<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
( ) Transaction Report Under Section 13 or 15(d) of Securities Exchange Act of
1934
For the transition period from ______ to ______
Commission File Number: 000-27391
GOURMETMARKET.COM, INC.
---------------------------------------------------------------------
(Exact Name of Small Business Registrant as Specified in its Charter)
Delaware 51-0347728
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
507 Howard Street, Suite 200, San Francisco, California 94105
--------------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number: (415) 979-0990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant (1) has filed all
documents and reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
----- -----
Indicate by check mark if no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is contained in this form and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
[ ]
<PAGE>
State Registrant's revenues for its most recent fiscal year: $880,464
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of March 28, 2000:
$8,510,695
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the Registrant's sole class of
Common Stock as of March 24, 2000, was 19,094,671.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-KSB 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.
2
<PAGE>
GOURMETMARKET.COM, INC.
Report on Form 10-KSB
For the Fiscal year Ended December 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
<S> <C> <C>
Item 1. Description of Business.............................................................4
Item 2. Description of Property............................................................14
Item 3. Legal Proceedings..................................................................14
Item 4. Submission of Matters to Vote of Security Holders..................................14
Part II
Item 5. Market for Common Equity and Related Stockholder Matters...........................15
Item 6. Management's Discussion and Analysis or Plan of Operation..........................17
Item 7. Financial Statements...............................................................19
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................................19
Part III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................................19
Item 10. Executive Compensation.............................................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management.....................22
Item 12. Certain Relationships and Related Transactions.....................................24
Item 13. Exhibits, List and Reports on Form 8-K.............................................27
Signatures..................................................................................28
</TABLE>
3
<PAGE>
PART I
Item 1. Description of Business
Background
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
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 GourmetMarket.com, 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.
4
<PAGE>
In February 1999 the Company acquired Travlang.com, an Internet
travel-related service company. On January 14, 2000, the Company sold its
Travlang.com assets to iiGroup, Inc., a related party, for consideration of
250,000 common shares of iiGroup, Inc., $146,000 in cash and the assumption of
$104,000 of Travlang.com liabilities.
The Company's office is located at 507 Howard Street, Suite 200, San
Francisco, California 94105. Its telephone number is 415-979-0990.
Business
The Company operates GourmetMarket.com, an e-commerce website. The
GourmetMarket.com website 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.
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.
5
<PAGE>
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 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
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.
6
<PAGE>
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 and kitchenware, 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,
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
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.
In March 1999, the Company established a partnership with Great Chefs
Television to license that company's content. In April 1999 the Company agreed
with @Home to be that site's exclusive food channel. The Company discontinued
its business with both Great Chefs Television and @Home prior to January 1,
2000, because both arrangements were not cost-effective.
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; Excite; Alta-vista; Inktomi, an
internet shopping engine, which will list GourmetMarket.com as a gourmet food
and wine merchant; 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 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.
7
<PAGE>
Experts
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
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.
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.
8
<PAGE>
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, Excite, Alta-vista, Yahoo
shopping, 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, 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 10%-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 in 2000 as a result
of the Company's marketing activities.
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, 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 some
of these publications will 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.
9
<PAGE>
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
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.
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
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.
10
<PAGE>
Inventory
Non-perishable foods and kitchenware orders will be fulfilled via two
third-party warehouses through the last quarter of 1999. In the year 2000, the
Company will shift to an internal warehouse solution. 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.
Competition
The Company believes that more than five web sites compete with its
GourmetMarket.com web site: these include cooking.com, tavolo.com,
greatfoods.com, wine.com, redenvelope.com, and webvan.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.
Trademarks
In the course of its business, the Company employs, and intends to
increase the use of, various trademarks, trade names and service marks,
11
<PAGE>
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
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 can ship
anywhere in 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. 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 Company is required to be licensed for
the sale of wine in California. In March 2000 the Company's California resale
12
<PAGE>
license expired, but the Company anticipates that it will be renewed in April
without materially disrupting the Company's wine sales.
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. C A valid credit card is required to place the order. C All
local laws related to the protection of minors are followed.
Employees
The Company has sixteen employees. None of the employees belongs to a
union. The Company believes that its employee relationship is excellent.
13
<PAGE>
Item 2. 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.
Item 3. Legal Proceedings
The Company is not a party to any legal proceeding.
Item 4. Submission of Matters to Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of calendar year 1999.
14
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder 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 20, 1999, when the Company's common stock commenced trading on
the OTC Bulletin Board, and ending December 31, 1999.
Bid Prices
Period High Low
------ ---- ---
Quarter Ended March 31, 1999 5.7500 0.3750
Quarter Ended June 30, 1999 2.9375 0.9375
Quarter Ended September 30, 1999 1.75 0.9375
Quarter Ended December 31, 1999 3.00 1.00
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 March 24, 2000, there were 98 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 March 24, 2000, there were 19,094,671 shares of Common Stock
issued. Of those shares 16,744,670 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
15
<PAGE>
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
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. 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.
16
<PAGE>
Item 6. 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 Report.
Results of Operations
The Company had sales of $132,693 in 1998 compared to sales of $880,464
in the year ended December 31, 1999. Sales for the year ended December 31, 1999,
as reported were reduced by the net sales of its Travlang website totaling
$38,888, which sales were reclassified to discontinued operations. The Company
had a gross loss of $8,844 in the year ended December 31, 1998, compared to a
gross profit of $69,873 in the year ended December 31, 1999. The Company had a
loss from operations of $698,142 in the year ended December 31, 1998, compared
to an operating loss of $3,559,130 in the comparable 1999 period. The Company
had a net loss of $3,760,710 in 1999 compared to a net loss of $456,121 in
calendar year 1998. In calendar year 1999, the Company significantly increased
its payroll, contract services and professional fees as it expanded its
operations. The Company's selling, general and administrative expenses, and its
advertising and promotion expenses increased comparably. A substantial portion
of the Company's 1999 increase in selling, general and administrative expenses
was attributable to $1,412,302 of stock- and option-based compensation in 1999,
compared to only $100,000 of such compensation in 1998.
Liquidity and Capital Resources
The Company had total current assets of $42,600 at December 31, 1998,
compared to total current assets of $277,043 at December 31, 1999. Total assets
increased from $450,212 at December 31, 1998, to $736,078 at December 31, 1999,
primarily as a result of an increase in cash from $41,378 at the end of 1998 to
$128,192 at the end of 1999. The Company's accounts receivable increased from
$1,222 at the end of 1998 to $59,018 at the end of 1999. The Company had no
inventory at December 31, 1998, but had inventory of $89,833 at the end of 1999.
The Company's current liabilities increased from $369,083 at December 31, 1998,
to $1,925,030 at December 31, 1999, primarily as a result of maturing long-term
debt and an increase in accounts payable and accrued expenses. The Company used
net cash for operations of $373,969 during 1998 compared to $1,729,893 for
calendar year 1999, as a result of substantially increased operating losses from
the Company's substantial expansion of the scope of its business operations in
1999.
In calendar year 1999, the Company borrowed $930,000 to meet ongoing
operating expenses. The Company also realized proceeds from the issuance of
common stock of $964,129 in 1999 compared to $392,138 in calendar year 1998.
17
<PAGE>
The Company has incurred significant net losses and negative cash flows
for 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, loans by third party lenders and the private placement of the Company's
securities to individuals. 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 substantial 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. The Company competes for capital with a
significant number of other internet and technology ventures and more
traditional businesses. Accordingly, although the Company has in the past been
able to obtain capital to meet its operating losses, there can be no assurance
that the Company will be able to continue to meet its operating expenses from
its fundraising activities until such time, if any, as the Company is able to
operate at a profit.
Year 2000 Compliance
The Company's transition into the year 2000 was seamless to both the
Company and its customers. The Company's systems in place have been year 2000
compliant, which has enabled the Company to operate its website and to service
its customers on an ongoing basis without technical difficulties.
Subsequent Event
On January 26, 2000, holders of $475,000 the Company's 8% notes
converted their notes, together with accrued interest, into 1,068,750 shares of
the Company's common stock.
18
<PAGE>
Item 7. Financial Statements
See the Index to Financial Statements on page F-1 of this Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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.
19
<PAGE>
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.
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.
No compensation is paid to any director, as such, for his or her
services, but, by resolution of the Board of Directors, a fixed sum or expense
for actual attendance at each regular or special meeting by the Board may be
authorized.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of Forms 4 and 5 furnished to the Company and
filed with the Securities and Exchange Commission under Rule 16a-3(e)
promulgated under the Securities Exchange Act of 1934, the Company believes that
all directors, officers and beneficial owners of more than 10% of any class of
equity securities filed on a timely basis the reports required by Section 16(a)
of the Exchange Act during the most recent fiscal year.
20
<PAGE>
Item 10. Executive Compensation
The following tables and notes present for the three years ended
December 31, 1999, the compensation paid by the Company to the Company's chief
executive officer. No executive officer received compensation of at least
$100,000 in 1997, 1998, or 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
- -------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Name and Principal Position Restricted Stock Securities Underlying All Other
(a)(1) Year Salary ($) Award(s)($) Options/SARs(#) Compensation($)
(b) (c)(2) (f) (g)(3) (i)
- -------------------------------------------------------------------------------------------------------------------------
Chanan Steinhart, 1999 $137,500 --- --- ---
President, Treasurer and a 1998 $27,000 --- 75,000 ---
Director 1997 $8,000 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</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 1997, 1998, and 1999.
(2) Paid through Market Street Publishing, an affiliate of Mr. Steinhart to
which the Company pays Mr. Steinhart's salary pursuant to his employment
agreement with the Company. See Item 12 of this Report.
(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.
- ------------------
21
<PAGE>
Item 11. 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 March 24, 2000. Unless otherwise
indicated, the Company believes that the beneficial owner has sole voting and
investment power over such shares.
Name and Address of Number of Shares Percentage
Beneficial Owner of Beneficially Owned Ownership of Class
- ----------------------- --------------------- ------------------
Chanan Steinhart(1)(4) 3,013,200 15.78%
507 Howard Street #200
San Francisco, CA 94105
MCG Partners, Inc.(2) 5,477,620 28.69%
7777 Glades Road #211
Boca Raton, FL 33434
Gideon Shalom-Ben Dor(3)(5) 1,215,000 6.36%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
Yishai Steinhart 1,215,000 6.36%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
Josh Dickman(6) 194,400 1.02%
507 Howard Street #200
San Francisco, CA 94105
Gideon Stein 1,215,000 6.36%
21C Yegia Kapayim St Kiryat-Arie
Petach-Tikva, 49130 ISRAEL
Janis Johnson 1,360,800 7.13%
360 Turtle Creek Blvd. #4
Dallas, Texas 75219
22
<PAGE>
All Executive Officers
and Directors as a group
(3 persons) 4,422,600 23.16%
- ----------------------------
(1) Officer and Director.
(2) 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. Includes 500,000 shares issued to
iiGroup, Inc., and 297,620 shares underlying convertible debt held by
iiGroup, Inc., of which Messrs. Rutstein and Swartz may be deemed beneficial
owners.
(3) Director.
(4) Includes 1,944,000 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).
(5) 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.
(6) Officer. Includes 48,600 shares underlying options held by Mr. Dickman.
- ----------------------------
23
<PAGE>
Item 12. 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 Chanan Steinhart, Arome,
Ltd., and Janis Johnson. i-Labs is 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: Chanan Steinhart and 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., a subsidiary of
Arome, Ltd., entered into an assignment and transfer agreement with
GourmetMarket. Pursuant to that agreement, Arome, Ltd., assigned to
GourmetMarket its copyright interest in certain wine programming content and
contracts, including an agreement with Anthony Diaz Blue. As partial
consideration for the assignment, GourmetMarket delivered to Arome, Ltd., its
7.5% promissory note in the amount of $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 is secured by certain intellectual 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 48,600 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.
24
<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 expiring January 1, 2000, 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.
25
<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 $405,000 from
JNG through December 31, 1999, pursuant to this note.
Subsequent Events
On January 14, 2000, the Company entered into an agreement to dispose
of its Travlang.com assets to iiGroup, Inc., for 250,000 shares of iiGroup,
Inc., common stock and $250,000 payable $146,000 in cash and $104,000 by the
assumption of liabilities. iiGroup, Inc., is an affiliate of MCG Partners, Inc.,
a principal shareholder of the Company.
On February 29, 2000, iiGroup, Inc., loaned $160,000 to the Company
pursuant to an 8% Convertible Bridge Note, and on March 13, 2000, iiGroup, Inc.,
loaned an additional $90,000 to the Company pursuant to an 8% Convertible Bridge
Note. Each of the Bridge Notes provides so that it may be prepaid at any time,
but is mandatorily prepayable upon the sale of all of the outstanding shares of
the Company, the sale of substantially all of the Company's assets, or the
closing of financings of at least $5,000,000. The Convertible Notes are
convertible into common stock of the Company at the lower of $1.00 per share or
75% of the average closing bid price of the Company's common stock in the five
days preceding the date of conversion. Both of the Bridge Notes mature on
December 31, 2000.
26
<PAGE>
PART III
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Merger Agreement dated January 29, 1999*
3.1 Articles of Incorporation, as amended*
3.2 By-Laws*
4.1 Form of common stock certificate*
10.1 1999 Stock Plan*
10.2 Agreement dated February 1, 1999, between Rainmaker Capital and
GourmetMarket.com, Inc.*
10.3 Technical Support Agreement, dated February 1, 1999, between
i-Labs, Ltd., and GourmetMarket.com, Inc.*
10.4 Letter Agreement, dated February 15, 1999, between Richmond House
Marketing and Promotions and GourmetMarket.com, Inc.*
10.5 Consulting Agreement, as amended, dated as of January 29, 1999,
between GourmetMarket.com, Inc., and MCG Partners, Inc.*
10.6 Agreement, dated April 29, 1999, between At Home Corporation and
GourmetMarket.com, Inc.*
10.7 Shopping Channel Promotional Agreement, dated May 6, 1999,
between America Online, Inc., and GourmetMarket.com, Inc.*
10.8 Employment Agreement with Chanan Steinhart dated January 22, 1999
10.9 Assignment and Transfer Agreement dated September 25, 1998,
between Arome Publishing U.S., Inc., and GourmetMarket.com*
10.10 Development and License Agreement, dated March 31, 1997, between
i-Labs, Ltd., and Chanan Steinhart*
10.11 Assignment Agreement, dated November 6, 1997, between
GourmetMarket.com, and Chanan Steinhart*
10.12 Stock Purchase and Assignment Agreement, dated September 25,
1998, between GourmetMarket.com and Arome Publishing U.S., Inc.*
* Filed previously
(b) Form 8-K
The Company filed no reports on SEC Form 8-K for the quarter ended December 31,
1999.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GOURMETMARKET.COM, INC.
Report of Independent Certified Public Accountants F-2
Balance Sheets - December 31, 1999 and 1998 F-3
Statement of Operations - Years ended F-4
December 31, 1999 and 1998
Statement of Stockholders' Equity - Years ended
December 31, 1999 and 1998 F-5
Statement of Cash Flows - Years ended December 31, 1999 and 1998 F-6
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 sheets of GourmetMarket.com, Inc. as of
December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 1999 and 1998 and the results of its operations and cash flows for
the years then ended 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, 1999. Furthermore, at December 31, 1999 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
March 10, 2000
Pompano Beach, Florida
F-2
<PAGE>
GOURMETMARKET.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31 December 31
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 128,192 $ 41,378
Accounts receivable , less allowance for doubtful
accounts of $32,000 and $0 respectively 59,018 1,222
Inventory 89,833 -
------------ ------------
Total current assets 277,043 42,600
Property and equipment
Less accumulated depreciation (Notes 1 & 2) 51,366 673
License agreements, less accumulated amortization 332,755 405,350
Net assets to be disposed - Travlang 52,999
Other assets 21,915 1,589
------------ ------------
$ 736,078 $ 450,212
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 755,000 $ 300,000
Accounts payable and accrued expenses 1,154,616 69,083
Deferred revenue 15,414 -
------------ ------------
Total current liabilities 1,925,030 369,083
------------ ------------
Long-term debt less current maturities 475,000 -
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock (Series A), par value $.001
authorized 10,000,000, issued 0 - -
Common stock, $.001 par value; authorized
100,000,000 shares;18,025,920 and 7,421,220 shares
(restated) issued and outstanding at December 31, 1999
and 1998, respectively 17,501 764
Additional paid-in capital 2,626,898 614,884
Retained deficit (4,295,229) (534,519)
------------ ------------
(1,650,830) 81,129
Less subscriptions receivable (13,122) -
------------ ------------
Total stockholders' equity (deficit) (1,663,952) 81,129
------------ -------------
$ 736,078 $ 450,212
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-3
<PAGE>
GOURMETMARKET.COM, INC.
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Sales $ 880,464 $ 132,693
Cost of sales 810,591 141,537
------------ ------------
Gross profit (loss) 69,873 (8,844)
------------ ------------
Selling, general and administrative expenses:
Payroll and payroll taxes 788,991 264,811
Stock and option based compensation 1,412,302 100,000
Occupancy & office expenses 55,514 41,368
Contract services and professional fees 614,565 166,672
Internet servicing expenses 179,437 28,652
General and administrative expenses 275,302 48,508
Advertising and promotion 295,266 38,720
Depreciation and amortization 7,626 567
------------ ------------
3,629,003 689,298
------------ ------------
Income (loss) from operations (3,559,130) (698,142)
------------ ------------
Other income (expenses):
Interest expense (60,469) (24,757)
Loan extension fee (47,500) -
------------ ------------
Total other income (expenses) (107,969) (24,757)
------------ ------------
Loss before discontinued operations
and extraordinary items (3,667,099) (722,899)
(Loss) from discontinued operations - Travlang (93,611)
Extraordinary item - gain on extinguishment
of debt (net of income taxes of $90,700) - 176,078
------------ ------------
Income (loss) before income taxes (3,760,710) (546,821)
Income tax expense (benefit) - 90,700
------------ ------------
Net loss $ (3,760,710) $ (456,121)
============ ============
Net loss per common share:
Basic and diluted:
Loss before extraordinary item $ (.23) $ (.10)
Discontinued operations - -
Extraordinary item (net of income taxes)
- .02
Net loss per common share
(.23) (.06)
Weighted average shares outstanding
basic and diluted (restated) 16,338,768 7,421,220
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-4
<PAGE>
GOURMETMARKET.COM, INC.
STATEMENT OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<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, 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 7,705 945,424 953,129
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
Exercise of incentive stock options 1,312,200 1,312 11,810 (13,122) -
Net loss - - - - (3,760,710) (3,760,710)
---------- --------- ----------- ---------- ----------- -----------
Balance, December 31, 1999 18,025,920 $ 17,501 $ 2,626,898 $ (13,122) $(4,295,229) $(1,663,952)
========== ========= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-5
<PAGE>
GOURMETMARKET.COM, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,760,710) $ (456,121)
----------- -----------
Adjustments to reconcile net income to net:
cash provided by (used for) operating activities
Depreciation and amortization 108,825 18,718
Non cash compensation 1,412,302
Changes in assets and liabilities:
Accounts receivable (57,796) (222)
Inventory (89,833)
Other assets (20,326)
Accounts payable and accrued expenses 662,231 63,656
Deferred revenue 15,414 -
----------- -----------
Total adjustments 2,030,817 82,152
----------- -----------
Net cash used for operations (1,729,893) (373,969)
----------- -----------
Net cash used in investing activities:
Acquisition of license agreements - net (19,525)
Purchase of equipment (57,897) (793)
----------- -----------
Net cash used for investing activities (77,422) (793)
----------- -----------
Cash flows from (used in ) financing activities
Proceeds from notes payable 930,000
Proceeds from issuance of common stock 964,129 392,138
----------- -----------
Net cash provided by financing activities 1,894,129 392,138
----------- -----------
Net increase (decrease) in cash
and cash equivalents 86,814 17,376
Cash and cash equivalents, beginning of period 41,378 24,002
----------- -----------
Cash and cash equivalents, end of period $ 128,192 $ 41,378
=========== ===========
Supplemental disclosure:
Acquisition of license agreements for stock $ - $ 123,500
=========== ===========
Acquisition of Travlang for stock and debt $ 145,817 $ -
=========== ===========
Issuance of common stock and options for services $ 1,412,302 $ 100,000
=========== ===========
Acquisition of license agreements for debt $ - $ 300,000
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements
F-6
<PAGE>
GOURMETMARKET.COM, INC.
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 a web site, GourmetMarket.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.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out method.
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.
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 1999 and 1998, 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.
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 APB 25, " 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 since inception 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 and
various debt instruments throughout the year.
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.
Management has been able to raise the capital necessary to continue the
implementation of the Company's fiscal year 2000 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 2000.
F-9
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998 Lives
---- ---- -----
<S> <C> <C> <C>
Equipment $ 58,438 $ 793 5-7 years
Less accumulated depreciation (7,072) (120)
------------ -------------
$ 51,366 $ 673
============ =============
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was $6,952
and $120, respectively.
4. LICENSE AGREEMENTS
License agreements consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Amortization
1999 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
------------- -------------
423,500 423,500
Less accumulated amortization (90,745) (18,150)
------------ ------------
$ 332,755 $ 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.
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.
5. ASSETS TO BE DISPOSED - TRAVLANG
On February 8, 1999, the Company acquired all the contracts, rights and interest
in Travlang.com, an 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 data bases of hotels in more
than 120 countries from which travelers can book reservations.
Travlang's content rights and 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.
On January 14, 2000 the Company entered into an agreement to dispose of
Travlang. The terms of the purchase were 250,000 shares if iiGroup, Inc. (a
related party) and $250,000 payable as follows: approximately $146,000 in cash
and the assumption of approximately $104,000 in liabilities.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following at December 31,
1999 and 1998:
1999 1998
---- ----
Accounts payable trade $ 596,804 $ 62,224
Accrued interest 62,445
Accrued stock-based compensation 423,302
Due to related party 45,000
Accrued wages and other 27,065 6,859
---------- ------------
$1,154,616 $ 69,083
========== ============
F-11
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. LEASES
The Company leases its office facilities for approximately $2,915 on a month to
month basis. Rent expense incurred by the Company for the years ended December
31, 1999 and 1998 was $34,280, and $23,805, respectively.
8. NOTES PAYABLE
Notes payable consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 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
8% revolving loan payable, due on demand or if earlier upon the 405,000
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
currently in default
8% Convertible notes, maturing on June 20, 2002, the notes are 475,000
convertible into the Company's common stock at aq conversion
price equal to 90% of the average bid and ask price 10 days prior
to conversion of the note, or the date of the note whichever is
lower , however the conversion price will not be less than $1.00,
all notes were converted in the subsequent period
- -
---------- ------------
1,230,000 300,000
Less current maturities 755,000 300,000
---------- ------------
$ 475,000 $ -
========== ============
</TABLE>
F-12
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. 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 $3,508,000 at December 31, 1999
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 $1,193,000 at December 31, 1999. 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, 1999 to December 31, 1999 was an increase of
approximately $1,011,000.
10. 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.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. 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.
On August 10, 1999 holders of the Company's incentive stock options exercised
options resulting in the issuance of an additional 1,312,200 shares of the
Company's common stock.
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.
F-14
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. STOCKHOLDERS' EQUITY AND MERGER (continued)
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.
11. STOCK OPTIONS
At various dates during the fiscal year, the Company issued to employees
non-qualified stock options to purchase 350,000 shares of stock at an exercise
price of $1.00. Compensation expense of $ 41,502 was recorded during the year as
a result of the discount to market at the date of grant.
On October 2, 1999, the Company issued non-qualified stock options to a
consultant for services rendered to purchase 30,000 shares of common stock at an
exercise price of $.01. Compensation expense of $31,800 was recorded as a result
of this transaction.
On November 1, 1999, the Company issued non-qualified stock options to a
consultant for services rendered to purchase 300,000 shares of common stock at
an exercise price of $.01. Compensation expense of $297,000 was recorded as a
result of this transaction.
At December 31, 1999, the Company has granted 1,666,580 stock options at an
exercise price of $.01; of this total, 1,216,256 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 631,800 $ .01 - $ .01
Granted during 1998 1,666,980 .01 792,180 .01
----------- ---------
Outstanding at December 31, 1998 2,298,780 .01 792,180 .01
Exercised during 1999 (1,312,200)
Granted during 1999 680,000 .52 494,076 .23
------------ ---------
Outstanding at June 30, 1999 1,666,580 .22 1,216,256 .08
=========== =========
</TABLE>
F-15
<PAGE>
GOURMETMARKET.COM, INC.
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
1999 (restated)
Net loss, as reported $ (3,760,710) $ (456,121)
============ ===========
Net loss, pro forma $ (5,058,230) $(1,503,451)
============ ===========
Net income per common share:
Basic and dilutive
Net loss, as reported $ (.23) $ (.06)
============ ===========
Net loss, pro forma $ (.31) $ (.20)
============ ===========
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 1999 and 1998; no dividend yield, volatility of
5.0% and 4.8%, risk free interest rate of 6.0% for both years, and an expected
term of ten years.
12. 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.
F-16
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES
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 up front 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").
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 of the date of these financial statements neither
party has acted upon the terms of the agreement.
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 others' 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.
F-17
<PAGE>
GOURMETMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES (continued)
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 are the only contracts
that individually are material to the Company.
14. SUBSEQUENT EVENTS
On January 14, 2000 the Company entered into an agreement to dispose of
Travlang. The terms of the purchase were 250,000 shares if iiGroup, Inc. (a
related party) and $250,000 payable as follows: approximately $146,000 in cash
and the assumption of approximately $104,000 in liabilities.
On January 26, 2000 holders of the Company's 8% convertible notes payable
totaling $475,000 converted their notes plus accrued interest due into in
1,068,750 shares of the Company's common stock.
On February 29, 2000, iiGroup, Inc., loaned $160,000 to the Company pursuant to
an 8% Convertible Bridge Note, and on March 13, 2000, iiGroup, Inc., loaned an
additional $90,000 to the Company pursuant to an 8% Convertible Bridge Note.
Each of the Bridge Notes provides so that it may be prepaid at any time, but is
mandatorily prepayable upon the sale of all of the outstanding shares of the
Company, the sale of substantially all of the Company's assets, or the closing
of financings of at least $5,000,000. The Convertible Notes are convertible into
common stock of the Company at the lower of $1.00 per share or 75% of the
average closing bid price of the Company's common stock in the five days
preceding the date of conversion. Both of the Bridge Notes mature on December
31, 2000.
F-18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Annual Report and any subsequent amendments
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized.
GOURMETMARKET.COM, INC.
Dated: March 30, 2000 By: /s/ Chanan Steinhart
---------------------------
Chanan Steinhart, President
Pursuant to the requirements of the Securities Act of 1934, this Annual Report
has been signed below by the following persons in their respective capacities
with the Registrant and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Chanan Steinhart President, Director March 30, 2000
- --------------------------------
Chanan Steinhart
/s/ Gideon Shalom-Ben Dor Director March 30, 2000
- --------------------------------
Gideon Shalom-Ben Dor
28
