reserve against the Company's
deferred tax asset.
At June 30, 2001, the Company has federal and state net operating loss
carry forwards of approximately $6,300,000 available to offset future
taxable income that will expire in 2021.
Note 7 - Convertible Debt Financing
On March 23, 2000, the Company entered into a Securities Purchase Agreement
(the "Agreement"), whereby the Company sold an 8% convertible note in the
amount of $3,000,000 due March 31, 2002 to Augustine Fund, L.P. (the
"Buyer").
The note is convertible into common stock at a conversion price equal to
the lesser of: (1) one hundred ten percent (110%) of the lowest of the
closing bid price for the common stock for the five (5) trading days prior
to March 23, 2000, or (2) seventy-five percent (75%) of the average of the
closing bid price for the common stock for the five (5) trading days
immediately preceding the conversion date.
F-32
Had the Buyer converted the note on March 23, 2000, the Buyer would have
received $4,000,000 in aggregate value of the Company's common stock upon
conversion of the $3,000,000 convertible note. Because the debt was
convertible at the date of issuance, the intrinsic value of the beneficial
conversion feature of $1,000,000 has been charged to interest expense with
an offsetting increase in additional paid in capital during 2000.
In connection with the Agreement, the Company also issued warrants to the
Buyer and Delano Group Securities to purchase 300,000 and 100,000 shares of
common stock, respectively. The purchase price per share of common stock is
$2.70, one hundred and twenty percent (120%) of the lowest of the closing
bid prices for the common stock during the five (5) trading days prior to
the closing date. The warrants expire on March 31, 2005.
In addition, the Company entered into a Registration Rights Agreement
("Registration Agreement"), whereby the Company agreed to file a
Registration Statement with the Securities and Exchange Commission (SEC),
on or before October 25, 2000, covering the common stock to be issued upon
the conversion of the convertible note and the stock purchase warrants. The
Registration Agreement was modified in May 2001, effective as of January 1,
2001, and again in July 2001 and contains a provision that decreased the
conversion percentage to seventy three percent (73%) because the
Registration Statement was not declared effective by the SEC by December
15, 2000. The modified Registration Agreement also contains provisions that
decrease the conversion percentage to fifty percent (50%) if the
Registration Statement is not declared effective by the SEC on or before
September 30, 2001 and provides for cash penalties, as liquidating damages,
equal to two percent (2%) for each thirty day period beyond that date.
Finally, as consideration for the January 1, 2001 modifications, the
Company agreed to grant a security interest in all of its assets as
security for the Company's obligations under the Agreement.
As of August 10, 2001, the SEC had not declared the Registration Statement
effective.
All fees and expenses related to the registration of the common stock will
be paid by the Company.
Note 8 - Issuance of Common Stock
On February 5 and June 22, 2001, the Company issued 227,417 and 392,752
shares of common stock in connection with the payment of $60,000 and
$58,520, respectively, of interest on its convertible debt.
During the second quarter of 2001 the Company issued 663,930 shares of
common stock in connection with the payment of $77,607 of legal and
consulting fees.
Note 9 - Litigation
The Company is currently involved in a dispute with Marc Stengel
("Stengel") and Hannah Kramer ("Kramer"), each of whom is a substantial
shareholder of the Company, and with Whirl Wind Collaborative Design, Inc.
("Whirl Wind") and Silesky Marketing, Inc. ("Silesky"), two entities
affiliated with Stengel. Stengel and Kramer are former directors of the
Company. Stengel is also a former officer and employee.
The lawsuit was initially filed against Stengel alone in June 2000. It
remains pending in the US District Court for the District of Maryland. A
First Amended Complaint was filed on October 11, 2000, which added the
defendants other than Stengel identified above. The First Amended Complaint
seeks rescission of the transactions pursuant to which Stengel and Kramer
obtained their substantial stock interests in the Company, and seeks
damages against Stengel and Kramer, in both cases, for misrepresentations
and omissions under the common law of fraud, the Maryland Securities Act
and certain contractual warranties and representations. The First Amended
Complaint also seeks damages and remedies against Stengel for breach of his
contractual duties as an employee of the Company and for misrepresentations
he made to the Company while acting as an employee; these claims relate to
businesses operated by Stengel in competition with the Company and using
F-33
the Company's resources. The First Amended Complaint also seeks to recover
damages from Stengel and the two corporate defendants for conversion of
certain of Company assets, resources and employee services, and for unjust
enrichment. All defendants have filed answers to the First Amended
Complaint. Stengel has filed a counterclaim seeking damages against the
Company for alleged interference with his ability to sell shares of our
common stock. Whirl Wind has filed a counterclaim against the Company for
conversion of a small quantity of computer equipment alleged to be owned by
Whirl Wind.
On or about June 16, 2000, Stengel commenced an action in the Delaware
Chancery Court pursuant to Section 225 of the Delaware General Corporation
Law (the "Delaware 225 Action") seeking a determination from the Court that
he was improperly removed as an officer and director of the Company, should
be reinstated as such, and that Gregory Rotman and Richard Rotman be
ordered to dismiss the Maryland action. The Delaware 225 Action was stayed
pending the outcome of a special meeting of shareholders discussed below.
Following the results of that meeting, the Company moved for summary
judgment and asked that the Delaware 225 Action be dismissed. On February
26, 2001, the Court issued a decision in which it granted the Company's
motion for summary judgment and dismissed the Delaware 225 Action. The
Court concluded that (1) the special meeting of stockholders held on
September 19, 2000 to elect directors was authorized by the Company's
bylaws and as a result, the new board was properly elected and had the
authority to terminate Stengel as an officer; (2) Stengel's post-election
challenge to the special meeting was barred by his own inequitable conduct;
and (3) his claim for back pay could not be pursued in the Court of
Chancery action. Stengel has appealed the Court of Chancery's decision to
the Delaware Supreme Court. That appeal is now pending.
On July 20, 2000, in accordance with the Company's Amended and Restated
Bylaws, Gregory Rotman called a special meeting of the stockholders to be
held on September 19, 2000 for the election of directors. Gregory Rotman
and Richard Rotman nominated themselves, Andrew Pilaro and John Martin for
election to the Board of Directors and filed soliciting materials with the
SEC. No proxy soliciting materials were filed by any other party. The
meeting was held on September 19, 2000, and the nominated slate of
directors was elected as the Company's Board of Directors.
A special Board of Directors meeting was called by Gregory Rotman
immediately following the special meeting of stockholders on September 19,
2000. At that meeting, the new Board removed Stengel as an officer of the
Company, formally ratified and approved the initiation and prosecution of
the Maryland action against Stengel, and authorized Gregory Rotman, as
president and CEO, to take all actions necessary to prosecute the Company's
claims against Stengel and others, and authorized the reimbursement of
approximately $75,000 of the Rotman's expenses in connection with the
aforementioned solicitation.
On or about October 3, 2000, Stengel submitted to the Company a demand for
advancement of certain expenses (including attorneys' fees) he allegedly
incurred in connection with the Delaware 225 Actions and the Maryland
action. In his advancement request, Stengel claimed to have incurred
approximately $96,800 in legal expenses in the Delaware 225 Action and the
Maryland action through August, 2000. On October 20, 2000, the Company
notified Stengel that the Board of Directors had denied his advancement
request.
On or about October 24, 2000, Stengel filed a second action in the Delaware
Court of Chancery pursuant to Section 145 of the Delaware General
Corporation Law seeking a determination from the Court that he is entitled,
pursuant to the Company's Bylaws, to be advanced his expenses, including
attorneys' fees, incurred by him in connection with the Delaware 225 Action
and the Maryland action (the "Delaware 145 Action"). The Company and
Stengel each moved for summary judgment in the Delaware 145 Action. A
hearing on the Delaware 145 Action was held on January 2, 2001, at which
time the Court of Chancery granted the Company's motion for summary
judgment and denied Stengel's motion. Stengel has appealed this decision to
the Delaware Supreme Court. On June 27, 2001, following briefing and oral
argument, a three judge panel of the Delaware Supreme Court issued an order
affirming the judgment of the Court of Chancery. On July 11, 2001 Stengel
filed an motion for rehearing en banc by all five members of the Delaware
Supreme Court of the Court's June 27, 2001 order. That motion is pending.
F-34
On November 1, 2000, the Company filed with the Maryland Court a Motion for
a Preliminary Injunction requesting that the Court enjoin Stengel and
Kramer from selling, attempting to sell, or otherwise disposing of their
shares of the company's stock pending resolution of the merits of the
Company's claim for rescission. On November 9, 2000, Stengel filed an
Opposition to our Motion for a Preliminary Injunction. On November 9, 2000,
Stengel also filed a Motion for Preliminary Injunction requesting that the
Court (i) order the Company to instruct its transfer agent to implement and
complete all measures necessary to sell his restricted stock in compliance
with Rule 144 and (ii) enjoin the Company from interfering with or
preventing the sale of stock by Stengel in accordance with Rule 144. The
District Court conducted an extensive evidentiary hearing on both motions,
which concluded on January 23, 2001. The parties briefed the issues and the
Court heard final arguments on February 22, 2001. On March 19, 2001, the
Court (1) denied the Company's motion for the preliminary injunction
against Stengel and Kramer, (2) granted in part Stengel's motion for a
preliminary injunction insofar as the Company is enjoined from interfering
with any sale of stock by Stengel that complies with SEC Rule 144, (3)
determined that the evidence supported a finding that Stengel and Kramer
are acting in concert in the disposition of their shares, and (4) denied
Stengel and Kramer's motions to dismiss the Company's lawsuit against them.
The Court has scheduled the case for trial in December, 2001.
The Company is unable to predict the ultimate outcome of the litigation
described above. The Company's financial statements do not include any
adjustments related to these matters.
F-35