AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000
REGISTRATION NO. 333-34730
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIQUOR.COM, INC.
(Name of small business issuer as specified in its charter)
DELAWARE 5921 36-3903894
(State or jurisdiction of (Primary Standard (I.R.S Employer
incorporation or organization) Industrial Identification Number)
Classification Code Number)
4205 W. IRVING PARK ROAD 4205 W. IRVING PARK ROAD
CHICAGO, IL 60641 CHICAGO, IL 60641
(773) 427-8620 (773) 427-8620
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S (ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED
PRINCIPAL EXECUTIVE OFFICES) PRINCIPAL PLACE OF BUSINESS)
SCOTT B. CLARK
4205 WEST IRVING PARK ROAD
CHICAGO, IL, 60641
(773) 427-8620
(Name, address and telephone number of agent for service)
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COPIES TO:
MICHAEL J. CHOATE, ESQ. LAWRENCE B. FISHER, ESQ.
Shefsky & Froelich, Ltd. Orrick, Herrington & Sutcliffe LLP
444 North Michigan Avenue, Ste. 2500 666 Fifth Avenue
Chicago, Illinois 60611 New York, New York 10103
(312) 836-4066 (212) 506-5055
(312) 527-5921 (Facsimile) (212) 506-5151 (Facsimile)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS POSSIBLE AFTER
EFFECTIVENESS.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JULY 27, 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[LOGO]
3,000,000 UNITS, EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT EXERCISABLE
TO PURCHASE ONE SHARE OF COMMON STOCK
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This is an initial public offering of 3,000,000 units of Liquor.com, Inc.
Each unit consists of one share of common stock and one redeemable common stock
purchase warrant. We anticipate that the initial public offering price will be
between $8.10 and $10.10 per unit, consisting of $8.00 to $10.00 per share of
common stock and $0.10 per warrant.
There is no public market for our common stock and warrants at the present
time. We have applied to quote the common stock under the symbol "LIQR" and the
warrants under the symbol "LIQRW" on the Nasdaq National Market.
INVESTING IN OUR SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER UNIT TOTAL
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Initial public offering price.............................
Underwriting discounts....................................
Proceeds, before expenses, to Liquor.com..................
Concurrently with this offering, we have registered for resale 422,222
shares of common stock held by selling shareholders.
We have granted the underwriters an option for forty-five days to purchase
an additional 450,000 units from us at the initial public offering price less
the underwriting discount to cover any over-allotments.
Delivery of the securities offered hereby will be made on or about
, 2000, in New York, New York. The underwriters are offering the
units on a firm commitment basis.
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DIRKS & COMPANY, INC.
HORNBLOWER & WEEKS, INC.
KASHNER DAVIDSON SECURITIES
CORPORATION
NOLAN SECURITIES CORPORATION
The date of this prospectus is , 2000
Inside Front Cover Page of Prospectus
Top of Page--The top of the page contains the Logo of
Liquor.com--"LIQUOR.COM--for the spirited life"--followed by the statement
"Liquor.com--Integrating eCRM and Business-to-Business Solutions for the Alcohol
Beverage Industry."
Body of Page--The body of the page contains a chart with the Logo of
Liquor.com--"LIQUOR.COM-- for the spirited life" in the center of the chart. The
four corners of the chart contain four series of photographs depicting the
various parties of the liquor distribution chain: (1) producers,
(2) wholesalers, (3) retailers and (4) consumers.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Cautionary Note Regarding Forward-Looking Statements........ 9
Use of Proceeds............................................. 10
Dividend Policy............................................. 10
Capitalization.............................................. 11
Dilution.................................................... 13
Selected Financial Data..................................... 14
Management's Discussion And Analysis of Financial Condition
And Results of Operations................................. 15
Business.................................................... 22
Management.................................................. 35
Certain Transactions........................................ 45
Principal Stockholders...................................... 47
Description of Securities................................... 49
Shares Available For Future Sale............................ 56
Underwriting................................................ 58
Legal Matters............................................... 61
Experts..................................................... 61
Where You Can Find Additional Information About Us.......... 61
Index to Consolidated Financial Statements.................. F-1
ii
PROSPECTUS SUMMARY
OUR BUSINESS
Liquor.com is an eCommerce company serving the alcohol and entertainment
beverage industry. We build and maintain relations with consumers by collecting
online and offline data which we use to tailor information and product offerings
to consumers' preferences, thereby creating what we believe to be a high-quality
customer experience. We offer consumers a wide selection of wines, champagnes,
spirits and related products on our website and in our catalogs, with a focus on
high-end, or "prestige" products. We also offer consumers access to a secure
eCommerce and custom content environment. We transmit our consumers' orders to
our global network of over 130 retailers and process all payments. The retailers
deliver the products directly to the consumer in our packaging.
We believe our services benefit both consumers and our affiliates by:
- increasing our participating retailers' sales by generating product orders
they typically would not otherwise have received;
- offering additional exposure of products featured on our website and in
our catalogs;
- providing consumers a convenient buying experience;
- providing consumers with a broad range of gift accessories such as
flowers, artwork, bottle stoppers, bar sets, cigars, chocolates, cocktail
mixes, glasses and gift baskets; and
- providing consumers access to a broad range of related services such as
personal assistance in party planning, bartending and access to our drink
recipe library and chat room.
We intend to provide marketing and eBusiness solutions for all three tiers
of the alcohol distribution system -- producers, wholesalers and retailers. We
intend to implement these solutions by offering these businesses direct access
to consumers through our website and offline promotions and by offering valuable
demographic and product preference information on consumers' purchases and
interests. We are developing an online business-to-business exchange that will
allow businesses to exchange information and process transactions more quickly.
This exchange will be a hosted, proprietary network designed to aggregate and
streamline product purchasing, reduce costs, increase revenue and effectively
disseminate product information and industry news for all three tiers.
CORPORATE BACKGROUND
Our executive offices are located at 4205 West Irving Park Road, Chicago,
Illinois 60641. Our phone number is (773) 427-8620. Our website is located at
www.liquor.com. We are not incorporating the information on our website into
this prospectus, and we do not intend to make our website a part of this
prospectus. This prospectus includes trademarks, trade names and service marks
of other companies. Each trademark, trade name or service mark of any other
company appearing in this prospectus is the property of its owner.
1
THE OFFERING
Units, each consisting of one share of our common
stock and one redeemable common stock purchase
warrant.............................................. 3,000,000 units, consisting of 3,000,000
shares of common stock and 3,000,000
redeemable warrants. The common stock and
warrants will trade as separate securities
immediately upon issuance.
Terms of redeemable common stock purchase warrants... Each warrant entitles the holder to acquire
one share of our common stock, at an exercise
price of $10.80 per share, for a four-year
period beginning twelve months from the date
of issuance. Beginning eighteen months from
the completion of this offering, we will be
able to redeem these warrants at a price equal
to $.10 per warrant if the average closing
price of our common stock on the Nasdaq
National Market is equal to or greater to
$22.50 per share for any 20 trading days
within a 30-day period.
Common stock to be outstanding upon completion of
this offering........................................ 7,053,558 shares
Redeemable warrants to be outstanding upon completion
of this offering..................................... 3,000,000
Use of proceeds...................................... We intend to use the proceeds of this offering
for:
- repaying indebtedness;
- marketing and other promotions;
- technological investments; and
- working capital and general corporate
purposes.
Proposed Nasdaq National Market Symbol for common
stock................................................ LIQR
Proposed Nasdaq National Market Symbol for redeemable
warrants............................................. LIQRW
Concurrently with this offering, we have registered for resale 422,222
shares of common stock by selling shareholders. These selling shareholders have
agreed not to sell or dispose of their shares without the underwriters' consent
for a period of six months after the date of this prospectus.
Unless stated otherwise, all information in this prospectus assumes that
neither the warrants that we will issue to Dirks & Company, Inc., Hornblower &
Weeks, Inc., Kashner Davidson Securities Corporation and Nolan Securities
Corporation, the representatives of the underwriters, nor the underwriters'
over-allotment option are exercised, and does not reflect the issuance of stock
in connection with the exercise of currently outstanding options and warrants to
purchase a total of 1,779,919 shares of common stock.
2
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. This
information is derived from, and should be read together with, the historical
financial data for the years ended December 31, 1997, 1998 and 1999 and the
three months ended March 31, 1999 and March 31, 2000. The data presented below
should also be read together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
accompanying notes appearing elswhere in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
------------------------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999 2000
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STATEMENT OF OPERATIONS:
Revenues.............................................. $1,281,453 $1,818,960 $2,788,187 $ 247,985 $ 612,619
Cost of revenues...................................... 704,486 1,076,197 1,946,758 167,068 553,118
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Gross profit.......................................... 576,967 742,763 841,429 80,917 (59,501)
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Marketing expenses.................................... 312,814 339,973 425,236 19,336 49,084
General and administrative expenses................... 310,804 360,174 592,613 123,456 1,907,123
(Loss) income from operations......................... (46,651) 42,616 (176,420) (61,875) (1,896,706)
Net (loss) income..................................... (54,121) 35,563 (195,200) (62,684) (2,104,591)
========== ========== ========== ========== ==========
SHARE DATA:
Net (loss) income per share: basic and diluted........ $ (.02) $ .01 $ (.06) $ (.02) $ (.68)
========== ========== ========== ========== ==========
Shares used in computing basic and diluted net (loss)
income per share.................................... 3,026,956 3,026,956 3,033,216 3,026,956 3,052,758
========== ========== ========== ========== ==========
MARCH 31, 2000
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ACTUAL AS ADJUSTED*
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BALANCE SHEET DATA:
Cash........................................................ $1,192,355 $25,948,178
Working capital (deficit)................................... 979,452 25,735,275
Total assets................................................ 2,006,117 26,761,940
========== ===========
Total noncurrent liabilities................................ 1,001,699 217,324
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Total stockholders' (deficit) equity........................ 340,506 25,880,704
---------- -----------
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* Adjusted to give effect to the sale of the units and the application of the
estimated net proceeds from the offering.
3
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER INFORMATION ABOUT THE RISKS WE FACE DESCRIBED IN THIS SECTION
AND ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SECURITIES.
WE HAVE A LIMITED OPERATING HISTORY AS A CUSTOMER RELATIONSHIP MANAGEMENT
COMPANY AND HAVE NOT YET IMPLEMENTED OUR BUSINESS-TO-BUSINESS EXCHANGE, WHICH
MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS.
We were incorporated in 1993, but we have recently dramatically changed the
focus of our business. Accordingly, we have only a limited operating history in
our current line of business as an eCommerce company. We have not yet begun to
implement our business-to-business solutions. Prospective investors may
therefore find it difficult to judge our performance and prospects. We are
subject to all of the risks associated with a new enterprise, including lack of
financial and human resources.
SINCE WE HAVE A WORKING CAPITAL DEFICIT, OUR FINANCIAL CONDITION WILL QUICKLY
DETERIORATE IF WE CANNOT GENERATE REVENUES.
As of March 31, 2000 we had working capital of $979,452. We may not be able
to adjust our spending in a timely manner to compensate for any unexpected
revenue shortfall. We also may not have enough working capital to pay for the
advertising or other marketing support needed to generate revenues that we
project.
WE HAVE NOT CONSISTENTLY EARNED PROFITS AND ANTICIPATE FUTURE LOSSES.
We have not consistently made profits, either on a quarterly or annual
basis. We have experienced losses in two of the last three years, and the
magnitude of the losses has varied from $54,121 in 1997 to $195,200 in 1999.
From August 1993 through December 31, 1999, we lost a total of approximately
$306,000. We plan to make significant expenditures on marketing and other items
during the twelve months following completion of this offering. We plan to
aggressively spend money to upgrade our technology and to advertise our website
to increase the awareness of our brand and to ensure that we can accommodate
increased website traffic and customer orders as we grow. These expenditures may
not increase revenues, and may therefore prevent us from achieving
profitability.
WE HAVE NOT PREVIOUSLY OPERATED A BUSINESS-TO-BUSINESS ONLINE EXCHANGE, AND IF
WE CANNOT SUCCESSFULLY DEVELOP THIS EXCHANGE WE MAY NOT BE ABLE TO EXPAND OUR
RELATIONSHIPS WITH PRODUCERS, WHOLESALERS AND RETAILERS AND OUR REVENUES MAY NOT
GROW.
A significant portion of our business plan involves generating revenue by
providing business-to-business services and developing an online exchange which
links producers, wholesalers and retailers in the alcohol beverage industry. Our
revenues depend significantly on our ability to successfully implement this
network and to expand our services. We do not have experience operating an
online exchange, and have not previously provided marketing and promotional
services on a broad scale. If we cannot develop this exchange or successfully
provide these additional services, or if a significant number of producers,
wholesalers and retailers do not use our exchange or promotional services, our
revenues may not increase.
IF ORDERS PLACED ON OUR WEBSITE LEAD TO SALES TO MINORS, WE MAY BE HELD LIABLE
FOR SUBSTANTIAL DAMAGES OR FINES OR BE PREVENTED FROM DOING BUSINESS.
The laws of each state in the United States require individuals to be at
least twenty-one years of age to purchase or consume alcohol beverages. We may
inadvertently facilitate the sale of alcohol
4
beverages to a minor, and thus become subject to actions by governmental bodies
seeking fines or orders preventing us from doing business in a particular state,
or lawsuits by private parties seeking compensatory and punitive damages.
STATES MAY REQUIRE US TO OBTAIN A LIQUOR LICENSE, WHICH WOULD INCREASE OUR
EXPENSES AND LIMIT OUR PRODUCT OFFERINGS AND OUR REVENUE GROWTH.
Based on an opinion from our regulatory counsel, we believe that we can
lawfully receive orders for alcohol beverages listed in our catalogs and website
in thirty states and the District of Columbia, because sales are made by
licensed retailers with whom we have arrangements, and not by us. Any or all of
these states could change their laws to prohibit us from providing our services
without a liquor license, or change the interpretation of their existing laws in
a way which would require us to obtain a license to provide our services to
residents of these states. If these changes occurred, it could greatly increase
our costs of doing business, or prevent us from accepting orders for delivery to
residents in the affected states.
WE COULD BE SUBJECT TO FINES OR PREVENTED FROM ACCEPTING ORDERS FOR DELIVERY
IN SOME AREAS IF THE RETAILERS WHO FULFILL ORDERS PLACED WITH US VIOLATE STATE
LAWS, GOVERNING THE SHIPMENT OF ALCOHOL BEVERAGES.
We do not currently have arrangements with retailers in three of the thirty
states in which we believe we can lawfully receive orders for alcohol beverages.
Orders received for delivery into these states are fulfilled by retailers in
neighboring states who ship into these states, but these shipments must be
limited to wine and champagne. If any of these retailers shipped alcohol
beverages other than wine or champagne into these states, we could be subject to
liability for violating these states' laws. In addition, some of the thirty
states for which we accept orders have "dry" areas in which delivery of alcohol
beverage is not allowed. We rely on the retailers who make the sales to
customers to know which areas are dry and to avoid making deliveries to these
areas. If these retailers make deliveries in prohibited areas, states could
impose fines on us or limit our ability to accept orders for delivery which
would cause our results of operations to significantly suffer.
IF OUR ACTIVITIES WERE FOUND TO VIOLATE LAWS RESTRICTING THE SOLICITATION OF
ORDERS FOR OR DELIVERY OF ALCOHOL BEVERAGES, WE MIGHT BE SUBJECT TO FINES OR
PREVENTED FROM DOING BUSINESS IN SEVERAL STATES.
Some of the states in which products ordered through us are delivered have
laws which restrict the solicitation of orders for alcohol beverages. Based on
an opinion from our regulatory counsel, we do not believe that our activities
constitute the "solicitation" of orders under the meanings of these statutes,
because we do not sell products to consumers. We also believe that these laws
may be considered impermissible restraints on interstate commerce or commercial
speech and, therefore, may not be enforceable against us. However, there is a
risk that states may bring actions against us for violating these laws. If any
or all of these states successfully pursued actions against us, we could be
liable for fines or prevented from doing business in these states, which would
impair our ability to achieve profitability. In addition, the City of Chicago's
ordinance governing licensed retailers has a provision which prohibits retail
deliveries of alcohol beverages. Based on an opinion from our regulatory
counsel, we do not believe that this ordinance, which was passed in 1992, has
been enforced, and, because retail deliveries are common in Chicago, we do not
expect the City to enforce the ordinance in the future. However, if the City of
Chicago does enforce the ordinance, it could limit our ability to transmit
orders to retailers in Chicago, which would reduce our revenues.
5
OUR RETAIL AFFILIATES AND THIRD-PARTY CARRIERS COULD TERMINATE THEIR
RELATIONSHIPS WITH US AT ANY TIME OR EXPERIENCE DIFFICULTIES DELIVERING THEIR
PRODUCTS, WHICH WOULD DISRUPT CUSTOMER DELIVERIES AND DAMAGE OUR BRAND.
We depend on third parties to sell and deliver the products ordered through
our website. These persons or entities may not accurately fill, or promptly
deliver these orders. While we have agreements with many of our affiliated
retailers, these agreements can be terminated at any time, which may disrupt our
business and cause us to incur significant costs.
We are also subject to the risk that labor shortages, strikes, inclement
weather or other factors may limit the ability of these parties to meet our
delivery needs. The failure to deliver products to our customers in a timely
manner would damage our brand and adversely affect the demand for our products
and services. If the couriers who currently deliver orders to our customers are
unable or unwilling to make these deliveries, we might have to pay an
alternative carrier more for delivery, or we might not be able to locate an
alternative carrier at all.
IF OUR BUSINESS PARTNERS AND CONSUMERS DO NOT ADOPT OUR BUSINESS SOLUTIONS, OUR
REVENUES MAY NOT GROW.
Our success requires, among other things, that producers, wholesalers,
retailers and consumers widely accept our eCommerce solutions. For example,
consumers may continue purchasing products through existing channels and may not
adopt a web-based solution because of their comfort with existing purchasing
habits, security or privacy concerns, or unfamiliarity with technology or the
Internet. Similarly, our potential business partners may not adopt our eCRM and
eCommerce solutions based on related concerns or the costs involved with
changing their marketing methods.
WE MAY NOT BE ABLE TO INCREASE OUR REVENUES IF WE CANNOT SUCCESSFULLY IMPLEMENT
A LARGE-SCALE MARKETING PROGRAM TO INCREASE OUR BRAND RECOGNITION.
Successful positioning of the Liquor.com brand will depend largely on the
success of our advertising, marketing and promotional efforts. We currently have
only three full-time marketing employees, and the success of our marketing plan
will depend to a large extent on our ability to attract and retain talented
employees to work in our marketing department. We have not yet engaged in a
broad-based marketing program, and we cannot assure you that our planned
advertising will be effective. If our brand development strategy is
unsuccessful, these expenses may never be recovered and we may not increase
traffic to our website and our revenues will not grow as expected.
THE MARKET FOR THE ONLINE SALE OF ALCOHOL BEVERAGES IS HIGHLY COMPETITIVE, AND
IF WE FAIL TO RESPOND TO COMPETITIVE PRESSURES THIS COULD REDUCE OUR MARKET
SHARE AND REVENUES.
The market for the online sale of alcohol beverages is intensely
competitive. Our business is characterized by minimal barriers to entry, and new
competitors can launch similar services at relatively low cost. We compete with
many companies that maintain websites. Online competition is likely to intensify
as this market matures. We compete with other entities which maintain similar
commercial websites, including 800-Spirits, Inc., Drinks.com, Wine.com, Inc.,
Internet Wines & Spirits, Geerlings & Wade, Inc. and Ambrosia. Several of these
companies have substantially greater resources than us. These competitors may be
able to spend more money on advertising, which would make their brands more
recognizable than ours.
Since we do not have exclusive agreements with our retail affiliates, we
cannot prevent them from establishing similar affiliations with our competitors
or from selling alcohol beverages through their own websites. We also run the
risk that other competitors may establish their own licensed entities instead of
using existing retailers, which would likely allow them to sell products at
lower prices than ours. New technologies and the expansion of existing
technologies also may increase competitive
6
pressures. As a result of increased competition, we may experience reduced
operating margins, as well as loss of market share and brand recognition and
reduced revenue and earnings growth.
WE HAVE NOT HISTORICALLY EARNED A LARGE PERCENTAGE OF OUR REVENUES FROM THE SALE
OF ADVERTISING ON OUR WEBSITE, AND IF WE CANNOT INCREASE THESE ADVERTISING
SALES, OUR REVENUES MAY NOT GROW.
In the past, we have not derived a large percentage of our revenues from
Internet advertising, but we project that a significant portion of our future
revenue will come from the sale of advertising on our website. The market for
Internet advertising has only recently begun to develop, is rapidly evolving and
is characterized by intense competition. Only a small portion of our historical
revenues have come from advertising sales. Our ability to generate substantial
advertising revenue depends on the amount of traffic on our website and the
visitors to our website having demographic characteristics which are attractive
to advertisers.
OUR REVENUES MAY NOT GROW IF WE ARE UNABLE TO ACHIEVE AND MAINTAIN A SIGNIFICANT
ADVERTISING PRESENCE ON HIGH-TRAFFIC WEBSITES.
To increase our revenues in general, and our advertising revenues in
particular, we must increase the number of visits to our website, which will
require us to establish and maintain an advertising presence on high-traffic
websites, including third party portals and content sites. We have limited
relationships with other websites and do not know if we will be able to develop
favorable relationships, if at all. We may have to pay significant fees to
establish or maintain a presence on other websites, which may also provide
advertising services to our competitors. As a result, these sites may be
reluctant to enter into or maintain relationships with us. The demand for our
services and products could be harmed if we do not develop and secure sufficient
online advertising or secure a sufficient presence on commercially reasonable
terms or if these activities do not effectively attract users to our website and
lead to a substantial number of orders.
OUR OPERATIONS COULD BE DISRUPTED AND CAUSE A DECREASE IN DEMAND FOR OUR
SERVICES IF THE THIRD PARTIES UPON WHICH WE DEPEND TERMINATE THEIR SERVICES OR
EXPERIENCE A SYSTEM FAILURE.
We rely on outside parties to provide many services, including just a single
company for all of the services relating to the technology used to operate our
website. We do not have a contract with this company. If these companies were
unable or unwilling to provide these services, we do not know if other companies
would provide these services on the same or similar terms as the current
providers. In addition, if one of these companies terminated its services, or
experienced a system failure, this could cause a significant disruption in
service on our website, which could cause damage to our reputation, and decrease
the demand for our products and services.
SYSTEM FAILURES COULD CAUSE US TO LOSE CUSTOMERS AND REVENUE.
Sudden and significant increases in traffic to our website could strain the
capacity of our software, hardware and telecommunications systems, leading to
slower response times or system failures. Similarly, an increase in the volume
of calls to our call center could lead to long wait times for callers. Any
system error or failure that interrupts the operation of our website or
increases response time could cause us to lose customers or advertisers and
negatively affect our revenues. In addition, if these failures or errors were
sustained or repeated, it could reduce the attractiveness of our website, reduce
our revenue and damage our brand.
7
WE MAY HAVE TO PAY DAMAGES AND OUR REPUTATION MAY BE HARMED IF WE FAIL TO
PROTECT CONFIDENTIAL CONSUMER INFORMATION, SUCH AS DRIVERS' LICENSE AND CREDIT
CARD NUMBERS.
We may be liable to our customers if a third party is able to penetrate our
network security and misappropriate our customers' personal information, such as
product preferences, drivers' license numbers or credit card numbers. We may be
held liable for claims based on unauthorized purchases with credit card
information, impersonation or other similar fraud claims. These claims could
result in litigation and financial liability. Security breaches would likely
damage our reputation and decrease the demand for our products and services.
SINCE WE INTEND TO GENERATE REVENUES BY ALLOWING PRODUCERS TO TARGET OUR
CUSTOMER BASE IN MARKETING THEIR PRODUCTS, WE MAY NOT BE ABLE TO INCREASE OUR
REVENUES IF GOVERNMENTAL AUTHORITIES ISSUE REGULATIONS LIMITING THE ABILITY OF
INTERNET COMPANIES TO GATHER CUSTOMER INFORMATION.
We intend to generate revenues by allowing producers of alcohol beverages to
use our database of customer information to target our customers in marketing
their products. Governmental authorities have proposed regulations that if
adopted may require us to notify users of our privacy policies, obtain their
consent to collect and use information and allow them to access and correct the
information. These regulations may also require us to pay damages to users of
websites if we improperly collect information.
THE PUBLIC MARKET FOR OUR SECURITIES MAY BE VOLATILE, AND IF AN ACTIVE TRADING
MARKET DOES NOT DEVELOP OR IS NOT SUSTAINED, YOU MAY NOT BE ABLE TO SELL YOUR
SHARES.
Prior to this offering, you could not buy or sell our common stock or
warrants publicly. An active public market may not develop or be sustained after
this offering, and the market price of the common stock or the warrants might
fall below the initial public offering price, which may bear no relationship to
the price at which our common stock or warrants will trade upon completion of
this offering. The initial public offering price may not be indicative of future
market performance. The market price of our common stock or warrants may
fluctuate significantly, which could expose us to litigation.
CHANGES IN THE INTERPRETATION OF ACCOUNTING RULES COULD FORCE US TO CHANGE OUR
REVENUE RECOGNITION POLICY, WHICH COULD CAUSE US TO RESTATE OUR FINANCIAL
STATEMENTS.
We recognize the gross revenue from the sales of products resulting from
orders placed on our website, even though the actual sales are made by our
affiliated retailers. We believe our accounting treatment is correct, but the
principles governing revenue recognition, particularly for companies which
maintain eCommerce sites, is being reviewed by the entities which set the
standards for the accounting profession. If new accounting principles are
issued, or if the interpretation of existing principles is changed, we might be
required to recognize as revenue only the difference between the gross sales
price and the price we pay to our affiliated retailers on each transaction. This
type of change in accounting principles could cause us to restate our historical
financial statements, and reduce the revenues we report on our financial
statements, although it would not affect our reported net income.
8
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify forward
looking statements. These statements include, but are not limited to, statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus concerning, among other things:
- our ability to maintain and expand current distribution, fulfillment and
other partnering relationships and to enter into new relationships;
- our ability to attract advertisers and increase advertising revenue; and
- our ability to broaden our existing product lines or expand into new
product categories.
You should not rely too extensively on the forward-looking statements
contained in this prospectus, because these statements reflect only our
management's view as of the date of this prospectus. In addition, these
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. The cautionary
statements made in this prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this prospectus. We
assume no obligation to publicly update or revise these forward-looking
statements for any reason, or to update the reasons actual results could differ
from those anticipated in these forward-looking statements, even if new
information becomes available in the future.
9
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 3,000,000 units
offered by this prospectus will be approximately $23,948,500 based on an assumed
initial public offering price of $9.10 per unit. If Dirks & Co., Inc. exercises
its over-allotment option in full, we estimate that the net proceeds will be
approximately $27,613,525. Both of these figures are net of the underwriting
discounts and commissions and estimated offering expenses of $485,000 payable by
us. We expect to use the net proceeds of this offering as follows:
PERCENTAGE
USE AMOUNT OF TOTAL
- --- --------------------- ----------------
Repayment of indebtedness................................... $ 500,000 2.1%
Marketing and public relations.............................. $ 13,000,000 54.3%
Technology.................................................. $ 5,000,000 20.9%
Working capital and general corporate purposes.............. $ 5,448,500 22.7%
--------------------- ----------------
Total..................................................... $ 23,948,500 100.0%
===================== ================
- We intend to use approximately $500,000 of the net proceeds of this
offering to repay a note in the principal amount of $500,000 which was
issued in a private placement in January, 2000 and which is due and
payable upon the closing of this offering. This note does not bear
interest.
- We intend to use approximately $13,000,000 of the proceeds of this
offering for marketing. Of this $13,000,000, we anticipate that
approximately $1,500,000 will be used on creative and production fees for
advertising of the Liquor.com brand name. We expect to spend approximately
$500,000 on website design services, and $3,000,000 on advertising the
launch of our services in Europe. The remaining funds allocated to
marketing, approximately $8,000,000, will be spent on purchasing
advertising space on websites and in traditional media such as print
publications, radio and television, and to engage in other promotional
activities, including events at nightclubs and other venues. The purpose
of our marketing expenditures will be to increase brand recognition,
revenue and website traffic.
- We intend to use approximately $5,000,000 of the proceeds of this offering
for technology expenditures. Approximately $2 million of these planned
expenditures relate to additional servers, and the lease of locations of
the United States in Europe to house the servers and provide faster
Internet connections. We anticipate using approximately $500,000 for
upgrades to our current accounting and order entry systems, and additional
personal computers and other equipment for additional employees. We expect
$450,000 of the funds allocated to technology to be used to further
develop the business-to-business and consumer areas of our website. We
intend to use an additional $450,000 to purchase personal computers and
printers to be used by our affiliates. The remaining funds allocated to
technology are to be used for office space to be used for the development
of software and for other miscellaneous uses relating to the development
of technology allowing us to communicate more effectively with our
retailers and the establishment of an online network linking producers,
wholesalers and retailers.
The remaining proceeds will be used for working capital and general
corporate purposes, including approximately $2,500,000 for salaries. Funds not
spent on salaries will be used for general administrative and similar expenses.
Our management will have broad discretion concerning the allocation and use of a
significant portion of the net proceeds of this offering, and we may need to
reallocate the net proceeds among the categories stated above. The amount or
timing of our actual expenditures will depend on numerous factors, including our
profitability, the availability of alternative financing, our business
development activities and competition. Pending the use of the net proceeds of
this offering, we intend to invest these proceeds in short-term, investment
grade, interest bearing securities. In the event Dirks & Company, Inc. exercises
the over-allotment option we intend to use these additional proceeds for working
capital and general corporate purposes.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain future earnings, if any, to operate and expand our
business and do not expect to pay cash dividends in the foreseeable future.
10
CAPITALIZATION
The following table reflects our capitalization at March 31, 2000:
- on an actual basis;
- on a pro forma basis to give effect to the issuance of: (a) convertible
promissory notes having a total principal amount of $715,625, (b) 27,582
shares of common stock to private investors, and (c) 21,428 shares of
common stock to Corporate Capital Strategies, Inc. under a termination
agreement.
- on a pro forma as adjusted basis to reflect, upon completion of the
offering: (a) the repayment of a promissory note with a total principal
value of $500,000, (b) the conversion of all 422,222 shares of our
Series A preferred stock into a total of 422,222 shares of our common
stock, (c) the conversion of eleven convertible notes issued by us into a
total of 284,090 shares of common stock, and (d) the receipt of
$23,948,500 in net proceeds from the sale by us of the 3,000,000 units at
an assumed initial public offering price of $9.10 per unit, representing
the mid point of the filing range, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
This table should be read together with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
MARCH 31, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
SHORT TERM DEBT:
Short-term liabilities.............................. $ 663,912 $ 663,912 $ 663,912
LONG-TERM DEBT:(1).................................... $ 1,001,699 $ 1,717,324 $ 217,324
STOCKHOLDERS EQUITY (DEFICIT):
Preferred stock, $0.00001 par value per share,
10,000,000 shares authorized, 422,222 shares
issued and outstanding actual, 422,222 shares
outstanding pro forma, 0 shares outstanding pro
forma, as adjusted................................ $ 4 $ 4 $ --
Common Stock, $0.00001 par value, 50,000,000 shares
authorized, 3,050,000 shares issued and
outstanding actual, 3,347,246 shares issued and
outstanding pro forma, 7,053,558 shares issued and
outstanding pro forma, as adjusted................ 33 33 71
Preferred stock discount(2)......................... (106,217) (106,217) --
Convertible debt with detachable
warrant discount(3)............................... (106,203) (373,460) --
Additional paid-in capital(4)....................... 4,264,650 5,279,930 30,728,396
Accumulated deficit(5).............................. (3,711,761) (4,368,086) (4,847,763)
----------- ----------- -----------
Total stockholders' equity (deficit).............. $ 340,506 $ 432,204 $25,880,704
----------- ----------- -----------
Total capitalization.............................. $ 2,006,117 $ 2,813,440 $26,761,940
=========== =========== ===========
- ------------------------
(1) Pro forma long-term debt of $1,717,324 includes the actual long-term debt of
$1,001,699 and convertible promissory notes having a total principal value
of $715,625 which were issued in April and June 2000. Pro forma as adjusted
long-term debt is pro forma long-term debt of $1,717,324 reduced by $500,000
for the repayment of a promissory note and $1,000,000 for repayment of
convertible promissory notes.
11
(2) The actual preferred stock discount of $(106,217) is a discount on a
non-interest bearing promissory note with a principal value of $500,000,
which we issued in January 2000 which reduced the value of the note when
originally issued. This discount will be eliminated when we recognize
interest expense upon completion of this offering.
(3) The actual convertible debt with detachable warrant discount of $(106,203)
is a discount on convertible promissory notes we issued in March 2000 with a
total principal value of $284,275. The pro forma as adjusted convertible
note with detachable warrant discount of $(373,460) includes the pro forma
discount on the March notes and an additional discount of $(267,257) on the
$715,625 in convertible promissory notes which were issued in April and June
2000.
(4) Actual, pro forma and pro forma as adjusted additional paid-in capital are
calculated as follows:
Actual...................................................... $ 4,264,650
Interest expense on convertible notes issued in
March, April and June 2000................................ $ 482,758
Discount on convertible notes with detachable warrants...... $ 267,257
Issuance of 27,582 shares valued for cash consideration..... $ 91,698
Issuance of 21,428 shares valued at $8.10 per share......... $ 173,567
-----------
Pro forma................................................... $ 5,279,930
-----------
Conversion of preferred stock, less par value............... $ 500,000
Conversion of convertible notes, less par value............. $ 999,996
Receipt of gross proceeds from public offering, less par
value..................................................... $23,948,470
-----------
Pro forma as adjusted....................................... $30,728,396
===========
(5) The pro forma accumulated deficit of $(4,368,086) is the actual accumulated
deficit of $(3,711,761) increased for interest expense on the convertible
promissory notes of $482,758 and compensation expense for the issuance of
stock valued at $173,567 to consultants. The pro forma as adjusted
accumulated deficit of $(4,847,763) is the pro forma accumulated deficit of
$(4,368,086) increased for interest expense of $106,217 recognized upon
conversion of the 422,222 shares of preferred stock, and interest expense of
373,460 recognized upon conversion of the convertible promissory notes.
The preceding table excludes:
- 450,000 shares of common stock and 450,000 redeemable common stock
purchase warrants issuable upon exercise of the underwriter's
over-allotment option;
- A total of 3,600,000 shares of common stock issuable upon exercise of the
redeemable common stock warrants, warrants issued to the representatives
of the underwriters, and the common stock purchase warrants issuable upon
exercise of the representatives' warrants.
- 1,779,919 shares of common stock issuable upon the exercise of currently
outstanding options and warrants; and
- 188,179 shares available for issuance upon the exercise of options which
may be granted under our stock plan.
12
DILUTION
Our pro forma net tangible book value at March 31, 2000, after giving effect
to: the issuance of (a) convertible promissory notes having a total principal
amount of $715,625, (b) the issuance of 27,582 shares of common stock in a
private offering, and (c) the issuance of 21,428 shares of common stock in
connection with the termination of a consulting agreement, was approximately
$432,204, or $.13 per share of common stock. Pro forma net tangible book value
per share represents total tangible assets less total liabilities, divided by
the number of shares of common stock outstanding after giving effect to the
conversion of all outstanding convertible preferred stock.
After giving effect to the sale of 3,000,000 units offered hereby at an
assumed offering price of $9.10 per unit, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses, our pro
forma net tangible book value at March 31, 2000, would have been $25,880,704, or
$3.67 per share. This represents an immediate increase in net tangible book
value of $3.54 per share, or 2,723%, to existing stockholders and an immediate
dilution of $5.33 per share, or 59%, to new investors. The following table
illustrates this dilution:
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value (deficit) per share at
March 31, 2000............................................ $ .13
Increase in net tangible book value per share attributable
to new investors.......................................... $3.54
Pro forma net tangible book value per share as adjusted for
the offering.............................................. $3.67
Dilution per share to new investors......................... $5.33
If the over-allotment option is exercised in full, the pro forma net
tangible book value of common stock after the offering would have been
$29,545,729, or $3.93 per share. This represents an immediate increase in net
tangible book value per share to existing stockholders of $3.80, or 2,923% and
an immediate dilution of $5.07 per share, or 56%, to new investors.
The following table summarizes as of March 31, 2000, on a pro forma as
adjusted basis, the total number of shares of common stock and consideration
paid to us and the average price per share paid by existing stockholders and by
new investors purchasing the 3,000,000 units offered by this prospectus at an
assumed initial public offering price of $9.10 per unit and before deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. The following table does not include the purchase of or any exercise
of the redeemable warrants offered by this prospectus.
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ----------- -------- -------------
Existing stockholders..................... 4,053,558 57% $ 3,560,183 12% $ .88
New investors............................. 3,000,000 43% $27,300,000 88% $9.00
--------- --- ----------- --- -----
Totals.................................. 7,053,558 100% $30,860,183 100%
========= === =========== ===
13
SELECTED FINANCIAL DATA
You should read the following selected financial data together with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999
are derived from the audited financial statements included elsewhere in this
prospectus. The balance sheet data as of December 31, 1997 is derived from our
unaudited financial statements. The selected financial data at March 31, 2000
and for the three months ended March 31, 2000 is derived from unaudited
financial statements included elsewhere in this prospectus. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments which we consider necessary for the fair presentation of
our financial position and results of operations for these periods. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that we will experience for the entire year. The historical
results are not necessarily indicative of results to be expected for future
periods.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 -----------------------
------------------------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS:
Revenues......................... $1,281,453 $1,818,960 $2,788,187 $ 247,985 $ 612,619
Cost of revenues................. 704,486 1,076,197 1,946,758 167,068 553,118
---------- ---------- ---------- ---------- ----------
Gross profit..................... 576,967 742,763 841,429 80,917 59,501
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Marketing........................ 312,814 339,973 425,236 19,336 49,084
General and administrative....... 310,804 360,174 592,613 123,456 1,907,123
Total operating expenses....... 623,618 700,147 1,017,849 142,792 1,956,207
---------- ---------- ---------- ---------- ----------
(Loss) income from operations.... (46,651) 42,616 (176,420) (61,875) (1,896,706)
OTHER INCOME (EXPENSE)
Interest expense................. (7,470) (7,053) (18,780) (809) (207,885)
---------- ---------- ---------- ---------- ----------
Net (loss) income................ $ (54,121) $ 35,563 $ (195,200) (62,684) (2,104,591)
========== ========== ========== ========== ==========
Net (loss) income per share:
basic and diluted.............. $ (.02) $ .01 $ (.06) $ (.02) $ (.69)
========== ========== ========== ========== ==========
Shares used in computing basic
and diluted net (loss) income
per share...................... 3,026,956 3,026,956 3,033,216 3,026,956 3,052,758
========== ========== ========== ========== ==========
AT DECEMBER 31, AT MARCH 31,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash............................. $ 129,324 $ 461,924 $ 340,786 62,676 1,192,355
Working capital (deficiency)..... $ (95,306) $ (102,729) $ (218,565) (107,440) 979,452
Total assets................... $ 231,117 $ 603,377 $1,212,310 361,797 2,006,117
========== ========== ========== ========== ==========
Total liabilities.............. $ 358,396 $ 695,093 $1,349,226 516,197 1,665,611
Total stockholder's (deficit)
equity....................... $ (127,279) $ (91,716) $ (136,916) $ (154,400) $ 340,506
---------- ---------- ---------- ---------- ----------
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH OUR
FINANCIAL STATEMENTS, AND THE NOTES WHICH ACCOMPANY THE FINANCIAL STATEMENTS,
APPEARING BELOW.
Currently, most of our revenues are generated through our receipt of online
and catalog orders for alcohol beverages and related products, which are sold by
our retail affiliates. As we seek to expand our business, we intend to generate
additional revenue through marketing fees and advertising payments from
producers, wholesalers and retailers. As a result of this planned expansion, we
also believe that our operating expenses will significantly increase as a result
of increased advertising, marketing and promotional activities and other
expenditures designed to increase the value of our brand. We anticipate
continuing to incur losses and generate negative cash flow from operations for
the foreseeable future.
In light of the rapidly changing nature of our business, our limited
operating history in our current form and the seasonality of our business, we
believe that comparisons of our operating results for any period with those of
the preceding period are not particularly meaningful and should not be relied
upon as an indication of future performance. Our revenues and operating results
may vary from quarter to quarter due to a number of factors, some of which are
beyond our control, as detailed below. This fluctuation is primarily due to
increased revenues and advertising expenditures during holiday seasons,
particularly the quarter ending December 31.
REVENUE
Sales of alcohol beverages to customers who order through our website or our
catalogs are made by local retailers with whom we have relationships, not
directly by us. As a result, we do not incur the costs associated with a large
distribution network or with maintaining inventory. The price of goods ordered
through our website or catalogs will be established based on a national average
of retail prices.
We treat the entire purchase price of orders placed through us as revenue
because we assume the following risks associated with orders generated by our
website or our catalogs:
- Credit risk for orders placed by customers for whom we do not require
payment at the time of the order;
- Credit risk for rejected credit cards and fraudulent orders;
- Inventory risk for returned products that are not successfully returned to
the suppliers for credit; and
- Refunds granted for customer satisfaction for late shipments or complaints
about quality.
The orders for which we bill the customers, rather than insisting on payment
at the time of the order, are typically placed by corporations, and we generally
require payment on these orders in thirty days. We do not impose a finance
charge on customers who do not pay in thirty days. We incur losses in connection
with deliveries of products ordered through our website if the wrong product is
delivered or a similar mistake is made. We sometimes incur losses because we
grant a refund to the customer but do not require the customer to return the
product to the retailer. For the years ended December 31, 1998 and 1999, total
refunds as a percentage of our total revenues were .87% and 3.75%, respectively.
Total refunds as a percentage of total revenues were approximately 2.9% for the
quarter ended March 31, 2000.
Our largest source of revenue comes from faciliting the sale of alcohol
beverages and related products through our catalogs and website. Our revenues
from these orders was $2,435,118 for the year ended December 31, 1999. For the
quarter ended March 31, 2000, our revenues from these orders was $612,619. We
expect our revenues from Internet orders, as a percentage of our total revenues
from
15
product orders, to increase if we successfully attract more visitors to our
website. For the year ended December 31, 1999, however, our revenue from catalog
orders still represented approximately 65% of our total revenues from product
orders. For the quarter ended March 31, 2000, our revenue from catalog orders
represented approximately 40% of our total revenues from product orders.
Our revenues from the sale of advertising space currently represent a much
smaller percentage of our total revenues than revenues from product orders. Our
advertising revenues were $353,069 for the year ended December 31, 1999. We did
not have any advertising revenues for the quarter ended March 31, 2000. We
entered into several contracts between May 1999 and May 2000 under which
producers agreed to pay us for advertising, but we did not receive any payments
under these contracts in the quarter ended March 31, 2000. We have historically
accounted for revenue under advertising when payments are received, because most
of our revenue under advertising contracts related to advertisements which
appear in a single publication of our catalog. In the future, because we expect
an increasing percentage of our advertising revenue to be derived from
advertisements on our website, which run continuously, we intend to recognize
revenue from advertising contracts over the life of the contract.
EXPENSES
Our expenses are divided into four general categories: cost of revenues,
marketing, general and administrative, and interest expense.
COST OF REVENUES. Our cost of revenues consists of the portion of the
purchase price of products ordered through us which we pay to our affiliated
retailers, direct costs associated with advertising revenues and shipping and
handling costs paid by us in connection with fulfilling customer orders. The
price paid to our affiliated retailers is generally the price at which the
retailers normally sell to customers, less a discount which is negotiated
separately with each retailer. The average discount from the retailers' prices
is approximately 10%. Retailers' typically have a margin of approximately 30% of
the retail price. Our gross profit varies from transaction to transaction
because the prices charged to consumers on our website remain relatively
constant but the amount paid to our affiliated retailers depends on the
retailer's standard price and the amount of the discount. We anticipate earning
a gross profit of between 10% to 15% on sales made by our affiliated retailers.
MARKETING EXPENSES. Marketing expenses consist primarily of advertising
costs, commission payments to affiliated websites, purchases of customer lists,
the costs of printing and mailing our catalogs and direct mailing expenses. We
expect that these expenses will increase significantly in future periods. We
anticipate that our marketing expenses will increase substantially as we
increase our advertising and other promotional expenditures with a view to
further developing our brand name.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel costs, facilities expenses, professional fees and
other general corporate expenses. We expect our general and administrative
expenses to grow as we hire additional personnel and incur expenses related to
the growth of our business and our operation as a public company.
INTEREST EXPENSE. Interest expense consists of interest on our bank debt
and other borrowings.
QUARTERLY OPERATING RESULTS
Our quarterly operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside our control. These quarterly
operating results may not be useful to you in evaluating our future performance.
We believe the seasonal nature of gift giving will cause our revenues to
fluctuate from quarter to quarter because that portion of our revenues which is
derived from online orders depends to a significant extent on gift giving. Our
revenues and operating results tend to be lower for the quarter that ends on
September 30 because none of the holidays which produce a
16
significant volume of our orders such as Valentine's Day, Mother's Day, Father's
Day and Christmas fall within that quarter. Our quarterly results also fluctuate
because of spending patterns of online shoppers and seasonal trends in Internet
usage. In addition, in response to changes in the competitive environment, we
may, from time to time, make pricing, service or marketing decisions that could
cause significant declines in our quarterly or annual operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our selected
statements of operations data.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999 2000
---------- ---------- ---------- --------- ------------
REVENUE AND COST OF REVENUES:
Revenues........................ $1,281,453 $1,818,960 $2,788,187 $247,985 $ 612,619
Cost of revenues................ 704,486 1,076,197 1,946,758 167,068 553,118
---------- ---------- ---------- -------- ------------
Gross profit.................... 576,967 742,763 841,429 80,917 59,501
OPERATING EXPENSES:
Marketing....................... 312,814 339,973 425,236 19,336 49,084
General and administrative...... 310,804 360,174 592,613 123,456 1,907,123
---------- ---------- ---------- -------- ------------
Total operating expenses...... 623,618 700,147 1,017,849 142,792 1,956,207
---------- ---------- ---------- -------- ------------
(Loss) income from operations... (46,651) 42,616 (176,420) (61,875) (1,896,706)
OTHER EXPENSE:
Interest expense................ (7,470) (7,053) (18,780) (809) (214,227)
---------- ---------- ---------- -------- ------------
Net (loss) income................. $ (54,121) $ 35,563 $ (195,200) (62,684) (2,104,591)
========== ========== ========== ======== ============
Net (loss) income per share: basic
and diluted..................... $ (.02) $ .01 $ (.06) $ (.02) $ (.69)
========== ========== ========== ======== ============
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
REVENUES. Our revenues increased approximately $365,000, or 147.2%, to
approximately $613,000 in the quarter ended March 31, 2000 from approximately
$248,000 for the same period in 1999. This increase was primarily the result of
increased Internet orders.
COST OF REVENUES. Our cost of revenues increased approximately $385,000, or
229.2%, to approximately $553,000 in the quarter ended March 31, 2000 from
approximately $168,000 for the same period in 1999. This increase was primarily
the result of the increased order volume described above. As a percentage of
revenues, cost of revenues increased from 67.4% for the quarter ended March 31,
1999 to 90.3% for the same period in 2000. This increase was due primarily to
our lowering the prices of products which may be ordered through our website or
catalogs to generate additional orders while the prices paid to retailers
remained about the same. In the quarter ended March 31, 2000 we also granted
approximately $40,000 worth of concessions to customers who were not satisfied
with custom orders from the 1999-2000 holiday season. We do not generally intend
to lower retail prices in the future to generate additional orders. Instead, we
intend to generate additional orders through increased advertising and other
promotional activities.
MARKETING EXPENSES. Our marketing expenses increased approximately $30,000,
or 157.9%, to approximately $49,000 for the quarter ended March 31, 2000 from
approximately $19,000 for the same period in 1999. This increase was primarily
due to increased travel costs for salespersons, increased expenses for credit
card orders, and our making more payments to other websites which provide links
to our website.
17
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased approximately $1,784,000, or 1450.4%, to approximately
$1,907,000 for the quarter ended March 31, 2000 from approximately $123,000 for
the same period in 1999. This change was primarily due to costs of recruiting
executives, higher salary payments as a result of our hiring additional
officers, compensation expense in connection with the issuance of options to
employees, depreciation expenses on our building, and increased professional
fees.
INTEREST EXPENSE. Our interest expense increased about $213,200, or
26,650%, to approximately $214,000 for the quarter ended March 31, 2000 from
approximately $800 for the same period in 1999. This increase is due to interest
payments on the mortgage on our property, a $500,000 promissory note and
convertible promissory notes which were not outstanding in the first quarter of
1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Our revenues increased approximately $969,000, or 53.3%, to
approximately $2,788,000 in 1999 from approximately $1,819,000 in 1998. This
increase was primarily the result of increased order volume.
COST OF REVENUES. Our cost of revenues increased approximately $871,000, or
80.9%, to approximately $1,947,000 in 1999 from approximately $1,076,000 in
1998. This increase was primarily the result of the increased order volume
described above as well as increases in the costs of developing and maintaining
our website. As a percentage of revenues, cost of revenues increased from 59.2%
in 1998 to 69.8% in 1999. This increase was due primarily to our lowering of our
retail prices to generate additional orders while the prices paid to our
affiliated retailers remained relatively constant.
MARKETING EXPENSES. Our marketing expenses increased approximately $85,000,
or 25.0%, to approximately $425,000 in 1999 from approximately $340,000 in 1998.
This increase was primarily due to increased advertising expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased approximately $233,000, or 64.7%, to approximately $593,000
in 1999 from approximately $360,000 in 1998. This change was primarily due to
increased personnel costs associated with our hiring additional employees.
INTEREST EXPENSE. Our interest expense increased about $11,700, or 164.8%,
to approximately $18,800 in 1999 from approximately $7,100 in 1998. This
increase is due to the fact that we increased our debt by borrowing $192,000,
which we used to purchase the building in which our offices are located and to
make improvements on the property.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Our revenues increased approximately $538,000, or 41.9%, to
approximately $1,819,000 in 1998 from approximately $1,281,000 in 1997. This
increase was primarily the result of increased Internet and catalog order
volume.
COST OF REVENUES. Our cost of revenues increased approximately $372,000, or
52.8%, to approximately $1,076,000 in 1998 from approximately $704,000 in 1997.
This increase was primarily the result of the increased Internet and catalog
order volume described above. As a percentage of revenues, cost of revenues
increased from 55.0% in 1997 to 59.2% in 1998. This increase was due primarily
to our lowering of our retail prices to generate additional orders while the
prices paid to our affiliated retailers remained relatively constant.
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MARKETING EXPENSES. Our marketing expenses increased approximately $30,000,
or 8.6%, to approximately $340,000 in 1998 from approximately $313,000 in 1997.
This change was primarily due to increased advertising and catalog expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased about $49,000, or 15.8%, to approximately $360,000 in 1998
from approximately $311,000 in 1997. This increase was primarily due to
increased personnel costs.
INTEREST EXPENSE. Our other expenses decreased approximately $400, or 5.3%,
to approximately $7,100 in 1998 from approximately $7,500 in 1997. This decrease
was primarily due to our cash flow improving, which allowed us to draw less on
our bank line of credit, and declining interest rates, which provided a more
favorable interest rate on the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our requirements for working capital primarily through
operating cash flows and more recently from the proceeds of the private
placement of our securities as well as borrowings under our line of credit. As
of March 31, 2000, we had a working capital deficit of $107,440 and a
stockholders' equity of $390,698. In contrast, as of December 31, 1999, we had a
working capital deficit of $218,565 and a capital deficiency of $136,916. As of
December 31, 1998, we had a working capital deficit of $102,729 and a capital
deficiency of $91,716.
In September 1999, we obtained a $120,000 line of credit from LaSalle Bank
FSB. Draws on the line currently bear interest at the rate of 9.75% and are
evidenced by a note that is payable on demand of the bank. In March 1999, we
borrowed $192,000 from Bank One, Illinois, N.A. The loan must be repaid by
September 19, 2004 and bears interest at a rate equal to 7.74% on a per annum
basis. Our President, Steven Olsher and our Chairman and Chief Sales Officer,
Gail Zelitzky, have each guaranteed our obligations under these two loans.
Since December, 1999, we have raised a total of $2,466,974 in proceeds from
the private placement of securities. On December 23, 1999, we sold a total of
50,000 shares of our common stock for $50,000. In January 2000 we issued a
promissory note in the principal amount of $500,000 to the Gem Global Yield Fund
Limited, and 422,222 shares of Series A Preferred Stock to the Gem Global Yield
Fund and four other entities, for total consideration of $500,000.
In March 2000 we issued ten units, each consisting of one convertible
promissory note and one warrant to purchase shares of our common stock, for
total consideration of $900,000. In addition, in April 2000, the holders of our
Series A Preferred Stock committed to purchase one unit for total consideration
of $100,000 by exercising their preemptive rights with regard to this offering.
This unit was issued in June 2000. Each convertible note bears interest at the
prime rate plus two percent. Each note automatically converts into shares of our
common stock at a conversion price of $3.52 per share upon completion of this
offering, but may be converted earlier, at the same conversion price, at the
option of the holder. Each warrant allows the holder, for a period of five years
from the date of issuance, to purchase a number of shares equal to 50% of the
number issuable upon conversion of the convertible note, at a price of $2.64 per
share.
From January through March 2000, we sold a total of 248,236 shares of common
stock for total consideration of $825,276. The first 42,194 shares sold in this
offering were sold at a price of $2.37 per share, and the remainder were sold at
a price of $3.52 per share. In addition, in March 2000 the holders of our
Series A Preferred Stock, in exercise of their preemptive rights with regard to
these sales, committed to purchase an additional 4,688 shares at a price of
$2.37 per share for total consideration of $11,111, and an additional 22,894
shares at a price of $3.52 for total consideration of $80,857. These shares were
issued in June 2000.
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Our principal uses of cash are to pay general and administrative expenses,
including salaries, to fund expanded marketing and advertising expenses and to
make improvements and enhancements to our technology. Our personnel costs have
recently increased substantially, primarily as a result of our hiring additional
executive officers and increasing the salaries of existing executive officers.
We anticipate that these increased costs will reduce our liquidity in the next
six to twelve months, and we intend to use the proceeds of this offering to
offset this reduction.
While there can be no assurance, we believe that the proceeds of this
offering, funds currently on hand and funds to be provided by operations will be
sufficient to meet our need for working capital for at least the next twelve
months. Actual results and working capital needs could differ materially from
those estimated due to a number of factors, such as increased costs due to
changing technology, the costs of acquiring or leasing office space being
greater than anticipated, or increased advertising costs driven by competition
among eCommerce companies. We may require additional financing within this time
frame. Additional funding may not be available on terms acceptable to us, or at
all.
Cash used in operating activities was approximately $8,000 in 1999, and cash
generated by operating activities was approximately $401,000 in 1998. We used
cash primarily to pay fees for strategic planning and website development and to
fund the increase in accounts receivable. A substantial portion of the increase
in receivables was due to processing delays associated with credit card orders
placed in 1999, but for which we did not receive payment until 2000.
Cash used in investing activities was approximately $56,000 for 1999. We
used this cash to purchase our office facility and make related improvements.
Financing activities provided approximately $69,000 in 1999, comprised of
$20,000 in draws on our line of credit and $50,000 from the placement of
securities discussed above, less a $1,000 reduction in our long-term debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that all the
costs related to the development of internal use software other than those
incurred during the application development stage be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. We adopted SOP
98-1 on January 1, 1999. Our adoption of SOP 98-1 did not have a material effect
on our financial position or results of operations.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instrument and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair market value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income (loss) depending on whether a derivative is designed
as part of a hedge transaction and, if so, the type of hedge transaction
involved. We do not expect adoption of SFAS No. 133 to have a material impact on
our consolidated financial position or results of operation.
In December 1998, we adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This standard requires that reportable
segments be reported consistent with how management assesses segment
performance. It also requires disclosure of information by reportable segment,
geographic area and major customer. As a result, we will separately report
information on the two operating segments: (1) catalog and website, and
(2) advertising. We do not calculate operating income by segment. Instead, we
present our gross profit. In addition, because we do not rely on segment asset
allocation, information regarding segment assets is not meaningful and is not
reported.
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We have elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
in accounting for our employee stock options, rather than the alternative fair
value accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation." APB No. 25 provides that the compensation expense relative to our
employee stock options is measured based on the intrinsic value of stock options
granted. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123. This method recognizes the fair value of stock options granted
at the date of grant in earnings over the vesting period of the options.
On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, which contains the staff's interpretation of accounting principles
governing the recognition of revenue. Among the issues on which the staff
provided interpretations were whether companies which receive product orders
which are fulfilled by third parties should recognize revenue on a gross or net
basis. Our application of this bulletin did not result in a change to our
revenue recognition policy or require a restatement to the financial statements
for any past periods. If the interpretation of existing principles is changed,
we might be required to recognize as revenue only the difference between the
gross sales price and the price we pay to our affiliated retailers.
We account for non-employee stock-based awards in which goods or services
are the consideration received for the equity instruments issued based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
21
BUSINESS
OVERVIEW
Liquor.com intends to focus on integrating producers, wholesalers, retailers
and consumers in the highly fragmented alcohol beverage industry. We target
consumers interested in "prestige" products, which are high-quality beverages
with well-known brand names which typically sell for higher prices than other
beverages in the same category. We build and maintain relationships with these
consumers by offering them custom content and a wide selection of products
through our catalogs and on our website. We transmit consumers' orders to a
global network of retail "affiliates," which are retail establishments with whom
we have non-exclusive arrangements for the sale and delivery of products ordered
through us. We offer these affiliates the opportunity to generate additional
revenue, reduce costs and build loyal customer relationships. We intend to
provide eBusiness solutions for all three tiers of the alcohol beverage
distribution system -- producers, wholesalers and retailers. We are currently
developing a hosted, proprietary network for the industry designed to aggregate
and streamline product purchasing, reduce costs, build revenue and effectively
disseminate product information and industry news for all three tiers.
We do not sell directly to customers, but rather use our industry
relationships, expertise and in-depth knowledge of our target markets to
generate demand, facilitate sales and build loyalty. Currently, the affiliates
participating in our network provide direct delivery to thirty states and more
than forty countries. By expanding our existing infrastructure and capitalizing
on relationships developed by our founders and their family over fifty years in
the alcohol beverage industry, we are seeking to become a leading eCommerce and
eCRM company serving the alcohol and entertainment beverage industry .
INDUSTRY BACKGROUND
GROWTH OF ONLINE COMMERCE. The Internet is a global medium which enables
millions of people to share information, conduct business and communicate
electronically. In a September 1999 report Forrester Research estimated that
17 million U.S. households will have purchased items online in 1999, increasing
to 49 million by 2004. In this report, Forrester Research also estimated that
Internet purchases of goods and services by U.S. households would increase from
$20.3 billion in 1998 to over $143 billion in 2003.
ELECTRONIC CUSTOMER RELATIONSHIP MANAGEMENT. The Internet offers consumers
unprecedented access to a large number of vendors, as well as the ability to
easily compare information on products, prices and service. In addition, the
Internet has fostered increased competition by weakening traditional barriers to
entry. As a result, to succeed in eCommerce we believe that companies must gain
a better understanding of their customers in order to respond to their
individual needs. At the same time, companies have the opportunity to increase
customer loyalty by employing targeted marketing campaigns and personalizing the
customer experience. "eCRM," or "electronic customer relationship management,"
provides a means for Internet companies to increase customer satisfaction. eCRM
is a technique through which businesses provide one-to-one customer service
which adapts to each customer's needs while seeking to provide an exceptional
customer experience. Successful eCRM solutions involve the collection of online
and offline data which enable businesses to tailor information and product
offerings to a consumer's preferences and behaviors.
BUSINESS-TO-BUSINESS ONLINE EXCHANGE. We believe that the Internet offers
increasing opportunities to provide business-to-business services which link
participants at all levels of a product distribution system. A
"business-to-business online exchange" is a network through which businesses can
share information and process transactions more quickly and easily than is
possible through traditional channels. Through the use of online exchanges,
businesses can improve efficiency and lower costs.
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MARKET FOR ALCOHOL BEVERAGES. Beverage Dynamics, an industry publication,
estimates that annual sales of alcohol beverages in the United States totaled
approximately $113 billion in 1999.
CORPORATE HISTORY
Liquor.com is the product of three generations of family service in the
alcohol beverage industry. In 1949, Irving Robins, our Chairman's father and
President's grandfather, founded Foremost Sales Promotions, Inc. which focused
on providing services to the alcohol beverage industry as well as the
franchising of Foremost Liquor Stores. Our predecessor, Liquor by Wire, was
created as a division of Foremost Sales Promotions to facilitate the worldwide
delivery of wine, champagne, spirits and gifts and as a means with which to help
differentiate the Foremost franchisees from their competition. In 1991, after
recognizing the significant opportunity for the further development of the
Liquor by Wire division, our founders began to focus on expanding the revenues
and reach of this division, which led to our Internet efforts.
We were incorporated in Illinois with the name Liquor by Wire, Inc. in
August 1993. In 1994, our founders discontinued their franchise operations to
fully concentrate on the opportunity within the online and direct segment of the
market. In 1995, we launched liquorbywire.com, beginning our transition into an
eCRM, eCommerce and business-to-business exchange company. Since 1995, the
majority of our revenue has been derived from facilitating the sale, online and
through our catalogs, of alcohol beverages and related products. In
October 1998, we acquired the URL liquor.com and began to implement the next
generation of our Internet strategy. In December 1999, we formed a subsidiary,
Liquor.com, Inc., a Delaware corporation, and conducted a merger under which
this subsidiary was the surviving corporation.
OUR STRATEGY
By expanding our existing infrastructure and capitalizing on relationships
developed by our founders and their family over fifty years in the alcohol
beverage industry, we are seeking to become a leading provider of eCRM,
eCommerce and business-to-business solutions for the industry. To achieve this
goal we will continue to focus on:
- Expanding our relationships with our retail affiliate network through
cooperative marketing, custom product development and other programs.
- Completing the development of our online exchange through which producers,
wholesalers and retailers can share information.
- Generating increased website traffic, orders and brand recognition through
direct marketing and expanded content.
- Increasing our database of Liquor.com consumers by offering a large
selection of wine, champagne, spirits and complementary products and
services.
- Further developing our growing list of Liquor.com consumers into an
extensive database of consumer demographic, product preference and other
information that our partners may use to focus their marketing efforts and
obtain valuable feedback.
CURRENT ECRM AND ECOMMERCE ACTIVITIES
Our current eCRM and eCommerce activities relate to our facilitating product
sales, providing customers with what we believe is a unique experience and
gathering customer data through our website. We currently employ eCRM solutions
by:
- focusing on customer service;
- emphasizing customer interaction and dialogue;
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- providing an easy-to-use format with which customers can order products
and view content; and
- analyzing customer data and preferences and using this data to focus our
marketing efforts.
THE LIQUOR.COM NETWORK
Currently, most of our revenue is generated from facilitating the sale of
alcohol beverages through our catalogs or website. Through these channels we
offer a large selection of wines, champagnes, spirits and alcohol beverage
related products. We receive the sales proceeds for each product offered through
our website and pay retailers a portion of the proceeds for actually selling and
delivering the product to our customers.
The product offerings on our website and in our catalogs provide one means
for our establishing and managing customer relationships and providing eCRM
services to other entities. When consumers order products through us, we
transmit these orders to our network of over 130 retail "affiliates." These
affiliates are retail establishments which enter into non-exclusive agreements
with us in which they agree to sell and deliver alcoholic beverages and related
products to our consumers. While we intend to expand our business by offering
increasing levels of eCommerce and business-to-business services to producers,
wholesalers and retailers, we believe that our role in generating product
orders, which are executed and delivered by a network of participating alcohol
beverage retailers, will remain an important part of our business.
Alcohol beverages are typically sold through a three-tier system, from the
producer to the wholesaler and then to the retailer. Each order received by our
retailers typically represents additional business they would not otherwise have
received. For example, orders processed through our website and catalogs as
business-to-business gifts typically generate orders for delivery which
originate outside of the selling retailer's immediate vicinity. We believe that
producers and wholesalers benefit from the additional exposure of having their
products featured on our website and in our catalogs.
Over the past several years, revenues from online orders, as compared to
catalog orders, have constituted an increasing percentage of our total revenues
from facilitating product sales. We expect this trend to continue, as we
increase the advertising of the Liquor.com name. However, we expect our catalogs
to remain an important part of our business.
TARGETED ADVERTISING
We believe our ability to provide direct access to consumers specifically
interested in the purchase of alcohol beverages at the point of sale can
significantly enhance a producer's marketing efforts. We generate revenues by
offering producers the opportunity to advertise their products on our website
and in our catalogs. The advertising rates for our website vary depending on the
specific placement of the advertisement within the site. Our advertising
contracts typically have a term of one year. From May 1999 to May 2000, we
signed agreements with nineteen producers of alcohol beverages who agreed to pay
us a total of over $600,000 over the period of May 1999 through May 2001 for
advertising on our website and in our catalogs. As the number of consumers
visiting our website and placing orders with us increases, we expect to generate
additional revenues from advertising on our website.
OUR CATALOG
We currently mail our catalog annually. The catalog features pictures of
wines, champagnes and spirits which customers can order by phone, along with
background information on these products. Our catalog also features samples of
custom products such as hand-etched glasses and bottles which can be
personalized for special occasions. In the fourth quarter of 2000 we plan to
launch a Liquor.com "Magalog," an expanded version of our catalog which will
feature articles on entertaining and other issues of interest to consumers of
alcohol beverages, in addition to product listings. We believe this
24
Magalog will increase our catalog sales and our brand recognition. We intend to
mail the Magalog two to three times per year, and increase the size of our
mailing list. We plan to mail the Magalog to people who have sent gifts through
our website or catalog in the past or who have received such gifts, and to
corporate gift givers.
OUR WEBSITE
A key component of our eCRM solution is our website. Liquor.com was
officially launched in November 1999, and we have been developing it into an
online community in which visitors can encounter a host of products, content and
services. The site is designed to enable our visitors to select and purchase
fine wines and spirits, learn the art of mixing drinks, understand the history
of products such as single malt scotch, plan parties and events, hire
professional bartenders or send unique gifts. We intend to further enhance the
consumer's experience by allowing consumers to view their purchase history and
track the status of current orders when visiting our site.
The following chart describes the layout of our website.
[CHART]
LINKS AVAILABLE ON EVERY PAGE:
[CHART]
* Under Construction
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Our website acts as a source for consumers to gain access to a wide variety
of products, information, and services, or an e-commerce "portal." By using the
Internet as a point of contact, commerce and service, we hope to be able to
broaden our network of affiliates, products and services, thereby helping
develop stronger relationships with the consumer. As our website traffic and
membership increase, we expect to be able to generate increasing revenue from
online advertising and marketing to these visitors. We are already selling
advertising space to producers and others wishing to target our constituency.
In addition to offering a wide selection of products, our website provides a
user experience combining custom content, including:
- "The Libation Library"--a database of drink recipes;
- An "Ask The Bartender!" feature, which allows consumers to receive answers
to questions on alcohol beverages, such as the difference between a
"blended" scotch and a single malt scotch;
- An interactive forum for real-time chat with other alcohol beverage
enthusiasts; and
- A "party planner" service called "Party Central" that provides product and
serving recommendations for consumer and corporate events.
We intend to add the following features to our website during the year:
- Entertainment, such as celebrity profiles and live interaction, including
Q & A LIVE!, to allow consumers to ask questions of celebrities and
industry notables;
- Information on offline events, such as tastings and nightclub promotions;
- The ability to create a personalized home page which will allow consumers
to receive information tailored to their specific interests; and
- A Liquor.com membership program, under which consumers will be assigned a
customer identification number which we will use to store their
demographic and previous order information. We intend for Liquor.com
members to be entitled to product discounts, invitations to members-only
events, and primary access to limited allocations or new products.
We intend to provide links to the websites of producers, retailers and
content providers. Any of these parties could provide information on their
websites which creates liability for defamation, negligence, copyright or
trademark infringement. As a result of the links on our website, we could be
exposed to liability for content that we do not control but that is accessible
from our website.
DEVELOPMENT OF AN INTEGRATED ECRM, ECOMMERCE AND BUSINESS-TO-BUSINESS EXCHANGE
COMPANY
We intend to expand our business by providing eCRM and eCommerce services to
businesses at all three levels of the alcohol beverage distribution chain. We
are developing and implementing an "online exchange," which will be a network of
information sharing and software solutions that incorporates our experience in
facilitating the delivery of alcohol and related entertainment beverages, as
well as custom products and services related to the upscale entertainment
lifestyle. We intend for this network to allow users to:
- share information;
- improve efficiency;
- generate revenues; and
- build relationships.
26
This network is in the very early stages of development. We anticipate that we
will be able to begin providing information-sharing services through this
network in approximately one year from the date of this prospectus, and that we
will be able to provide the full range of intended services in eighteen to
twenty-one months.
PRODUCER SERVICES
As our online network is deployed, we intend to link producers with
wholesalers and retailers via the Internet, which we believe will offer them the
opportunity to:
- receive up-to-date industry news and product sales statistics;
- streamline their order purchasing process by conducting such transactions
online; and
- generally operate their businesses more efficiently and effectively.
We anticipate that the first phase of development of this network, which we
intend to complete by the second quarter of 2001, will involve applications
which provide producers with access to industry information. We intend to offer
producers the opportunity to manage their customer relationships in a manner
that we believe is rarely available within the current distribution system. We
believe producers will be able to utilize this relationship to educate and
inform their customers, reach new markets, and introduce new products. Once the
first phase of the network development is complete, we intend to:
- create specific intranet applications for producers within the Liquor.com
website accessible through password only. These areas will provide product
sales information, such as "This Week's Top 10 Selling Items," information
on new products, consumer comments on products of interest and news
related to the industry;
- increase the opportunities available to producers for the direct promotion
of their products beyond placing advertisements on our website and in our
catalogs;
- offer producers opportunities for "Category Exclusive" positioning on our
website, sponsorship of online events, such as Q & A LIVE!, and the
offering of online coupons;
- establish Liquor.com as a calendar and special events hub which gives
producers the opportunity to sponsor nightclub-based events, such as
Liquor.com LIVE!, a nationwide nightclub tour, or The Bartender Olympics,
a cross-country search for the world's most talented bartender;
- provide producers with the opportunity to use existing retailer
relationships for new product introductions and advertise in our various
direct mail pieces;
- become an integral marketing partner with producers, and receive marketing
dollars from producers which would otherwise be allocated to other
marketing campaigns;
- offer producers the opportunity to receive feedback directly from
consumers through our website by utilizing interactive forums to forward
consumer comments, such as product or drink reviews, directly to
producers.
We believe offering these increased services will increase our advertising
revenues and create additional sources of revenue, such as revenues from
organizing offline events.
We anticipate that the second phase of our network development, which we
hope to complete in late 2001 or the first quarter of 2002, will allow producers
to receive orders from wholesalers online, track the status of orders, and
manage inventory. We believe that producers will use our network to decrease
inventory costs and operate more efficiently. Once the second phase is
completed, we expect to generate additional revenues from producers, through the
sale of business-to-business advertising.
27
WHOLESALER SERVICES.
We believe that our online network will benefit wholesalers by linking them
with producers and retailers, improving their ability to communicate with
suppliers and customers and reduce costs. Once the first phase of our network is
completed, we plan to offer wholesalers access to password-protected sales and
marketing information available only to participants at the wholesale tier,
along with industry news. After completing the second phase, we intend to offer
wholesalers the opportunity to order products and manage inventory online. We
intend to receive commissions or fees from wholesalers in connection with online
transactions. We have not yet determined whether the payment from wholesalers
would take the form of a commission based on the dollar value of transactions or
a flat fee for each transaction. We intend to study the payments charged by
online exchanges both in the alcohol beverage industry and other industries in
making this determination.
RETAILER SERVICES.
Like producers and wholesalers, we believe retailers will be able to improve
efficiency and communicate more effectively with business partners by using our
online network. We intend to receive commissions from retailers on online
transactions equal to those received from wholesalers. In addition, we believe
increasing the size of our affiliate network will create the potential for
buying power and product leverage as the number of affiliates increases. The
retail alcohol beverage industry is highly fragmented. We believe that an
opportunity exists to combine the purchasing power of these accounts into a
nationally recognized buying cooperative, combining these accounts for on-site
product placements and cooperative marketing. By combining our member retailers,
we believe we can affect the current alcohol beverage distribution structure
through bulk purchase of their products. Although this practice is commonly
conducted on a market by market basis, we are not aware of anyone attempting to
do this on a national basis. We intend to generate revenues by charging a fee to
the retailers for this service. The amount of this fee will be based on a
percentage of the discount savings we are able to achieve for our retailers
through these bulk purchases.
AFFILIATE NETWORK
Our affiliates provide customers with a resource for product information,
service and direct delivery. We have agreements with over 130 alcohol beverage
retailers to provide fulfillment for Liquor.com according to our specifications.
We believe these retailers are among the industry's largest and most recognized
stores. We intend to expand our affiliate network by adding retailers of similar
size.
We intend to provide our affiliates with online access to retail sales by
offering custom links, or "eLinks," and icons on the Liquor.com website, which
lead to the affiliate's websites. We are in the process of implementing an
"eStore" builder that will enable retailers to create their own personalized
storefronts. "eStores" will be a series of web pages, maintained on and accessed
through our website, containing background information on a particular
affiliate. We believe these links and storefronts will offer Liquor.com
affiliates the opportunity to enhance revenues by:
- offering our selection of custom products that may not be normally
available to these affiliates;
- offering their products to a broader geographic range of customers; and
- providing promotional information, such as notices of sales or online
coupons, to consumers.
Additionally, because we will operate the portal and manage its technology,
we believe affiliates will be able to offer a greater level of product and
service to their customers with little initial capital investment. We intend for
affiliates to be able to create their own "eLinks" and "eStores" in an
automated, Internet-based environment, enabling new affiliates to join the
network and quickly go online with links and icons. We believe many of our
affiliates will take advantage of the "eStore"
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program, which we expect to offer as a free service. We believe this system will
allow us to reduce our costs, by improving the speed and efficiency by which we
communicate with retailers. In addition, we intend to process all orders placed
through an "eStore" on our website.
We believe our "eLinks" and "eStores" will allow our affiliates to use
Liquor.com content to assist their patrons in planning and supporting their
professional and personal entertainment lifestyle. Liquor.com's corporate and
personal gift services provide our affiliates with an array of custom packaged,
private label wines, champagnes and alcohol beverages, as well as an array of
custom related goods.
DISTRIBUTION AND ORDER PROCESSING
Our distribution model allows us to offer a wide selection of products
without the need to maintain any inventory. We retrieve orders electronically
from our server located in Hoffman Estates, Illinois which was built by PC
Connection and is maintained by Wink Communications, Inc. We believe that hiring
an outside company to maintain our server makes it easier for us to accommodate
a larger number of customer orders without significantly increasing our work
force. In connection with processing orders at our office, we plan to invest in
technology designed to allow us to communicate more effectively with our
retailers, which we believe will improve the method of communication between us
and these retailers, while allowing us to process a higher volume of orders.
Under our current system, when we retrieve orders at our offices, we
transmit them by facsimile to our affiliated retailers. These retailers then
confirm acceptance of the order by telephone or facsimile. We plan to
significantly improve the efficiency of this system as part of the development
of our online network. By the end of 2000, we intend for our system to allow our
affiliates to receive and confirm customer orders online. In twelve months, we
plan to have developed an application which enables affiliates to print custom
Liquor.com labels at their establishments, and allows affiliates and their
customers to track the progress of orders online.
We process customers' credit card orders for the retailers, but the
retailers make the actual sale and delivery to the consumer. Domestic orders are
generally delivered within one to three business days. International orders are
typically delivered in five to seven business days. Since we do not sell
directly, we believe local tax and regulatory considerations remain the
responsibility of the local affiliates.
DEVELOPMENT OF OUR TECHNOLOGY
To generate more traffic on our website, we intend to introduce additional
or enhanced features to our website and ensure that the site can accommodate
increased numbers of visitors and orders. If the number of orders handled by our
website exceeds available capacity, we may not be able to add additional
hardware and software in time to process the increased orders. If we cannot
upgrade our existing technology or network infrastructure to accommodate
increased traffic or to introduce new services and features, this could cause
customer dissatisfaction and damage our brand. In addition, while we have
estimated the amounts needed to develop our technology, Internet technology
changes rapidly. Accordingly, we may have to spend more money, or spend money
more quickly, than we currently anticipate.
MARKETING
Liquor.com's marketing approach focuses on incorporating the choice of fine
alcohol beverages and packaging them with other elements of the entertainment
lifestyle, offering alternatives to traditional liquor-store concepts. A key
part of our strategy is to solidify the relationship between alcohol beverage
producers and related lifestyle product marketers, creating a broad base of
related products through our affiliate network. We also believe that our online
eStore and eLink models will
29
offer opportunities for thousands of retail outlets across the U.S. and abroad
to provide content to their customers.
We plan to establish a range of services and marketing opportunities for
"on-premise accounts," such as bars, nightclubs and restaurants. These services
and opportunities are intended to include implementing traffic-generating,
Liquor.com LIVE! events at their establishments. As our brand name gains
additional recognition, we believe this will help attract more customers to our
partners' establishments. We then intend to increase services we provide to our
member accounts, allowing us to implement monthly fees for our on-premise
accounts' continued participation. We also intend to introduce private label
products to participating liquor.com retailers, nightclubs, bars, restaurants
and consumers.
To increase traffic on our website, we offer an online partnership program.
This program is managed by LinkShare, an online partnership management company
whose website is located at www.linkshare.com. Online partners who place a
Liquor.com banner on their website receive commissions of between five and ten
percent for revenues generated as a result of the banner, which provides a link
to our website. We have also entered into marketing partnerships under which
orders for alcohol beverages from the websites of our partners are fulfilled
through our network of retail affiliates, generating additional revenue for us
and for the partners.
We intend to aggressively implement marketing programs to increase
recognition of the Liquor.com name. In addition to launching our "Magalog," our
marketing strategy will also target specific groups such as purchasing agents
and individuals responsible for corporate gift-giving. We also intend to create
specific business-to-business gift programs, such as developing gift items
tailored to specific corporations and creating a business-to-business marketing
staff.
We believe we have achieved relatively broad exposure from our limited
advertising efforts to date. In December 1999, we received approximately
6,700,000 "hits" on our website, with an average session length of nine minutes
and ten seconds. This was accomplished with a total marketing and advertising
budget of under $450,000 for 1999.
After this offering, we will seek to promote our brand name with extensive
advertising, both in traditional media and on the Internet. Our traditional
advertising will consist of print advertising, direct mail campaigns, local
radio and cable television commercials, a business-to-business print campaign,
television infomercials and targeted outdoor media. We intend for our Internet
advertising efforts to include establishing partnerships with search engines,
directories, and award sites; banner advertising; postings to news groups and
Internet mailing lists; and gaining certification on shopping channels of major
Internet portals. Our non-traditional marketing will include advertising on
taxi-cab rooftops and bus stands and marketing in smaller local publications and
local nightclubs. We also intend to reward consumers for registering with our
site. We plan to focus our initial marketing efforts on the largest United
States cities and on executives of large corporations and individuals
responsible for corporate gift giving.
DEPENDENCE ON GROWTH OF ONLINE COMMERCE
Our business strategy focuses heavily on generating online orders and
providing online services to producers, wholesalers and retailers of alcohol
beverages. The Internet and other online services may not be accepted as a
viable commercial marketplace for a number of reasons, including inadequate
development of enabling technologies and the lack of performance improvements.
In addition, use of the Internet by consumers could decline due to delays in
developing or adopting new standards required to handle increased levels of
Internet activity. If technological problems or changing consumer attitudes
hamper the growth of online commerce, we may not be able to achieve our intended
revenue growth if we cannot attract advertisers for our website.
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COMPETITION
The business of marketing and selling alcohol beverages is highly
competitive, and there are few barriers to entry in the markets in which we
compete. We do not have exclusive agreements with the retailers who sell the
products ordered on our website or through our catalogs. The number of
e-commerce sites competing for consumers' attention and advertising dollars has
increased rapidly during the past several years. We compete with other marketers
of alcohol beverages who sell through various channels, including retail stores,
the Internet, telephone and catalogs. We also compete with traditional "bricks
and mortar" liquor and convenience stores as well as full-service grocery stores
and businesses which offer non-alcohol gift items, such as flowers or candy,
through catalogs or on websites.
Many of our competitors have greater technical expertise, Internet commerce
experience and more established customer bases than us. Our existing or
potential competitors may be able to devote far greater resources than us to
marketing campaigns, attracting traffic to their website and developing their
technology. Our principal competitors are 800-Spirits, Inc., Drinks.com,
Wine.com, Inc., Internet Wines & Spirits, Geerlings & Wade, Inc. and Ambrosia.
In addition, many of our affiliated retailers have their own websites, so
customers can make online purchases from these retailers without using our
website.
We believe that the primary competitive factors in our markets are:
- brand recognition;
- customer service;
- reliability;
- site content;
- ease of use;
- price; and
- capacity to fill orders.
Our success will depend on our ability to provide value-added services to our
marketing partners and a compelling shopping experience to consumers. Some of
our competitors have and may continue to adopt aggressive pricing and marketing
strategies. Our prices are designed to be about the same as prices at retail
establishments. We intend to focus on prestige products, however, and do not
intend to compete with discount sellers, whether traditional or online
retailers. Increased competition may prevent us from achieving our financial
goals and result in the loss of market share and a reduced value for our brand.
In addition to competing with online and traditional retailers for customer
orders, we also compete with other websites and traditional media for
advertising dollars. In addition, the number of companies selling Web-based
advertising and the available inventory of advertising space has increased
substantially. Accordingly, the rates paid by advertisers for each advertisement
on our website may decline.
EMPLOYEES
As of June 1, 2000 we had 21 full-time employees, in the following areas:
- five in positions as executive officers;
- two in office management or support;
- one in accounting;
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- four in customer service;
- five in marketing; and
- four in technology.
We also hire temporary employees, when necessary, to aid in order processing at
our busiest times. None of our employees are represented by a labor union and we
consider our relations with our employees to be good.
INTELLECTUAL PROPERTY
We rely on a combination of trademark, service mark and trade secret laws
and contractual restrictions to establish and protect our proprietary rights in
our intellectual property. We have no patented technology that would prevent or
inhibit competitors from entering our market. We have federally registered
trademarks and service marks and we have registered the URL "Liquor.com." We
also have applied for registration of "Liquor.com" as a federally registered
trademark, but, because the word "liquor" is commonly used, it is unlikely that
registration will be granted. Even if registration is granted, we may be limited
in the scope of services for which we may exclusively use this trademark. We
enter into confidentiality agreements with our employees, consultants and
partners, and we control access to, and distribution of, our proprietary
information. Our intellectual property may be misappropriated or a third party
may independently develop similar intellectual property. In addition, the laws
of certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States. Unauthorized use of any of
our proprietary information could seriously harm our business.
We could be subject to claims by others that we infringe upon their
intellectual property rights. Any litigation regarding our proprietary rights
could be costly and divert management's attention, result in the loss of
proprietary rights we own or the payment of substantial monetary damages,
require us to seek licenses from third parties or prevent us from selling our
services.
GOVERNMENT REGULATION
REGULATION OF THE ALCOHOL BEVERAGE INDUSTRY. The distribution of alcohol
beverages is highly regulated by various governmental agencies. In particular,
retail stores that sell alcohol beverages must obtain alcohol beverage licenses
and are subject to extensive regulation. Based on an opinion from our regulatory
counsel, we do not believe that we are required to obtain an alcohol beverage
license in any state or are otherwise subject to laws which govern retail liquor
stores, because we provide a service which connects buyers and sellers of
alcohol beverages, and do not sell alcohol beverages ourselves. Based on this
opinion, we also believe that we can lawfully receive orders for the products
listed in our catalogs and website in thirty states and the District of Columbia
without the need to obtain an alcohol beverage license. In three of these states
- -- Idaho, New Mexico and West Virginia -- we can receive orders for shipment
into that state of wine and champagne only. Any or all of these states could
change their laws to prohibit us from providing our services without an alcohol
beverage license, or change the interpretation of their existing laws in a way
which would require us to obtain a license to provide our services to residents
of these states. If either of these changes occurred in one or more of the
states, it could greatly increase our costs of doing business, or prevent us
from accepting orders for shipment to residents of those states.
Our regulatory counsel has advised us that in the following six states we
are currently only permitted to receive orders for non-alcohol products:
Alabama, Arkansas, Georgia, Pennsylvania, South Carolina, and Utah. Other states
have "dry" areas in which delivery of alcohol beverages is not permitted. These
limitations have had the effect of limiting our ability to expand our business,
and if other states adopted similar systems this could greatly reduce our
revenues and profitability. To date,
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no foreign government has imposed limitations on our ability to accept orders
for shipment to a particular country. However, there is nothing to prevent
foreign governments from imposing these types of limitations.
Some states for which we accept orders have laws restricting the
solicitation of orders for alcohol beverages. Based on an opinion from our
regulatory counsel, we do not believe that our activities violate these laws,
and these laws may be considered impermissible restraints on interstate commerce
or commercial speech and therefore unenforceable. However, states could bring
actions against us for violations of these solicitation laws, which, if
successful, could result in our being liable for fines or being prevented from
doing business in these states. In addition, the City of Chicago's ordinance
governing licensed retailers has a provision which prohibits retail deliveries.
Based on an opinion from our regulatory counsel, we do not believe this
ordinance is enforced, or is likely to be enforced in the future, and even if it
were enforced we do not believe the City of Chicago would bring an action
against us, because the ordinance applies to licensed retailers and not to us.
However, if the ordinance were enforced, we might not be able to transmit orders
to retailers in Chicago, which would reduce our revenues.
REGULATION OF ONLINE COMMERCE. There are currently few laws or regulations
directly applicable to the Internet or online commerce on the Internet. Laws and
regulations may be passed covering issues such as user privacy, pricing,
taxation, content, copyrights, distribution, antitrust and quality of products
and services. The growth and development of online commerce may lead to requests
for more stringent consumer protection laws, both in the U.S. and abroad. We are
also subject to regulations affecting direct marketers and advertisers. The
adoption or modification of laws or regulations applicable to the Internet could
reduce the demand for our services and products or increase our cost of doing
business.
FACILITIES
We currently own a building in Chicago, Illinois occupying approximately
5,000 square feet in which our executive offices are located. We have mortgaged
this property to secure a loan. We used the proceeds of the loan to purchase and
make improvements to this property. The property is in good condition and is of
sufficient size to accommodate our current employees. However, if our business
continues to grow, we will need to lease or buy additional space. In addition to
our office space in Chicago, we may seek additional space in New York, where our
Chief Executive Officer and Chief Financial Officer live and where many
producers of alcohol beverages are located. We anticipate that any additional
space we lease or buy will be sufficient to accommodate our computer equipment,
which we do not expect to require substantial space. We have no agreements,
understandings or arrangements with regard to any additional space as of the
date of this prospectus.
INSURANCE
We maintain insurance in such amounts and with such coverages and
deductibles as our management believes are adequate. The primary risks that we
insure against are officer's and director's liability, workers' compensation,
personal injury, bodily injury, property damage and fidelity losses. We cannot
assure you that our insurance will adequately protect us from potential losses
and liabilities. In addition, we do not maintain business interruption insurance
covering losses which could result if consumers were unable to access our
website due to system failure or some other cause. We signed an agreement in
connection with a $500,000 loan to us in which we agreed to obtain key man life
insurance policies on Ms. Zelitzky and Mr. Olsher naming the lender as the
beneficiary, and to obtain other key man life insurance policies at the
discretion of our board of directors. We have key man insurance policies on
Mr. Grieff, Ms. Zelitzky and Mr. Olsher.
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LEGAL PROCEEDINGS
We are involved, from time to time, in various legal proceedings arising in
the ordinary course of business. On May 9, 2000, Etching Industries Spirits,
Inc. and Etching Industries, Inc., two companies which provided services to us
in connection with custom product orders, filed a lawsuit against us in the
Circuit Court of Cook County, Illinois, seeking a total of approximately $87,000
in damages. One of these companies was to supply bottled liquor to be provided
to our customers, and the other was to etch messages or logos of our customer on
the bottles. In the lawsuit the companies claim that we breached contracts with
them by not paying for their services. We believe that we are not liable for any
further payments to these companies because of poor quality services and late
deliveries, and intend to vigorously defend this action. In addition, we have
filed a counterclaim against the companies seeking damages from what we believe
to be breaches of contract by them. Other than the two proceedings described
above, we are not a party to any other current or threatened legal proceedings
that our management believes would adversely affect our business, results of
operations or financial condition.
34
MANAGEMENT
The following table sets forth information regarding our officers, directors
and key personnel as of June 20, 2000:
NAME AGE POSITION
- ---- -------- --------
Barry L. Grieff................... 53 Chief Executive Officer and Director
Scott B. Clark.................... 43 Chief Financial Officer and General Counsel
Gail P. Zelitzky.................. 58 Chairman of the Board, Chief Sales Officer and Director
Steven Olsher..................... 30 President
Jonathan McDermott................ 35 Executive Vice President, Business Development
Eric Reiner....................... 33 Chief Technology Officer
Jamie Cutburth.................... 28 Vice President, Online Marketing
Michael Polisky................... 31 Vice President, Strategic Marketing
Wade Baxter....................... 29 Vice President, Sales
Barry M. Berish................... 69 Director
Bryan D. Legate................... 33 Director
Ralph J. Sorrentino............... 48 Director
John G. Vandegrift................ 33 Director
BARRY L. GRIEFF, CHIEF EXECUTIVE OFFICER Barry L. Grieff became our Chief
Executive Officer in March 2000. From March 1999 to March 2000, Mr. Grieff was
the Chairman and Chief Executive Officer of Dormrat LLC, which is developing
interactive content and a website designed for the college market. Since May
1999, he has served on the board of directors of Volatile Media, Inc., which
operates Ezcd.com, a music website, and acted as a marketing consultant. From
August 1997 to March 1999, Mr. Grieff was the President of Broadway Video
Entertainment, an entertainment and talent management company. From 1988 to
August 1997, Mr. Grieff was the President and Chief Executive Officer of
Promotional Concept Group, an affiliate of The Interpublic Group of
Companies, Inc. which creates and markets entertainment promotional packages.
Mr. Grieff received a Bachelor of Arts in 1967 from the University of Rochester.
SCOTT B. CLARK, CHIEF FINANCIAL OFFICER AND GENERAL COUNSEL. Scott B. Clark
became our Chief Financial Officer and General Counsel in March 2000. From
October 1999 through March 2000, Mr. Clark acted as an independent consultant
with PriceWaterhouseCoopers to Internet and telecommunications companies. From
October 1997 through September 1999, Mr. Clark was a partner with the accounting
firm of PriceWaterhouseCoopers. Mr. Clark was Associate Tax Counsel at GTE
Corporation from July 1993 through October 1997. Mr. Clark received a B.B.A. in
Accounting in 1978 from George Washington University, and a J.D. from Pace
University School of Law in 1984. Mr. Clark also received an L.L.M. in Taxation
in 1992 from Quinnipiac University. Mr. Clark is a Certified Public Accountant.
GAIL P. ZELITZKY, CHAIRMAN OF THE BOARD AND CHIEF SALES OFFICER. Gail P.
Zelitzky became the President and Chief Operating Officer of Foremost Sales
Promotions, Inc. in 1981 and in this position was directly responsible for
advertising and marketing in addition to overseeing the operations of the
business. She became our President and Chief Executive Officer when we were
formed in 1993. As our President and Chief Executive Officer, in addition to
overseeing all aspects of the business, her responsibilities included strategic
planning, advertising sales and oversight of our financial operations. In
December 1999, she relinquished her position as President and Chief Executive
Officer and Steven
35
Olsher became our President. She assumed the position of Chief Sales Officer in
March 2000. Since December 1999, Ms. Zelitzky has been our Chairman and Chief
Sales Officer. Ms. Zelitzky received her Bachelor of Education degree with
honors in 1962 from National-Louis University.
STEVEN OLSHER, PRESIDENT. Steven Olsher started with Foremost Sales
Promotions, Inc. as Vice President in 1991. He became our Vice President when we
were formed in 1993 and in this position was responsible for strategic planning
and the creation of our operational structure. Mr. Olsher's responsibilities
included brand development, maintaining relations with our retail affiliates,
business development, and the launch of liquorbywire.com in 1993. Mr. Olsher
became our President in December 1999 and held this position until March 2000
when he became our Chief Operating Officer. He again assumed the title of
President in June 2000. Mr. Olsher received a Bachelor of Science degree in
Speech Communications in 1991 from Southern Illinois University.
JONATHAN MCDERMOTT, EXECUTIVE VICE PRESIDENT, BUSINESS
DEVELOPMENT. Jonathan McDermott became our Executive Vice President, Business
Development in February 2000. From August 1999 to January 2000, Mr. McDermott
was the Managing Director and a founding partner of Corporate Capital
Strategies, Inc., which provides consulting services to businesses in the areas
of capital formation, mergers and acquisitions and forming strategic alliances.
Corporate Capital Strategies provided services to us under the terms of a
contract which was terminated in March 2000. From July 1999 to December 1999,
and June 1998 to October 1998, Mr. McDermott worked as a registered
representative at Security Capital Trading, Inc. From February 1998 to
June 1998 Mr. McDermott was a registered representative at Dirks &
Company, Inc., the representative of this offering. From October 1998 to
July 1999, Mr. McDermott was President and strategic advisor of Spotlight
Entertainment Group, Inc., a start-up business in the entertainment industry.
From October 1994 to February 1998, Mr. McDermott was the President of John
Magee, Inc., a financial publishing company. From September 1995 to May 1997,
Mr. McDermott was employed with Access Financial Group, Inc., a broker-dealer.
Mr. McDermott received a Bachelor of Science degree in business in 1986 from the
University of Arizona.
BARRY M. BERISH, DIRECTOR. Barry M. Berish joined our board of directors in
June 2000. Mr. Berish was Chairman and Chief Executive Officer of JBB
Worldwide, Inc., the parent company of Jim Beam Brands Co., Alberta Distillers
Limited, and Fortune Brands Pty. Ltd., from its formation in February 1996 until
his retirement in May 1997. From July 1993 to February 1996, Mr. Berish was the
Chairman and Chief Executive Officer of Jim Beam Brands, Inc. Mr. Berish
received a Bachelor of Science in Advertising and Marketing in 1954 from the
University of Florida.
BRYAN D. LEGATE, DIRECTOR. Bryan D. Legate was elected to our board of
directors in March 2000 by the holders of our Series A Preferred Stock, who were
granted the right to elect one director. Mr. Legate has been a Managing Director
of The GEM Group, a New York and London based private equity investment firm
since September 1998. Mr. Legate co-founded River Oaks Trading, L.P., a
securities trading firm, in January 1997 and served as its Chairman of the Board
until May 1998. Mr. Legate was an associate in the Houston law firm of Porter &
Hedges, L.L.P., where he practiced corporate and securities law, from June 1992
to June 1995. From July 1995 to December 1997, Mr. Legate operated the Ku Legate
Group, an intellectual property consulting firm specializing in the licensing of
underutilized patents and trademarks for small and middle market companies.
Mr. Legate is a Captain in the United States Army Reserve and a member of the
State Bar of Texas. He received his law degree from the University of Houston
Law Center in 1994 and an undergraduate degree, with distinction, in 1989 from
Princeton University.
RALPH J. SORRENTINO, DIRECTOR. Ralph J. Sorrentino joined our board of
directors in March 2000. Since May 2000, Mr. Sorrentino has been the Chief
Executive Officer of Digital Creative Development Corporation, an entertainment
corporation. From May 1998 to April 2000, Mr. Sorrentino was an Executive Vice
President and the Chief Financial Officer of Liberty Digital Inc., a new media
company
36
with strategic holdings in Internet content and interactive television
businesses, and its predecessor, TCI Music, Inc. From September 1997 to
May 1998, Mr. Sorrentino worked independently as a consultant. From 1994 to
September 1997, Mr. Sorrentino was the President and Chief Operating Officer of
Bohbot Entertainment & Media Inc., an independent children's television
syndication and advertising company. Mr. Sorrentino received a Bachelor of
Science in Accounting in 1979 from Brooklyn College. Mr. Sorrentino is a
Certified Public Accountant.
JOHN G. VANDEGRIFT, DIRECTOR. John G. Vandegrift joined our Board of
Directors in March 2000. Since January 2000, Mr. Vandegrift has provided
consulting services to technology companies through Whodoweknow, LLC. We
previously had a contract with Whodoweknow under which it agreed to provide us
consulting services. From March 1999 to January 2000, Mr. Vandegrift worked as a
strategic advisor for yesmail.com, Inc. From July 1997 to March 2000,
Mr. Vandegrift served on the board of directors of yesmail.com, Inc. From
January 1999 to March 1999, Mr. Vandegrift was the Interim Chief Executive
Officer of Frictionless Commerce, Inc., an Internet software company. From
December 1997 to December 1998, Mr. Vandegrift was Marketing Senior Executive
with Compaq Computer Corp. From May 1993 to July 1998, Mr. Vandegrift was
Executive Vice President of Marketing and Business Development and then
President of TAC Systems, a communications company. Mr. Vandegrift received a
Bachelor of Science in Engineering in 1989 from Texas A&M University and a
Master of Science in Engineering in 1997 from the University of Alabama.
In addition to our directors and executive officers, we employ the following
key employees:
JAMIE CUTBURTH, VICE PRESIDENT, ONLINE MARKETING. Jamie Cutburth became our
Vice President of Marketing in January 2000. From August 1999 until joining us,
Mr. Cutburth worked independently to write a book. From April 1999 to August
1999, Mr. Cutburth was a Channel Account Manager for Covad Communications. From
January 1995 to March 1999, Mr. Cutburth was employed by U.S. Robotics
Corporation, holding the positions of Inside Sales Representative, Senior Retail
Sales Representative, Sales Program Manager, and ISP Marketing Manager.
Mr. Cutburth received a B.S. Degree in Business Administration in 1994 from the
University of Kansas.
ERIC REINER, CHIEF TECHNOLOGY OFFICER. Eric Reiner joined us as our Chief
Technology Officer in February 2000. From October 1997 to February 2000,
Mr. Reiner was the Director of Product Development of Florists' Transworld
Delivery. From October 1993 to October 1997, Mr. Reiner was Manager of the
Client/Server Development Group and Manager of the Internet Development Group
for the Chicago Board Options Exchange. Mr. Reiner received a B.S. in Computer
Science in 1988 from Iowa State University.
MICHAEL POLISKY, VICE PRESIDENT, STRATEGIC MARKETING. Michael Polisky
became our Vice President of Strategic Marketing in May 2000. From April 1996 to
April 2000, Mr. Polisky was employed by Jim Beam Brands Company as National
Accounts Marketing Manager. From May 1991 to March 1996, Mr. Polisky was
employed by Public Communications Inc., as a Senior Account Supervisor.
Mr. Polisky received a B.S. Degree in Journalism in 1991 from the University of
Iowa.
WADE BAXTER, VICE PRESIDENT, SALES. Wade Baxter became our Vice President
of Sales in May 2000. From September 1997 to May 2000, Mr. Baxter was a National
Sales Representative for Playboy Enterprises, Inc. From August 1996 to
September 1997, Mr. Baxter served as a sales representative for Newspapers
First. From February 1994 to August 1996, Mr. Baxter worked as a Media
Planner/Analyst with J. Walter Thompson-Chicago. Mr. Baxter received a B.S. in
Journalism in 1993 from the University of Kansas.
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Our bylaws require us to have at least two, but no more than seven,
directors. We currently have a board comprised of six members. Once elected, our
directors hold office until our next annual meeting
37
of shareholders or until a successor has been elected and qualified, unless they
resign at some earlier time. As a result, all of our director positions will be
filled at each annual meeting. The holders of our Series A Preferred Stock
currently have the right to elect one director to our board, and have chosen
Mr. Legate to serve on the board. The right of these holders to elect one
director will terminate upon completion of this offering.
In addition, we have agreed to grant to Dirks & Company, Inc., the
representative of the underwriters, the right for one year from completion of
this offering to designate one person to attend all meetings of our board of
directors. We have also agreed to reimburse the person designated by Dirks &
Company for expenses incurred in attending these meetings.
We have entered into a voting agreement with our founders, Gail Zelitzky and
Steven Olsher, under which Ms. Zelitzky's and Mr. Olsher's shares of common
stock are to be voted in accordance with the recommendation of the nominating
committee of our board of directors in any shareholder vote on the election or
removal of a director. However, in the voting agreement, we have agreed to
nominate and recommend Ms. Zelitzky as a director, and not seek to remove her as
a director, for the term of the agreement. The voting agreement will terminate
on the earlier of June 21, 2002 or the date on which the total number of shares
owned by Ms. Zelitzky and Mr. Olsher are less than 20% of our outstanding stock.
Our executive officers are appointed by our board on an annual basis until
their successors have been elected and qualified. Gail Zelitzky, our Chairman
and Chief Sales Officer, is the mother of our President, Steven Olsher. Samantha
McDermott, our Manager of Marketing and Creative Services, is the wife of
Jonathan McDermott, our Executive Vice President, Business Development. There
are no other family relationships among any of our directors, officers or key
employees.
We operated for several years without a large team of executive officers. We
have recently hired several senior managers, including Barry Grieff, our Chief
Executive Officer, and Scott Clark, our Chief Financial Officer and General
Counsel. Since we have not previously had many executive officers, our senior
executives may not assimilate themselves in our business, and we may not be able
to retain these executives. Our success will depend to a significant degree on
the ability of these individuals to work effectively with each other and with
our founders, Mr. Olsher and Ms. Zelitzky. Although we have employment
agreements with Mr. Grieff, Mr. Clark, Mr. Olsher and Ms. Zelitzky, these
executives may terminate their employment with us for any reason.
Even after we become public, Ms. Zelitzky, our Chairman, and Mr. Olsher, our
President, will own over 36% of our common stock. As a result, they will have
significant influence on the outcome of corporate actions requiring stockholder
approval, including mergers and other changes of corporate control, going
private transactions and other extraordinary transactions. This concentration of
stock ownership could have the effect of delaying or preventing, and may
discourage attempts to bring about, a change in control of us or the removal of
existing management.
We have entered into a contract with Redwood Partners, Ltd., an executive
recruiting firm in connection with our search for executives. Under this
contract, we have agreed to pay Redwood a placement fee of 25% of the first
year's cash compensation paid to any employee hired as the result of Redwood's
search, and 10% of the guaranteed stock options or warrants paid to the
employee. We have also agreed to pay Redwood a $7,500 non-refundable retainer
fee for each individual search assignment, along with an additional $7,500 fee
which is payable after 60 days for each search if Redwood has presented several
viable candidates for each search and we are satisfied with Redwood's services.
In addition, the contract provides that we will pay Redwood a fee of $250 per
month for each active search assignment to pay for Redwood's expenses. As of the
date of this prospectus, we have paid Redwood $30,500. In addition, we have
issued to Redwood a warrant to purchase approximately 13,750 shares of our
common stock.
38
DIRECTOR COMPENSATION AND COMMITTEES
We do not currently pay any compensation to our directors apart from that
which they receive if they are also officers of ours, although our bylaws permit
us to do so. We intend to pay our directors compensation of $1,000 per month and
from time to time to grant options to our directors in the discretion of our
compensation committee. We have agreed to pay a $10,000 bonus to Mr. Sorrentino
upon his becoming a member of our board of directors, but do not intend to
typically pay such bonuses in the future. We also intend to provide expense
reimbursements to directors for attendance at board meetings or performing other
business of the board of directors.
AUDIT COMMITTEE. Our audit committee consists of Mr. Legate,
Mr. Sorrentino and Mr. Berish. The duties of the audit committee are generally:
(a) to recommend to our board of directors the selection of the independent
auditors to conduct annual audits of our books and records, (b) to review the
activities and reports of our independent auditors and (c) to report the results
of such review to our board of directors. The audit committee also periodically
reviews the adequacy of our internal controls.
COMPENSATION COMMITTEE. Our compensation committee consists of Mr. Legate,
Mr. Vandegrift and Mr. Sorrentino. None of the members of the compensation
committee is currently or has been, at any time, one of our officers or
employees. None of our executive officers serves or has served as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our board or compensation committee. Prior to
our forming the compensation committee, all compensation decisions were made by
our entire board of directors. The duties of the compensation committee are
generally to review employment, development, reassignment and compensation
matters involving corporate officers and other executive level associates as may
be appropriate including, without limitation, issues relating to salary, bonus,
stock options and other incentive arrangements.
EMPLOYMENT AGREEMENTS
We entered into a one-year employment agreement with Barry L. Grieff, our
Chief Executive Officer, that began on March 1, 2000. We amended this agreement
on July 27, 2000. Under the terms of his employment agreement, as amended,
Mr. Grieff has agreed to work for us full time, and will receive an annual base
salary of $250,000, which will be reviewed annually by our board of directors to
determine whether it should be increased, but cannot be decreased. If we
terminate Mr. Grieff without cause, if he voluntarily terminates the agreement
for "good reason," or if his employment term ends because we choose not to renew
his agreement, he is entitled to receive both salary and bonus severance
payments. The salary severance payment is equal to the salary due through the
date of termination plus an additional amount equal to one year of his current
base salary, and the bonus severance payment is equal to any bonus earned
through the date of termination and an additional amount designed to approximate
one-half of his annual performance bonus, calculated based on the actual
percentage of his performance target which he had reached as of the data his
employment ended or 50% of the target, whichever is greater.
The employment agreement with Mr. Grieff requires us to pay annual
performance bonuses to Mr. Grieff based on our achieving financial goals
established by our board of directors. Under the agreement, Mr. Grieff is
eligible to receive performance bonuses for the period from the execution of the
agreement to twelve months after the completion of this offering. The
performance bonuses are related to our achieving specified revenue goals over a
twelve-month period and are to be paid as follows:
- $25,000 if we reach $4 million in revenue,
- $100,000 if we reach $5 million in revenue,
39
- $10,000 for each $100,000 incremental increase in gross revenue between $5
and $5.9 million in gross revenue; and
- $100,000 if we reach $6 million in gross revenue.
Under his employment agreement, Mr. Grieff is also entitled to receive
options to purchase up to 7% of the number of shares of our common stock, on a
fully diluted basis, at an exercise price of $3.52 per share. The calculation of
the number of shares which equals 7% of our shares will be made after the
completion of this offering. We estimate that the option we grant to Mr. Grieff
will allow him to purchase approximately 872,284 shares of our common stock.
Approximately 11% of the shares which Mr. Grieff may purchase under the option
vested on March 1, 2000, approximately 46% will vest in equal monthly
installments over a two-year period beginning on March 1, 2000, approximately 4%
will vest upon the completion of this offering, and an additional 14% will vest
on March 1, 2002. The remaining 25% will vest if we meet performance goals,
including approximately 11% if we reach $4 million in revenue and 14% if we
reach $10 million in revenue. We have agreed to pay the insurance premiums for
Mr. Grieff's current medical benefits until such time as we establish a group
health plan for our executive officers. We also agreed to pay the premiums on a
$1 million life insurance policy for Mr. Grieff.
In March, 2000, we entered into an employment agreement with Scott B. Clark,
our Chief Financial Officer and General Counsel. We amended this agreement on
July 21, 2000. Mr. Clark's amended employment contract does not have a fixed
term, but only our Chief Executive Officer or our board have the authority to
terminate the contract on our behalf. If Mr. Clark is terminated without cause,
he will receive a severance payment of six months salary. We have agreed to pay
Mr. Clark an annual salary of $175,000, to be increased to $200,000 upon
completion of this offering. We also granted Mr. Clark options to purchase
244,337 shares of our common stock at an exercise price of $3.52 per share. An
option to purchase 61,084 shares vested upon Mr. Clark's starting date, 91,626
vest over the first twelve months of his agreement, 30,542 vest over the second
twelve months of the agreement, and 30,542 vest upon completion of this
offering. We agreed to provide Mr. Clark with a two-year, non-interest bearing
loan to allow him to immediately exercise vested stock options on a cashless
basis. Under the agreement, Mr. Clark is entitled to a bonus of $25,000 on the
six-month anniversary of the employment agreement. After the first year of the
agreement, Mr. Clark is to receive a bonus in an amount determined by our board
of directors but not less than $50,000. Mr. Clark is also entitled to
participate in any bonus plans established by our executive management. Mr.
Clark's agreement also requires us to provide him with the health insurance
benefits available to all of our employees, or, if thee benefits are not
equivalent to the benefits he had prior to joining us, to pay the premiums on
equivalent benefits.
We have entered into a three-year employment agreement with our Chairman and
Chief Sales Officer, Gail P. Zelitzky, that began on March 1, 2000. If
Ms. Zelitzky voluntarily terminates the agreement for "good reason," prior to
March 1, 2002, she will receive her salary due for the entire term, and a
performance bonus equal to the previous year's bonus multiplied by the number of
years remaining in the agreement. If she voluntarily terminates the agreement
for "good reason," after March 1, 2002, she will receive a severance payment
equal to one year's salary and the prior year's performance bonus.
Ms. Zelitzky's base salary is $100,000 per year, but will increase to $150,000
upon completion of this offering. She is also entitled to receive annual
performance bonuses to be established by our board of directors based on our
achieving financial goals, and receives a car allowance of $500 per month.
We originally entered into an employment agreement with our President,
Steven Olsher, that began on March 1, 2000. In June 2000 we amended this
agreement. The amended agreement has a term of one year, beginning June 21,
2000. Under the amended agreement, Mr. Olsher has the title of President but
does not have the actual authority or duties customarily associated with the
title of
40
President, and only has limited authority and supervisory responsibilities.
Under the amended agreement we can also terminate Mr. Olsher at any time for
"special cause," which includes his exceeding his limited authority, failing to
perform assigned duties, making disparaging remarks about executive officers or
directors of ours or engaging in insubordinate behavior. Our Chief Executive
Officer, after consultation with our board of directors, has the sole and
exclusive authority to determine whether "special cause" for termination exists.
If Mr. Olsher voluntarily terminates his employment agreement for "good
reason," or we terminate him without "cause" or "special cause," he will receive
the greater of his salary for the remainder of the initial one-year term of the
agreement or six months severance and a bonus equal to the previous year's
performance bonus prorated for the number of days worked in the year of
termination. If we terminate Mr. Olsher's agreement for special cause, he is
entitled to receive a severance payment equal to the lesser of six months salary
or his base salary through the end of the original one-year term of the amended
agreement. Mr. Olsher's base salary is $100,000 per year, but is to be increased
to $150,000 on the completion of this offering or a similar large financing
transaction, and he is also entitled to annual performance bonuses to be
established by our Chief Executive Officer based on our achieving financial
goals. Mr. Olsher also receives a car allowance of $500 per month.
We have entered into an employment agreement with Jonathan McDermott, our
Executive Vice President, Business Development, which began on March 1, 2000 and
may be terminated by us at any time. If we terminate Mr. McDermott without cause
and he signs a separation agreement containing a general release and reaffirms a
confidentiality agreement he has previously signed, we will make a severance
payment to him equal to six months salary. Mr. McDermott's base salary is
$150,000 per year, and he is also entitled to receive annual performance bonuses
to be established by our board of directors based on our achieving financial
goals. We have issued options to Mr. McDermott to purchase 50,000 shares of our
common stock at an exercise price of $3.52 per share. An option to purchase
20,000 shares vested when we signed the agreement, and the remainder of the
option shares will vest at a rate of 2,000 per month.
The employment agreements of Mr. Grieff, Ms. Zelitzky and Mr. Olsher provide
that, following the end of their original term, they will automatically renew
for one-year terms, unless terminated by either party before the end of the term
with prior written notice, or if terminated as allowed under the agreements. The
agreements of Mr. Clark and Mr. McDermott do not have defined terms. All of the
agreements with our executive officers allow us to terminate the officers for
cause. "Cause" is specifically defined in the agreements to include the
following:
- engaging in conduct amounting to fraud, embezzlement or willful or illegal
misconduct in connection with the officer's duties under the agreement;
- being indicted, convicted, or confessing to a crime which either caused
significant harm to us or is a felony;
- materially breaching a confidentiality agreement the officer entered into
with us; or
- substantially and continually failing to perform duties reasonably
assigned to the officer by our board of directors or, in the case of
Mr. Olsher, our Chief Executive Officer.
The agreements of Mr. Grieff, Ms. Zelitzky and Mr. Olsher allow each of
these executive officers to terminate his or her agreement at any time on five
days' notice for "good reason," which includes, among other things, our
materially breaching the agreement. In addition, Mr. Grieff's agreement defines
"good reason" to include our requiring Mr. Grieff to have his principal office
outside the greater metropolitan area of New York. Ms. Zelitzky's agreement also
defines "good reason" to include our taking any action designed to remove her
from our board of directors.
41
The employment agreements of Mr. Grieff, Mr. Clark, Ms. Zelitzky and
Mr. Olsher provide for the following bonuses upon completion of this offering:
- $50,000 to Mr. Grieff;
- $25,000 to Mr. Clark;
- $50,000 to Ms. Zelitzky; and
- $50,000 to Mr. Olsher.
All of the employment agreements with our executive officers allow them to
participate in any stock, option, health or employee benefit plan established
specifically for our executive officers. We do not currently have any of these
types of plans.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of our most highly compensated executive officers for services in their
capacities to us for fiscal years 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND CURRENT YEAR ENDED COMPENSATION COMPENSATION
PRINCIPAL POSITION DEC. 31, SALARY ($) BONUS ($) (1) ($) ($)
- ------------------ ---------- ---------- --------- ------------ ------------
Gail P. Zelitzky............................. 1999 $48,100 0 $20,062 0
Chairman 1998 $37,600 0 $28,931 0
1997 $34,750 0 $26,256 0
- ------------------------
(1) For the years 1997 through 1999, Ms. Zelitzky received a commission equal to
7.5% of our total advertising revenues. Ms. Zelitzky's current employment
contract does not provide for the payment of any commissions to her.
The total compensation we paid to all persons who served as directors and
executive officers of ours in 1999, two persons, was $136,324.
2000 STOCK PLAN
We have adopted the 2000 stock plan which we will use to attract, reward and
retain our key employees, directors and consultants. The maximum number of
shares of common stock reserved for issuance under the plan is 1,750,000 shares,
subject to adjustment for anti-dilution provisions. As of June 15, 2000, we had
granted options to purchase 1,561,121 shares of our common stock under the 2000
plan, with an average exercise price of $3.52 per share.
Awards under the 2000 stock plan may be in the form of incentive stock
options, or "ISOs," or non-qualified stock options; or stock purchase rights.
Awards may be paid in shares, cash or a combination thereof.
ADMINISTRATION. The plan is administered by the compensation committee,
which has the authority to select the participants to be granted awards under
the plan, determine the size and terms of an award, and determine the time when
grants of awards will be made. The committee is authorized to, among other
powers, interpret the plan, and establish, amend and rescind any rules and
regulations relating to the plan.
OPTIONS. An option may be granted as an ISO, as defined in the Internal
Revenue Code of 1986, as amended, or as a non-qualified stock option. The
exercise price per share of common stock is
42
determined by the committee but cannot be less than 110% of the fair market
value of the shares on the date of grant for any employee owning 10% or more of
our voting stock, or 100% of the fair market value of the shares on the date of
grant for all other employees. Options granted under the plan are exercisable at
the time and upon the terms determined by the committee, but in no event will an
option be exercisable more than ten years after the date it is granted.
STOCK PURCHASE RIGHTS. The committee may also grant a stock purchase right
independent of an option or in connection with an option or other award granted
under the plan.
EXERCISE OF OPTIONS. Except as otherwise provided in the stock plan or in
an applicable award agreement, an award may be exercised for all, or any part,
of the shares of common stock for which it is then exercisable. The purchase
price for the shares of common stock as to which an award is exercised shall be
paid to us in full at the time of exercise:
- in cash;
- by issuing a promissory note to us;
- in shares of common stock having a fair market value equal to the
aggregate option price for the shares of common stock being purchased and
satisfying such other requirements as may be imposed by the compensation
committee; or
- some combination of the above forms of payment.
TRANSFERABILITY. Except to the extent provided by the committee, each
option and stock purchase right granted under the plan is non-transferable
during the lifetime of the participant, except in limited circumstances.
TERMINATION, AMENDMENT AND TERM. The plan will terminate on January 9, 2010
unless terminated earlier by our board of directors. Our board of directors may
suspend, amend or terminate the plan, in whole or in part. However, no
amendment, suspension or termination of the plan may, without the consent of a
participant, impair any of the rights or obligations existing under any award
previously granted to any participant under the plan.
ADJUSTMENTS. In the event of any change in the outstanding shares of our
common stock by reason of any dividend, split, or merger, the committee, in its
sole discretion, may make such substitution or adjustment as it deems to be
equitable to the number or kind of shares or securities issued or reserved under
the plan or to any affected terms of the awards.
CHANGE OF CONTROL. If we merge into another company or sell all or
substantially all of our assets, all of our outstanding options are to be
exchanged for options to purchase shares of the company which acquires us or our
assets. If the acquiring company does not provide options for its stock in
exchange for our outstanding options, all of our outstanding options would
become exercisable immediately, even if under their original terms they would
not yet have been exercisable.
OPTION GRANTS
We did not grant any stock options or stock appreciation rights in 1999 or
any previous year.
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LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides for a limit on the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or any transaction from which the director derived an
improper personal benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in their
capacity as an officer, director, employee or other agent, regardless of whether
the bylaws would permit indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of ours,
we have been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws, prior
to the completion of this offering. These agreements, among other things, will
provide for indemnification for judgments, fines, settlement amounts and
expenses, including attorneys' fees incurred by the director, executive officer
or controller in any action or proceeding, including any action by or in our
right, arising out of the person's services as a director, executive officer or
controller of us, any of our subsidiaries or any other company or enterprise to
which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers. The limited liability and indemnification
provisions in our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against our directors for breach of their
fiduciary duty and may reduce the likelihood of derivative litigation against
our directors and officers, even though a derivative action, if successful,
might otherwise benefit us and our stockholders. A stockholder's investment in
us may be adversely affected to the extent we pay the costs of settlement or
damage awards against our directors and officers under these indemnification
provisions. At present, there is no pending litigation or proceeding involving
any of our directors, officers or employees in which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
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CERTAIN TRANSACTIONS
Other than the employment agreements described under "Management" and the
transactions described below, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of these people had or will have a direct
or indirect material interest.
GUARANTEES BY EXECUTIVE OFFICERS
Steven Olsher, our President, and Gail Zelitzky, our Chairman and Chief
Sales Officer, have each guaranteed our obligations under two loans. The first
guaranty applies to draws on a line of credit with LaSalle Bank, FSB, which has
an interest rate of 9.75% per year and is payable on demand. As of March 31,
2000 we had an outstanding balance of $25,000 on this line of credit. The second
guaranty relates to a $192,000 promissory note that we issued in March 1999 to
Bank One Illinois, N.A., which has an interest rate of 7.75% and a maturity date
of September 19, 2004. We used the proceeds of this loan to purchase, and to
make improvements to, the building in which our offices are located. As of
May 31, 2000, we owed approximately $189,500 on this loan.
OTHER TRANSACTIONS
On August 31, 1999, we entered into an agreement, entitled "Founder's
Service Agreement, Acknowledgment and Receipt" with Corporate Capital
Strategies, Inc. Jonathan McDermott, who is now our Executive Vice President,
Business Development, was a founding partner of Corporate Capital Strategies and
was its Managing Director from August 1999 to January 2000. Mr. McDermott
formerly worked as a registered representative at Dirks & Company, Inc., one of
the representatives of the underwriters, from February 1998 to June 1998.
Mr. McDermott is no longer an officer or shareholder of Corporate Capital
Strategies. Under the agreement with Corporate Capital Strategies it agreed to:
- assist us in preparing our business plan;
- identify possible strategic partners or sources of capital;
- assist us in developing our financial and business models; and
- consult with us on the composition of our board of directors, website
development and other matters.
We paid Corporate Capital Strategies a total of $16,000 under the agreement,
and issued to Corporate Capital Strategies 13 1/3 of our shares, which later
converted into 300,000 shares when we conducted a stock split. Corporate Capital
Strategies later distributed all of these shares to its owners, including
118,000 to Mr. McDermott, and other individuals. We terminated this agreement in
April 2000, and in connection with the termination issued to Corporate Capital
Strategies an additional 21,428 shares of our common stock and agreed to pay it
$50,000 upon completion of this offering.
On December 7, 1999, we entered into a consulting agreement with
e-Consulting, Inc. which is owned by Mr. McDermott. The term of the agreement
began on January 1, 2000 and was to terminate on the later of six months after
its execution or the date of an initial public offering of our securities. Under
this agreement we agreed to pay e-Consulting compensation of $10,000 per month,
and to reimburse Mr. McDermott or e-Consulting for reasonable business expenses.
e-Consulting agreed to provide us with business development, financial and
investment banking consulting services. This agreement terminated on
February 29, 2000, when Mr. McDermott joined us as a full-time employee. We paid
e-Consulting a total of $20,000 under the agreement.
45
Samantha McDermott, who is now our Manager of Marketing and Creative
Services and the wife of Mr. McDermott, previously provided website and graphic
design services as a consultant. We did not have a contract with Ms. McDermott.
From September 1999 to December 1999, we paid her a total of approximately
$3,800 for her services.
In March 2000, we entered into a consulting agreement with Ron Bloom and
Whodoweknow, LLC under which Mr. Bloom and Whodoweknow agreed to provide us with
consulting services, including assisting us with investor relations and further
developing our business plan and providing advice on our capital structure. John
G. Vandegrift, one of our directors, owns approximately 20% of the outstanding
membership interests of Whodoweknow. Under the agreement, we agreed to grant to
Mr. Bloom and Whodoweknow warrants exercisable for 5 years, to purchase our
common stock at a price of $3.52 per share, to be divided among Mr. Bloom and
Whodoweknow in any manner they choose, on the following terms:
- a warrant to purchase 80,000 shares upon execution of the agreement;
- a warrant to purchase 5,000 shares for each of the six months beginning
with April 2000; and
- on October 1, 2000, in the discretion of our Chief Executive Officer, a
warrant to purchase an additional 30,000 shares.
Under the agreement with Mr. Bloom and Whodoweknow we have also agreed to grant
"piggyback" and demand registration rights to Mr. Bloom and Whodoweknow.
The agreement between us and Mr. Bloom and Whodoweknow was terminated on
June 22, 2000. Under the termination agreement, we reduced the total
compensation payable to Mr. Bloom and Whodoweknow by amending a warrant
previously issued under the agreement. As amended, the warrant entitles
Mr. Bloom to purchase 25,000 of our shares at a price of $3.52 per share, and
Whodoweknow to purchase 7,500 of our shares at a price of $3.52 per share. The
termination agreement eliminated all rights of Mr. Bloom and Whodoweknow under
the consulting agreement except their piggyback registration rights, which they
retain.
We believe that the transactions described above were fair and reasonable
and on terms at least as favorable as we would expect to negotiate with an
unaffiliated third party. In the future, we intend to present all proposed
transactions between us and our officers, directors or 5% shareholders, and
affiliates, to our board of directors for consideration and approval. Any such
transaction will require approval by a majority of the directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.
OPTIONS GRANTS TO EXECUTIVE OFFICERS AND DIRECTORS
Since January 1, 2000, we have granted options to the following executive
officers or directors to purchase the indicated number of shares. All of the
options have an exercise price of $3.52 per share.
DATE OF ISSUANCE EMPLOYEE NUMBER OF SHARES
- ---------------- ------------------ ----------------
March 2000............................. Barry L. Grieff 872,284
March 2000............................. Scott B. Clark 244,337
March 2000............................. Jonathan McDermott 50,000
March 2000............................. John G. Vandegrift 50,000
Ralph J.
March 2000............................. Sorrentino 50,000
June 2000.............................. Barry M. Berish 50,000
June 2000.............................. Bryan D. Legate 50,000
In addition, we have issued options to purchase a total of 194,500 shares of
our common stock, also at an exercise price of $3.52 per share, to non-executive
employees.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of the date of this
prospectus, regarding the beneficial ownership of our common stock by:
- our directors;
- each of our named executive officers;
- each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock; and
- each of our directors, director nominees and executive officers, as a
group.
Unless otherwise indicated, each of the stockholders listed below has sole
voting and investment power with respect to the shares beneficially owned.
A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus upon the
exercise of warrants or options. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such person,
but not those held by any other person, and which are exercisable within
60 days from the date of this prospectus, have been exercised. Unless otherwise
indicated, we believe that all persons named in this table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them. Common stock beneficially owned is based on 3,347,246 shares
outstanding on June 1, 2000 and 7,053,558 shares outstanding after the offering.
Unless otherwise indicated, the address of each person listed below is 4205
West Irving Park Road, Chicago, Illinois, 60641.
BENEFICIAL OWNERSHIP
PRIOR TO OFFERING
----------------------------------
SHARES ISSUABLE PERCENT
NUMBER OF PURSUANT TO OPTIONS BENEFICIALLY OWNED
SHARES AND WARRANTS -----------------------------------
BENEFICIALLY EXERCISABLE WITHIN BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED 60 DAYS OF OFFERING OFFERING
- ------------------------------------ ------------ ------------------- ---------------- ----------------
Steven Olsher................... 1,282,500 0 38.32% 18.18%
Gail P. Zelitzky................ 1,282,500 0 38.32% 18.18%
Barry L. Grieff................. 0 259,563 7.20% 3.55%
Jonathan McDermott.............. 118,000(1) 34,000 4.50% 2.14%
Ralph J. Sorrentino(4).......... 0 135,284 3.88% 1.88%
Scott B. Clark.................. 0 145,075 4.15% 2.02%
John G. Vandegrift.............. 3,000 89,517(2) 2.69% 1.30%
Bryan D. Legate................. 42,222(3) 23,750 1.96% *
Barry M. Berish................. 0 23,750 * *
All directors, director nominees and
executive officers, as a group
(8 persons).................. 2,728,222 710,939 84.75% 44.29%
- ------------------------
* Less than 1% of our outstanding shares.
(1) Includes 30,000 shares held by a trust, the beneficiary of which is Samantha
L. McDermott, Mr. McDermott's wife.
(2) Includes an option to purchase 28,750 shares of our common stock held by Mr.
Vandegrift, 35,511 shares of our common stock to be issued to Mr. Vandegrift
upon the conversion of a promissory note held by him when this offering is
completed, a warrant to purchase 17,756 shares of our
47
common stock issued to Mr. Vandegrift in connection with his purchase of the
convertible promissory note, and warrants to purchase 7,500 shares of our
common stock which could be granted to Whodoweknow, LLC, a company in which
Mr. Vandegrift has an ownership interest, under a consulting agreement with
us. Mr. Vandegrift's address is 1545 S. State St., Suite 503, Chicago,
IL 60605.
(3) Consists of 42,222 shares of our Series A Preferred Stock owned by Tazmanic
Corporation, for which Mr. Legate has voting power, and which will
automatically convert into shares of our common stock upon completion of
this offering. Mr. Legate's address is 712 Fifth Avenue, 7th Floor, New
York, NY 10019.
(4) Mr. Sorrentino's address is 67 Irving Place North, 4th Floor, New York,
NY 10003. Includes 71,023 shares to be issued upon conversion of a
convertible promissory note held by Digital Creative Development
Corporation, of which Mr. Sorrentino is Chief Executive Officer. Also
includes a warrant to purchase 35,511 shares which is held by Digital
Creative Development. Mr. Sorrentino disclaims beneficial ownership of the
106,534 shares attributable to the convertible promissory note and warrant
owned by Digital Creative Development.
48
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue 50,000,000 shares of common stock, par value
$.00001 per share, of which 3,347,246 shares were issued and outstanding on
June 22, 2000 and 10,000,000 shares of preferred stock, par value $.00001 per
share, the rights and preferences of which may be established from time to time
by our board of directors. As of the date of this prospectus, 422,222 shares of
Series A Preferred Stock were issued and outstanding. These 422,222 shares of
preferred stock will be converted to common stock upon completing this offering.
Except as otherwise expressly stated, all references in this prospectus to us or
our capital stock, including the common stock, are to such after completion of
the offering. Immediately following this offering, we will have 7,053,558 shares
of common stock outstanding, or 7,503,558 if the underwriters' over-allotment
options is exercised in full and no shares of preferred stock outstanding. This
amount excludes:
- 1,561,121 shares issuable upon the exercise of options which have been
granted pursuant to our 2000 stock plan;
- 188,879 shares of common stock available for future issuance under our
incentive plans; and
- A total of 3,600,000 shares issuable upon the exercise of the redeemable
warrants offered by this prospectus, the warrants issued to Dirks &
Company, Inc., Hornblower & Weeks, Inc., Kashner Davidson Securities
Corporation and Nolan Securities Corporation, the representatives of the
underwriters, and the common stock purchase warrants issuable upon
exercise of the representatives' warrants.
The following description of our capital stock and related matters is
qualified in its entirety by reference to our certificate of incorporation and
our bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus forms a part.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock are also
entitled to receive dividends if, as and when dividends are declared from time
to time by our board of directors out of funds legally available, after payment
of dividends required to be paid on outstanding preferred stock. In the event of
our liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and accrued but unpaid dividends and liquidation preferences on any outstanding
preferred stock. The shares of common stock have no preemptive or conversion
rights and are not subject to our further calls or assessment. There are no
redemption or sinking fund provisions applicable to the common stock. All of our
currently issued and outstanding common stock is, and the common stock we are
selling in this offering will be when sold to the underwriters in the manner
described in this prospectus, duly authorized, validly issued, fully paid and
non-assessable.
Our certificate of incorporation does not provide for cumulative voting.
Therefore, our shareholders do not have the right to aggregate their votes for
the election of directors and, accordingly, the shareholders of more than 50% of
all of our outstanding shares can elect all of the directors and approve
significant corporate transactions.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to 10,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of these shares,
including dividend rights, conversion rights, voting rights, terms of
49
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series. These shares may
have rights senior to our common stock. The issuance of preferred stock may have
the effect of delaying or preventing a change in control of us even if an
acquisition would benefit our shareholders. The issuance of preferred stock
could decrease the amount of earnings and assets available for distribution to
the holders of common stock or could adversely affect the rights and powers,
including voting rights, of our common stock. At present, we have no plans to
issue any additional shares of our preferred stock.
SERIES A PREFERRED STOCK
ISSUANCE OF SERIES A PREFERRED STOCK. All 422,222 shares of our Series A
Preferred Stock were issued in January 2000 in connection with a bridge loan we
received from a third party. The lender agreed to loan us $500,000, to be paid
out of the proceeds of this offering. In exchange for the bridge loan, we issued
a promissory note which does not bear interest, and also issued the 422,222
shares of Series A Preferred Stock.
LIQUIDATION PREFERENCE OVER COMMON STOCK. The holders our Series A
Preferred Stock have the right to receive payments from any assets or funds of
ours before the holders of common stock in the event we are subject to a
liquidation, dissolution or winding up. The liquidation preference of each
holder is equal to approximately $3.55 per share if the promissory note held by
the holders of Series A Preferred Stock has been repaid at the time of
liquidation, dissolution or winding up, and approximately $4.74 per share if the
note has been paid off at this time. In addition, the amount of this liquidation
preference will be increased by the amount of any unpaid dividends on the
Series A Preferred Stock. If we do not have enough assets to make the
liquidation payments to which the holders of the Series A Preferred Stock and
any other classes of stock with priority over the common stock are entitled,
then the holders of the Series A Preferred Stock will receive a portion of the
available assets in proportion to their ownership interests.
DIVIDENDS. If we declare a dividend, the holders of our Series A Preferred
Stock will share equally with the holders of our common stock in the dividend.
The share of the dividend to which the holders of the Series A Preferred Stock
will be entitled will be calculated based on the number of shares of common
stock to be received upon conversion of the Series A Preferred Stock.
CONVERSION. The holders of the Series A Preferred Stock have the right to
convert their shares into shares of our common stock at any time. The shares of
Series A Preferred Stock will automatically convert into shares of our common
stock upon completion of this offering. The number of shares of common stock
which the holders of the Series A Preferred Stock are entitled to receive for
each share of Series A Preferred Stock is calculated by dividing the original
issue price of the Series A Preferred Stock of approximately $1.18 per share by
a conversion price which is subject to adjustment. The initial conversion price
was equal to the issue price of the Series A Preferred Stock of approximately
$1.18 per share, so the initial conversion rate was one share of common stock
for each share of Series A Preferred Stock. The conversion price will be
adjusted for the following:
- specified issuances of shares at a price less than the conversion price
for the Series A Preferred Stock at the time of the issuance;
- specified issuances of options with an exercise price of less than the
conversion price of the Series A Preferred Stock; and
- stock splits, dividends or combinations.
VOTING RIGHTS. On each matter submitted to our stockholders for a vote, the
holders of the Series A Preferred Stock are entitled to the number of votes to
which they would be entitled if their shares were converted to shares of common
stock.
50
SPECIAL VOTING RIGHTS. The holders of the Series A Preferred Stock have the
option to elect a Series A Director to our board of directors. If they choose to
exercise this right, the Series A Director will be elected by holders of a
majority of the shares of Series A Preferred Stock or by a written consent of
the holders of Series A Preferred Stock. The holders of the Series A Preferred
Stock have exercised their right to elect Mr. Legate to our board of directors.
We are required to obtain the approval of either 66 2/3% of outstanding shares
of Series A Preferred Stock, or a representative of the holders of Series A
Preferred Stock unanimously designated in writing by these holders, to take the
following actions:
- selling all or substantially all of our assets or engaging in a merger in
which we are not the surviving company;
- paying dividends on our common stock;
- making any loans or advances to our officers, directors, employees or
consultants other than in the ordinary course of business or for the
purchase of stock in exchange for a secured promissory note;
- making any guarantees outside of the ordinary course of business;
- creating a security interest in any of our property in an amount over
$100,000, unless unanimously approved by our board of directors;
- owning the securities of another corporation, partnership or similar
entity unless we own the entire entity;
- creating a new class of securities which are convertible into common stock
and which have rights with regard to voting, dividends or liquidation
which are equal or superior to the rights of the Series A Preferred Stock;
- make any changes to our certificate of incorporation or bylaws which would
change the rights, preferences or privileges of the Series A Preferred
Stock;
- enter into a business other than the development, marketing and support of
a website related to the sale of alcoholic beverages on the Internet and
related activities;
- increase or decrease the authorized number of shares of our common stock,
preferred stock, or Series A Preferred Stock;
- increase the number of shares available to be issued under our stock
option plan or a similar plan to greater than 750,000;
- increase the size of our board of directors to more than five members; or
- repay any money we owe to any shareholder of ours.
PREEMPTIVE RIGHTS. If we offer any equity securities for sale before
conducting a public offering at a price of at least four times the initial issue
price of the Series A Preferred Stock, as adjusted for any stock dividends,
splits or similar transactions, the holders of the Series A Preferred Stock have
the right, with some exceptions, to purchase a number of the equity securities
option which allows them to maintain their percentage of ownership in us. The
preemptive rights of the holders of the Series A Preferred Stock will no longer
exist once the Series A Preferred Stock is converted into shares of our Common
Stock upon completion of this offering.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
GENERALLY. Upon completing this offering, the redeemable common stock
purchase warrants will be freely tradeable and will be tradeable separately from
our common stock. Each redeemable common
51
stock purchase warrant entitles the registered holder to purchase, at any time
commencing twelve months after the date of this prospectus until 60 months after
the date of this prospectus, one share of our common stock at a price equal to
120% of the initial public offering price of the common stock.
REDEMPTION PROVISIONS. Commencing eighteen months after the date of this
prospectus, we may redeem these warrants in whole but not in part, at $.10 per
warrant on 30 days' prior written notice. The warrants may only be redeemed if
the average closing sale price of our common stock as reported on the Nasdaq
National Market equals or exceeds 250% of the initial public offering price per
share of the common stock for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
notice of redemption. If we decide to redeem the warrants, holders will lose
their rights to purchase the underlying shares of common stock unless the
warrant is exercised before we redeem.
EXERCISE. The holder of any redeemable warrant may exercise the warrant by
surrendering the certificate representing the warrant and paying the exercise
price. No fractional shares will be issued upon the exercise of the warrants.
The exercise price of the redeemable warrants bears no relationship to any
objective criteria of value and should in no event be regarded as an indication
of any future market price of the securities offered in this offering.
The redeemable warrants are not exercisable unless, at the time of the
exercise, we have a current prospectus covering the shares of common stock
issuable upon exercise of the redeemable warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities or blue sky
laws of the state of residence of the exercising holders of the redeemable
warrants. Although we have undertaken to use our best efforts to have all of the
shares of common stock issuable upon exercise of the redeemable warrants
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the redeemable warrants, we
do not know if we will be able to do so, and if we cannot, the value of the
warrants may decline.
ADJUSTMENTS. The exercise price of the redeemable warrants and the number
of shares of common stock issuable upon exercise are subject to adjustment for
specified events, including stock dividends, stock splits, combinations or
reclassifications of the common stock. Additionally, an adjustment would be made
in the case of a reclassification or exchange of common stock, consolidation or
merger of us with or into another corporation, other than a consolidation or
merger in which we are the surviving corporation, or sale of all or
substantially all of our assets, in order to enable warrant holders to acquire
the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares of common stock
that might otherwise have been purchased upon the exercise of the redeemable
warrant.
TRANSFER, EXCHANGE AND EXERCISE. The redeemable warrants are in registered
form and may be presented to the warrant agent for transfer, exchange or
exercise at any time on or prior to their expiration date, at which time they
will be void and have no value. The redeemable warrants may not be exercised
until 12 months after the date of this prospectus. If a market for the
redeemable warrants develops, the holder may sell the redeemable warrants
instead of exercising them. However, we do not know if a market for the
redeemable warrants will develop or, if developed, will continue.
MODIFICATION OF REDEEMABLE WARRANTS. We and the warrant agent may make such
modifications to the redeemable warrants as we deem necessary and desirable that
do not adversely affect the interests of the redeemable warrant holders. We may,
in our sole discretion, lower the exercise price of the redeemable warrants for
a period of no less than 30 days on not less than 30 days' prior written notice
to the warrant holders and the representatives of the underwriters. Modification
of the number of securities purchasable upon the exercise of any redeemable
warrant, the exercise price, other than as provided in the preceding sentence,
and the expiration date with respect to any redeemable warrant requires the
consent of at least two-thirds of the redeemable warrant holders.
52
Although the securities will not knowingly be sold to purchasers in
jurisdictions in which the securities are not registered or otherwise qualified
for sale, investors in those jurisdictions may purchase redeemable warrants in
the secondary market or investors may move to jurisdictions in which the shares
underlying the redeemable warrants are so registered or qualified during the
period that the warrants are exercisable. If this happens, we would be unable to
issue shares to those persons desiring to exercise their warrants, and holders
of redeemable warrants would have no choice but to attempt to sell the warrants
in jurisdictions where such sale is permissible or allow them to expire
unexercised.
REPRESENTATIVES' WARRANTS
At the closing of this offering, we will issue and sell to the
representatives of the underwriters, or persons designated by the
representative, five-year warrants at a price of $.0001 per warrant. The
representatives' warrants will entitle the holder to purchase up to 300,000
shares of our common stock at a price per share equal to 165% of the initial
public offering price for the shares of common stock offered by this prospectus
and up to 300,000 warrants at a price per warrant equal to 165% of the initial
public offering price for the redeemable warrants offered by this prospectus.
The representatives' warrants are exercisable at any time for four years
commencing on the one-year anniversary from the date of issuance. The shares of
common stock, redeemable warrants and the shares of common stock underlying the
redeemable warrants issuable upon exercise of the representatives' warrants are
identical to those offered to the public and the securities underlying the
representatives' warrants are being registered in this offering. The
representatives' warrants contain anti-dilution provisions providing for
adjustment of the number of securities issuable upon exercise of the
representatives' warrants under specific circumstances, including (a) stock
dividends, (b) stock splits, (c) mergers, (d) recapitalizations and
(e) acquisitions.
WARRANTS
With respect to $900,000 in convertible notes purchased in a private
placement, in March 2000 we issued five-year warrants to purchase a total of
127,843 shares of our common stock at a price of $2.64 per share. In addition,
in June 2000 we issued to the holders of our Series A Preferred Stock five-year
Warrants to purchase a total of 14,205 shares of our common stock in connection
with the exercise by the preferred holders, in April 2000, of their preemptive
rights in connection with the convertible note offering. In March 2000, under a
consulting agreement, we issued to Ronald Bloom and Whodoweknow, LLC five-year
warrants to purchase a total of 80,000 shares. John G. Vandegrift, one of our
directors, has an ownership interest in Whodoweknow. We later terminated the
consulting agreement and amended the warrant to grant to Mr. Bloom the right to
purchase 25,000 shares of our common stock at a price of $3.52 per share and to
grant to Whodoweknow the right to purchase 7,500 of our shares at a price of
$3.52 per share. The warrants issued to the noteholders and the consultants are
each exercisable only upon payment in cash. The warrants include features for
adjustment in the event of a common stock split, stock dividend, reverse common
stock split, merger, consolidation or other change in our capital structure.
Holders of the warrants have no voting rights until such time as our underlying
common stock is issued to the holder. Upon the issuance of our common stock to
the holders of the warrants, the holders shall have the same rights as any other
stockholder owning our common stock.
CONVERTIBLE NOTES
We have issued a total of eleven convertible notes. Each convertible note
bears interest at the prime rate, as published in The Wall Street Journal, plus
two percent. The interest rate on each note will be adjusted each month based on
changes in the prime rate. Each note has a maturity date of December 31, 2002,
but automatically converts into shares of our common stock at a conversion price
53
of $3.52 per share upon completion of this offering, but may be converted
earlier, at the same conversion price, at the option of the holder.
REGISTRATION RIGHTS
We have agreed to provide the holders of the warrants granted to the
representatives with "piggyback" registration rights for a period of seven
years. Under the terms of the piggyback registration rights, if we intend to
register additional securities for sale to the public, we will notify all
registered holders of the representatives' warrants and/or the securities
underlying the representatives' warrants. If requested by the holders of the
representatives' warrants, we will provide, at our expense, material to permit a
public offering of the securities underlying the representatives' warrants.
Additionally, we have agreed to provide the holders of the representatives'
warrants with "demand" registration rights for a period of five years from
closing. Under the terms of the demand registration rights, a majority of the
holders of the representatives' warrants may, on one occasion, make a demand for
registration which obligates us to promptly register the underlying securities
at our own expense.
We have also granted piggyback and demand registration rights to purchasers
of our Series A Preferred Stock. The piggyback registration rights allow these
purchasers to include the shares of common stock received on conversion of the
Series A Preferred Stock in a registration statement which we file. The demand
registration rights allow holders of a majority of the Series A Preferred Stock,
or common stock into which it is converted, on one occasion, to have us file a
registration statement registering their shares of common stock at our own
expense. In addition, we have agreed to use our best efforts to qualify for the
use of Form S-3 under the Securities Act, and have granted the holders of the
Series A Preferred Stock the right to request two registrations on Form S-3. The
holders of the Series A Preferred Stock have exercised their registration rights
in connection with the registration statement of which this prospectus forms a
part. If these holders do not sell all of their shares of common stock while
this registration statement remains effective, their registration rights will
continue, subject to the termination provisions of the agreement we entered into
with them. Under these provisions the piggyback and demand registration rights
of a particular holder of the Series A Preferred Stock will terminate if an
active public trading market exists for our stock and the holder can sell all of
his securities within a ninety-day period under Rule 144 under the Securities
Act. In addition, the demand registration rights expire in January 2002.
We have granted piggyback registration rights to Ronald Bloom and
Whodoweknow, LLC with respect to shares of common stock issuable upon exercise
of warrants granted under an agreement with Mr. Bloom and Whodoweknow. The total
number of shares which may be issued to Mr. Bloom and Whodoweknow, LLC for which
they have registration rights is 32,500. Mr. Bloom and Whodoweknow have waived
their registration rights in connection with this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Some provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise to remove incumbent officers and directors. These
provisions, summarized below, are expected to discourage some types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of us to first negotiate with us. We believe that the
benefits of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person
54
became an interested stockholder, unless, with some exceptions, the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, either owns, or owned within the previous three years, 15% or more
of a corporation's voting stock. The existence of this provision would be
expected to have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
Our bylaws provide that our board of directors shall not have more than
seven members. This provision may have the effect of deterring hostile takeovers
or delaying changes in control or management of us. In addition, we must obtain
the approval of the holders of 66 2/3% of the outstanding shares of our Series A
Preferred Stock before taking specified actions, including engaging in a merger
or increasing the size of our board to more than five members. These voting
rights may also have the effect of deterring takeovers or delaying changes in
control.
TRANSFER AND WARRANT AGENT
Our transfer and warrant agent is Continental Stock Transfer and Trust
Company.
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SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there was no market for any of our securities and we
do not know if significant public market will develop for any of our securities
following completion of this offering. We cannot predict the effect, if any,
that sales of shares of our common stock will have on the market price of our
common stock. However, sales of substantial amounts of such shares in the public
market could cause the market price of our common stock to decline or impair our
ability to raise money through an offering of our equity securities.
Upon completion of this offering, we will have 7,053,558 shares of common
stock outstanding, and 3,000,000 warrants to purchase common stock, in each case
assuming that the underwriters do not exercise their over-allotment option to
purchase additional shares or warrants. The 3,000,000 shares of common stock
sold in this offering and the 3,000,000 warrants to purchase a like number of
common stock also sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act; provided, however,
that none of the shares or warrants are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act, their sales of shares would be
subject to limitations and restrictions described below.
The remaining 4,053,558 shares of common stock which will be outstanding
upon completion of the offering were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act and can be
categorized as follows:
- 3,347,246 shares of common stock issued and outstanding as of the date of
this prospectus;
- 422,222 shares of Series A preferred stock which will be converted into
common stock upon completion of this offering; and
- 284,090 shares of common stock which will be issued upon completion of
this offering upon the conversion of convertible notes.
In addition, we had warrants to purchase 218,798 shares outstanding prior to
this offering. Before this offering there were 37 holders of our common stock
and 15 holders of our warrants. All 4,272,356 shares owned by our existing
stockholders or underlying warrants currently outstanding will be subject to
"lock-up" agreements described below on the effective date of this offering. On
the effective date of this offering, shares not subject to the lock-up will not
be eligible for sale under Rule 144(h). All of our officers and directors as
well as stockholders collectively holding more than 100% of the outstanding
common stock have entered into lock-up agreements with the underwriters that
provide that the shares set forth in the table below will become eligible for
sale on the dates set forth in the table below, subject in most cases to the
limitations of Rule 144. In addition, holders of stock options could exercise
these options and sell shares issued on exercise as described below.
Sales of a substantial number of the shares listed below, or the perception
that these sales could occur, could cause our stock price to fall or impair our
ability to raise capital through an offering of equity securities.
APPROXIMATE
SHARES ELIGIBLE FOR
RELEVANT DATES FUTURE SALE COMMENT
-------------- ------------------- -------
On effective date(1)..................... 3,000,000 Shares sold in this offering
90 days after effective date(2).......... -- Shares tradeable under Rules 144 and 701.
180 days after effective date(2)......... 4,272,356 All shares subject to lock-up released;
shares tradeable under Rule 144 and 701.
- ------------------------
(1) Assumes no exercise of the underwriter's over-allotment option to purchase
additional shares in the offering.
(2) The effective date is .
56
We have agreed not to offer or sell any of our securities for a period of
thirteen months from the date of this prospectus without the consent of Dirks &
Company, Inc., one of the representatives of the underwriters, except that we
may conduct a secondary public offering of our securities in an amount of at
least $30,000,000 if Dirks & Company, Inc. is given the opportunity to
participate in the secondary offering. Our officers and directors and all of our
current stockholders have agreed not to offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any of our securities for a period of six months following the date
of this prospectus, without the prior written consent of Dirks & Company, Inc.
RULE 144
In general, under Rule 144, as currently in effect, beginning 90 days after
completion of this offering, a person or persons, including an affiliate, whose
shares are aggregated and who has satisfied a one-year holding period including
the period of any prior owner who is not an affiliate of ours, may sell within
any three-month period a number of shares which does not exceed the greater of:
- 1% of the then outstanding shares of our common stock; or
- the average weekly trading volume during the four calendar weeks preceding
the sale.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and to the availability of current public information about us.
RULE 144(K)
Rule 144(k) also permits the sale of shares, without any volume limitation
or manner of sale or public information requirements, by a person who is not an
affiliate of ours and who has not been an affiliate of ours for at least the
three months preceding the sale, and who has satisfied a two-year holding
period.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, even if the exercise occurs after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates", as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by "affiliates" under Rule 144 without compliance
with its one year minimum holding period requirement.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the form
of which is filed as an exhibit to the registration statement filed with the
Commission of which this prospectus is a part, the underwriters named below,
have agreed through Dirks & Company, Inc., Hornblower & Weeks, Inc., Kashner
Davidson Securities Corporation and Nolan Securities Corporation, as the
representatives of the underwriters, to purchase from us, and we have agreed to
sell to the underwriters, the aggregate number of units set forth opposite their
respective names:
UNDERWRITERS NUMBER OF UNITS
- ------------ ---------------
Dirks & Company, Inc........................................
Hornblower & Weeks, Inc.....................................
Kashner Davidson Securities Corporation.....................
Nolan Securities Corp.......................................
---------
Total..................................................... 3,000,000
=========
The underwriting agreement provides that the obligations of the several
underwriters under that agreement depend on various conditions, including:
- the absence of any material adverse change in our business;
- the absence of any event that has materially disrupted or in the
representatives' opinion will in the immediate future materially adversely
disrupt the financial markets;
- the absence of our default under any of our agreements or contracts;
- the continued truth of the statements made in this prospectus;
- the absence of any event that in the representatives' opinion that would
make it inadvisable to proceed with this offering,
- the continued employment of some of our officers and directors; and
- the receipt of certificates, opinions and letters from us, our counsel and
our independent public accountants.
This section contains the material conditions upon which the underwriting
agreement depends, although we direct you to the underwriting agreement, the
form of which is filed in an exhibit to the registration statement, of which
this prospectus forms a part, for a complete list of the conditions of the
underwriters' obligations.
The underwriters are committed to take and to pay for all of the units
offered by this prospectus, if any are purchased. In the event of a default by
any of the underwriters, the purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
The underwriters will offer the units to the public at the public offering
price set forth on the cover page of this prospectus. The underwriters may allow
some dealers concessions of not more than $ per unit. The underwriters also
may allow, and those dealers may re-allow, a concession of not more than
$ per unit to some other dealers. The public offering price,
concessions and re-allowances may be changed after the completion of this
offering.
We have agreed to indemnify the underwriters and their controlling persons
against some liabilities, as more fully set forth in the underwriting agreement,
including liabilities under the
58
Securities Act, and to contribute to payments the underwriters and their
controlling persons may be required to make.
We have granted the underwriters an option, exercisable not later than
45 days after the date of this prospectus, to purchase up to 450,000 additional
units at the public offering price less the underwriting discount set forth on
the cover page of this prospectus. To the extent that the underwriters exercise
such option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of such option that the number of units to be
purchased by it in the above table bears to 3,000,000, and we will be obligated
under the option to sell such units to the underwriters. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the securities offered in this offering. If purchased, the underwriters
will offer such additional units on the same terms as those on which the
3,000,000 units are being offered.
We have also agreed to pay to the representatives a non-accountable expense
allowance equal to two and one half percent of the gross proceeds of this
offering, less $25,000 which has been paid to a prior underwriter.
We have also agreed to pay all expenses in connection with qualifying the
securities under the laws of those states that the representatives may
designate, including fees and expenses of counsel retained for these purposes by
the representatives, and the costs and expenses in connection with qualifying
the offering with the National Association of Securities Dealers, Inc.
The representatives of the underwriters have informed us that the
underwriters do not expect sales of the units offered by this prospectus to be
made to discretionary accounts to exceed five percent of the total number of
units offered.
We have agreed not to offer or sell any of our securities for a period of
thirteen months from the date of this prospectus without the consent of Dirks &
Company, Inc., except that we may conduct a secondary public offering of our
securities in an amount of at least $30,000,000 if Dirks & Company, Inc. is
given the opportunity to participate in the secondary offering. Our officers and
directors and all of our current stockholders have agreed that, for a period of
six months from the completion of this offering, we and they will not, without
the prior written consent of Dirks & Company, Inc.:
- offer;
- pledge;
- sell;
- contract to sell;
- sell any option or contract to purchase;
- purchase any option or contract to sell;
- grant any option, right or warrant to purchase; or
- otherwise transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for our common stock.
We have agreed to issue and sell to the representatives of the underwriters
or their designees, for nominal consideration, warrants to purchase 300,000
shares of our common stock and 300,000 redeemable common stock purchase
warrants. The representatives' warrants are exercisable for a period of four
years commencing one year after the date of issuance at a price per share equal
to 165% of the initial public offering price of each share and $0.165 per
redeemable common stock purchase warrant. The representatives' warrants contain
anti-dilution provisions providing for adjustments of the exercise price and the
number of shares issuable upon exercise, upon the occurrence of specific events,
including (a) stock dividends, (b) stock splits and (c) recapitalizations. The
59
representatives' warrants contain demand and piggyback registration rights
relating to the shares of common stock issuable upon exercise of these warrants.
For the life of the representatives' warrants, the representatives will have the
opportunity to profit from a rise in the market price of our shares of common
stock. The representatives' warrants are restricted from sale, transfer,
assignment or hypothecation for the one-year period from the date of this
prospectus, except to officers or partners of the underwriters and members of
the selling group and/or their officers or partners.
We have agreed to grant Dirks & Company, Inc. the right, for one year from
the date of this prospectus, to designate one person to attend all meetings of
our board of directors. Dirks & Company, Inc. has not yet exercised its right to
designate this person. We have agreed to reimburse the Dirks & Company, Inc.
designee for all out-of-pocket expenses incurred in connection with the
designee's attendance at meetings of our board of directors. As a results of our
agreements with Dirks & Company, Inc., the Dirks & Company, Inc. will continue
to have influence over us following the completion of this offering.
Prior to this offering, there has been no public market for any of our
securities. The initial public offering price of the units and the underlying
securities offered by this prospectus will be determined by negotiations between
the representatives and us. Among the factors considered in determining the
price include:
- prevailing market conditions;
- the history of and the prospects for the industry in which we compete;
- an assessment of our management;
- our prospects; and
- our capital structure.
The offering price does not necessarily bear any relationship to our assets,
results of operations or net worth. There can be no assurance that an active
trading market will develop for any of the securities offered by this
prospectus, or that such securities will trade in the public market at or above
the initial public offering price.
The representatives, on behalf of the underwriters, may engage in:
- over-allotments;
- stabilizing transactions;
- syndicate covering transactions; and
- penalty bids.
An over-allotment involves syndicate sales in excess of this offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the shares of common stock and warrants being offered so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the shares of common stock and warrants
originally sold by the syndicate member are purchased in a syndicate covering
transaction and penalty bids may cause the price of the shares of common stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise,
and if commenced, may be discontinued at any time. In addition, the underwriters
may engage in passive market making transaction in our securities on the Nasdaq
National Market in accordance with Rule 103 of Regulation M. Neither we nor the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the securities offered by this prospectus.
60
LEGAL MATTERS
Certain legal matters in connection with the offering, including the
validity of the shares of common stock and the redeemable common stock purchase
warrants offered hereby, and the shares of common stock underlying the warrants
offered hereby, will be passed on for us by Shefsky & Froelich, Ltd., Chicago,
Illinois. Some of the shareholders of Shefsky & Froelich, Ltd. own a total of
20,044 shares of our common stock. Certain legal matters relating to regulation
of the alcohol beverage industry will be passed on for us by Webster Carlson
Christopoulos & Wilcox, P.C., Chicago, Illinois. Certain legal matters will be
passed upon for the underwriters by Orrick, Herrington & Sutcliffe LLP, New
York, New York.
EXPERTS
Our consolidated financial statements for the years ended December 31, 1997,
1998 and 1999 appearing in this prospectus and registration statement, have been
audited by Blackman Kallick Bartelstein, LLP, independent auditors, Chicago,
Illinois, as set forth in their reports thereon appearing elsewhere herein and
in the registration statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement, of which this prospectus is a part, on Form SB-2 under the Securities
Act with respect to the securities offered by this prospectus. This prospectus
does not contain all the information set forth in the registration statement. We
have omitted certain portions of this information as allowed by the rules and
regulations of the Commission. Statements contained in this prospectus as to the
content of any contract or other document are not necessarily complete. To gain
a complete understanding of any such contract or other documents, you should
read the copies which are filed as exhibits to the registration statement.
For further information regarding us and the securities we are offering, you
may read the registration statement, including all amendments, and the exhibits
and schedules which may be obtained from the Commission in Room 1024 of the
Commission's main offices at 450 Fifth Street, N.W., Washington, DC 20549, and
at the Commission's regional offices located at the Citicorp Center, 500 West
Madison, Suite 1400, Chicago, IL 60661 and 7 World Trade Center, 13thFloor, New
York, New York 10048. You can inspect this material for free at the Commission's
offices, and you can make copies of the material if you pay fees established by
the Commission. The Commission's phone number is 1-800-SEC-0330
(1-800-732-0330).
The Commission maintains a website that contains registration statements,
reports, proxy material and other information regarding registrants that file
electronically with the Commission. The address for the website is
http://www.sec.gov.
Upon effectiveness of the registration statement, we will be subject to the
reporting requirements of the Securities Exchange Act and intend to furnish our
stockholders annual reports containing financial statements audited by our
independent accountants and to make available quarterly reports containing
unaudited financial statements for each of the first three quarters of each
fiscal year.
We have applied for listing of our securities on the Nasdaq National Market
and upon listing, investors can obtain information about us on its website
http://www.nasdaq.com.
61
LIQUOR.COM, INC.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
--------
Independent Auditor's Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7-17
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Liquor.com, Inc.
We have audited the accompanying balance sheets of LIQUOR.COM, INC. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LIQUOR.COM, INC. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, on January 7, 2000, the
Company obtained $500,000 of bridge financing. Repayment of this promissory note
is highly dependent upon the success of the upcoming public offering.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
February 15, 2000
F-2
LIQUOR.COM, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------- MARCH 31 PRO FORMA AS OF
1998 1999 2000 MARCH 31, 2000
--------- ---------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash.......................................... $ 461,924 $ 340,786 $1,192,355 $25,948,178
Accounts receivable, less allowance for
doubtful accounts of $10,000 in 1999 and $0
in 1998..................................... 74,155 520,312 210,317 210,317
Prepaid expenses and other current assets..... 24,310 51,076 240,692 240,692
--------- ---------- ---------- -----------
Total Current Assets........................ 560,389 912,174 1,643,364 26,399,187
PROPERTY AND EQUIPMENT (Net of accumulated
depreciation and amortization)................ 20,742 248,361 362,478 362,478
OTHER........................................... 22,246 51,775 275 275
--------- ---------- ---------- -----------
$ 603,377 $1,212,310 $2,006,117 $26,761,940
========= ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings--Bank................... $ 5,000 $ 25,000 $ 25,000 $ 25,000
Accounts payable--Trade....................... 654,100 1,074,942 612,466 612,466
Long-term debt due within one year............ -- 4,432 4,560 4,560
Accrued expenses.............................. 4,018 26,365 21,886 21,886
--------- ---------- ---------- -----------
Total Current Liabilities................... 663,118 1,130,739 663,912 663,912
--------- ---------- ---------- -----------
NONCURRENT LIABILITIES
Long-term debt (Net of portion included in
current liabilities)........................ -- 186,512 969,724 185,349
Due to related party.......................... 31,975 31,975 31,975 31,975
--------- ---------- ---------- -----------
Total Noncurrent Liabilities................ 31,975 218,487 1,001,699 217,324
--------- ---------- ---------- -----------
Total Liabilities........................... 695,093 1,349,226 1,665,611 881,236
--------- ---------- ---------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock--$.00001 par value; authorized--
6,000,000 shares; issued--2,700,000 shares,
3,050,000 shares, and 3,298,236 shares as of
December 31, 1998, 1999, and March 31, 2000,
respectively; pro forma 7,053,568 issued and
outstanding at March 31, 2000............... 27 31 33 71
Additional paid-in capital.................... 19,123 1,181,169 4,264,650 30,728,396
Preferred stock discount...................... -- -- (106,217)
Convertible debt with detachable warrant
discount.................................... -- -- (106,203)
Preferred stock--$.00001 par value;
authorized--1,000,000 shares; issued, none,
none and 422,222 shares as of December 31,
1998 and 1999 and March 31, 2000,
respectively; proforma--no shares issued and
outstanding................................. -- -- 4 --
Accumulated deficit........................... (110,916) (1,318,116) (3,711,761) (4,847,763)
--------- ---------- ---------- -----------
Total Stockholders' (Deficit) Equity........ (91,716) (136,916) 340,506 25,880,704
--------- ---------- ---------- -----------
Total....................................... $ 603,377 $1,212,310 $2,006,117 $26,761,940
========= ========== ========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
LIQUOR.COM, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUES........................... $1,281,453 $1,818,960 $2,788,187 $ 247,985 $ 612,619
COST OF REVENUES................... 704,486 1,076,197 1,946,758 167,068 553,118
---------- ---------- ---------- --------- -----------
GROSS PROFIT (LOSS)................ 576,967 742,763 841,429 80,917 59,501
---------- ---------- ---------- --------- -----------
OPERATING EXPENSES
Marketing........................ 312,814 339,973 425,236 19,336 49,084
General and administrative....... 310,804 360,174 592,613 123,456 1,907,123
---------- ---------- ---------- --------- -----------
Total Operating Expenses....... 623,618 700,147 1,017,849 142,792 1,956,207
---------- ---------- ---------- --------- -----------
(LOSS) INCOME FROM OPERATIONS...... (46,651) 42,616 (176,420) (61,875) (1,896,706)
INTEREST INCOME.................... -- -- -- -- 6,342
INTEREST EXPENSE................... (7,470) (7,053) (18,780) (809) (214,227)
---------- ---------- ---------- --------- -----------
NET (LOSS) INCOME.................. $ (54,121) $ 35,563 $ (195,200) $ (62,684) $(2,104,591)
========== ========== ========== ========= ===========
NET (LOSS) INCOME PER SHARE:
BASIC AND DILUTED................ $ (.02) $ .01 $ (.06) $ (.02) $ (.69)
========== ========== ========== ========= ===========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET (LOSS) INCOME PER
SHARE............................ 3,026,956 3,026,956 3,033,216 3,026,956 3,052,758
========== ========== ========== ========= ===========
PRO FORMA NET LOSS PER SHARE:
BASIC AND DILUTED (UNAUDITED).... $ (.48)
===========
SHARES USED IN COMPUTING PRO FORMA
NET LOSS PER SHARE
BASIC AND DILUTED (UNAUDITED).... 6,808,080
===========
The accompanying notes are an integral part of the financial statements.
F-4
LIQUOR.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
UNAUDITED THREE-MONTH PERIOD ENDED MARCH 31, 2000
CONVERTIBLE
DEBT WITH
COMMON STOCK PREFERRED STOCK PREFERRED ADDITIONAL DETACHABLE
-------------------- ------------------- STOCK PAID-IN WARRANTS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DISCOUNT CAPITAL DISCOUNT DEFICIT
--------- -------- -------- -------- --------- ---------- ----------- ------------
BALANCE, JANUARY 1, 1997...... 2,700,000 $ 27 -- $ -- $ -- $ 19,173 -- $ (92,358)
Net loss.................... -- -- -- -- -- -- -- (54,121)
--------- ---- ------- ---- --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1997.... 2,700,000 27 -- -- -- 19,173 -- (146,479)
Net income.................. -- -- -- -- -- -- -- 35,563
--------- ---- ------- ---- --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1998.... 2,700,000 27 -- -- -- 19,173 -- (110,916)
Issuance of common stock for
professional services..... 300,000 3 -- -- -- 995,997 -- --
Deemed dividend for issuance
of common stock for
professional services..... -- -- -- -- -- -- -- (896,000)
Issuance of common stock for
cash...................... 50,000 1 -- -- -- 165,999 -- --
Deemed dividend for issuance
of common stock for
cash...................... -- -- -- -- -- -- -- (116,000)
Net loss.................... -- -- -- -- -- -- -- (195,200)
--------- ---- ------- ---- --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1999.... 3,050,000 31 -- -- -- 1,181,169 -- (1,318,116)
Issuance of convertible
preferred stock on
January 7, 2000
(unaudited)............... -- -- 422,222 4 -- 395,267 -- --
Deemed dividend for issuance
of convertible preferred
stock (unaudited)......... -- -- -- -- -- -- -- (289,054)
Discount on preferred stock
(unaudited)............... -- -- -- -- (106,217) -- -- --
Issuance of common stock
(unaudited)............... 248,236 2 -- -- -- 825,274 -- --
Issuance of warrants with
convertible debt
(unaudited)............... -- -- -- -- -- 191,838 -- --
Issuance of warrants
(unaudited)............... -- -- -- -- -- 148,850 -- --
Issuance of stock options
(unaudited)............... -- -- -- -- -- 1,416,049 -- --
Discount on convertible debt
with detachable warrants
(unaudited)............... -- -- -- -- -- -- (106,203) --
Issuance of detachable
warrants (unaudited)...... -- -- -- -- -- -- 106,203 --
Net loss (unaudited)........ -- -- -- -- -- -- -- (2,104,591)
--------- ---- ------- ---- --------- ---------- --------- -----------
BALANCE, MARCH 31, 2000
(UNAUDITED)................. 3,298,236 $ 33 422,222 $ 4 $(106,217) $4,264,650 $(106,203) $(3,711,761)
========= ==== ======= ==== ========= ========== ========= ===========
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
BALANCE, JANUARY 1, 1997...... $ (73,158)
Net loss.................... (54,121)
-----------
BALANCE, DECEMBER 31, 1997.... (127,279)
Net income.................. 35,563
-----------
BALANCE, DECEMBER 31, 1998.... (91,716)
Issuance of common stock for
professional services..... 996,000
Deemed dividend for issuance
of common stock for
professional services..... (896,000)
Issuance of common stock for
cash...................... 166,000
Deemed dividend for issuance
of common stock for
cash...................... (116,000)
Net loss.................... (195,200)
-----------
BALANCE, DECEMBER 31, 1999.... (136,916)
Issuance of convertible
preferred stock on
January 7, 2000
(unaudited)............... 395,271
Deemed dividend for issuance
of convertible preferred
stock (unaudited)......... (289,054)
Discount on preferred stock
(unaudited)............... (106,217)
Issuance of common stock
(unaudited)............... 825,276
Issuance of warrants with
convertible debt
(unaudited)............... 191,838
Issuance of warrants
(unaudited)............... 148,850
Issuance of stock options
(unaudited)............... 1,416,049
Discount on convertible debt
with detachable warrants
(unaudited)............... (106,203)
Issuance of detachable
warrants (unaudited)...... 106,203
Net loss (unaudited)........ (2,104,591)
-----------
BALANCE, MARCH 31, 2000
(UNAUDITED)................. $ 340,506
===========
The accompanying notes are an integral part of the financial statements.
F-5
LIQUOR.COM, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- --------- --------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................... $(54,121) $ 35,563 $(195,200) (62,684) $(2,104,591)
-------- -------- --------- --------- -----------
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities
Depreciation and amortization....... 7,340 11,216 20,546 6,987 6,578
Professional fees paid in common
stock............................. -- -- 100,000 -- --
Issuance of stock options as
compensation.......................... -- -- -- -- 1,416,049
Professional fees paid in warrants...... -- -- -- -- 148,850
Interest expense in connection with
convertible notes payable............. -- -- -- -- 191,838
(Increase) decrease in
Receivables....................... (7,259) (5,043) (445,218) 12,044 309,995
Prepaid expenses and deposits..... (713) (22,332) (57,234) 3,066 (138,116)
Increase (decrease) in
Accounts payable.................. 49,480 382,799 420,842 (379,115) (462,476)
Accrued expenses.................. (3,026) (1,408) 22,347 454 (4,479)
-------- -------- --------- --------- -----------
Total Adjustments............... 45,822 365,232 61,283 (356,564) (847,983)
-------- -------- --------- --------- -----------
Net Cash (Used in) Provided by
Operating Activities.......... (8,299) 400,795 (133,917) (419,248) (636,352)
-------- -------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from insurance for loss of
assets.............................. 13,063 -- -- -- --
Capital expenditures.................. (15,798) (23,500) (56,165) -- (120,695)
-------- -------- --------- --------- -----------
Net Cash Used in Investing
Activities.................... (2,735) (23,500) (56,165) -- (120,695)
-------- -------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line
of credit........................... (24,600) (44,695) 20,000 20,000 --
Payment of long-term debt............. -- -- (1,056) -- (1,035)
Proceeds from issuance of long-term
debt................................ -- -- -- -- 784,375
Proceeds from issuance of common
stock............................... -- -- 50,000 -- 825,276
-------- -------- --------- --------- -----------
Net Cash (Used in) Provided by
Financing Activities.......... (24,600) (44,695) 68,944 20,000 1,608,616
-------- -------- --------- --------- -----------
NET (DECREASE) INCREASE IN CASH......... (35,634) 332,600 (121,138) (399,248) 851,569
CASH, BEGINNING OF YEAR................. 164,958 129,324 461,924 461,924 340,786
-------- -------- --------- --------- -----------
CASH, END OF YEAR....................... $129,324 $461,924 $ 340,786 $ 62,676 $ 1,192,355
======== ======== ========= ========= ===========
The accompanying notes are an integral part of the financial statements.
F-6
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS AND RECAPITALIZATION
Liquor.com, Inc. (the Company) provides services and information to
producers, sellers and consumers of alcohol beverages over the Internet.
Consumers order products via the Company's Web site or catalog. The orders are
filled through the Company's network of over 130 alcohol beverage retailers
worldwide as the Company does not sell directly to the consumer. Producers and
sellers of alcohol beverages are provided with demographic information and
product advertising through the Company's Web site and catalog. Substantially
all of the Company's revenues are generated in the United States. Credit is
extended to the Company's corporate customers under normal trade terms without
security.
On August 16, 1993, Liquor By Wire, Inc. was incorporated in the State of
Illinois. On December 15, 1999, Liquor.com, Inc., a wholly owned subsidiary of
Liquor By Wire, Inc. was incorporated in the State of Delaware. On December 22,
1999, Liquor By Wire, Inc. using the purchase method of accounting was merged
into Liquor.com, Inc., with Liquor.com, Inc. being the surviving corporation.
Following the merger, each outstanding share of common stock of Liquor By
Wire, Inc. was converted into 22,500 shares of the common stock of
Liquor.com, Inc. so that all 133 1/3 shares outstanding of Liquor By Wire, Inc.
were converted into 3,000,000 shares of Liquor.com, Inc. and all of the
outstanding shares of Liquor.com, Inc. held by Liquor By Wire, Inc. were
canceled. All references in the financial statements to the number of shares and
to the per share amounts have been retroactively restated to reflect these
changes.
(b) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of credit card and trade receivables
arising in the normal course of business. The Company has arranged with its
network of alcohol beverage retailers that goods sold to customers be shipped
directly from the retailer.
(c) PROPERTY AND EQUIPMENT
The company's policy is to depreciate or amortize the original cost of the
assets over the estimated useful lives of the assets by use of the straight-line
method.
YEARS
--------
Building and improvements................................... 39
Furniture and fixtures...................................... 7
Computer software and hardware.............................. 3-5
(d) DEFERRED EXPENSES
As of December 31, 1999 and March 31, 2000, external costs directly
attributable to the planned initial public offering have been deferred. The
costs will be charged against the Company's additional paid-in-capital in
connection with the consummation of its initial public offering.
F-7
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable, long-term debt and miscellaneous other
assets and liabilities, approximate fair value.
(f) REVENUE RECOGNITION
Net revenues include the dollar amount of orders placed, via telephone or
Web site, net of returns and allowances, and advertising revenues. The Company
recognizes revenue on customer orders, net of estimated sales returns, when the
products are shipped to the customer.
The Company bears the following risks and rewards of ownership relating to
sales:
- Credit risk for trade accounts receivable
- Credit risk for rejected credit cards and fraudulent orders
- Inventory risk for returned products that are not successfully returned to
the suppliers for credit
- Refunds granted for customer satisfaction for late shipments or quality
issues
The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months. To
the extent that advertising customers may have paid for advertisements that have
yet to be published in the Company's catalog or on the Company's Web site, the
Company defers revenue recognition until such advertisements are delivered.
(g) COST OF GOODS SOLD
The cost of goods sold includes product costs, direct costs associated with
advertising revenues and shipping and handling costs paid by the Company in the
fulfillment of customer orders.
(h) ADVERTISING
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and 2000 the Company incurred advertising expenses of $185,575, $210,499 and
$229,143, $0 and $8,647 respectively.
(i) INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. Under the Tax Reform
Act of 1986, the benefits from net operating losses carried forward may be
impaired or limited in certain circumstances. In addition, a valuation allowance
has been provided for deferred tax assets when it is more likely than not that
all or some portion of the deferred tax asset will not be realized. The Company
has established a full valuation allowance on the aforementioned deferred tax
assets due to the uncertainty of realization.
F-8
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(j) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income (loss) and its
components in the financial statements. Components of comprehensive income
(loss) include amounts that, under SFAS No. 130, are included in the
comprehensive income (loss) but are excluded from net income (loss). There were
no significant differences between the Company's net loss and comprehensive
loss.
(k) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all
the costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. The
Company's adoption of SOP 98-1 on January 1, 1999 did not have a material effect
on the Company's financial position or results of operations. The Company
capitalizes acquired and internally developed or modified software solely to
meet the Company's internal needs integral to the Company's web site. The amount
of costs capitalized in 1998 and 1999 relating to internal use software in
process was approximately $23,500 and $18,625, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133 is
effective for the fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair market value. Changes in the fair value of derivatives are recorded
each period in the current earnings or other comprehensive income (loss)
depending on whether a derivative is designed as part of a hedge transaction
and, if so, the type of hedge transaction involved. The Company does not expect
that adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operation, as the Company does not currently
hold any derivative financial instruments.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements. Application of this
bulletin by the Company did not result in a change to the company's revenue
recognition policy nor require a restatement to the financial statements for any
period presented.
(l) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(m) SEGMENT REPORTING
In December 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The adoption of this
standard requires that reportable segments be reported consistent with how
management assesses segment performance. This statement requires disclosure of
certain information by reportable segment, geographic area and major customer.
See Note 10, "Segment Information," for further information. As a result, the
Company will separately report information on the two operating segments:catalog
and advertising. The Company does not calculate operating income by segment.
Accordingly, gross profit is instead presented. In addition, because management
does not rely on segment asset allocation, information regarding segment assets
is not meaningful and therefore is not reported.
(n) CONCENTRATION RISKS
Substantially all of the company's cash is held at one financial
institution.
(o) STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its employee stock options rather than
alternative fair value accounting allowed by SFAS No. 123, "Accounting for
Stock-Based Compensation." APB No. 25 provides that the compensation expense
relative to the company's employee stock options is measured based on the
intrinsic value of stock options granted. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123. This method recognizes the fair
value of stock options granted at the date of grant into earnings over the
vesting period of the options.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(p) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, the accompanying unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position at March 31, 2000 and the results of its operations and its cash flows
for the three months ended March 31, 1999 and 2000. Results for the three months
ended March 31, 2000 are not necessarily indicative of future results of
operations.
F-10
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 2-- PROPERTY AND EQUIPMENT
MARCH 31,
1998 1999 2000
-------- -------- ----------
Land.......................................... $ -- $ 18,000 $ 18,000
Building and improvements..................... -- 202,192 226,149
Furniture and fixtures........................ 10,573 19,921 85,720
Computer software and hardware................ 23,500 42,125 73,063
-------- -------- --------
34,073 282,238 402,932
Accumulated depreciation and amortization..... (13,331) (33,877) (40,454)
-------- -------- --------
$ 20,742 $248,361 $362,478
======== ======== ========
NOTE 3-- SHORT-TERM BORROWINGS--BANK
As of December 31, 1999, the Company was obligated under a line of credit
with LaSalle Bank for $25,000. Borrowings under this line of credit bear
interest at the prime rate plus 1.5% and are secured by substantially all of the
Company's assets. Certain conditions stipulated in the borrowing agreement
relating to net income must be met on an annual basis. As of December 31, 1999,
the Company was in violation of this covenant. The Bank has not yet exercised
its rights under the default provisions of the loan agreement. The Company
obtained alternative sources of financing to meet working capital needs. See
Note 13. As of December 31, 1999, maximum additional available borrowings on
this line of credit were $95,000. This agreement is payable on demand. The
Company's two principal stockholders have personally guaranteed the borrowings
under this line of credit.
NOTE 4-- LONG-TERM DEBT
Mortgage note payable to bank, payable in monthly
installments of $1,590, including interest at 7.75% per
annum, due September 2004; secured by a mortgage on the
building and land and guaranteed by the company's two
principal stockholders.................................... $190,944
Less current maturities..................................... (4,432)
--------
$186,512
========
Maturities on long-term debt are as follows as of December 31, 1999:
Year Ending December 31:
2001...................................................... $ 4,788
2002...................................................... 5,173
2003...................................................... 5,588
2004...................................................... 170,963
--------
$186,512
========
F-11
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 4-- LONG-TERM DEBT (CONTINUED)
As of March 31, 2000, the Company was obligated under the terms of a bridge
financing agreement described in the Note 13. Additionally, the Company issued
convertible notes during the three months ended March 31, 2000 amounting to
$284,375. In April 2000, the company issued $615,625 of convertible notes and in
June 2000, the Company issued an additional $100,000 convertible note. Each note
bears interest at the prime rate plus 2% and the principal including accrued and
unpaid interest, is payable in one lump sum, on December 31, 2002. The notes are
convertible into common stock at the option of the holder or automatically upon
a Qualified Public Offering at an initial conversion price of $3.52 per share.
The notes contain warrants to purchase up to one half of the number of common
shares for which the note is convertible at a price of $2.64 per share.
NOTE 5-- INCOME TAXES
The Company incurred taxable losses for federal and state purposes for the
years ended December 31, 1997, 1998 and 1999. Accordingly, the Company did not
incur any federal income tax expense for those periods other than the minimum
required taxes for certain state and local jurisdictions.
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $220,000 related to federal and state income taxes which can be
used to offset future federal and state taxable income from operations.
Substantially all of these carryforwards will begin to expire in 2010.
Significant components of the Company's deferred tax asset as of
December 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999
-------- -------- --------
Net operating loss carryforward................ $ 34,300 $ 19,600 $ 85,500
Other.......................................... -- -- 2,000
-------- -------- --------
Gross deferred tax assets...................... 34,300 19,600 87,500
Valuation allowance............................ (34,300) (19,600) (87,500)
-------- -------- --------
Net Deferred Income Tax Asset.................. $ -- $ -- $ --
======== ======== ========
Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50.0% over a three-year period. The
impact of any limitations that may be imposed for future issuances of equity
securities, including issuances with respect to acquisitions, has not been
determined.
F-12
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 5-- INCOME TAXES
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
1997 1998 1999
-------- -------- --------
U.S. Federal statutory rate............................... 35% 35% 35%
Change in valuation allowance............................. (35) (35) (35)
--- --- ---
--% --% --%
=== === ===
NOTE 6-- STOCKHOLDERS' EQUITY
As of December 31, 1998, 6,000,000 shares of $.00001 par value common stock
of the Company were authorized, 2,700,000 of which were issued and outstanding.
As of December 31, 1999, 6,000,000 shares of $.00001 par value common stock were
authorized, of which 3,050,000 shares were issued and outstanding; and 1,000,000
shares of $.00001 par value Series A convertible preferred stock were
authorized, but none were issued until January 7, 2000. See Notes 1 and 13.
Each share of preferred stock is convertible into common stock as determined
by dividing the original issue price by the conversion price at the time in
effect for a share of Series A convertible preferred stock. The preferred stock
is automatically convertible upon the consummation of a corporate transaction
that meets certain minimum conditions in a qualified public offering as defined,
or at the option of the preferred stockholders upon the completion of a public
offering which does not meet the minimum conditions.
On August 31, 1999, the company issued 300,000 shares of common stock in
exchange for $100,000 of business consulting services rendered by an outside
consulting firm. On December 31, 1999, the company issued 50,000 shares of
common stock for $50,000 in cash to a previously unrelated party. An additional
$1,012,000 was recorded as a deemed dividend to these third parties for the
difference between the price per share based upon the value of services rendered
and the market value of the stock.
During the three months ended March 31, 2000, the Company issued 248,236
shares of common stock at an average price of $3.32 per shares for a total of
$825,276 in cash to previously unrelated parties.
NOTE 7-- OTHER CASH FLOW INFORMATION
Cash payments for interest were $9,181, $7,053 and $18,780 in 1997, 1998 and
1999, respectively.
During 1999, the Company financed the purchase of its office building and
land for $192,000. In addition, the Company deemed dividends in the amount of
$896,000 and $116,000 for the issuance of common stock as professional fees and
the issuance of common stock for cash, respectively.
F-13
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 8-- EARNINGS (LOSS) PER SHARE
The Company computes net loss per share under the provisions of SFAS
No. 128, "Earnings per Share" (SFAS 128), and SEC Staff Accounting Bulletin
No. 98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss per
share is computed by dividing the net (loss) income available to common
stockholders for the period by the weighted-average number of shares of common
stock outstanding during the period. The calculation of diluted net (loss)
income per share excludes potential common shares if the effect is antidilutive.
Basic earnings per share is computed by dividing income or loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding during this period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's preferred stock. In addition, income or
loss would be adjusted for dividends and other transactions relating to
preferred shares for which conversion is assumed. The weighted average number of
shares utilized in arriving at diluted earnings per share for all periods
presented reflect an adjustment for the 350,000 shares of common stock issued as
described in Note 6 above which were issued for consideration below the proposed
initial public offering price. As the Company had a net loss, the impact of the
assumed preferred stock conversion is anti-dilutive and as such, these amounts
have been excluded from the calculation of diluted earnings per share.
NOTE 9-- UNAUDITED PRO FORMA FINANCIAL INFORMATION
On April 11, 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the company to sell shares of the Company's stock in connection
with a proposed initial public offering ("IPO"). If the IPO is consummated under
the terms presently anticipated, upon the closing of the IPO, all of the then
outstanding shares of the Company's preferred stock will automatically convert
into shares of common stock on a 1-for-1 basis, subject to antidilution
provisions, including stock splits, stock dividends and recapitalizations. In
addition, all convertible debt outstanding prior to the closing will
automatically convert into shares of common stock.
The unaudited pro forma balance sheet presented assumes the successful
completion of the IPO under the terms presently anticipated and the conversion
of the preferred stock and convertible debt outstanding into shares of common
stock.
Unaudited pro forma net loss per share is computed by dividing net loss by
the weighted number of shares of common stock outstanding, including the shares
to be issued upon the successful completion of the IPO and the shares to be
issued upon conversion of the preferred stock and convertible debt into common
shares as if these events had occurred on March 31, 2000. In addition the
unaudited pro forma net loss per share includes all shares of common stock
issued subsequent to December 31, 1999 through June 23, 2000.
F-14
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 9-- UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
The unaudited pro forma net loss per share assumes the conversion of the
preferred stock to common stock on a 1-for-1 basis and the conversion of the
convertible notes payable to common stock at a conversion price of $3.52 as if
converted at March 31, 2000, even though the result is antidilutive.
The following tables presents the calculation of unaudited pro forma net
loss per share for the three-month period ended March 31, 2000:
DENOMINATOR
NUMERATOR (WEIGHTED-
(NET LOSS) AVERAGE SHARES) PER SHARE
----------- --------------- ---------
Basic and diluted net loss per common
share for the three month period ended
March 31, 2000--unaudited............. $(2,104,591) 3,052,758 $ (.69)
Assumed conversion of shares of
preferred stock into 422,222 shares of
common stock at March 31,
2000--unaudited....................... (106,217) 422,222 (.03)
Issuance and 284.0% assumed conversion
of convertible debt into 284,090
shares of common stock March 31,
2000--unaudited....................... (856,218) 28,400 (.27)
Issuance of 21,428 shares of common
stock--unaudited...................... (173,567) 21,428 (.05)
Issuance of 27,582 shares of common
stock--unaudited...................... -- 307 --
Issuance of 3,000,000 shares for initial
public offering at March 31,
2000--unaudited....................... -- 3,000,000 --
Pro forma basic and diluted net loss per
common shares for the three month
period ended March 31,
2000--unaudited....................... $(3,240,593) 6,808,080 $ (.48)
=========== ========== ======
The unaudited pro forma equity presented in the balance sheet assumes the
issuance of: (a) convertible promissory notes having a total principal amount of
$715,625, (b) 27,582 shares of common stock to private investors for total
consideration of $91,698, (c) 21,428 shares of common stock to a related party.
Further reflected is, upon completion of the public offering: (a) the repayment
of a promissory note with a principal value of $500,000, (b) the conversion of
all 422,222 shares of the Company's Series A preferred stock into a total of
422,222 shares of common stock, (c) the conversion of eleven convertible notes
into 284,090 shares of common stock, and (d) the receipt of $23,948,500 in net
proceeds from the sale of the 3,000,000 units at an assumed initial public
offering price of $9.10 per unit, representing the mid point of the filing
range, after deducting underwriting discounts and commissions and estimated
offering expenses.
The weighted average shares is presented as though all pro forma shares were
outstanding for the entire three-month period ended March 31, 2000.
F-15
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 10-- SEGMENT INFORMATION
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- -------- -----------
(UNAUDITED)
Revenues
Catalog and website.............. $ 970,475 $1,452,079 $2,435,118 $247,460 $ 612,619
Advertising...................... 310,978 366,881 353,069 525 --
---------- ---------- ---------- -------- -----------
Total revenues................. 1,281,453 1,818,960 2,788,187 247,985 612,619
---------- ---------- ---------- -------- -----------
Gross Profit (Loss)
Catalog and website.............. 273,551 375,882 488,360 80,392 59,501
Advertising...................... 303,416 366,881 353,069 525 --
---------- ---------- ---------- -------- -----------
Total Gross Profit (Loss)...... 576,967 742,763 841,429 80,917 59,501
---------- ---------- ---------- -------- -----------
Less: Marketing expenses.......... 312,814 339,973 425,236 19,336 49,084
General and administrative
expenses................... 310,804 360,174 592,613 123,456 1,907,123
Interest income.............. -- -- -- -- (6,342)
Interest expense............. 7,470 7,053 18,780 809 (214,227)
---------- ---------- ---------- -------- -----------
Net (Loss) Income.................. $ (54,121) $ 35,563 $ (195,200) $(62,684) $(2,104,591)
========== ========== ========== ======== ===========
All amounts have been stated in accordance with the provisions of SFAS
No. 131. There were no sales to any individual customer during any of the years
in the three-year period ended December 31, 1999 or the three month period ended
March 31, 1999 and 2000 that represented 10% or more of net sales. The Company
has no long-lived assets located in foreign countries. The Company attributes
net sales to an individual country based upon the location of the customer. The
majority of the customers are located in the United States.
NOTE 11-- RELATED PARTY
Demand notes payable to a stockholder of the Company amounted to $31,975 as
of December 31, 1998 and 1999. The note is non-interest bearing and is
classified as long-term as the stockholder has committed to not demanding
payment prior to December 31, 2000.
NOTE 12-- COMMITMENTS AND CONTINGENCIES
On October 11, 1999, the Company entered into an agreement with a business
consulting firm and a minority stockholder to pay a finder's fee in cash equal
to 2% of the equity capital or other financing raised. The agreement was
terminated on April 1, 2000. Under the termination agreement, the Company issued
21,428 shares of stock to the consulting firm.
The Company has also entered into an agreement with this stockholder
whereby, if a successful public offering does not occur on or before
September 1, 2000, the stockholder will return all stock issued to the Company
or its designee. This agreement was subsequently terminated.
F-16
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS
UNAUDITED)
NOTE 12-- COMMITMENTS AND CONTINGENCIES (CONTINUED)
On December 7, 1999, the Company entered into a consulting agreement with a
minority stockholder to provide business development and financial and
investment banking consulting services from January 1, 2000 to February 29,
2000. The agreement calls for monthly compensation of $10,000 plus reasonable
expenses. The agreement was terminated on February 29, 2000. The Company paid
the minority stockholder's company a total of $20,000 under the agreement.
NOTE 13-- SUBSEQUENT EVENTS
On January 7, 2000, in consideration for $500,000 in bridge financing, the
Company issued to Gem Global Yield Fund Limited a non-interest bearing
promissory note in the principal amount of $500,000 and 422,222 shares of
Series A Preferred Stock. The promissory note is due on or before the earlier of
a qualified public offering, upon demand or December 31, 2001. If demand is
made, it shall be repaid in two equal annual installments, each covering
one-half the principal sum of the note, the first to be made within 60 days of
the demand for payment and the second payment to be made one year after the due
date of the first payment or a qualified public offering. Repayment of this note
is highly dependent upon the success of the upcoming public offering.
In January 2000, the Company implemented a stock option plan which reserves
1,000,000 shares of common stock. Nonstatutory Stock Options and Stock Purchase
Rights may be granted to service providers at a price determined by the
administrator. Incentive Stock Options may be granted only to employees. The per
share exercise price of the incentive stock options is 110% of the fair market
value of the shares on the date of the grant for employees owning more than 10%
of the voting stock of the Company and 100% of the fair market value for
employees owning less than 10% of the voting stock. The term of each option
shall be stated in the option agreement; however, that term shall be no more
than 10 years from the date of the grant. No options or purchase rights have
been granted as of February 15, 2000. See also Notes 4 and 6 for unaudited
quarterly subsequent event disclosures.
NOTE 14-- STOCK OPTION PLAN
In March 2000, the Company amended the stock option plan to reserve
1,500,000 shares of common stock and granted 1,461,121 options at an exercise
price of $3.52 per share. In July 2000, the Company amended the Plan to reserve
1,750,000 shares of common stock. The weighted average fair value of these
options was determined to be $8.10 per share. No options were exercised or
cancelled during the quarter ended March 31, 2000. Approximately 34% of the
options vested at the grant date with approximately 50% vesting evenly on a per
month basis over the next twenty-four month period. The remaining options,
primarily belonging to certain officers of the Company, vest upon successful
completion of the IPO or the attainment of certain future revenue thresholds.
The options expire on March 1, 2010. On the grant date approximately $1,416,000
of compensation expense was recorded for the difference between the exercise
price per share granted and the fair market value price per share multiplied by
the number of options vesting during the quarter.
F-17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION OR REPRESENT ANYTHING THAT IS NOT CONTAINED IN THIS
PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE AS OF THE
DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. THIS
PROSPECTUS IS AN OFFER TO SELL ONLY THE UNITS, AND COMPONENTS THEREOF, OFFERED
HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO
DO SO.
------------------------
PAGE
--------
Prospectus Summary.................... 1
Risk Factors.......................... 4
Cautionary Note Regarding Forward-
Looking Statements.................. 9
Use of Proceeds....................... 10
Dividend Policy....................... 10
Capitalization........................ 11
Dilution.............................. 13
Selected Financial Data............... 14
Management's Discussion And Analysis
of Financial Condition And Results
of Operations....................... 15
Business.............................. 22
Management............................ 35
Certain Transactions.................. 45
Principal Stockholders................ 47
Description of Securities............. 48
Shares Available For Future Sale...... 55
Underwriting.......................... 57
Legal Matters......................... 60
Experts............................... 60
Where You Can Find Additional
Information About us................ 60
Index to Consolidated Financial
Statements.......................... F-1
------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the units, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters with
respect to their unsold allotments or subscriptions.
3,000,000 UNITS CONSISTING OF
ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON
STOCK PURCHASE WARRANT
[LOGO]
---------------------
PROSPECTUS
---------------------
DIRKS & COMPANY, INC.
HORNBLOWER & WEEKS, INC.
KASHNER DAVIDSON SECURITIES CORPORATION
NOLAN SECURITIES CORPORATION
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALTERNATE PAGE OF SELLING SHAREHOLDER PROSPECTUS
SUBJECT TO COMPLETION, DATED , 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[LOGO]
422,222 SHARES OF COMMON STOCK
------------------------
This prospectus relates to 422,222 shares of our common stock that may be
sold from time to time by certain of our security holders.
There is no public market for our common stock at the present time. We have
applied to list the common stock under the symbol "LIQR" on the Nasdaq National
Market.
FOR INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is , 2000
ALTERNATE PAGE OF SELLING SHAREHOLDER PROSPECTUS--CONTINUED
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Cautionary Note Regarding Forward-Looking Statements........ 9
Dividend Policy............................................. 10
Capitalization.............................................. 11
Selected Financial Data..................................... 13
Management's Discussion And Analysis of Financial Condition
And Results of Operations................................. 14
Business.................................................... 20
Management.................................................. 32
Certain Transactions........................................ 41
Principal Stockholders...................................... 43
Description of Securities................................... 44
Selling Shareholders and Plan of Distribution............... 51
Shares Available For Future Sale............................ 51
Legal Matters............................................... 55
Experts..................................................... 55
Where You Can Find Additional Information About Us.......... 56
Index to Consolidated Financial Statements.................. F-1
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes corporations
to limit or eliminate the personal liability of directors and officers to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. Our Certificate
of Incorporation limits the liability of our directors and officers to us or our
stockholders to the fullest extent permitted by the Delaware statute. The
inclusion of this provision in the Certificate of Incorporation may have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even thought such an action,
if successful, might otherwise have benefitted us and our stockholders. The
Employment Agreements of some of our directors and officers contain a provision
similar to the provisions of the Certificate of Incorporation.
We intend to obtain directors' and officers' insurance providing
indemnification for certain of our directors, officers and employees against
certain liabilities, prior to the completion of this offering.
Reference is also made to the underwriting agreement filed as Exhibit 1.1 to
the Registration Statement for information concerning the underwriters'
obligation to indemnify us and our officers and directors in specified
circumstances, and our obligation to indemnify the underwriters. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of ours pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a schedule of the estimated expenses to be incurred by us
in connection with the issuance and sale of the securities being registered
hereby:.
Registration Fee............................................ $ 23,153.65
Nasdaq Listing Fee.......................................... $ 72,875.00
NASD Filing Fee............................................. $ 8,297.72
Blue Sky Fees and Expenses.................................. $ 15,000.00*
Accounting Fees and Expenses................................ $ 90,000.00*
Legal Fees and Expenses..................................... $140,000.00*
Printing Expenses........................................... $125,000.00*
Transfer Agent and Registrar Fees........................... $ 2,500.00
Miscellaneous............................................... $ 8,173.63
-----------
Total................................................... $485,000.00
===========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have sold unregistered securities as
described below. Unless otherwise indicated, there were no underwriters involved
in the transactions and there was no
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underwriting discounts or commissions paid in connection with the transactions.
Unless otherwise indicated, the issuances of these securities were considered to
be exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and the regulations promulgated thereunder. The purchasers of the
securities in these transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution of the securities, and appropriate legends were affixed to
the certificates for the securities. The purchasers of the securities received
adequate information about us or had access, through employment or other
relationships, to such information.
1. In August 1999 we issued 13 1/3 shares of common stock, which
represented ten percent of our shares, on a fully diluted basis, at the time of
issuance, to Corporate Capital Strategies, Inc. in exchange for business
planning and business development services to be rendered pursuant to a Founders
Service Agreement dated August 31, 1999. The 13 1/3 shares were later converted
into 300,000 shares of our shares pursuant to a merger, and were later
transferred to certain persons affiliated with Corporate Capital Strategies,
Inc., including 118,000 shares to Jonathan McDermott, our Senior Vice President,
Business Development. Under this agreement, as amended, we also are obligated to
issue 21,428 shares to Corporate Capital Strategies upon completion of this
offering. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act in connection with this offering. One of the
principals of Corporate Capital Strategies was a financially sophisticated
individual who had a business relationship with us dating back to 1996. In
addition, all of the persons who received shares from Corporate Capital
Strategies were financially sophisticated individuals, who had access to
information about our business plan and financial condition through this
individual and had the opportunity to ask questions of our management.
2. In December 1999 we sold a total of 50,000 shares of our common stock at
$1.00 per share to four individuals affiliated with Wink Communications, Inc.,
which maintains our website. We relied on the exemption from registration
contained in Section 4(2) of the Securities Act in connection with this
offering. All of the purchasers of shares were financially sophisticated
investors, who had access to information about our business plan and financial
condition through one of the purchasers, who had a prior business relationship
with us, and had the opportunity to ask questions of our management.
3. In January 2000 we sold a promissory note in the principal amount of
$500,000 and 422,222 shares of Series A Preferred Stock to GEM Global Group
Yield Fund Limited, Global Strategic Holdings Limited, Ocean Strategic Holdings
Limited, Tazmanic Corporation, and W.R. Timken Trust FBO Alexander C. Timken for
a total of $500,000. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder in
connection with this offering. All of the purchasers of shares were accredited
investors.
4. From January through March 2000, we sold a total of 248,236 shares of
common stock to
accredited investors for total consideration of $825,276. The first 42,194
shares sold in this offering were sold at a price of $2.37 per share, and the
remainder were sold at a price of $3.52 per share. In addition, in March 2000
the holders of our Series A Preferred Stock, in exercise of their preemptive
rights with regard to these sales, committed to purchase an additional 4,688
shares at a price of $2.37 per share for total consideration of $11,111, and an
additional 22,894 shares at a price of $3.52 for total consideration of $80,587.
These shares were issued in June 2000. We relied on the exemption from
registration contained in Section 4(2) of the Securities Act and Rule 506
promulgated thereunder in connection with this offering. All of the purchasers
of shares were accredited investors.
5. In March 2000 we issued ten units, each consisting of one convertible
promissory note and one warrant to purchase shares of our common stock, to ten
purchasers for total consideration of $900,000. Each convertible note bears
interest at the prime rate plus two percent. Each note automatically converts
into shares of our common stock at a conversion price of $3.52 per share upon
completion of this offering, but may be converted earlier, at the same
conversion price, at the option of
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the holder. Each warrant allows the holder, for a period of five years from the
date of issuance, to purchase a number of shares equal to the number issuable
upon conversion of the convertible note, at a price of $2.64 per share. In
addition, the holders of our Series A have made a committment to purchase one
unit for total consideration of $100,000 by exercising their preemptive rights
with regard to this offering. We relied on the exemption from registration
contained in Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder in connection with this offering. All of the purchasers of units were
accredited investors.
6. Between March and June 2000 we issued warrants to purchase 76,750 shares
of our common stock to various consultants and advisors in consideration for
services rendered. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act in connection with this offering. All of the
purchasers of shares were financially sophisticated investors, who had access to
information about us by virtue of their provision of services to us.
ITEM 27. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
*1.1 Form of Underwriting Agreement
*1.2 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant
*3.1 Articles of Incorporation of Liquor by Wire, Inc. as filed
with the Illinois Secretary of State on August 16, 1993
*3.2 Certificate of Incorporation of Liquor.com, Inc. as filed
with the Delaware Secretary of State on December 15, 1999
*3.3 Articles of Merger of Liquor.com, Inc. as filed with the
Illinois Secretary of State on December 22, 1999
*3.4 Certificate of Ownership and Merger Merging Liquor by Wire,
Inc. into Liquor.com, Inc. as filed with the Delaware
Secretary of State on December 22, 1999
*3.5 Certificate of Designation of Series A Preferred Stock of
Liquor.com, Inc. as filed with the Delaware Secretary of
State on January 7, 2000
*3.6 Bylaws of the Liquor.com, Inc.
*4.1 Specimen Common Stock Certificate
*4.2 Form of Warrant Agreement
*4.3 Specimen Warrant Certificate
**5 Opinion of Shefsky & Froelich Ltd. Regarding Legality of
Shares
*10.1 Master Merchant-Partner Agreement for The LinkShare Network
*10.2 Network Membership Agreement between LinkShare Corporation
and Liquor by Wire, Inc.
*10.3 Founder's Services Agreement, Acknowledgment and Receipt
between Liquor by Wire, Inc. and Corporate Capital
Strategies, Inc.
*10.4 Termination of Founder's Services Agreement
*10.5 Consulting Agreement between Liquor by Wire, Inc. and
e-consulting, Inc.
*10.6 Termination of e-consulting agreement
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EXHIBIT NO. DESCRIPTION
----------- -----------
**10.7 Investors' Rights Agreement between Liquor.com, Inc. and
holders of shares of Liquor.com Inc.'s Series A Preferred
Stock
*10.8 [DELETED]
*10.9 Marketing Agreement between Damark International, Inc. and
Liquor by Wire, Inc.
*10.10 Merchant Agreement between Camdens and Liquor.com, Inc.
*10.11 Advertising Agreement between Liquor.com, Inc. and Seagram
Americas
*10.12 Consulting Agreement between Liquor.com, Inc., Whodowekrow,
LLC and Ronald Bloom
*10.13 Liquor.com, Inc. 2000 Stock Option Plan and Agreement
*10.14 Employment Agreement between Liquor.com, Inc. and Gail P.
Zelitzky
**10.15 Employment Agreement between Liquor.com, Inc. and Barry L.
Grieff
*10.16 Employment Agreement between Liquor.com, Inc. and Steven
Olsher
**10.17 Employment Agreement between Liquor.com, Inc. and Scott
Clark
**10.18 Employment Agreement between Liquor.com, Inc. and Jonathan
McDermott
*10.19 Form of Indemnification Agreement with Officers and
Directors
23.1 Consent of Blackman Kallick Bartelstein LLP
*23.2 Consent of Shefsky & Froelich Ltd. (incorporated into
Exhibit 5)
*24 Power of Attorney (see signature page to this registration
statement)
*27 Financial Data Schedule.
*27.1 Financial Data Schedule.
- ------------------------
* Previously filed.
** Amended copy of previously filed exhibit.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant in all instances will provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the undersigned Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of the registration statement as of the time it was
declared effective;
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be in the initial bona fide offering thereof.
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(c) The undersigned Registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(1) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended;
(2) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (for the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(d) The undersigned Registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless, in the opinion of counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized the this registration
statement to be signed on its behalf by the undersigned, in the City of Chicago,
State of Illinois, on July 27, 2000.
LIQUOR.COM, INC.
(Registrant)
By: /s/ BARRY L. GRIEFF
-----------------------------------------
Barry L. Grieff, CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BARRY L. GRIEFF Chief Executive Officer and July 27, 2000
------------------------------------------- Director (Principal Executive
Barry L. Grieff Officer)
/s/ SCOTT B. CLARK Chief Financial Officer July 27, 2000
------------------------------------------- (Principal Financial and
Scott B. Clark Accounting Officer)
* July 27, 2000
------------------------------------------- Director
Gail P. Zelitzky
* July 27, 2000
------------------------------------------- Director
John G. Vandegrift
* July 27, 2000
------------------------------------------- Director
Ralph J. Sorrentino
* July 27, 2000
------------------------------------------- Director
Bryan D. Legate
/s/ SCOTT B. CLARK
-------------------------------------------
* Scott B. Clark
as Power of Attorney
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