10QSB 1 d26535_10qsb.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 COMMISSION FILE NUMBER 0-28720 SALES ONLINE DIRECT, INC. (Exact name of registrant as specified in its charter) DELAWARE 73-1479833 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 4 Brussels Street, Worcester, Massachusetts 01610 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 791-6710 Common Stock, $0.001 Par Value (Title of each class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of August 6, 2001, the issuer had outstanding 64,221,946 shares of its Common Stock, par value $.001 per share. Transitional Small Business Disclosure Format Yes ___ No _X_ Sales Online Direct, Inc. Form 10-QSB For the three months ended June 30, 2001 TABLE OF CONTENTS Part I - Financial Information Item 1. Financial Statements Balance Sheet - June 30, 2001 and December 31, 2001 (unaudited).............. 3 Statements of Operations-- Three and Six months ended June 30, 2001 and 2000 (unaudited)............................................. 4 Statements of Cash Flows - Six-months ended June 30, 2001 and 2000 (unaudited)............................................. 5 Statements of Changes in Stockholders' Equity - Six-months ended June 30, 2001 and 2000 (unaudited).................................................. 6 Notes to Financial Statements Six-months ended June 30, 2001 and 2000...................... 7-14 Item 2. Management's Discussion and Analysis or Plan of Operations... 15 Part II - Other Information Item 1. Legal Proceedings............................................ 19 Item 2. Changes in Securities and Use of Proceeds.................... 21 Item 3. Defaults Upon Senior Securities.............................. 21 Item 4. Submission of Matters to a Vote of Security Holders.......... 21 Item 5. Other Information ........................................... 21 Item 6. Exhibits and Reports on Form 8-K............................. 22 Signature.............................................................. 23 - 2 - PART I - FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS 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 1,043,010 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 - 3 - SALES ONLINE DIRECT, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three months Six months Three months Six months ended June ended June ended June ended June 30, 2001 30, 2001 30, 2000 30, 2000 ------------ ------------ ------------ ------------ 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) $ (2,519,654) ============ ============ ============ ============ 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 - 4 - SALES ONLINE DIRECT, INC. STATEMENTS OF CASH FLOWS FOR THE SIX 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 Statements - 5 - 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) -- (2,029,977) ---------- ------- ----------- ----------- --------- ----------- 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 - 6 - 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 Celtic Channel.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 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 - 7 - should be read in 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. - 8 - 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 form 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 and three months ended June 30, 2000 to give affect to this change. - 9 - 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". 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 Intangible 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 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other 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 will rather 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 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 in connection with this loan and, in the absence of 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, December 31, 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 ========== ========== - 10 - 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 though 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 due to primarily 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 - 11 - 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. Since 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 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 50% if the Registration Statement is not declared effective by the SEC on or before August 31, 2001 and provide 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, respectively, 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 Whirlwind 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 - 12 - 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 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 (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. Stengel has appealed the Court of Chancery's decision to the Delaware Supreme Court. This 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 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. - 13 - 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 judgement of the Court of Chancery. On July 11, 2001 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. That motion is pending. 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 the Company's 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. - 14 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS This Quarterly Report on Form 10-QSB contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements in this Report. Additionally, statements concerning future matters such as the development of new services, technology enhancements, purchase of equipment, credit arrangements, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this Report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks, contingencies and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in this Report. Although the Company believes that its plans, intentions and expectations reflected in these forward-looking statements are reasonable, the Company can give no assurance that its plans, intentions or expectations will be achieved. For a more complete discussion of these risk factors, see Exhibit 99.1, "Risk Factors", in the Company's Form 10-KSB for the fiscal year ended December 31, 2000. Overview The Company's primary business, based on its 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 that will charge fees to access their services, and others to leverage company-owned technology and websites. Results of Operations for Three Months Ended June 30, 2001 The following discussion compares the Company's results of operations for the three months ended June 30, 2001, with those for the three months ended June 30, 2000. The Company's 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 the Company's own product and fees from buyers and sellers through the Rotman Auction operations. Gross sales of the Company's 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 the Company's own product represented 79% and sales of consignment merchandise represented 8%, of gross sales, but, because we only receive a fee for sales on - 15 - consignment sales, sales of the Company's own product represented 85%, and sales on consignment represented 1%, of our revenue. Web hosting and advertising fee revenues were approximately $26,500. The Company's 2001 second quarter revenues represent an increase of $46,300 from the three-month period ended June 30, 2000, in which revenues were approximately $144,000. For the three month period ended June 30, 2000, sales of the Company's own product were approximately $100,900 and sales of items on consignment were approximately $227,100, of which the Company received approximately $34,000 as fees. For that quarter, sales of the Company's own product represented 31%, and sales of consignment merchandise represented 69%, of gross sales, but, because the Company only receives 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. The Company 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. Sales, 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 in the transaction with CSEI. Professional fees decreased by $153,700, primarily attributable to a decrease in costs associated with the Company's 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 the Company's online sites. The Company decreased its marketing expenses in an effort to conserve cash. The Company plans to seek additional financing that will enable it to increase its marketing and advertising activities to attract more visitors to its 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, the Company 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. The Company 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. - 16 - Inflation. The Company believes 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 the Company's results of operations for the six months ended June 30, 2001, with those for the six months ended June 30, 2000. The Company's 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 the Company's own product and fees from buyers and sellers through the Rotman Auction operations. Gross sales of the Company's 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 the Company's 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 the Company's own product represented 88%, and sales on consignment represented 3%, of our revenue. Web hosting and advertising fee revenues were approximately $52,000. The Company's 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 the Company's own product were approximately $496,600 and sales of items on consignment were approximately $273,700, of which the Company received approximately $41,100 as fees. For that period, sales of the Company's own product represented 64%, and sales of consignment merchandise represented 36%, of gross sales, but, because the Company only receives 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. The Company 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 the Company's 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 the Company's online sites. The Company decreased its marketing expenses in an effort to conserve cash. The Company plans to seek additional financing that will enable it to increase its marketing and advertising activities to attract more visitors to its websites. - 17 - 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, the Company 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. The Company 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 three months June 30, 2000. Inflation. The Company believes that inflation has not had a material effect on its results of operations. 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 the Company had obtained the proceeds of the convertible note discussed below 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 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 Augustine Fund, L.P. converted the note on March 23, 2000, Augustine Fund, L.P. would have received $4,000,000 in aggregate value of the Company's common stock upon conversion. 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 the thee months ended March 31, 2000. In connection with the Agreement, the Company also issued warrants to Augustine Fund, L.P. 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. 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 stock. The Registration Agreement was modified, in May 2001, effective as of January 1, 2001, and again on July 15, 2001, and contains a provision that fixed the conversion percentage at seventy three percent (73%). The modified Registration Agreement also contains provisions that decrease the conversion percentage to fifty percent - 18 - (50%) if the Registration Statement is not declared effective by the SEC on or before August 31, 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. The Company's independent auditors have issued a going concern opinion on the Company's financial statements. Although the Company has begun to receive revenue from web hosting and advertising sales and has 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 Marc Stengel, management believes that presently the Company does not have sufficient cash to fund operations for the next 12 months. Based on the Company's current cash position, the Company currently needs an infusion of $700,000 of additional capital to fund its anticipated marketing costs and operating expenses over the next 12 months. The Company has secured a commitment for additional financing from the holder of the convertible note to fund its operations for the next 10 months of approximately $751,000, pending negotiation and execution of final documents. 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 the convertible note has advanced the Company funds to sustain its operations and pay off some of the Company's debts. These funds should last the Company through December 31, 2001. If the financing is not completed by then, management will be required to find alternative sources of capital to support its operations. Although the Company can offer no assurances, in the long term, management believes that if the Company is successful in concluding the litigation, having the registration statement of Augustine Fund, L.P. as the holder of the convertible note, declared effective by the SEC, and obtaining the needed capital, the Company is likely to be profitable by the end of the first quarter 2002 as a result of its efforts in greatly decreasing expenses and increasing product and advertising sales. The Company does not expect to incur the same level of litigation costs in the long term that it has sustained in the past year because of the substantial discovery and hearings conducted through December 2000. However, the Company's ability to become profitable may be adversely affected as a result of a number of factors that could thwart its efforts. These factors include our inability to successfully implement the Company's business and revenue model, the collectibles community not accepting the services the Company offers, higher costs than anticipated, the Company's inability to sell its products and services to a sufficient number of customers, the Company's failure to attract sufficient interest in and traffic to its sites, the Company's inability to complete development of its sites, the failure of the Company's operating systems, and the Company's inability to increase its revenues as rapidly as anticipated. If the Company is not profitable, it will not be able to continue its business operations. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 Whirlwind 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 - 19 - 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 $500,000 in 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 (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. Stengel has appealed the Court of Chancery's decision to the Delaware Supreme Court. This 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 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 - 20 - 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 judgement of the Court of Chancery. On July 11, 2001 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. That motion is pending. 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 the Company's 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. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) On February 5, 2001, and June 22, 2001, the Company issued 227,417 and 392,752 shares of its common stock, par value $.001 per share, to the Augustine Fund, L.P. in payment of $60,000 and $58,520, respectively, of interest due pursuant to the eight percent convertible note issued by the Company to the Augustine Fund, L.P. on March 23, 2000. Augustine Fund, L.P. is an accredited investor that represented that it acquired the convertible note and the warrants issued in connection with the note for its own account. The issuance of the securities is exempt from registration under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION In May 2001, the Company and Augustine Fund, L.P. entered into a Modification Agreement dated as of January 1, 2001, pursuant to which the parties agreed to (i) amend the eight percent convertible note to Augustine Fund, L.P. to establish the applicable conversion percentage of the - 21 - convertible note at 73%, provided that the percentage shall decrease to 50% if the registration statement filed by the Company on behalf of the Augustine Fund, L.P. (the "Registration Statement") has not been declared effective by the SEC by July 15, 2001; and (ii) to amend the registration rights agreement between the parties to waive all liquidated damages for the period January 1, 2001 through July 15, 2001, provided that such liquidated damages shall begin to accrue again if the Registration Statement is not declared effective by July 15, 2001. 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 On July 15, 2001, the Registration Agreement was modified again to fix the conversion percentage to seventy three percent (73%). 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 August 31, 2001 and provides for cash penalties, as liquidating damages, equal to two percent (2%) for each thirty day period beyond that date. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. 4.1 Amendment to Modification Agreement dated as of July 15, 2001, between the Company and Augustine Fund, L.P. (Incorporated by reference to Exhibit 4.10 to Form SB-2/A filed on August 8, 2001) (b) Reports on Form 8-K None. - 22 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2001 SALES ONLINE DIRECT INC. /s/ Gregory Rotman ---------------------------------------- Gregory Rotman, President /s/ Richard Rotman ---------------------------------------- Richard Rotman, Chief Financial Officer, Vice President and Secretary - 23 - LIST OF EXHIBITS Exhibit No. Description ----------- ----------- 4.1 Amendment to Modification Agreement dated as of July 15, 2001, between the Company and Augustine Fund, L.P. (Incorporated by reference to Exhibit 4.10 to Form SB-2/A filed on August 8, 2001)