-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N2XJ3o9k1r/AEbjsxVp4Tt5O3/3X+RU5O7GETccgp4R/n0hUFCNaWWWS8TyPzz7a 3ab4tM/U6PJbdKzjw/nvMg== /in/edgar/work/0001014100-00-000097/0001014100-00-000097.txt : 20001116 0001014100-00-000097.hdr.sgml : 20001116 ACCESSION NUMBER: 0001014100-00-000097 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALES ONLINE DIRECT INC CENTRAL INDEX KEY: 0001017655 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 731479833 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-28720 FILM NUMBER: 768232 BUSINESS ADDRESS: STREET 1: 4 BRUSSELS STREET STREET 2: SUITE 220 CITY: WORCESTER STATE: MA ZIP: 01610 BUSINESS PHONE: 5166254040 MAIL ADDRESS: STREET 1: 7633 EAST 63RD PL STREET 2: SUITE 220 CITY: TULSA STATE: OK ZIP: 74133 FORMER COMPANY: FORMER CONFORMED NAME: SECURITIES RESOLUTION ADVISORS INC DATE OF NAME CHANGE: 19980814 FORMER COMPANY: FORMER CONFORMED NAME: ROSE INTERNATIONAL LTD DATE OF NAME CHANGE: 19960627 10QSB 1 0001.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 September 30, 2000 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 October 31, 2000, the issuer had outstanding 47,056,140 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 nine months ended September 30, 2000 TABLE OF CONTENTS ----------------- Part I - Financial Information Item 1. Financial Statements Balance Sheet - September 30, 2000 (unaudited)......................3 Statements of Operations - Three and Nine months ended September 30, 2000 and 1999 (unaudited)....................................4 Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 (unaudited)..................................5-6 Statements of Changes in Stockholders' Deficit - Nine months ended September 30, 2000 and 1999 (unaudited).........................................7 Notes to Financial Statements Nine-months ended September 30, 2000 and 1999....8-15 Item 2. Management's Discussion and Analysis or Plan of Operations.................................16 Part II - Other Information Item 1. Legal Proceedings.........................................19 Item 2. Changes in Securities and Use of Proceeds.................20 Item 3. Defaults Upon Senior Securities...........................20 Item 4. Submission of Matters to a Vote of Security Holders.......20 Item 5. Other Information ........................................20 Item 6. Exhibits and Reports on Form 8-K..........................20 Signature...................................................................21 - 2 - PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
SALES ONLINE DIRECT, INC BALANCE SHEET SEPTEMBER 30, 2000 Assets Current assets: Cash and cash equivalents $ 831,589 Inventory 729,812 Marketable securities 31,041 Prepaid expenses 97,348 Other current assets 46,105 ----------- Total current assets 1,735,895 Property and equipment, net 581,625 Goodwill 32,539 Other intangible assets 254,550 Debt financing costs, net 198,750 Other assets 15,667 ----------- Total assets $ 2,819,026 =========== Liabilities and stockholders' deficit Current liabilities: Accounts payable $ 87,081 Accrued expenses 357,781 ------------ Total current liabilities 444,862 ------------ Convertible Debt 2,683,446 ------------ Stockholders' deficit: Common stock, $.001 par value, 100,000,000 shares authorized; 47,056,140 shares issued and outstanding 47,056 Additional paid-in capital 5,809,211 Accumulated deficit (5,691,145) Unearned compensation (474,404) ------------ Total stockholders' deficit (309,282) ------------ Total liabilities and stockholders' deficit $ 2,819,026 =============
See accompanying notes to unaudited financial statements - 3 -
SALES ONLINE DIRECT, INC. STATEMENTS OF OPERATION (unaudited) Three months Nine months Three months Nine months ended ended ended ended September 30, September 30, September 30, September 30, 2000 2000 1999 1999 ------------- ------------- ------------- ------------- Revenues $ 461,554 $ 1,007,692 $ 380,148 $ 692,792 Cost of revenues 429,511 790,449 363,232 437,063 ------- ---------- ------- ------- Gross Profit 32,043 217,243 16,916 255,729 Selling, general and administrative expenses 825,169 2,445,492 665,520 1,456,714 ------- --------- ------- --------- Loss from operations (793,126) (2,228,249) (648,604) (1,200,985) -------- --------- ------- --------- Other income (expense) Interest expense (147,500) (1,309,956) - - Other income (expense) 25,905 54,231 (89,927) (43,394) ------- --------- ------ ------ Total other income (expense) (121,595) (1,255,725) (89,927) (43,394) ------- --------- ------ ------ Loss before income taxes (914,721) (3,483,974) (738,531) (1,244,379) Provision for taxes on income - - - - -------- --------- ------- --------- Net loss $ (914,721) $ (3,483,974) (738,531) $(1,244,379) ================ ================ ================ ============ Loss per share Basic $ (0.019) $ (0.074) $ (0.016) $ (0.028) ================ ================ =============== ============== Weighted average shares 47,056,140 46,983,093 46,711,140 44,794,786 ================ ================ =============== ==============
See accompanying notes to unaudited financial statements - 4 -
SALES ONLINE DIRECT, INC STATEMENT OF CASH FLOWS For the nine months ended (unaudited) September 30, September 30, 2000 1999 ------------ ------------- Operating activities: Net (loss) $ (3,483,974) $ (1,244,379) Adjustments to reconcile net (loss) to net cash (used in) operating activities Depreciation and amortization 230,626 33,314 Amortization of unearned compensation 139,507 - Realized (gain) loss on marketable securities 26,286 15,069 Unrealized (gain) loss on marketable securities (41,098) 49,912 Beneficial conversion feature 1,000,000 - Amortization of debt discount 113,446 - Changes in assets and liabilities: Accounts receivable 48,682 (81,942) Inventory (100,083) 28,739 Due from related parties - 4,006 Accounts payable (266,588) 11,351 Accrued expenses 276,298 89,952 Other, net (59,225) (51,262) ---------- ----------- Net cash (used in) operations (2,116,123) (1,145,240) ---------- ---------- Investing activities: Acquisition of marketable securities (407,975) (2,149,446) Proceeds from sales of marketable securities 391,746 1,710,029 Acquisition of Securities Resolution Advisors, Inc. - 488 Merger with Rotman Auction, Inc. - 9,864 Other assets - (70,000) Property and equipment additions (74,460) (230,994) ---------- ---------- Net cash (used in) investing activities (90,689) (730,059) ---------- ---------- Financing activities: Proceeds from assignment of common stock call options 87,188 2,450,000 Stock subscription receivable - 1,000 Repayment of officer loan - (12,000) Net proceeds from convertible securities 2,300,000 - Proceeds from sale of warrants 430,000 - ---------- ---------- --- Net cash provided by financing activities 2,817,188 2,439,000 ---------- ---------- --- Net increase in cash and equivalents 610,376 563,701 Cash and equivalents, beginning 221,213 - ---------- ---------- Cash and equivalents, ending $ 831,589 $ 563,701 ========== ========== See accompanying notes to unaudited financial statements
- 5 -
SALES ONLINE DIRECT, INC STATEMENTS OF CASH FLOWS (continued) For the nine months ended (unaudited) September 30, September 30, 2000 1900 ------------- ------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ - $ - ============= ============= Income taxes $ 5,185 $ - ============= ============= 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) 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 Common stock and liabilities $ 287,500 Consulting fees paid in common stock 44,835 See accompanying notes to unaudited financial statements
- 6 -
SALES ONLINE DIRECT, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the nine months ended September 30, 2000 (unaudited) Common Stock ----------------------------- Additional Paid-in Accumulated Unearned Shares Amount Capital Deficit Compensation Total ---------- --------- ----------- ------------ ------------- ---------- Balance, December 31, 1999 46,711,140 $46,711 $4,010,033 $(2,207,171) $(613,911) $1,235,662 Common stock issued in connection with 110,000 110 (110) - - - call option agreement Common stock issued to consultant 35,000 35 44,800 - - 44,835 for services Acquisition of Internet Collectible Awards 200,000 200 237,300 - - 237,500 Proceeds from assignment of options - - 87,188 - - 87,188 Beneficial conversion discount - - 1,000,000 - - 1,000,000 Issuance of warrants - - 430,000 - - 430,000 Amortization of stock-based compensation - - - - 139,507 139,507 Net loss - - - (3,483,974) - (3,483,974) ---------- ------- ---------- ----------- --------- ---------- Balance, September 30, 2000 47,056,140 $47,056 $5,809,211 $(5,691,145) $(474,404) $ (309,282) ========== ======= ========== =========== ========= ========== See accompanying notes to unaudited financial statements
- 7 - SALES ONLINE DIRECT, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS Nine months ended September 30, 2000 and 1999 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 all of the issued and outstanding shares 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 the business of Internet Auction became the business of SRAD. 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 has 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 (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 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 has been allocated to other intangible assets. (See Note 6) 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 that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements 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, 1999 which is included in the Company's Form 10KSB. - 8 - Marketable Securities Marketable securities are classified as trading and are stated at fair value. Goodwill Goodwill is being amortized on a straight-line basis over an estimated useful lives of three to five years. Other intangible assets The other intangible assets acquired from Internet Collectible Awards are being amortized over their estimated useful life of five years. Debt financing costs Debt financing costs associated with the convertible debt are being amortized over the two year term of the related debt. 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. 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 to the customer 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. The Company then releases the net sales proceeds to the Consignor. - 9 - 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 the inventory valuation and the 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. Earnings per 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 outstanding stock options, convertible debt and common stock warrants and are determined using the treasury stock method. The potential common shares have been excluded from the computation of earnings per share because they were antidilutive as a result of the Company's net loss for the period. Fair Value of Financial Instruments The carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and marketable securities, approximate fair value. The fair value of the convertible debt, based upon the market value of the common stock and the terms of the note, is estimated to be $4.0 million. 3. 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 - 10 - services rendered to SRAD in connection with the acquisition of Internet Auction, Inc. Also, the Company assigned options to purchase 700,000 shares of stock from Universal to Steven Rotman, the father of Richard and Gregory Rotman, in connection with the acquisition of certain inventories. 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 September 30, 2000, the Company had a balance of 497,500 shares remaining under the agreement with an exercise price of $.75 and an expiration date of February 25, 2001. 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. The aggregate value of the common stock issued was $140,000 treated as a cost of raising capital, with no impact on the net worth of the Company. Also, the Company issued 35,000 shares to a consultant for services rendered in the first quarter of 2000. The fair value of the shares issued, $44,800, was charged to expense and added to additional paid in capital in the first quarter of 2000. 4. INCOME TAXES There was no provision for income taxes for the periods ended September 30, 2000 or 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. At September 30, 2000 the Company has federal and state net operating loss carryforwards of approximately $4,175,000 available to offset future taxable income that will expire in 2020. 5. CONVERTIBLE DEBT FINANCING On March 23, 2000, the Company entered into a Securities Purchase Agreement (the "Agreement"), whereby the Company issued 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 - 11 - 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, for the period ended March 31, 2000, the intrinsic value of the beneficial conversion feature of $1,000,000 has been allocated to debt discount and additional paid-in capital. Since the debt was convertible at date of issuance, the debt discount was charged to interest expense in the period ended March 31, 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 are exercisable on June 23, 2000 and expire on March 31, 2005. The fair value of the warrants granted is estimated to be $430,000 using the Black-Scholes option-pricing model. The amount of the proceeds allocated to the warrants results in a debt discount of $430,000 which will be amortized as additional interest expense during the two years ending March 23, 2002. Amortization of $53,750 and $113,446 has been charged to operations during the three and nine months ended September 30, 2000, respectively. In addition, the Company entered into a Registration Rights Agreement (modified on September 19, 2000), 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. A Registration Statement was filed on October 25, 2000. All fees and expenses related to the registration of the common stock will be paid by the Company. Estimated fees and expenses to be incurred in connection with this agreement in the amount of $35,000 have been accrued during the nine months ended September 30, 2000. If the Registration Statement is not declared effective by the SEC on or before December 15, 2000, then with respect to any portion of the note not previously converted into common stock, the applicable conversion percentage will decrease by two percent (2%) each thirty day period until the Registration Statement is declared effective by the SEC. If the SEC has not declared the Registration Statement effective within one year after March 23, 2000, the applicable conversion percentage shall be fifty percent (50%). Also, if the Registration Statement is not declared effective by the SEC on or prior to December 15, 2000, the Company shall pay cash, as liquidating damages, for such failure. The required payment will be equal to two (2%) of the purchase price of the note and warrant for each thirty-day period, until the breach of the Registration Rights Agreement is cured. Expenses incurred in connection with the sale of this convertible note amounted to $270,000. These expenses are being amortized to interest expense over the term of the convertible note. 6. 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. and Silesky Marketing, Inc., two entities affiliated with Stengel. - 12 - 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 ("the Maryland Action"). A First Amended Complaint ("Complaint") was filed on October 11, 2000, which added the defendants other than Stengel identified above. The Complaint seeks rescission of the transactions pursuant to which Stengel and Kramer obtained their substantial stock interests in the Company, and seeks damages against them for misrepresentations and omissions under the common law of fraud, the Maryland Securities Act and certain contractual warranties and representations. The 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. The Complaint also seeks to recover damages from Stengel and the two corporate defendants for conversion of certain of the Company's assets, resources and employee services, and for unjust enrichment. The Complaint also alleges that the acquisition of Internet Collectible Awards discussed in note 1 is a related party transaction. The Complaint has not yet been responded to by any of the defendants and the Court has not ruled on any of these claims. 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 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 and Richard Rotman (Rotmans) be ordered to dismiss the Maryland Action (the "Delaware 225 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. That motion is pending. On July 20, 2000, Gregory Rotman, called a special meeting of the stockholders to be held on September 19, 2000 for the election of directors. The Rotmans nominated themselves, Andrew Pilaro and John Martin for election to the Company's 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, authorized the 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 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. On October 20, 2000, the Company notified Stengel that the Board of Directors had denied Stengel's 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 by-laws 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 have each moved for summary judgment in the Delaware 145 action. A hearing on these motions is scheduled for December 22 2000. - 13 - 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 Company's preliminary injunction motion is scheduled to be heard by the Court on November 20, 2000. 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. 7. RESTATEMENT Historically, the Company recognized the revenue relating consignment-type arrangements on a net commission basis. In connection with its review of the current quarter, the Company found that certain consignment-type arrangements were recorded in first and second quarters of 2000 on a gross basis rather than on a net basis. As a result, the revenues and cost of revenues were overstated for these quarters. Accordingly, the restatement of the financial statements for the first and second quarters of 2000 did not have any impact on the previously reported loss from operations or net loss for those quarters. The Company has properly reflected the net commission service revenue relating consignment-type arrangements in the current quarter and has adjusted the year-to-date revenues and cost of revenues in the quarter ended September 30, 2000. The items in the financial statements that are affected by the restatement are as follows: for the quarter ended --------------------- 3/30/00 3/31/00 6/30/00 6/30/00 Previously AS Previously AS Reported Restated Reported Restated INCOME STATEMENT - -------------------------------------------------------------------------------- Revenue $ 442,370 $402,743 $327,927 $143,395 Cost of revenue 228,566 188,939 356,532 172,000 Net loss (1,506,958) (1,506,958) (1,062,296) (1,062,296) for the six-months ended ------------------------ 6/30/00 6/30/00 Previously AS Reported Restated INCOME STATEMENT - -------------------------------------------------------------------------------- Revenue $ 770,297 $546,138 Cost of revenue 585,098 360,939 Net loss (2,569,254) (2,569,254) - 14 - 8. SUBSEQUENT EVENT On November 9, 2000, the Company acquired a substantial portion of the 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 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 and $300,000 worth of the Company's common stock which is to be registered. - 15 - 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 Form 10-QSB. 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, 1999. Overview The Company's primary business is collectibles. The Company's primary online collectibles site is located at "www.collectingexchange.com", which can also be accessed through "www.rotmanauction.com" and "www.salesonlinedirect.com". In order to take advantage of the tremendous growth in both the online auction and e-commerce industries, the Company is now focused on the creation of a unique and multi-faceted internet collectibles market place that services all aspects of the purchase, ownership and sale of collectibles. Our mission is to become the premier internet collectibles site consisting not only of a collectibles portal but also a global auction search and research center. We will derive revenues from the sale at auction of collectibles from our own inventory as well as from merchandise under consignment type arrangements with the public through our Rotman Auction division; sale of advertising on our website; and fees for services such as appraisals and gradings. Subsequent Event On November 9, 2000, the Company acquired a substantial portion of the assets of Channel Space 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. Results of Operations The following discussion compares the Company's results of operations for the three months ended September 30, 2000, with those for the three months ended September 30, 1999. 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 September 30, 2000 revenue was $462,000, substantially all of which is attributable to sales of the Company's own product and fees from buyers and sellers through the Rotman Auction operations. This represents an increase of approximately $82,000, or 21% from the three-month period ended September 30, 1999, in which revenue was $380,000. The primary reason for the increase is that the Company is focused on selling higher end auction lots. Most of the Company's sales consist of Company-owned product. Gross profit from product sales for the three months ended September 30, 2000 was $32,000, which represents an increase of $15,000 from the comparable quarter in 1999, in which gross profit was $17,000. The increase in gross profit is a result of the Company selling higher end auction lots. - 16 - Sales, General, and Administrative Expenses. Sales, general and administrative ("SG&A") expenses for the three months ended September 30, 2000 were $825,000, compared to $665,000 for the three months ended September 30, 1999. The increase in SG&A costs includes an increase in professional fees of $52,000, which are primarily attributable to the Company's legal activities. Marketing and advertising costs decreased by approximately $35,000 from the three months ended September 30, 1999. Marketing expenses were primarily attributable to print and online marketing and advertising programs designed to create brand awareness for the Company's online sites. In addition the Company made investments in product development that it believes are required to remain competitive and handle increased growth. Interest expense. The Company incurred interest charges associated with the $3,000,000 convertible note and warrants during the three months ended September 30, 2000 while no such charges were incurred in the prior year. Loss. The Company recognized a loss for the three months ended September 30, 2000 of $915,000, or ($.02) per share as compared to a loss of $739,000, or ($.02) per share for the three months September 30, 1999. The following discussion compares the Company's results of operations for the nine months ended September 30, 2000, with those for the nine months ended September 30, 1999. Revenue. For the nine months ended September 30, 2000 revenue was $1,008,000, substantially all of which is attributable to sales of the Company's own product and fees from buyers and sellers through the Rotman Auction operations. This represents an increase of approximately $315,000 or 45% from the nine-month period ended September 30, 1999 in which revenue was $693,000. The primary reason for the increase is the Company is offering more lots during each auction and has increased the amount of the average dollars sold per lot. Gross profit for the nine months ended September 30, 2000 was $217,000 compared with $256,000 for the nine months ended September 30, 1999. Sales, General, and Administrative Expenses. Sales, general and administrative ("SG&A") expenses during the nine months ended September 30, 2000 were $2,445,000 compared to $1,457,000 for the nine months ended September 30, 1999. The increase in SG&A costs includes professional fees ($211,000), which are primarily attributable to the Company's legal activities, personnel related costs ($348,000), and depreciation and amortization ($126,000). Marketing and advertising costs decreased by approximately $104,000 from the nine months ended September 30, 1999. The Company also incurred significant expenses relating to the closing of the Maryland office and moving of the Company's Internet infrastructure to Massachusetts in June 2000. In addition the Company made significant investments in product development that it believes are required to remain competitive and handle increased growth. Interest expense. The Company incurred $310,000 of interest charges associated with the issuance of a $3,000,000 convertible note and warrants as well as a $1,000,000 one time charge associated with the beneficial conversion feature in that debt. See "Liquidity and Capital Resources" below. Loss. The Company realized a loss for the nine months ended September 30, 2000 of $3,484,000, or ($.07) per share, compared to $1,244,000, or ($.03) per share for the nine months ended September 30, 1999. - 17 - Inflation. The Company believes that inflation has not had a material effect of its results of operations. Working Capital and Liquidity Cash and cash equivalents were approximately $832,000 at September 30, 2000, compared to $564,000 at September 30, 1999. 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 allocated to debt discount and additional paid-in capital. Since the debt was convertible at date of issuance, the debt discount was charged to earnings during the quarter ended March 31, 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 expire on March 31, 2005. In addition, the Company entered into a Registration Rights Agreement (modified on September 19, 2000), whereby the Company agreed to file a Registration Statement with the Securities and Exchange Commission (SEC) by October 25, 2000 covering the common stock to be issued upon the conversion of the convertible note and stock purchase warrants. If the Registration Statement is not declared effective by the SEC on or before December 15, 2000, then, with respect to any portion of the note not previously converted into common stock, the applicable conversion percentage will decrease by two percent (2%) each thirty day period until the Registration Statement is declared effective by the SEC. If the SEC has not declared the Registration Statement effective within one year after March 23, 2000, the applicable conversion percentage shall be fifty percent (50%). Also, if the Registration Statement is not declared effective by the SEC on or prior to December 15, 2000, the Company shall pay cash, as liquidating damages, for such failure. The required payment will be equal to two (2%) of the purchase price of the note and warrant for each thirty-day period, until the breach of the Registration Rights Agreement is cured. Management believes that the proceeds from this Convertible Note and cash from operations will provide sufficient liquidity and capital resources to finance the Company's operations through the end of the current fiscal year. - 18 - 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. and Silesky Marketing, Inc., two entities affiliated with Marc Stengel. Mr. 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 (the "Maryland Action"). A First Amended Complaint ("Complaint") was filed on October 11, 2000, which added the defendants other than Stengel identified above. The 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 for misrepresentations and omissions under the common law of fraud, the Maryland Securities Act and certain contractual warranties and representations. The 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. The Complaint also seeks to recover damages from Stengel and the two corporate defendants for conversion of certain of the Company's assets, resources and employee services, and for unjust enrichment. The Complaint has not yet been responded to by any of the defendants; the Court has not ruled on any of these claims. 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 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 and Richard Rotman (the "Rotmans") be ordered to dismiss the Maryland Action (the "Delaware 225 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. That motion is 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. The Rotmans 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 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 Sales Online, 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 Sales Online's claims against Stengel and others. 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 Maryland Action. On October 20, 2000, the Company notified Stengel that the Board of Directors had denied his advancement request. - 19 - 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 by-laws 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 have each moved for summary judgment in the Delaware 145 Action. A hearing on these motions is scheduled for December 22, 2000. 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 Company's preliminary injunction motion is scheduled to be heard by the Court on November 20, 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- None ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On September 19, 2000, a special meeting of stockholders was held for the election of four directors. At the meeting, the holders of 26,551,585 shares of the company's common stock were represented in person or by proxy, constituting a quorum. The following table indicates the names of the individuals elected and the number of votes cast for or against and the number of abstentions: Directors For Against Abstained --------- --- ------- --------- Gregory Rotman 26,450,117 0 101,468 Richard Rotman 26,450,117 0 101,468 John Martin 26,450,117 0 101,468 Andrew Pilaro 26,450,117 0 101,468 ITEM 5. OTHER INFORMATION ----------------- On November 9, 2000, the Company acquired a substantial portion of the 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, and $300,000 worth of the Company's common stock which is to be registered. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits: Exhibit No. - ----------- 27 Financial Data Schedule - 20 - 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: November 14, 2000 SALES ONLINE DIRECT INC. Registrant /s/ Gregory Rotman ---------------------------------------- Gregory Rotman, President /s/ Richard Rotman ----------------------------------------- Richard Rotman, Chief Financial Officer, Vice President and Secretary - 21 - LIST OF EXHIBITS Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 0002.txt FDS -- FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Form 10QSB and is qualified in its entirety by reference to such financial statements. 0001017655 SALES ONLINE DIRECT, INC. 1 U.S. DOLLARS 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1 831,589 31,041 0 0 729,812 1,735,895 581,625 0 2,819,026 444,862 0 0 0 47,056 0 2,819,026 1,007,692 1,007,692 790,449 2,445,492 54,231 0 (1,309,956) (3,483,974) 0 0 0 0 0 (3,483,974) (0.074) 0
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