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As filed with the Securities and Exchange Commission on October 13, 1999.
File No. 99-20400
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
AMENDMENT NO. 1
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General Form for Registration of Securities
of Small Business Issuers under Section 12(b) or (g)
of the Securities Exchange Act of 1934
GOURMETMARKET.COM, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 51-0347728
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
507 Howard Street, Suite 200, San Francisco, California 94105
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(Address of Principal Executive Offices) (Zip Code)
(415) 979-0990
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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GOURMETMARKET.COM, INC.
FORM 10 - GENERAL FORM FOR REGISTRATION OF SECURITIES
Table of Contents
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Part I
Item 1. Description of Business.............................................4
Item 2. Management's Discussion and Analysis
or Plan of Operation......................................17
Item 3. Description of Property............................................20
Item 4. Security Ownership of Certain Beneficial
Owners and Management.....................................21
Item 5. Directors, Executive Officers, Promoters
and Control Persons.......................................23
Item 6. Executive Compensation.............................................25
Item 7. Certain Relationships and Related Transactions.....................26
Item 8. Description of Securities..........................................30
Part II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters...............31
Item 2. Legal Proceedings..................................................32
Item 3. Changes in and Disagreements with Accountants......................32
Item 4. Recent Sales of Unregistered Securities............................32
Item 5. Indemnification of Directors and Officers..........................33
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Part F/S
Financial Statements........................................................34
Part III
Item 1. Index to Exhibits..................................................36
Item 2. Description of Exhibits............................................36
Signatures..................................................................37
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This Registration Statement contains certain forward-looking
statements. These forward looking statements include statements regarding (i)
research and development plans, marketing plans, capital and operations
expenditures, and results of operations; (ii) potential financing arrangements;
(iii) potential utility and acceptance of the Registrant's existing and proposed
products; and (iv) the need for, and availability of, additional financing.
The forward-looking statements included herein are based on current
expectations and involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions regarding the business of
GourmetMarket.Com, Inc. (the "Company") which involve judgments with respect to,
among other things, future economic and competitive conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
actual results may differ materially from those set forth in the forward-looking
statements. In light of the significant uncertainties inherent in the
forward-looking information contained herein, the inclusion of such information
should not be regarded as any representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
PART I
Item 1. Description of Business
Background
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The Company is a Delaware corporation organized in April 1993 under the
name Sterling Partners, Inc. Upon its organization, the Company engaged in the
business of acquiring tax lien certificates of redemption from various county
governments located in Maryland. In May 1996 the Company acquired Sterling Real
Estate Company, a Delaware corporation, which owned a commercial property in
Cecil County, Maryland. The property was subsequently sold and, in October 1998,
the Company distributed all of the shares in its subsidiary, then known as
Sterling Global, Ltd., to the Company's shareholders.
On January 29, 1999, GourmetMarket.Com, a California corporation
("GourmetMarket"), merged with and into the Company, with the Company being the
surviving corporation. Pursuant to its merger agreement with GourmetMarket, the
shareholders of GourmetMarket received 7,421,220 shares of the Company's common
stock, or approximately 47.4% of the Company's common stock outstanding after
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the merger. Also pursuant to the merger agreement, persons holding options for
the purchase of GourmetMarket common stock exchanged their options for options
to purchase 2,298,780 shares of the Company's common stock. The merger agreement
also gave the GourmetMarket shareholders control of the Company's board of
directors, subject to the Company's meeting business projections to be agreed
upon by the parties to the merger. The merger agreement also provided for the
resignation of substantially all of the Company's officers and directors, who
were replaced by designated officers and directors, most of whom were then
officers or directors of GourmetMarket.
The Company owns and operates two web sites, GourmetMarket.Com and
Travlang.com, which are referred to by those names in this Registration
Statement. The GourmetMarket.Com web site is an online culinary marketplace for
gourmet and specialty food, wine and cookware. The GourmetMarket.Com site has
been in full operation since September 1998. Since the commencement of the
GourmetMarket.Com web site in 1997, GourmetMarket, and subsequently the Company,
have developed the technology used in the web site, established relationships
with leading culinary suppliers, and developed revenue- and traffic-building
partnerships. The software used in the GourmetMarket.Com web site enables the
Company to instantly update the web site with new merchandise, unique internet
addresses, special pricing and promotions. The Company's state-of-the-art
back-office software package can handle thousands of orders per day.
In February 1999 the Company acquired Travlang.com, an Internet
travel-related service company. The Travlang.com web site, which was started in
1995, offers language translations (text and audio) for travelers in more than
70 languages, real-time currency exchanges, and a database of more than 130,000
hotels in more than 120 countries from which travelers can book reservations.
While the Company maintains the Travlang.com web site, its business is focused
almost exclusively on the GourmetMarket.Com web site, and the Company does not
intend to devote management or technical time, nor capital resources, to the
Travlang.com website in the foreseeable future.
The Company's office is located at 507 Howard Street, Suite 200, San
Francisco, California 94105. Its telephone number is 415-979-0990.
Business
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The Company's sole business is the maintenance and operation of two web
sites, GourmetMarket.Com and Travlang.com. The Travlang.com web site is
discussed under the caption "Travlang.com." The discussion which follows until
that caption is directed to the Company's GourmetMarket.Com web site.
The GourmetMarket.Com Web Site
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GourmetMarket.Com delivers not only products, but also a
lifestyle. By offering superior quality products along with expert information
and resources via the Internet, GourmetMarket.Com provides customers with easy
accessibility to the "good life." The Company intends to expand the range of
products and services offered through its GourmetMarket.Com web site to
encompass other high-end lifestyle products and services.
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GourmetMarket.Com targets busy professionals with substantial
disposable income who are seeking premium culinary products. The Company
believes that GourmetMarket.Com's targeted audience is making a lifestyle
decision -- not simply seeking to purchase culinary items, but to find the finer
things in life. This segment is relatively quality-sensitive and relatively less
price-sensitive. The Company believes that customers come to GourmetMarket.Com
for several reasons, including:
o Finest quality, hard-to-find products. GourmetMarket.Com is
committed to searching the world for premium food and wine.
GourmetMarket.Com only selects products that are of the
highest quality. Many of the products on GourmetMarket.Com
are only available on its site and cannot be found in even
the highest-end grocery and specialty stores.
o Convenience. Shoppers can browse GourmetMarket.Com's store,
search through listings of frequently updated recipes and
explore its extensive wine database, 24 hours a day, 7 days
a week, without ever leaving their computers.
o Expert advice. GourmetMarket.Com is the only online premium
culinary marketplace that features expert advice and
recommendations. GourmetMarket.Com only carries wines that
have been rated very good or better by Bon Appetit Wine &
Spirits Editor Anthony Dias Blue. His extensive tasting
notes are available to both GourmetMarket.Com wine club
members and the general public on the site. Renowned pastry
chef and author Alice Medrich also selects all chocolate for
GourmetMarket.Com's chocolate clubs and determines many of
the products that are sold on the site.
o Content. The Company believes that the more information
consumers are offered, the more satisfied they are with
their purchases and the more likely they are to keep buying
online. GourmetMarket.Com's abundance of culinary
information is intended to lead customers to make purchases.
The Company's marketing strategy is to build the
GourmetMarket.Com web site's reputation on the Company's commitment to
best-of-best product and service quality. While many e-commerce web sites stress
their ability to offer tens of thousands of products, GourmetMarket.Com focuses
on a limited number of premium products in each product family.
GourmetMarket.Com has established more than 150 business and co-marketing
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partnerships, which enables it to offer more than 4,500 products, including
wines, chocolates, cigars, coffee and specialty kitchenware.
GourmetMarket.Com seeks partnerships with industry experts,
such as Anthony Dias Blue, Wine and Spirits Editor of Bon Appetit magazine, and
world-renowned pastry-chef and author Alice Medrich, who respectively make the
wine and chocolate selections for the site. More product experts will be added
to GourmetMarket.Com's consulting staff in 1999 and 2000.
E-Commerce and the Specialty Food Industry
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E-commerce, which is a term used to describe commerce done
over the Internet, is expected to be one of the fastest-growing markets over the
next five years. Jupiter Communications predicts that United States consumer Web
revenue will grow to $40 billion by 2002, while the Yankee Group is anticipating
that the consumer e-commerce market will grow to $123.6 billion by 2003 from
$11.5 billion in 1998. According to International Data Corporation, corporate
Internet spending is expected to grow to $203 billion by 2002. Several sources,
including International Data Corporation, believe that the number of online
users will grow from about 150 million worldwide now to about 500 million by
2003, with the United States accounting for more than half of the online users.
The United States, Europe and Asia presently account for nearly 90% of the
online users worldwide.
The specialty food industry in which GourmetMarket.Com operates is an
important segment of the U.S. food market, accounting for almost 10 percent of
the total U.S. food industry. According to the consumer research firm Find/SVP,
sales of specialty foods are projected to reach $50 billion by the year 2000.
Growth in the on-line food and beverage market is expected to jump from
about $90 million in 1998 to $463 million by 2001, according to Forrester
Research. While the growth of the on-line food and beverage market is projected
to grow rapidly, on-line sales will still represent only 1 to 2 % of total
industry figures in the U.S. alone. Traditional retail grocery stores have an
advantage over e-commerce food sites as direct food providers because of
consumers prefer a name they know and trust. The Company does not believe that
this advantage will last, however, as today's emerging consumer direct
providers, including GourmetMarket.Com, become more established.
GourmetMarket.Com's interactive library includes nearly 10,000 pictures
of foods, kitchenware and travel destinations, as well as over 5,000 recipes and
related articles. This database will become very important as web access becomes
faster and full motion video becomes more viable. The Company believes that its
GourmetMarket.Com interactive media are particularly attractive to its targeted
audience. Instead of simply linking to a photo and text of sauteing onions,
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visitors to the Company's GourmetMarket.Com web site will be able to view a full
video demonstrating how to saute onions and, at the same time, link to
manufacturers of products featured in the demonstration or even purchase all the
items used in the demonstration or recipe with one click of the mouse.
Promotional Agreements
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On April 28, 1999, the Company signed an agreement with @Home
to be @Home's exclusive "food channel." @Home Network has affiliate partnerships
with 16 leading cable companies in the United States and Canada. These companies
include Bresnan Communications, Cablevision Systems, Century Communications,
Cogeco Cable, Comcast, Cox Communications, Garden State Cable, Insight
Communications, InterMedia Partners, Jones Intercable, Marcus Cable,
Midcontinent Cable, Prime Cable, Rogers Cablesystems, Shaw Communications,
Suburban, and Tele-Communications, with access to over 65 million households.
Anyone whose cable service is provided by any of the companies listed above and
who wants a cable modem must use the @Home interface; and anyone who clicks on
"food" in the cable system's lifestyle channel will go to the GourmetMarket.Com
web site. Just like any new television network, @Home needs new product,
particularly product which can take advantage of @Home's broadband technology
available through cable systems. As the Company's product was developed to take
advantage of broadband technology, it is particularly well-suited to @Home's
product needs.
In March 1999, the Company established a partnership with
Great Chefs Television to license Great Chefs' content through the
GourmetMarket.Com site. Great Chefs, which is aired daily on the Discovery
Channel, is seen by millions of viewers nationwide and is the only culinary
television show that consistently features world renowned chefs cooking on
location in their own restaurant kitchens. The Company maintains the Great Chefs
web site as a condition of its agreement.
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In May 1999 the Company entered into an agreement with America
Online ("AOL"), a provider of content and internet services. The agreement
provides that the Company will have a promotional placement within AOL's
shopping channel. The agreement is for a term of ten months commencing with the
launch date of AOL's commerce center, which is September 1999.
The Company has also entered into a series of other agreements
intended to promote its GourmetMarket.Com web site and increase sales of the
Company's products and services. Among the parties with which the Company has
such agreements are e-Cal, a leading provider of internet calendar solutions;
Infospace, an active shopping internet portal; MSN, which will list
GourmetMarket.Com as an anchor tenant with the MSN Network; Inktomi, an internet
shopping engine, which will list GourmetMarket.Com as a gourmet food and wine
merchant; e-Greetings, an online greeting card provider, with which the Company
has a revenue sharing agreement; a contract with e-Centives, a provider of
discount coupons that appear on sites such as Excite and USA Today; an agreement
with CollegeClub.com, a web site for college students; Snap.com, an internet
content provider; ShopNow, an internet shopping mall site; NetZero, an internet
service provider; and CyberGold, a consumer shopping web site. The Company also
continues to expand its relationships with magazines to provide large and
continuing print advertising space in those magazines in exchange for the
magazine's exposure on our site.
Experts
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While many sites sell products, the selection is either so
limited that the consumer feels unsatisfied or so vast that the consumer is
lost. GourmetMarket.Com offers a large selection as well as expert product
advice. Leading culinary experts Anthony Dias Blue and Alice Medrich provide
product reviews and product selections for visitors to GourmetMarket.Com, as
well as offer advice and information about the best products in their respective
fields.
Clubs
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To encourage repeat and large orders, the Company has created
food and beverage clubs which give subscribers a monthly selection of choice
products.
o Wine Lovers Club entitles members to two bottles each month
of Mr. Blue's selection of delicious and exemplary versions
of the world's great wine varieties. Each month will bring
another opportunity to compare examples of the same wine
variety. Chardonnay, Merlot, Pinot Noir, Cabernet Sauvignon,
Sauvignon Blanc and many more will be featured.
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o Premier Tasting Wine Club is designed especially for
individuals who are interested in giving their palates an
unusual, exciting treat by the wines this club has to offer.
o Chocolate Lover's Club is for the unabashed hedonist--anyone
who simply enjoys feasting on exquisite, handcrafted
chocolates. Each month's shipment features assorted
chocolates (typically one-half pound or more) or a special
creation from a single chocolatier chosen especially for the
club.
o Couverture Club is designed for the serious nibbler and
cook. Each month members receive bars of world-class
chocolate couverture--either from a single manufacturer or
from a chocolatier who has created a custom blend of
chocolate from different manufacturers. These bars
(typically 1.5 pounds or more) are perfect for eating,
baking or dessert making.
o Premier Chocolate Club members receive chocolate from the
Chocolate Lover's Club and the Couverture Club.
Marketing and Distribution
--------------------------
The Company's partnership program with other web sites plays a
key role in driving traffic to its GourmetMarket.Com site. The Company has
established more than 250 key partnerships which it divides into five
categories, as follows:
1. Portals. The Company's GourmetMarket.Com web site has
established relationships with major portals, including AOL, MSN, Yahoo
shopping, Excite @home and Infoseek.
2. Large Content or Shopping Sites. The Company has created
partnerships with many content and commerce companies like Greeting Cards, xoom,
GTE.net, Let's Shop, Sparks, Amazon.com, Cox, Indigo City, Mindspring, Infobeat
and others. For Mother's Day in 1999 GourmetMarket.Com teamed up with Amazon.com
to deliver Mother's Day gift baskets. The baskets were featured in Amazon.com's
gift store, giving GourmetMarket.Com exposure to nearly 8 million customers.
3. Affiliates. The Company pays a fifteen percent (15%)
commission to affiliates who send customers to its GourmetMarket.Com web site.
The Company has about 150 affiliates. The Company estimates that this number
will grow to about 1,500 by mid-2000 as a result of the Company's agreement with
LinkShare Network(TM), the leader in partnership-based marketing programs on the
Web, which the Company has retained to identify, secure and manage new affiliate
web sites.
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4. Miscellaneous Partners. The Company has established other
partnerships that help drive traffic and sales. The Company is a featured
merchant with Merrill Lynch credit card holders. The Company also has agreements
with CyberGold, E-centives, Netcentives, Junglee, coolsavings and many others
for its GourmetMarket.Com web site.
5. Print Media Partnerships. The Company has established
co-promotional relationships with off-line media partners. These include a
non-profit radio station for which the Company provides goods for fund-raising,
and more than 25 leading print magazines focusing on the culinary and lifestyle
categories. This represents an immediate marketing opportunity for
GourmetMarket.Com because these publications provide GourmetMarket.Com with
significant additional advertising exposure in exchange for the Company listing
them on the GourmetMarket.Com web site.
Other parts of the Company's GourmetMarket.Com distribution
program include:
o Search Engine Registration. The Company is working to
registering different parts of its GourmetMarket.Com web
site and product offerings with the principal search
engines.
o Corporate Program. This program caters to corporate need
gifts to employees and others.
o Public Relations. The Company employs a full-time public
relations person responsible for promoting and exposing the
Company and promoting the Company's GourmetMarket.Com
product offerings.
Technology
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The Company employs technology developed by i-Labs, Ltd.
("i-Labs"), one of the founders of GourmetMarket, to maintain its
GourmetMarket.Com web site, process orders and, in general, make the online
experience easy and satisfying. i-Labs customers, which include Apple Computers,
among others, are generally much larger, better-capitalized, and handle more
transactions than the Company. The Company believes that its relationship with
i-Labs, which is a founder of GourmetMarket.Com, has enabled the Company to not
only compete with better capitalized web sites, but has also positioned
GourmetMarket.Com to be able to provide better service than virtually any
competitor, regardless of size.
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Through its i-Labs relationship, the Company also has begun
using MarketDrive(TM), a sophisticated technological tool that helps convert
site visitors to buyers. The software enables the GourmetMarket.Com web site to
offer more of what the site's customers want today, as well as forecast trends
in products, prices and required delivery times.
Vendors
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The specialty food industry is dependent on the craftsmanship
necessary to produce many of its products. Many of its vendors need significant
planning and guidance to handle dramatic increases in order volume. The Company
has focused on vendor relationships and order procedures, quality assurance,
packaging requirements, and exclusive product offerings.
The Company is confident in its vendors' abilities to handle
GourmetMarket.Com's increases in product sales. To help mitigate supply
concerns, the Company's technology incorporates an overflow system that allows
the Company to anticipate and use maximum daily quantities from individual
vendors. Once a vendor has reached its maximum quantity, the Company's system
will roll over to a back-up vendor which fulfills similar products. This
approach will assist the Company in managing vendor bottlenecks associated with
limitations in supply.
Inventory
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Non-perishable foods and kitchenware orders will be fulfilled
via two third-party warehouses through the last quarter of 1999. The Company
intends to shift to an internal warehouse solution in 2000. Perishable food
orders will be fulfilled directly to customers via drop-ship by the
manufacturers for the foreseeable future. The Company intends to include some
perishable items in a centralized warehouse when the Company learns more about
consumer buying patterns.
Travlang.com
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Travlang.com is a popular web site for information on foreign language
on the Internet. The site focuses on two areas of interest: travel and language.
Travlang.com has been in existence since 1995, has won several awards for
excellence in the travel and leisure categories. (See
http://www.travlang.com/languages/awards.html.) Features included on the site
are 73 different foreign language tutorials, translation dictionaries, detailed
information on planning and touring Europe, hotel reservations, and over 7,000
links to other web sites related to both travel and foreign language topics.
This service is targeted to both business users and vacationers. The Company has
no plan to promote or expand this web site in the foreseeable future.
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Competition
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The Company believes that five web sites compete with its
GourmetMarket.Com web site: cooking.com, tavolo.com (known as Digital Chef),
greatfoods.com, virtual vinyards.com, and 911 gifts.com. In addition there are
different retail and catalog businesses that have a web presence (for example,
Balducci's, Williams Sonoma, and Crate and Barrel). Many of these competitors
are better-funded than the Company and have better brand recognition. The
Company believes that its GourmetMarket.Com web site has four major advantages
over these competitors:
o GourmetMarket.Com's merchandizing strategy consists of becoming a
one-stop shop for the customer's every gourmet need. Competitors do
not offer the same range of gourmet foods and products.
o GourmetMarket.Com offers superior product quality. The gourmet and
specialty food industry is, above all, about taste. The Company sifts
through the entire universe of gourmet products to deliver only the
highest quality products. Because GourmetMarket.Com's customers will
not give it a second chance, the Company intends to provide high
quality products and services. This focus differentiates
GourmetMarket.Com from some of its online competitors, which often
sacrifice quality for quantity.
o GourmetMarket.Com offers a comprehensive selection of gourmet foods
and products, including an in-depth assortment of perishable foods.
At the same time, GourmetMarket.Com is able to accommodate
large-volume orders.
o GourmetMarket.Com's content offering surpasses its competitors. The
Company owns a large library of rich media content and, internally,
has the knowledge to create and handle this content in a way which
the Company anticipates will allow it to dominate the broadband space
in the gourmet e-commerce marketplace.
Numerous travel web sites compete with Travlang.com. However, the
Company does not believe that any competitor offers comparable language
information and translations with more customary travel information and
services.
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Trademarks
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In the course of its business, the Company employs, and intends to
increase the use of, various trademarks, trade names and service marks,
including its logo, in the packaging and advertising of its products. The
Company believes that the use of service marks, trademarks and trade names are
of considerable value and importance to its business and intends to continue to
protect and promote its marks as appropriate. The Company does not have any
trademark registered with the United States Patent and Trademark Office, but
intends in the immediate future to file trademark registrations for
GourmetMarket.Com and Travlang.com. The Company owns the domain names for both
of its web sites.
Regulation
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E-commerce is new and rapidly changing, and federal and state
regulation relating to the Internet and e-commerce is evolving. Currently, there
are few laws or regulations directly applicable to the access of the Internet or
e-commerce on the Internet. Due to the increasing popularity of the Internet, it
is possible that laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy, pricing, taxation, content,
copyrights, distribution, antitrust and quality of products and services.
Additionally, the rapid growth of e-commerce may trigger the development of
tougher consumer protection laws. The adoption of such laws or regulations could
reduce the rate of growth of the Internet, which could potentially decrease the
usage of the Company's online stores or could otherwise have a material adverse
effect on the Company's business. In addition, applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of such laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies.
Further, several telecommunications carriers have requested the Federal
Communications Commission ("FCC") to regulate telecommunications over the
Internet. Due to the increasing use of the Internet and the burden it has placed
on the current telecommunications infrastructure, telephone carriers have
requested the FCC to regulate Internet service providers and online service
providers and impose access fees on those providers. If the FCC imposes access
fees, the costs of using the Internet could increase dramatically. This could
result in the reduced use of the Internet as a medium for commerce, which could
adversely effect the Company's business.
GourmetMarket.Com ships anywhere in the United States and Canada. Due
to alcohol shipping restrictions in certain states, wine orders are shipped
directly from the winery to California, Oregon, Washington, Colorado, New
Mexico, Idaho, Missouri, Minnesota, Iowa, Illinois, Wisconsin and West Virginia.
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Although the Company does not, at present, distribute wine in all 50 states, the
Company is continuously expanding its network as its resources and governmental
regulation allow.
The sale of alcoholic beverages even within state lines to minors is
also of great concern. GourmetMarket.Com takes every precaution to prevent
selling alcohol to minors, including the following steps:
o When a customer attempts to purchase wine, GourmetMarket.Com issues
an online warning notifying the customer that he/she must be over 21
to purchase alcohol from the site.
o An adult signature and identification is required to receive the
order.
o A valid credit card is required to place the order.
o All local laws related to the protection of minors are followed.
Employees
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The Company has sixteen employees. None of the employees belongs to a
union. The Company believes that its employee relationship is excellent.
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Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction
with the Financial Statements appearing elsewhere in this Registration
Statement. Sterling Partners, Inc. (which is referred to in this Registration
Statement as the "Company") was substantially inactive in the years ended
December 31, 1997, and 1998, and became active upon its merger on January 29,
1999, with GourmetMarket.Com, when it began to operate GourmetMarket.Com's
business. Accordingly, the information which follows reflects the business and
operations of GourmetMarket.Com from its inception on November 5, 1997, until
its merger into the Company on January 29, 1999. Information provided for any
period after January 29, 1999, including information with respect to the six
months ended June 30, 1999, is provided on a pro forma basis as if the Company's
merger with GourmetMarket.Com had occurred as of January 1, 1999.
Results of Operations
Periods Ended December 31, 1997 and 1998
The Company had nominal sales in 1997 and sales of $132,693 in the year
ended December 31, 1998. The Company had a gross profit of $462 in the period
ended December 31, 1997, compared to a gross loss of $(8,844) in the year ended
December 31, 1998. The Company had a loss from operations of $78,398 in the
period ended December 31, 1997, compared to a loss of $722,899 of the comparable
1998 period. In the period ended December 31, 1997, the Company had significant
organizational expenses as well as expenses associated with the start up of the
Company's GourmetMarket.Com web site, including costs of acquisition of content
and technology, and other expenses of the start-up of the Company's web site.
These expenses continued during calendar year 1998 as selling, general and
administrative expenses increased from $78,860 for the period ended December 31,
1997, to $689,298 for the year ended December 31, 1998.
Payroll and payroll taxes increased by $234,009 for the period ended
December 31, 1998, compared to the period ended December 31, 1997. The Company
commenced operations in late 1997 and expanded its staff significantly in 1998.
Stock and option based compensation increased by $100,000 from the period ended
December 31, 1997, compared to the period ended December 31, 1998. This increase
was the result of stock issued in consideration for web site design and
development services provided during 1998. Contract services and professional
fees increased by $142,006 for the period ended December 31, 1998, compared to
the period ended December 31, 1997. This increase resulted primarily from the
employment of outside professionals and independent contractors to meet the
Company's development, technical, and financial demands on a timely basis.
Internet servicing expenses increased by $26,508 for the period ended December
31, 1998, compared to the period ended December 31, 1997, as the Company's
internet business expanded.
General and administrative expenses increased by $37,317 for the period
ended December 31, 1998, compared to the period ended December 31, 1997, as the
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Company expanded operations in 1998. The Company's occupancy and office expenses
increased from $7,240 for the year ended December 31, 1997, to $41,368 for the
year ended December 31, 1998. However, on an annualized basis occupancy and
office expenses remained fairly constant. Advertising and promotion increased by
$36,106 for the period ended December 31, 1998, compared to the period ended
December 31, 1997, as the Company increased its promotional expenses to grow its
business. The Company has no interest expense in 1997 compared to interest
expense of $24,757 for the period ended December 31, 1998, as the Company
borrowed to meet its working capital requirements. During the year ended
December 31, 1998, the Company recorded a gain of $176,078 (net of income taxes)
on extinguishment of $658,778 of debt in exchange for 392,000 shares of common
stock valued at $392,000, or $1.00 per share.
Six Months Ended June 30, 1998 and 1999
The Company's revenues increased from $2,787 for the six months ended
June 30, 1998, to $293,017 for the six months ended June 30, 1999, as a result
of the Company's increased marketing efforts, web site development, and addition
of products. The substantial increase in period comparison is a result of the
Company having substantially no sales for the first six months of 1998. Selling,
general and administrative expenses increased from $304,120 for the six months
ended June 30, 1998, to $2,218,099 for the six months ended June 30, 1999, as
the Company added staff, increased marketing, and entered into third party
agreements with America Online, Excite, @Home, and other business partners. The
Company had a loss from operations of $303,804 for the six months ended June 30,
1998, compared to a loss of $2,286,555 for the comparable 1999 period, primarily
as a consequence of the substantial costs associated with its business expansion
and other non-recurring expenses.
Payroll and payroll taxes increased by $113,132 for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998. This
comparative difference is primarily the result of the Company having no
substantial operations until the second half of 1998. Stock and option based
compensation increased by $956,570 for the six months ended June 30, 1999,
compared to the six months ended June 30, 1998, primarily from the sale of
common stock in March 1999 at a price below the price of the Company's January
1999 private placement. The Company also recorded compensation expense of $6,570
resulting with the issuance of stock options at an exercise price lower than the
fair market value at the date of issuance. Occupancy and office expenses
increased by $9,575 for the six months ended June 30, 1999, compared to the six
months ended June 30, 1998, as the Company leased more space to accommodate its
growth. Contract services and professional fees increased by $448,033 for the
six months ended June 30, 1999, compared to the six months ended June 30, 1998.
This increase primarily resulted from consulting fees incurred in connection
with the Company's merger with GourmetMarket and the need to employ outside
professional and contractors to meet the Company's development, technical, and
financial demands on a timely basis.
17
<PAGE>
Internet servicing expenses increased by $50,950 for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998. This
increase resulted primarily from the Company's need to develop and expand its
web site infrastructure to meet anticipated growth. General and administrative
expenses increased by $96,370 for the six months ended June 30, 1999, compared
to the six months ended June 30, 1998, as a result of the Company's continued
growth in 1999. Advertising and promotion increased by $237,109 for the six
months ended June 30, 1999, compared to the six months ended June 30, 1998, as
the Company increased promotional spending to promote its growth. Interest
expense increased by $16,672 for the six months ended June 30, 1999, compared to
the six months ended June 30, 1998, as the Company paid interest on debt
incurred to meet its working capital requirements.
Liquidity and Capital Resources
The Company had total current assets of $42,600 at December 31, 1998,
compared to total current assets of $93,888 at June 30, 1999. Total assets
increased from $450,212 at December 31, 1998, to $650,126 at June 30, 1999,
primarily as a result of an increase in license agreements. During the same
period, the Company's total current liabilities increased form $369,083 to
$864,245 as the Company borrowed to pay operating expenses and significantly
increased accounts payable and accrued expenses. The Company used net cash for
operations of $73,768 from November 5, 1997, to December 31, 1997, compared to
$373,969 for the year ended December 31, 1998. Net cash used for operations
increased from $292,813 for the six months ended June 30, 1998, to $1,119,720
for the six months ended June 30, 1999, as the Company paid costs associated
with its substantial business expansion in 1999.
During the period from November 5, 1997, to December 31, 1997, the
Company paid for operations by borrowing $100,000 from its founders. In
September 1998 the Company acquired certain assets from one of the one of its
founders, Arome, Ltd., for stock and a $300,000 purchase money note. During the
six months ended June 30, 1999, the Company borrowed $275,000 to meet operating
expenses. In the year ended December 31, 1998, the Company also provided cash to
meet operating expenses by net proceeds from the sale of common stock of
$392,138. The Company realized $964,129 from the sale of common stock on a
private placement basis in the six months ended June 30, 1999, but did not sell
stock in the first six months of 1998.
The Company has incurred significant net losses and negative cash flows
from operations since November 1997 as a result of the development of its
GourmetMarket business operations. The Company has funded these losses primarily
from the issuance of common stock to the Company's founders, loans by related
parties, and the private placement of the Company's securities to individuals.
At June 30, 1999, the Company had used substantially all of the proceeds of the
private placement completed in January 1999, and had net cash reserves of
$65,086 at June 30, 1999. In August 1999, the Company had insubstantial cash but
completed a loan financing of $300,000 due March 2000. The Company has received
commitments for an additional $200,000 of short-term loan financing and
anticipates receiving the proceeds of such loans in September 1999. The Company
18
<PAGE>
believes that its cash reserves at September 1, 1999, together with income from
operations will be sufficient to carry on its business through December 1999.
The Company will be dependent in the foreseeable future on raising capital on a
debt or equity basis to meet its operating expenses, as it will in all
probability continue to incur operating losses through calendar year 2000. The
Company anticipates that it will be able to continue to obtain working capital
through the proceeds of equity or debt financing on a private basis, and is also
exploring the availability of equity financing through a public offering.
Year 2000 Compliance
The Company's web system was designed to be year 2000 ("Y2K")
compatible. The system was tested for its ability to accept orders for dates
beyond January 1, 2000, and verify credit cards with year 2000 dates. In certain
areas, where Y2K issues were discovered, it was considered a minor fix to fix
the system. Therefore the Company does not consider Y2K issues to be of high
risk or expensive to fix.
The major Y2K risk may come from the Company's usage of third-party
products. The Company's system is based on Microsoft Windows NT operating system
running on the Intel Pentium Pro Processor, an Oracle database, and a NetScape
WWW server. In addition, the Company is using external credit card processors,
CyberSource online credit card transaction processing, an external server
co-location hosting service (Exodus), and a third party accounting system for
the purpose of billing, invoicing and reporting. These third-party vendors claim
their products to be Y2K compatible, and the system, during testing, did not
show any reason to question this claim. However, in the unlikely event that any
of these vendor's products fail to be Y2K compatible, and the vendor does not
offer any upgrade path to solve this failure, the Company will be required to
upgrade its system. This upgrade may result in an expense of anywhere between
$50,000 to $250,000. The Company believes that as its testing did not reveal any
Y2K problems, it is unlikely that the Company's operation will be disturbed
significantly, and the Company should be able to replace any incompatible
component or fix any similar bug in a matter of days.
Item 3. Description of Property
The Company occupies a 2,500 square foot office at 507 Howard Street,
Suite 200, San Francisco, California 94105, on a lease basis. The Company
anticipates that it will require new and expanded space in the near future, but
has not estimated the location or cost of any such space.
19
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information with respect to the anticipated
beneficial ownership of the Common Stock by (i) each of the directors of the
Company, (ii) each person known by the Company to be the beneficial owner of
five percent or more of the outstanding Common Stock, and (iii) all executive
officers and directors as a group, as of August 1, 1998. Unless otherwise
indicated, the Company believes that the beneficial owner has sole voting and
investment power over such shares.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage
Beneficial Owner of Beneficially Owned Ownership of Class
- ---------------- --------------------- ------------------
<S> <C> <C>
Chanan Steinhart(1)(2) 3,011,200 18.02%
507 Howard Street
San Francisco, CA 94105
Gideon Shalom-Ben Dor(3)(4) 1,215,000 7.26%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
Yishai Steinhart(3) 1,215,000 7.26%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
Gideon Stein(3) 1,215,000 7.26%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
MCG Partners, Inc.(5) 5,200,000 31.11%
7777 Glades Road #211
Boca Raton, FL 33434
Janis Johnson 1,360,800 8.14%
360 Turtle Creek Blvd. #4
Dallas, Texas 75219
All Executive Officers
and Directors as a group
(2 persons) 4,224,200 25.27%
</TABLE>
Footnotes continued on next page.
20
<PAGE>
- ----------------------------
(1) Officer and Director.
(2) Includes 1,942,000 shares of which Mr. Steinhart is the record owner.
Pursuant to Rule 13d-3, Mr. Steinhart may be deemed the beneficial
owner of an aggregate of 1,069,200 shares of common stock held by the
following corporations of which he is a principal shareholder, officer
and director: Arome Publishing U.S., Inc. (85,864 shares); Arome, Ltd
(583,200 shares); and Market Street Publishing (400,136 shares).
(3) Messrs. Shalom-Ben Dor, Yishai Steinhart and Gideon Stein are
shareholders, officers and directors of i-Labs, which is one of the
founders of GourmetMarket. Yishai Steinhart is the brother of Chanan
Steinhart.
(4) Director.
(5) Pursuant to Securities and Exchange Commission Rule 13d-3, C. Lawrence
Rutstein and Neil Swartz, both of whom are principal shareholders of
MCG Partners, Inc. ("MCG"), may each be deemed the beneficial owner of
the shares of common stock held by MCG.
- ----------------------------
21
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons
The following sets forth the names and ages of the Company's officers
and directors. The directors of the Company are elected annually by the
shareholders, and the officers are appointed annually by the board of directors.
Name Age Position
- ---- --- --------
Chanan Steinhart 43 President, Director
Gideon Shalom-Ben Dor 42 Director
Chanan Steinhart. Mr. Steinhart was a co-founder and president of
Arome, Ltd., a founder of GourmetMarket.Com, from 1992 until 1998. Arome, Ltd.,
is an Israeli corporation engaged in publishing culinary CD-ROMS. While at
Arome, Ltd., Mr. Steinhart was responsible for development of business partner
relationships and distribution of the Company's product in more than twenty
countries. Also while employed by Arome, he participated in the development of
Apple Computers e.commerce. Mr. Steinhart has received his undergraduate and law
degrees from Tel Aviv University in Israel.
Gideon Shalom-Ben Dor. From 1984 until 1989, Mr. Shalom-Ben Dor managed
research and development and localization projects at Yeda Computers, Israel. In
1990 he joined Apple Computers and was responsible for the shipment of the
Hebrew MacOperatingSystems. From 1994-1995 Mr. Shalom-Ben Dor was employed by
Pineapple Multimedia in Israel, where he managed various international projects
for large telecommunication companies. Since 1995 he has been president of
i-Labs. Mr. Shalom- Ben Dor received B.A. degrees in computer science and
economics from Bar-Ilan University in Israel and an M.B.A. degree from San Jose
State University in California, through the Apple Management Masters Program.
Board of Directors
- ------------------
All directors of the Company hold office until the next annual meeting
of stockholders or until their successors are elected and qualified.
The Company's By-Laws eliminate the personal liability of officers and
directors to the fullest extent permitted by Delaware Law. The effect of such
provision is to require the Company to indemnify the officers and directors of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was lawful. See "Description of Securities."
22
<PAGE>
There are no committees of the Board, which acts as the full Board with
respect to any matter. No director receives any compensation for serving as a
member of the Board of Directors.
23
<PAGE>
Item 6. Executive Compensation
The following tables and notes present for the three years ended
December 31, 1998, the compensation paid by the Company to the Company's chief
executive officer. No executive officer received compensation of at least
$100,000 in 1996, 1997 or 1998.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
------------------------------------------------------------------
Awards Payouts
- -------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Stock Underlying All Other
Principal Position Year Salary ($) Award(s)($) Options/SARs(#) Compensation($)
(a)(1) (b) (c)(2) (f) (g)(3) (i)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chanan Steinhart, 1998 $27,000 --- 75,000 ---
President, 1997 $8,000 --- --- ---
Treasurer and a 1996 $-0- --- --- ---
Director
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes information with respect to GourmetMarket.Com, a California
corporation merged into the Company in January 1999. No compensation
was paid to any officer or director of the Company (then known as
Sterling Partners, Inc.) during calender years 1996, 1997, and 1998.
(2) Includes $8,000 of compensation paid to Mr. Steinhart through Market
Street Publishing, a company controlled by Mr. Steinhart in 1997 and
$27,000 paid to Mr. Steinhart through Arome Publishing U.S., Inc., in
1998. Mr. Steinhart was not paid any salary directly by the Company
during the three years ended December 31, 1998.
(3) In January 1997 GourmetMarket.Com issued options for 75,000 shares of
GourmetMarket common stock exercisable at a price of $.01 per share for
a period of ten years. Pursuant to the merger agreement between
GourmetMarket and the Company, in January 1999 the options issued to
Mr. Steinhart were exchanged for an option issued by the Company for
the purchase of 729,000 shares of common stock at an exercise price of
$.001 per share. The option has been exercised in full. Also pursuant
to the merger agreement, Mr. Steinhart is entitled to receive a
performance-based option for the purchase of 900,000 shares of common
stock exercisable at $1.00 per share. These options are exercisable
over a period of ten years and vest over three years based on
performance criteria which remain to be determined by the Company.
- ------------------
As of December 31, 1998, Mr. Steinhart did not own any shares of the
Company's common stock.
24
<PAGE>
Item 7. Certain Relationships and Related Transactions
The following discussion includes certain transactions by both the
Company and GourmetMarket prior to their merger on January 29, 1999, and by the
Company after that date.
GourmetMarket was formed in November 1997 by i-Labs, Arome, Ltd., and
Janis Johnson. i-Labs and its wholly-owned subsidiary, i-Labs-e.commerce, Inc.,
are controlled by Gideon Shalom-Ben Dor, a Director of the Company, and Yishai
Steinhart, a brother of Chanan Steinhart, the Company's President. Chanan
Steinhart is a principal shareholder, officer and director of Arome, Ltd. The
founders of GourmetMarket had an oral agreement to provide capital, technology,
content and services as they deemed necessary on a start-up basis. In
consideration of their organizing GourmetMarket and their agreement to provide
capital, services, technology and content, GourmetMarket issued shares of its
common stock to each of its three founders. Prior to the merger of GourmetMarket
into the Company, GourmetMarket had 763,500 shares of its common stock
outstanding as follows: Arome , 123,500 shares; Janis Johnson, 140,000 shares;
and i-Labs, 500,000 shares. These shares were each exchanged for 9.72 shares of
common stock of the Company pursuant to the merger.
On September 25, 1998, Arome Publishing U.S., Inc., assigned to
GourmetMarket its copyright interest in certain wine programming content and
contracts, including an agreement with Anthony Diaz Blue, for 63,500 shares of
common stock. Also on September 25, 1998, Arome, Ltd., sold GourmetMarket
recipes, videos, articles and other content described under the caption
"Business--E-Commerce and the Specialty Food Industry" for 60,000 shares of
common stock and GourmetMarket's 7.5% promissory note in the amount $300,000
payable from 10% of the proceeds of any financing in an amount greater than
$1,500,000 completed after January 29, 1999. The note, which was assumed by the
Company upon its merger with GourmetMarket, is secured by certain intellectual
property and tangible personal property of the Company.
At December 31, 1998, GourmetMarket had issued options for the purchase
of 236,500 shares of its common stock at an exercise price of $.01 per share. Of
this total, 185,667 options were vested but had not been exercised. Pursuant to
the merger agreement between the Company and GourmetMarket, options for the
purchase of GourmetMarket common stock were exchanged for options to purchase
2,298,780 shares of the common stock of the Company. Among those persons whose
options were exchanged were Mr. Steinhart, who holds an option to purchase
729,000 shares of the Company's common stock; Josh Dickman, who at the time of
the completion of the merger was an officer of the Company and who holds an
option to purchase 194,400 shares of the Company's common stock; and Eric Ott,
who was a director of the Company at the time of the merger and who holds an
option to purchase 388,800 shares of the Company's common stock.
25
<PAGE>
In January 1999, MCG Partners, Inc., a newly-organized business
consulting firm ("MCG"), agreed with GourmetMarket and the Company that MCG
would assume certain obligations of Marblehead Capital Group, Inc., a firm which
had provided guidance to the Company and Marblehead in connection with their
proposed merger. Pursuant to that agreement, the Company issued MCG 100,000
shares of the Company's preferred stock in payment of the par value thereof and,
upon the completion of the merger on January 29, 1999, paid MCG a $100,000
merger completion fee. MCG subsequently converted all of its shares of preferred
stock into 6,030,000 shares of common stock. At the time of the merger, the
Company entered into a consulting agreement with MCG pursuant to which it
appointed MCG its exclusive agent through December 1, 2004, to provide financial
advisory services to the Company. As compensation for its services, MCG is paid
a monthly fee of $6,000 and will be entitled to receive a fee of 5% of the fair
market value of any merger or acquisition arranged for the Company through MCG,
together with a fee of ten percent (10%) of any debt financing arranged through
MCG.
On January 22, 1999, the Company entered into an employment agreement
with Chanan Steinhart effective as of the date of the merger between the Company
and GourmetMarket pursuant to which Mr. Steinhart is employed as the Company's
President and Chief Executive Officer. The agreement continues unless terminated
in accordance with its terms. The agreement provides for base compensation to
Mr. Steinhart of $150,000 per year and for a ten year non-statutory stock option
to purchase 900,000 shares of the Company's common stock at an exercise price of
$1.00, subject to vesting in accordance with criteria to be designated by the
Company's Board of Directors. As of the date of this Registration Statement, no
criteria had been designated and none of the options had vested. The salary
payable to Mr. Steinhart is subject to an agreement by MCG to purchase from Mr.
Steinhart common stock of the Company owned by him at a price of $1.00 per share
to the extent necessary to provide him with cash compensation of $150,000 in the
first year of his employment.
On February 1, 1999, the Company entered into a technical support
agreement with i-Labs pursuant to which i-Labs agreed to provide support and
maintenance of the Company's software in consideration of a monthly fee of
$10,000.
On February 1, 1999, the Company entered into an agreement with
Rainmaker Capital, LLC ("Rainmaker"), a company owned by Eric Ott, who was then
a director of the Company, pursuant to which Rainmaker agreed to provide
investment banking services to the Company in consideration of a retainer of
$5,000 per month for a period of twelve months ending February 1, 2000. Under
the agreement Rainmaker is entitled to a fee of five percent (5%) of proceeds of
any debt or equity financing, or merger or acquisition, for which it is
responsible. Also on or about February 1, 1999, the Company paid Rainmaker an
advisory fee of $50,000 for its advice to GourmetMarket in connection with
the merger.
26
<PAGE>
In March 1999 the Company issued 1,000,000 shares of common stock to
JNG & Associates, Inc., for cash of $50,000. JNG is wholly-owned by Joshua
Greenberg, the stepson of C. Lawrence Rutstein, who was then a director of the
Company and a principal shareholder, officer and director of MCG. In May 1999
the Company executed a revolving loan note with JNG & Associates, Inc., in the
maximum principal amount of $1,000,000. The Company had borrowed $340,000 from
JNG through August 31, 1999, pursuant to this note.
27
<PAGE>
Item 8. Description of Securities
The following statements do not purport to be complete and are
qualified in their entirety by reference to the detailed provisions of the
Company's Articles of Incorporation and Bylaws, which are exhibits to this
Registration Statement.
Common Stock
- ------------
The Company is authorized to issue 25,000,000 shares of Common Stock,
par value $.001 per share. As of September 2, 1999, the Company had 18,025,921
shares of common stock issued and outstanding. In January 1999, the Company's
shares were reverse-split on a 1 share for 4 share basis and the Company's
authorized shares of Common Stock were reduced at the same time from 100,000,000
shares to 25,000,000 shares.
The holders of shares are entitled to equal dividends and distributions
per share with respect to the Common Stock when, as and if declared by the Board
of Directors from funds legally available therefor. No holder of any shares has
a pre-emptive right to subscribe for any securities of the Company nor are any
common shares subject to redemption or convertible into other securities of the
Company. Upon liquidation, dissolution or winding up of the Company, and after
payment of creditors and preferred stockholders, if any, the assets will be
divided pro-rata on a share-for-share basis among the holders of the shares. All
shares now outstanding are fully paid, validly issued and non-assessable. Each
share is entitled to one vote with respect to the election of any director or
any other matter upon which shareholders are required or permitted to vote.
Holders of the Company's common shares do not have cumulative voting rights, so
that the holders of more than 50% of the combined shares voting for the election
of directors may elect all of the directors, if they choose to do so and, in
that event, the holders of the remaining shares will not be able to elect any
members to the Board of Directors. The election of directors is subject to a
voting provision of the merger agreement between the Company and GourmetMarket.
Under that provision the former holders of GourmetMarket common stock have the
right to elect three of the five board members unless the Company fails to meet
performance criteria not established as of the date of this Registration
Statement.
Preferred Stock
- ---------------
The Company has authorized 100,000 shares of $.001 par value preferred
stock, all of which are designated Series A Preferred Stock ("Preferred Stock")
and none of which were issued and outstanding at September 1, 1999.
28
<PAGE>
Each holder of shares of Preferred Stock is entitled to the number of
votes equal to the number of whole shares of common stock into which the shares
of preferred stock are convertible. Except as otherwise provided by law, holders
of Preferred Stock vote together with holders of Common Stock as a single class.
The consent of not less than two-thirds of the outstanding shares of Preferred
Stock, voting separately as a class, is necessary for the Company to sell all or
substantially all of its assets or to effect any merger, consolidation, share
exchange or similar transaction to which the Company is a party, or to enter
into any other transaction resulting in the acquisition of a majority of the
outstanding voting stock of the Company by another corporation or entity.
Holders of the Preferred Stock have the right to convert their shares
into shares of Common Stock on the basis of 60.3 shares of Common Stock for each
share of Preferred Stock. The conversion rate is subject to adjustment for
certain stock splits and combinations, a stock dividend or distribution by the
Company, and certain other changes in the Company's capital structure, including
any change on merger or reorganization.
The holders of Preferred Stock have a liquidation preference equal to
$.10 per share of Preferred Stock, plus accrued and unpaid dividends, if any,
and interest thereon. The Preferred Stock does not have a dividend preference.
The Preferred Stock has no sinking or redemption fund.
Dividend Policy
- ---------------
The Company has not paid any dividend to its shareholders for any class
of stock and does not anticipate paying any such dividend in the foreseeable
future.
Transfer Agent
- --------------
The Company's registrar and transfer agent is Florida Atlantic Stock
Transfer, 7130 Knob Hill Road, Tamarac, Florida 33321.
Stock Option Plan
- -----------------
The Company has adopted a 1999 Stock Option Plan and has reserved
4,800,000 Shares of Common Stock for issuance upon the exercise of options which
the Board of Directors has the authority to grant to key employees, officers,
directors and consultants of the Company as part of the Plan. To date the
Company has issued 1,506,600 incentive stock options and 792,180 non-statutory
stock options outstanding, none of which have been exercised. All outstanding
options are exercisable at $.001 per share of Common Stock. The vesting
provisions and other material provisions of the options vary.
29
<PAGE>
PART II
-------
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
The Company's Common Stock is traded on the NASD OTC Bulletin Board
under the symbol WINE.
The following bid quotations have been reported for the period
beginning January 15, 1999, when the Company's common stock commenced trading on
the OTC Bulletin Board, and ending June 30, 1999. The Company's common stock was
not quoted on the OTC Bulletin Board prior to January 15, 1999.
Bid Prices
----------
Period High Low
------ ---- ----
Quarter Ended March 31, 1999 5.7500 0.3750
Quarter Ended June 30, 1999 2.9375 0.9375
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission. Such quotes are not necessarily representative of
actual transactions or of the value of the Company's securities, and are in all
likelihood not based upon any recognized criteria of securities valuation as
used in the investment banking community.
The Company has been advised that eight member firms of the NASD are
currently acting as market makers for the common stock. There is no assurance
that an active trading market will develop which will provide liquidity for the
Company's existing shareholders or for persons who may acquire common stock
through the exercise of warrants.
As of September 2, 1999, there were 109 holders of record of the
Company's common stock. Certain of the shares of common stock are held in
"street" name and may, therefore, be held by several beneficial owners.
As of September 2, 1999, there were 18,025,921 shares of Common Stock
issued. Of those shares 15,950,920 shares are "restricted" securities of the
Company within the meaning of Rule 144(a)(3) promulgated under the Securities
Act of 1933, as amended, because such shares were issued and sold by the Company
in private transactions not involving a public offering.
In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (in general, a person who has a control relationship with the
company) who has owned restricted securities of common stock beneficially for at
least one year is entitled to sell, within any three-month period, that number
of shares of a class of securities that does not exceed the greater of (i) one
30
<PAGE>
percent (1%) of the shares of that class then outstanding or, if the common
stock is quoted on NASDAQ, (ii) the average weekly trading volume of that class
during the four calendar weeks preceding such sale. A person who has not been an
affiliate of the company for at least the three months immediately preceding the
sale and has beneficially owned shares of common stock for at least two (2)
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
No prediction can be made as to the effect, if any, that future sales
of shares of common stock or the availability of common stock for future sale
will have on the market price of the common stock prevailing from time-to-time.
Sales of substantial amounts of common stock on the public market could
adversely affect the prevailing market price of the common stock.
The Company has not paid a cash dividend on the common stock since
current management joined the Company in 1996. The payment of dividends may be
made at the discretion of the Board of Directors of the Company and will depend
upon, among other things, the Company's operations, its capital requirements,
and its overall financial condition.
Item 2. Legal Proceedings
The Company is not a party to any legal proceeding.
Item 3. Changes In and Disagreements With Accountants
None.
Item 4. Recent Sales of Unregistered Securities.
In December 1998 the Company issued 2,900,000 shares of its common
stock (calculated on a pre-reverse stock split basis) for a subscription
receivable of $29,000. Shares were issued to a sophisticated investor pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act").
In January 1999 the Company issued 100,000 shares of its Series A
Convertible Preferred Stock to MCG Partners, Inc., a related party and a
sophisticated investor, for a subscription receivable of $10,000 pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act.
31
<PAGE>
In January 1999 the Company issued 950,000 shares of common stock for
cash consideration of $950,000 to sophisticated investors pursuant to the
exemption from registration provided by Regulation D, Rule 504.
In March 1999 the Company issued 1,000,000 shares of common stock for
cash consideration of $50,000 to a sophisticated investor pursuant to the
exemption from registration provided by Regulation D, Rule 504.
Item 5. Indemnification of Directors and Officers
The statutes, charter provisions, by-laws, contracts or other
arrangements under which controlling persons, directors or officers of the
Company are insured or indemnified in any manner against any liability which may
occur in such capacity are as follows:
The General Corporation Law of Delaware (the "DGCL") provides that a
corporation may limit the liability of each director to the corporation or its
stockholders for monetary damages except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, and (iv) for any transaction from which the
director derives an improper personal benefit. The Company's by-laws provide for
the elimination and limitation of the personal liability of directors of the
Company for monetary damages to he fullest extent permitted by the DGCL. The
effect of this provision is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligence or grossly
negligent behavior), except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
ro any stockholder to seek non-monetary relief such as an injunction or recision
in the event of a breach of a director's duty of care. The by-laws also provide
that the Company shall, to the full extent permitted by the DGCL, as amended
from time-to-time, indemnify and advance expenses to each of its currently
acting and former directors, officers, employees and agents.
32
<PAGE>
PART F/S
--------
Index to Financial Statements
-----------------------------
GourmetMarket.Com, Inc. (formerly GourmetMarket.Com)
- ----------------------------------------------------
Report of Independent Certified Public
Accountants.................................................................F-2
Balance Sheet - June 30, 1999 (unaudited)
and December 31, 1998.......................................................F-3
Statement of Operations - Six Months Ended
June 30, 1999 and 1998 (unaudited), Year Ended
December 31, 1998, and From November 5, 1997
(date of inception) to December 31, 1997....................................F-4
Statement of Stockholders Equity - From November
5, 1997 (date of inception) to December 31, 1997,
Year Ended December 31, 1998, and Six Months
Ended June 30, 1999 (unaudited).............................................F-5
Statement of Cash Flows - Six Months Ended
June 30, 1999 and 1998 (unaudited), Year Ended
December 31, 1998, and From November 5, 1997
(date of inception) to December 31, 1997....................................F-6
Notes to Financial Statements................................................F-7
Sterling Partners, Inc.
- -----------------------
Report of Independent Certified Public
Accountants................................................................F-19
Balance Sheet - January 29, 1999 (unaudited)
and December 31, 1998......................................................F-21
Statement of Operations - Twenty-Nine Days Ended
January 29, 1999 (unaudited) and Years Ended
December 31, 1998 and 1997.................................................F-22
33
<PAGE>
Statement of Stockholders Equity - Twenty-Nine
Days Ended January 29, 1999 (unaudited) and
Years Ended December 31, 1998 and 1997.....................................F-23
Statement of Cash Flows - Twenty-Nine Days
Ended January 29, 1999 (unaudited) and Years
Ended December 31, 1998 and 1997...........................................F-25
Notes to Financial Statements...............................................F-26
34
<PAGE>
PART III
Item 1. Index to Exhibits
Exhibit No. Description
- ----------- -----------
2.1* Merger Agreement among Sterling Partners Inc.,
GourmetMarket.Com, and Marblehead Capital Group, Inc.
3.1* Articles of Incorporation, as amended
3.2* By-Laws
10.1* 1999 Stock Plan
10.2* Agreement with Rainmaker Capital dated February 1, 1999
10.3* Technical Support Agreement with i-Labs, Ltd., dated
February 1, 1999
10.4* Letter Agreement with Richmond House Marketing and
Promotions dated February 15, 1999
10.5* Consulting Agreement, as amended, dated as of
January 29, 1999
10.6* Agreement with At Home Corporation dated April 29, 1999
10.7* Shopping Channel Promotional Agreement dated May 6, 1999
10.8* Employment Agreement with Chanan Steinhart dated
January 22, 1999
10.9* Assignment and Transfer Agreement dated
September 25, 1998
10.10* Development and License Agreement dated March 31, 1997
10.11* Assignment Agreement dated November 6, 1997
10.12* Stock Purchase and Assignment Agreement dated
September 25, 1998
* Previously Filed.
Item 2. Description of Exhibits
None.
35
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
GOURMETMARKET.COM, INC.
Dated: October 12, 1999 By: /s/ Chanan Steinhart
-------------------------- --------------------------------
Chanan Steinhart, President
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GOURMETMARKET.COM, INC. (formerly GourmetMarket.com)
Report of Independent Certified Public Accountants F-2
Balance Sheet - June 30, 1999 (unaudited) and December 31, 1998 F-3
Statement of Operations - Six Months Ended June 30, 1999 F-4
and 1998 (unaudited), Year ended December 31, 1998,
and From November 5, 1997 (date of inception) to December 31, 1997
Statement of Stockholders' Equity - From November 5, 1997 F-5
(date of inception ) to December 31, 1997,
Year ended December 31, 1998, and
Six Months Ended June 30, 1999 (unaudited)
Statement of Cash Flows - Six Months Ended June 30, 1999 F-6
and 1998 (unaudited), Year ended December 31, 1998,
and From November 5, 1997 (date of inception) to December 31, 1997
Notes to financial statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC CERTIFIED ACCOUNTANTS
To the Shareholders and
Board of Directors
GourmetMarket.Com, Inc.
We have audited the accompanying balance sheet of GourmetMarket.com, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year ended December 31, 1998, and from November
5, 1997 (date of inception) to December 31, 1997. 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 audits 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 GourmetMarket.com, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year ended December 31, 1998, and from November
5, 1997 (date of inception) to December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
GourmetMarket.com, Inc. will continue as a going concern. As discussed in note 2
to the financial statements, the Company has suffered recurring losses from
operations and has working capital and total stockholders' deficiencies at
December 31, 1998. Furthermore, at December 31, 1998 the Company could not
demonstrate that it had sufficient liquidity to meet its routine operating costs
for the next year. These circumstances raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard to
these matters are described in note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Margolies, Fink and Wichrowski
June 5, 1999
Pompano Beach, Florida
F-2
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS June 30,
1999 December 31
(unaudited) 1998
------------ --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 65,086 $ 41,378
Accounts receivable 28,802 1,222
------------ ------------
Total current assets 93,888 42,600
Property and equipment
less accumulated depreciation (Notes 1 & 2) 40,700 673
License agreements, less accumulated amortization 514,173 405,350
Other assets 1,365 1,589
------------ ------------
$ 650,126 $ 450,212
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 602,705 $ 300,000
Accounts payable and accrued expenses 261,540 69,083
------------ ------------
Total current liabilities 864,245 369,083
------------ ------------
Long-term debt less current maturities 14,678 -
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock (Series A), par value $.001
authorized 10,000,000, issued 0 - -
Common stock, $.001 par value; authorized
25,000,000 shares;16,713,720 and 7,421,220 shares
(restated) issued and
outstanding at March 31, 1999
and December 31, 1998, respectively 16,189 764
Additional paid-in capital 2,615,088 881,662
Retained deficit (2,821,074) (801,297)
------------ ------------
(189,797) 81,129
Less subscriptions receivable (39,000) -
------------ ------------
Total stockholders' equity (deficit) (228,797) 81,129
------------ ------------
$ 650,126 $ 450,212
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-3
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
From
Six Months Six Months November 5,
Ended Ended Year 1997 (date of
June 30, June 30, Ended inception) to
1999 1998 December 31, December 31,
(unaudited) (unaudited) 1998 1997
---------- ---------- ---- ----
<S> <C> <C> <C> <C>
Sales $ 293,017 $ 2,787 $ 132,693 $ 1,000
Cost of sales 304,801 2,471 141,537 538
----------- ------------ ------------ ------------
Gross profit (loss) (11,784) 316 (8,844) 462
----------- ------------ ------------ ------------
Selling, general and administrative expenses:
Payroll and payroll taxes 240,769 127,637 264,811 30,802
Stock and option based compensation 956,570 100,000
Occupancy & office expenses 26,158 16,583 41,368 7,240
Contract services and professional fees 535,244 87,211 166,672 24,666
Internet servicing expenses 72,704 21,754 28,652 2,144
General and administrative expenses 118,215 21,845 48,508 11,191
Advertising and promotion 265,975 28,866 38,720 2,614
Depreciation and amortization 2,464 224 567 203
----------- ------------ ------------ ------------
2,218,099 304,120 689,298 78,860
----------- ------------ ------------- -------------
Income (loss) from operations (2,229,883) (303,804) (698,142) (78,398)
----------- ------------ ------------ ------------
Other income (expenses):
Interest expense (16,672) (24,757)
Loan extension fee (40,000) - - -
----------- ------------ ------------ ------------
Total other income (expenses) (56,672) - (24,757) -
----------- ------------ ------------ ------------
Income (loss) before extraordinary items (2,286,555) (303,804) (722,899) (78,398)
Extraordinary item - gain on extinguishment
of debt (net of income taxes of $90,700) - - 176,078 -
----------- ------------ ------------ ------------
Income (loss) before income taxes (2,286,555) (303,804) (546,821) (78,398)
Income tax expense (benefit) - - 90,700 -
------------ ------------ ------------ ------------
Net loss $(2,286,555) $ (303,804) $ (456,121) $ (78,398)
=========== ============ ============ ============
Net loss per common share:
Basic:
Net loss per common share $ (.15) $ (.04) $ (.06) $ (.01)
=========== ============ ============ ============
Weighted average shares outstanding (restated) 14,902,933 7,421,220 7,421,220 7,421,220
=========== ============ ============ ============
Diluted:
Net loss per common share $ (.15) $ (.04) $ (.06) $ (.01)
=========== ============ ============ ============
Weighted average shares outstanding (restated) 14,902,933 7,421,220 7,421,220 7,421,220
=========== ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-4
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
Number of Par paid-in Subscriptions Retained
Shares Value Capital Receivable (deficit) Total
------ ----- ------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, November 5, 1997
(Date of inception) 10,000 $ 10 $ - $ - $ - $ 10
Net loss - - - - (78,398) (78,398)
---------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1997 10,000 10 - (78,398) (78,388)
Issuance of common for cash 138,000 138 138
Issuance of stock in exchange for
rights & services 223,500 224 223,276 223,500
Issuance of stock in exchange for
debt extinguishment 392,000 392 391,608 392,000
Net loss - - - - (456,121) (456,121)
---------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1998 763,500 764 614,884 - (534,519) 81,129
Shares held by former Sterling
Partners, Inc. shareholders 8,230,000 7,705 945,424 (39,000) 914,129
Issuance of additional shares
Pursuant to merger agreement 6,657,720 6,658 (6,658) -
Proceeds of private placement 1,000,000 1,000 999,000 1,000,000
of stock
Acquisition of Travlang 62,500 62 62,438 62,500
Net loss - - - - (2,286,555) (2,286,555)
---------- --------- ----------- ----------- ----------- ------------
Balance, June 30, 1999 (unaudited) 16,713,720 $ 16,189 $ 2,615,088 $ (39,000) $(2,821,074) $ (228,797)
========== ========= =========== =========== =========== ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-5
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
From
Six Months Six Months November 5,
Ended Ended Year 1997 (date of
June 30, June 30, Ended Inception) to
1999 1998 December 31, December 31,
(unaudited) (unaudited) 1998 1997
---------- ---------- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,286,555) $ (303,804) $ (456,121) $ (78,398)
----------- ----------- ----------- -----------
Adjustments to reconcile net income to net:
cash provided by (used for) operating activities
Depreciation and amortization 51,958 224 18,718 203
Non cash compensation 956,570
Changes in assets and liabilities:
Accounts receivable (27,580) 523 (222) (1,000)
Accounts payable and accrued expenses 185,887 10,244 63,656 5,427
----------- ----------- ----------- -----------
Total adjustments 1,166,835 10,991 82,152 4,630
----------- ----------- ----------- -----------
Net cash used for operations (1,119,720) (292,813) (373,969) (73,768)
----------- ----------- ----------- -----------
Net cash used in investing activities:
Acquisition of license agreements and other assets (12,500) (2,240)
Purchase of equipment (42,127) (1,564) (793) -
----------- ----------- ----------- -----------
Net cash used for investing activities (54,627) (1,564) (793) (2,240)
----------- ----------- ----------- -----------
Cash flows from (used in )financing activities
Proceeds from notes payable and advances 275,000 340,000 100,000
Payments of long term debt (41,074)
Proceeds from issuance of common stock 964,129 - 392,138 10
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,198,055 340,000 392,138 100,010
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 23,708 45,623 17,376 24,002
Cash and cash equivalents, beginning of period 41,378 24,002 24,002 -
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 65,086 $ 69,625 $ 41,378 $ 24,002
=========== =========== =========== ===========
Supplemental disclosure:
Acquisition of license agreements for stock $ 62,500 $ - $ 123,500 $ -
=========== =========== =========== ===========
Issuance of common stock for services $ 956,570 $ - $ 100,000 $ -
=========== =========== =========== ===========
Acquisition of license agreements for debt $ 83,317 $ - $ 300,000 $ -
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-6
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of presentation
Gourmet Market.com was formed on November 5, 1997. The Company is an online
marketplace specializing in the sale of premium culinary products, including
wine, chocolates, cigars, and kitchenware. The Company currently owns and
operates two web sites, GourmetMarket.com and Travlang.com. Gourmet's mission is
to establish itself as the leading online culinary community, providing an
unmatched selection of the finest gourmet products, resources and expertise.
On January 29, 1999, GourmetMarket.com, (a California corporation), was acquired
by Sterling Partners, Inc., a non-operating Delaware corporation, in a reverse
merger, which was accounted for as a recapitalization in accordance with APB 16.
At the same time Sterling Partners, Inc. changed its name to GourmetMarket.Com,
Inc. (a Delaware corporation) and emerged as the surviving Corporation.
Cash equivalents
Cash equivalents are short-term, highly liquid investments readily convertible
to known amounts of cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates.
Property and equipment
Property and equipment are carried at cost. The Company provides depreciation
for financial purposes over the estimated useful lives of fixed assets using the
straight-line method. Upon retirement or sale of fixed assets, their net book
value is removed from the accounts and the difference between such net book
value and proceeds received is recorded in income. Expenditures for maintenance
repairs are charged to expense; renewals and improvements are capitalized.
Revenue recognition
The Company recognizes income, and expenses when the merchandise is shipped.
F-7
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company accounts for income taxes according to Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes" which requires an
asset and liability approach to financial accounting for income taxes. Deferred
income tax assets and liabilities are computed annually for the difference
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period, plus or minus the
change during the period in deferred tax assets and liabilities.
Net income (loss) per share
Net loss per share is determined by dividing net loss by the weighted average
common shares outstanding. The outstanding common shares reflect the
reorganization of Gourmet Market.com. Common stock equivalents, consisting of
stock options in fiscal 1998 and 1999, were antidilutive and were not included
in the calculation of net loss per share. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which
simplifies the accounting for earnings per share by presenting basic earnings
per share including only outstanding common stock and diluted earnings per share
including the effect of dilutive common stock equivalents. The Company's basic
and diluted earnings per share are the same, as the Company's common stock
equivalents are dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These assumptions, if not realized, could 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 revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, primarily consisting of cash and cash
equivalents, investments, accounts receivable, note receivable form related
party, accounts payable, bank line of credit payable, and long-term debt,
approximate fair value due to their short-term nature or interest rates that
approximate market.
F-8
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value of
long lived assets, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the assets carrying amount
to determine if a write down to market value or discounted cash flows is
required.
Stock Based Compensation
Statement of Financial Accounting Standard no. 123 " Accounting for Stock Based
Compensation" is effective for fiscal years beginning after December 15, 1995.
Statement No. 123 provides companies with a choice to follow the provisions of
No. 123 in the determination of stock based compensation expense or to continue
with the provisions of APB25, " Accounting for Stock issued to employees". The
Company has elected to follow APB 25 and will provide pro forma disclosure as
required by statement No.123 in the notes to the financial statements.
2. MANAGEMENT'S PLAN
The Company has incurred significant losses and negative cash flows from
operations over the last seventeen months as a result of the development of its
business operations. These losses have been funded primarily with the issuance
of common stock through the Company's private placement of stock in January
1999. At June 30, 1999, the Company had net cash reserves of $65,086.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However management of the Company is
continually negotiating with various outside entities for additional working
capital. From January 31, 1999 to June 30, 1999 the Company has raised $275,000
through additional debt funding.
To date, management has been able to raise the capital necessary to continue the
implementation of the Company's fiscal year 1999 operating plan, however the
Company's ability to successfully implement its plans and to improve its
operations in the future is dependent upon a number of factors, some of which
are beyond its control. There can be no assurance that the Company's operating
results or financial conditions will improve in fiscal year 1999.
F-9
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
3. EQUIPMENT
Equipment consists of the following:
June 30,
1999 December 31,
(unaudited) 1998 Lives
----------- ---- -----
Equipment $ 42,920 $ 793 5-7 years
Less accumulated depreciation (2,220) (120)
-------- --------
$ 40,700 $ 673
======== ========
Depreciation expense for the year ended December 31, 1998, and from November 5,
1997 (date of inception) to December 31, 1997, were $120,and $0, respectively.
4. LICENSE AGREEMENTS
License agreements consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 December 31, Amortization
(unaudited) 1998 Period
----------- ---- ------
<S> <C> <C> <C>
Arome, Ltd. Internet content agreement $ 360,000 $ 360,000 7 years
America's Wine List Program (AWL) 63,500 63,500 3 years
Travlang.com 158,317 - 5 years
---------- -----------
581,817 423,500
Less accumulated amortization (67,644) (18,150)
---------- -----------
$ 514,173 $ 405,350
========== ===========
</TABLE>
On September 25, 1998 the Company entered into a transfer agreement with Arome
Ltd., a related party, to acquire certain copyright interest, trademark interest
in photographs, recipes, video, and articles making up content for internet
publication. The internet content was acquired for $360,000 through the issuance
of a note payable in the amount of $300,000, and 60,000 shares of the Company's
common stock valued at $1.00 per share, the fair market value at September 25,
1998.
F-10
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
4. LICENSE AGREEMENTS (continued)
On September 25, 1998, the Company entered into a stock purchase and assignment
agreement with Arome Publishing U.S., Inc., a related party, to acquire Arome
Publishing's interest in America's Wine List, (AWL) a commercial internet
program selling wine, and wine services, and presenting wine and wine content to
a broad customer base. America's Wine Store (AWS) a comprehensive wine store on
the internet, including wine reviews and tasting notes by Anthony Dias Blue.
America's Wine List Program content was acquired for 63,500 shares of the
Company's common stock valued at $1.00 per share, the fair market value at
September 25, 1998.
On February 8, 1999, the Company acquired all the contracts, rights and interest
in Travlang.com., a up to date repository on the internet of information
regarding travel, and travel related agendas for traveling both domestically and
abroad. Travlang.com includes language translations for travelers in more than
70 languages. real-time currency exchanges, and a date bases of hotels in more
tan 120 countries from which travelers can book reservations.
Travlang's content rights & interest were acquired for $95,817 in cash and notes
payable, and 62,500 shares of the Company's common stock valued at $1.00 per
share totaling $158,317.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
June 30,
1999 December 31
(unaudited) 1998
----------- ----
Accounts payable trade $ 234,130 $ 62,224
Accrued expenses 20,840 6,859
---------- -----------
$ 254,970 $ 69,083
========== ===========
6. LEASES
The Company leases its office facilities for approximately $2,215 on a month to
month basis. Rent expense incurred by the Company for the year ended December
31, 1998, and from November 5, 1997 (date of inception) to December 31, 1997 was
$3,082, and $23,805, respectively.
F-11
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
7. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
----------- ----
<S> <C> <C>
7.5% note payable, repayment to be made from any debt or equity $ 300,000 $ 300,000
financing which the Company completes after January 29, 1999 greater
than $1,500,000, at 10% of the gross proceeds, plus 10% of the gross
financing fees in excess of $1,500,000 until the balance has been paid
in full. Secured by certain copyright interest, trademark interest in
photographs, recipes, video, and articles making up content for
internet publication
7.0% note payable, original balance $46,250 payable in twenty equal 42,383
monthly installments of $2,500 principal and interest, commencing four
months from date of note
8% revolving loan payable, due on demand or if earlier upon the 225,000
Company's receipt of gross proceeds of equity or debt financing
aggregating more than $3,000,000 calculated from the date on issuance,
unsecured
10% note payable, principal and interest due on August 31, 1999 50,000
- -
----------- -----------
617,383 300,000
Less current maturities 602,705 300,000
----------- -----------
$ 14,678 $ -
=========== ===========
</TABLE>
F-12
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as the result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $535,000 at December 31, 1998 to
offset future taxable income. Such carryforwards expire in years beginning in
2013. The deferred tax asset recorded by the Company as a result of these tax
loss carryforwards is approximately $182,000, at December 31, 1998. The Company
has reduced the deferred tax asset resulting from its tax loss carryforwards by
a valuation allowance of an equal amount as the realization of the deferred tax
asset is uncertain. The net change in the deferred tax asset and valuation
allowance from January 1, 1998 to December 31, 1998 was an increase of
approximately $155,000.
9. STOCKHOLDERS' EQUITY, AND MERGER
Stockholders equity
On June 11, 1998 (effective November 5, 1997) the Company entered into a
restricted stock purchase agreement with the Company's founders to issue 10,000
shares with a par value of $.001 of the Company's for $10.
On July 1, 1998 the Company issued an additional 138,000 shares of the Company's
common stock with a par value of $.001 to one of the Company's founders for
$138.
On September 25, 1998 the Company entered into a Stock Purchase and Assignment
Agreement with Arome Publishing, Inc., a related party to acquire Arome
Publishing's interest in America's Wine List, (AWL) a commercial internet
program, selling wine, wine services, and presenting wine and wine content to a
broad customer base. The Assignment of the interest was acquired for 63,500
shares of the Company common stock valued at $1 per share, the fair market value
at September 25, 1998.
On December 1, 1998 the Company entered into a Stock Purchase and Assignment
Agreement with Arome Ltd. a related party to acquire from Arome Ltd. certain
copyright interest, trademark interest in photographs, recipes, video, and
articles making up content for internet publication. The internet content was
acquired for $360,000 by issuance of a note payable in the amount of $300,000
and 60,000 shares of the Company's common stock valued at $1 per share, the fair
market value at September 25, 1998.
On December 1, 1998 the Company entered into Stock Purchase and Assignment
Agreement with i-Labs Ltd. a related party, for the issuance of 100,000 shares
of the Company's common stock. The stock was issued in consideration for the
development services provided during 1998 by i-Labs Ltd. in connection with the
design and development of the Company's website on the internet. The services
provided were valued at $100,000 and were expensed during 1998.
F-13
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCKHOLDERS' EQUITY, AND MERGER (continued)
On December 1, 1998, the Company entered into another Stock Purchase and
Assignment Agreement with i-Labs Ltd., a related party, for the issuance of
392,000 shares of the Company's common stock as forgiveness of a note payable
and accrued interest totaling $658,778. In connection with this transaction the
Company has record a net gain on extinguishment of debt in the amount of
$176,078 (less income taxes of $90,700). The gain has been recorded at the
excess of the debt being extinguished ($658,778) less the fair value ($1.00 per
share) of the common stock exchanged at December 31, 1998.
On January 29, 1999, GourmetMarket.com, a California corporation, was acquired
by Sterling Partners, Inc., a Delaware corporation in a reverse merger, which
was accounted for as a recapitalization in accordance with to APB 16 whereby,
the stockholders of GourmetMarket.com received 7,421,220 common shares of
Sterling Partners, Inc in exchange for their 763,500 shares of
GourmetMarket.com. At the same time Sterling Partners, Inc. changed its name to
GourmetMarket.com, Inc. (a Delaware corporation) and emerged as the surviving
Corporation.
On February 8, 1999, the Company acquired all the contracts, rights and interest
in Travlang.com (see Note 8) for $95,817 in cash and notes payable, and 62,500
shares of the Company's common stock valued at $1 per share totaling.
On March 26, 1999, the Company issued in a private placement 1,000,000 shares of
common stock for $50,000 in cash to a related party. As of the date of the
transaction the fair market value of the stock approximated $1 per share. The
Company has recorded compensation expense of $950,000 due to the issuance of the
common stock at a discount from its fair market value.
Merger
The registrant, previously Sterling Partners, Inc., was incorporated in April
1993 under the laws of the state of Delaware. Prior to the transaction described
below, Sterling Partners, Inc. was engaged in the business of acquiring tax lien
certificates of redemption from various county governments located in Maryland.
In May 1996 the Company acquired Sterling Real Estate Company, a Delaware
corporation, which owned a commercial property in Cecil County, Maryland. The
property was subsequently sold and in October 1998, the Company distributed all
of its shares in its subsidiary, then known as Sterling Global, Ltd. to the
Company's shareholders. As of the date of the transaction described below the
Company was not engaged in any business.
As reflected in the Statement of Stockholders Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at the time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of
GourmetMarket.com were recorded at their net book value at the date of the
merger.
F-14
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
10. RELATED PARTY TRANSACTIONS
On January 22, 1999 the Company entered into a contract with MCG Partners, Inc.
(MCG) a merchant banking firm, and significant shareholder of Sterling Partners,
Inc, (Sterling), to provide capital and strategic investment banking advice see
(Note 12). In connection with this agreement MCG caused Sterling to commence an
offering of Sterling common stock pursuant to Securities and Exchange Commission
Rule 504 to raise $950,000 by January 31, 1999.
On February 1, 1999 the Company entered into a one year technical support
agreement with i-Labs Ltd. a related party which calls for monthly payments of
$10,000 plus reimbursement of related travel expenses.
11. STOCK OPTIONS
At December 31, 1998, the Company has granted 236,500 stock options at an
exercise price of $.01; of this total, 120,286 stock options were vested but not
exercised. Pursuant the merger agreement with Sterling Partners, Inc., dated
January 29, 1999, persons holding options for the purchase of GourmetMarket.com
exchanged their options, for options, to purchase 2,298,780 of
GourmetMarket.com, Inc. (formerly Sterling Partners, Inc.) common stock.
Transactions and other information relating to the plans are summarized as
follows:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
------------------------- -------------------------
Weighted Weighted
Shares Ave. Price Shares Ave. Price
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997 65,000 $ .01 21,667 $ .01
Granted during 1998 171,500 .01 97,334 .01
---------- ----------
Outstanding at December 31, 1998 236,500 .01 119,001 .01
Option conversion 2,062,280 .01 1,037,690 .01
Granted during six months
ended June 30, 1999 100,000 1.00 -
---------- ----------
Outstanding at June 30, 1999 2,398,780 .05 1,156,691 .01
========== ==========
</TABLE>
F-15
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
11. STOCK OPTIONS (continued)
Pro forma Disclosure
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" issued
in October 1995. Accordingly, no compensation cost has been recognized for its
fixed stock option plans with respect to its employees. Had compensation cost
for the Company's fixed-based compensation plan been determined based on the
fair value at the grant dates for awards under this plan consistent with the
method of SFAS 123, the Company's pro forma net income, and pro forma net income
per share would have been as indicated below:
1998 1997
---- ----
Net loss, as reported $ (456,121) $ (78,398)
============ ===========
Net loss, pro forma $ (573,932) $ (78,398)
============ ===========
Net income per common share:
Basic and dilutive
Net loss, as reported $ (.06) $ (.01)
============ ===========
Net loss, pro forma $ (.08) $ (.01)
============ ===========
For purposes of the preceding pro forma disclosures, the weighed average fair
value of each option has been approximated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998and 1997; no dividend yield, volatility of
4.8% and 0%, risk free interest rate of 6.0% for both years, and an expected
term of ten years. No options were vested during the period ended December 31,
1997.
12. COMMITMENTS AND CONTINGENCIES
On January 15, 1999 the Company entered into a contract with Richmond House,
Inc. to provide business development and sales and marketing services. The
contract is for one year at $10,000 per month plus a $2,000 per month overhead
charge. Either party may terminate this agreement with a sixty day written
notice.
F-16
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
12. COMMITMENTS AND CONTINGENCIES (continued)
On January 22, 1999 the Company entered into a contract with MCG Partners, Inc.,
a merchant banking firm, and significant shareholder of Sterling Partners, Inc.,
to provide capital and strategic investment banking advice. The consulting
agreement provided for an upfront fee of $100,000 at the closing on the
Company's merger with Sterling Partners Inc., and a monthly fee of $6,000
commencing February 1, 1999 through December 1, 2004, and a 5% fee on the value
of any mergers or acquisitions arranged by MCG. This agreement may be terminated
by mutual consent of the Company and MCG at any time or by either party upon a
material default by the other party.
On February 1,1999 the Company entered into an agreement with Rainmaker Capital,
Inc., a consulting group to assist in business development, capital sourcing,
and interim financial consulting. The agreement is for twelve months, at $5,000
per month.
On January 22, 1999 the Company entered into an employment agreement with its
President and Chief Executive officer which provides for compensation of
$150,000 per year. Additionally the Company agreed to grant the president a
ten-year non-statutory stock option to purchase 900,000 shares of the Company's
common stock at an exercise price of $1.00 per share (the "Stock Option"). The
stock option shall vest upon the satisfaction of certain performance criteria,
which shall be unanimously approved by the Company's board of directors (the
"Performance Criteria").
The Company has entered into relationships with major internet portals including
AOL, MSN, Yahoo shopping, Excite @home and Infoseek. Additionally the Company
has created partnership relationships with content and commerce companies such
as Greeting Cards, Amazon.com, Mindspring and others. The terms of these
agreements vary. The contacts with AOL and Excite @home (see note 13) are the
only contracts that individually are material to the Company.
13. SUBSEQUENT EVENTS
On April 29, 1999 the Company entered into a two year agreement with @Home
Network. The terms of the agreement call for @Home Network to provide
GourmetMarket.com, Inc. with persistent channel navigation, which will include
access to the Food SubChannel Button, GourmetMarket.com Branding, Shopping
Channel access along with marketing and promotional assistance throughout its
network. The value of the services to be provided by @Home Network for
development, promotion, and carriage during the term of this agreement are
$800,000 in year one, and $1,450,000 in year two. All payments made during the
Contract Year will become due in quarterly installments. Either party has the
right to terminate the agreement at its discretion on or after the one-year
anniversary date, or upon 30 days written notice, if the other party fails to
cure a material breach under the agreement. Payments per the terms of this
contract will be expensed as advertising costs during the period that the
services are provided. As the date of these financial statements the above
agreement is in the process of being renegotiated.
F-17
<PAGE>
GOURMETMARKET.COM, INC.
(formerly GourmetMarket.com)
NOTES TO FINANCIAL STATEMENTS (Continued)
13. SUBSEQUENT EVENTS (continued)
During May 1999 the Company entered into a $1,000,000 revolving loan agreement
with a related party. As of June 30, 1999, the related party has advanced
$225,000 under this agreement. The revolving loan agreement bears interest at
8%. The note is due on demand, or earlier, upon the Debtor's successful receipt
of gross proceeds of equity or debt financing aggregating more than $3,000,000
calculated commencing from the date of the note.
Additionally during May 1999 the Company entered into an agreement with America
Online (AOL), a provider of content and internet services. The agreement
provides that the Company will have a promotional placement with AOL's shopping
channel and that the Company and AOL will cross promote each other web sites.
The agreement is for a ten-month period commencing in September 1999. The
Company will pay AOL $104,405 per this agreement, payable in three equal
installments. Payments per the terms of this contract will be expensed as
advertising costs during the period that the services are provided.
On June 14, 1999 the Company began offering units in a convertible debenture in
an effort to raise $1,500,000. The units are being offered in a private
placement to qualified investors. As of June 30, 1999 no funds have been raised
through this offering.
On June 30, 1999 under the terms of a promissory note the Company borrowed
$50,000 from an unrelated third party. The note bears interest at ten percent
and is payable in full on August 31, 1999.
F-18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
STERLING PARTNERS, INC.
Report of Independent Certified Public Accountants F-20
Balance Sheet - January 29, 1999 (unaudited), F-21
and December 31, 1998
Statement of Income - Twenty nine days ended F-22
January 29, 1999 (unaudited) and years
ended December 31, 1998 and 1997
Statement of Stockholders' Equity - Twenty nine days ended F-23
January 29, 1999 (unaudited), and years
ended December 31, 1998 and 1997
Statement of Cash Flows - Twenty nine days ended F-25
January 29, 1999 (unaudited), and years
ended December 31, 1998 and 1997
Notes to financial statements F-26
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
Sterling Partners, Inc.
We have audited the accompanying balance sheet of Sterling Partners, Inc. as of
December 31, 1998 and the related statements of income, stockholders' equity and
cash flows for the years ended December 31, 1998 and 1997. 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 audits 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 Sterling Partners, Inc. as of
December 31, 1998, the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ Margolies, Fink and Wichrowski
June 6, 1999
Pompano Beach, Florida
F-20
<PAGE>
STERLING PARTNERS, INC.
BALANCE SHEET
ASSETS
January 29,
1999 December 31
(unaudited) 1998
----------- ----
Current assets:
Cash $ 922,000 $ -
---------- ----------
$ 922,000 $ -
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,871 $ -
---------- ----------
Total current liabilities 7,871 -
---------- ----------
Stockholders' equity
Convertible preferred stock (Series A),
par value .001, authorized 100,000, issued 0 - -
Common stock, $.001 par value;
authorized 100,000,000 shares;
7,280,000 shares issued and outstanding 9,880 2,900
Additional paid-in capital 943,249 26,100
Retained equity - -
---------- ----------
953,129 29,000
Less: subscriptions receivable (39,000) (29,000)
---------- ----------
Total stockholders' equity 914,129 -
---------- ----------
$ 922,000 $ -
========== ==========
The accompanying notes are an
integral part of these financial statements
F-21
<PAGE>
STERLING PARTNERS, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Twenty Nine
Days Ended Year Ended Year Ended
January 29, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income $ - $ 5,100 $ 9,667
Operating expenses (4,203) (2,320)
------------- ----------- -----------
Income before income taxes - 897 7,347
Income taxes - - (188)
------------- ----------- -----------
Net income $ - $ 897 $ 7,159
============= =========== ===========
Net income per common share:
Basic:
Net income per common share $ - $ - $ .01
============= =========== ==========
Weighted average shares outstanding (restated) 1,457,931 550,882 525,000
============ =========== ==========
Diluted:
Net income per share $ - $ - $ .01
============= =========== ==========
Weighted average shares outstanding (restated) 1,457,931 550,882 525,000
============= =========== ==========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-22
<PAGE>
STERLING PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Number of Par Number of Par paid-in Subscriptions Earnings
Shares Value Shares Value capital Receivable (deficit) Total
------ ----- ------ ----- ------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1996 (restated) 10 $ 10 1,500,000 $ 1,500 $ 69,190 $ 60,253 $ 130,953
Conversion of preferred
stock (10) (10) 600,000 600 (590) - -
Net income - - - - - - 7,159 7,159
----- ----- --------- -------- --------- -------- --------- ---------
Balance December 31,
1997 2,100,000 2,100 68,600 67,412 $ 138,112
Issuance of common
Stock 2,900,000 2,900 26,100 (29,000)
Net income 897 897
Dividend distribution - - - - (68,600) - (68,309) (139,009)
----- ----- --------- -------- --------- -------- --------- ---------
Balance December 31,
1998 - - 5,000,000 2,900 26,100 (29,000) - -
----- ----- --------- -------- --------- -------- --------- ---------
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-23
<PAGE>
STERLING PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Number of Par Number of Par paid-in Subscriptions Earnings
Shares Value Shares Value capital Receivable (deficit) Total
--------- ----- --------- ------- ---------- -------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1998 - - 5,000,000 2,900 26,100 (29,000) - -
1 for 4 reverse stock
Spit (3,750,000) (2,175) 2,175
Issuance of preferred
stock 100,000 100 9,900 (10,000) -
Conversion of preferred
Shares to common (100,000) (100) 6,030,000 6,030 (5,930) - - -
Private placement - - 950,000 950 913,179 - - 914,129
-------- ---- ---------- ------- --------- -------- ----- ---------
Balance January 29,
1999 (unaudited) - - 8,230,000 $ 7,705 $ 945,424 $(39,000) $ - $ 914,129
======== ==== ========== ======= ========= ======== ===== =========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-24
<PAGE>
STERLING PARTNERS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty Nine
Days Ended Year Year
January 29, Ended Ended
1999 December 31, December 31,
(unaudited) 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ - $ 897 $ 7,159
-------- -------- --------
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Changes in assets and liabilities:
Short-term investments 42,425 (28,880)
Accounts payable and accrued expenses 7,871 (5,715) 5,715
Income taxes payable - - (11,059)
-------- -------- --------
Total adjustments 7,871 36,710 (34,224)
-------- -------- --------
Net cash provided by (used for) operations 7,871 37,607 (27,065)
-------- -------- --------
Cash flows from financing activities
Distributions to stockholders (139,009)
Proceeds from issuance of common stock 914,129 - -
-------- -------- --------
Net cash (used in) provided by
financing activities 914,129 (139,009) -
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 922,000 (101,402) (27,065)
Cash and cash equivalents, beginning of period - 101,402 128,467
-------- -------- --------
Cash and cash equivalents, end of period $922,000 $ - $101,402
======== ======== ========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-25
<PAGE>
STERLING PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of presentation
Sterling Partners, Inc, was incorporated in April 1993 under the laws of the
state of Delaware. Prior to the transaction described in note 2, Sterling
Partners, Inc. was engaged in the business of acquiring tax lien certificates of
redemption from various county governments located in Maryland. In May 1996 the
Company acquired Sterling Real Estate Company, a Delaware corporation, which
owned a commercial property in Cecil County, Maryland. The property was
subsequently sold and in October 1998, the Company distributed all of its shares
in its subsidiary, then known as Sterling Global, Ltd. to the Company's
shareholders. As of December 31, 1998 the Company was not engaged in any
business.
Cash equivalents
Cash equivalents are short-term, highly liquid investments readily convertible
to known amounts of cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates.
Income taxes
The Company accounts for income taxes according to Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes" which requires an
asset and liability approach to financial accounting for income taxes. Income
tax expense is the tax payable or refundable for the period, plus or minus the
change during the period in deferred tax assets and liabilities.
Net income per share
Net income per share is determined by dividing net income by the weighted
average common shares outstanding. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which
simplifies the accounting for earnings per share by presenting basic earnings
per share including only outstanding common stock and diluted earnings per share
including the effect of dilutive common stock equivalents. The Company's basic
and diluted earnings per share are the same, as the Company's common stock
equivalents are dilutive.
F-26
<PAGE>
STERLING PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These assumptions, if not realized, could 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 revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, primarily consisting of cash and cash
equivalents, investments, accounts receivable, note receivable form related
party, accounts payable, bank line of credit payable, and long-term debt,
approximate fair value due to their short-term nature or interest rates that
approximate market.
2. STOCKHOLDERS' EQUITY, MERGER
On September 20, 1998 the Company declared a special stock dividend of 100%
interest in Sterling Global Ltd. to the stockholders of record as of October 1,
1998. The dividend consisted of one share of Sterling Global Ltd. for each two
shares of Sterling Partners, Inc, common stock held as of the record date
October 1, 1998.
On December 18, 1998 the Company issued an additional 2,900,000 shares of its
common stock in exchange for a subscription receivable of $29,000.
On January 13, 1999 the Company affected a 1 for 4 reverse stock split, reducing
the outstanding shares of the corporation from 5,000,000 to 1,250,000.
On January 18, 1999 the Company issued 100,000 shares of its Series A
convertible Preferred Stock to a related party for a subscription receivable of
$10,000.
On January 29,1999 the shareholders of the above mentioned Series A convertible
Preferred Stock, converted their shares into 6,030,000 shares of the Company's
common stock.
F-27
<PAGE>
STERLING PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. STOCKHOLDERS' EQUITY, MERGER (continued)
During January 1999, the Company raised $950,000 through the issuance of 950,000
shares of its common stock through a private placement. In connection with
private placement the Company incurred $35,871 of expenses which were offset
against the proceeds recorded in paid in capital.
On January 29, 1999, Sterling Partners acquired GourmetMarket.com, a California
corporation, in a reverse merger, which was accounted for as a recapitalization
according to APB 16. The stockholders of GourmetMarket.com received 7,421,220
common shares of Sterling Partners, Inc. At the same time Sterling Partners,
Inc. changed its name to GourmetMarket.com, Inc. (a Delaware corporation) and
emerged as the surviving Corporation. This transaction resulted in the old
stockholders of GourmetMarket.com emerging with approximately 47.4% of the
common shares of the Company.
F-28
<PAGE>
EXHIBITS INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
2.1* Merger Agreement among Sterling Partners Inc.,
GourmetMarket.Com, and Marblehead Capital Group, Inc.
3.1* Articles of Incorporation, as amended
3.2* By-Laws
10.1* 1999 Stock Plan
10.2* Agreement with Rainmaker Capital dated February 1, 1999
10.3* Technical Support Agreement with i-Labs, Ltd., dated
February 1, 1999
10.4* Letter Agreement with Richmond House Marketing and
Promotions dated February 15, 1999
10.5* Consulting Agreement, as amended, dated as of
January 29, 1999
10.6* Agreement with At Home Corporation dated April 29, 1999
10.7* Shopping Channel Promotional Agreement dated May 6, 1999
10.8* Employment Agreement with Chanan Steinhart dated
January 22, 1999
10.9* Assignment and Transfer Agreement dated
September 25, 1998
10.10* Development and License Agreement dated March 31, 1997
10.11* Assignment Agreement dated November 6, 1997
10.12* Stock Purchase and Assignment Agreement dated
September 25, 1998
* Previously Filed
Item 2. Description of Exhibits
None.
