Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration of Securities by a Small-Business 83 404K
Issuer
2: EX-3.1 Articles of Incorporation/Organization or By-Laws 5 31K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws 5 23K
4: EX-3.3 Articles of Incorporation/Organization or By-Laws 6 28K
5: EX-3.4 Articles of Incorporation/Organization or By-Laws 3 13K
6: EX-3.5 Articles of Incorporation/Organization or By-Laws 16 61K
7: EX-3.6 Articles of Incorporation/Organization or By-Laws 13 46K
9: EX-10.13 Material Contract 23 84K
10: EX-10.14 Material Contract 8 36K
11: EX-10.16 Material Contract 8 38K
8: EX-10.3 Material Contract 2 12K
12: EX-23.1 Consent of Experts or Counsel 1 7K
13: EX-27 Financial Data Schedule (Pre-XBRL) 2 12K
SB-2 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000
REGISTRATION NO. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIQUOR.COM, INC.
(Name of small business issuer as specified in its charter)
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DELAWARE 5921 36-3903894
(State or jurisdiction of (Primary Standard (I.R.S Employer
incorporation or organization) Industrial Identification Number)
Classification Code Number)
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4205 W. IRVING PARK ROAD 4205 W. IRVING PARK ROAD
CHICAGO, IL 60641 CHICAGO, IL 60641
(773) 427-8620 (773) 427-8620
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL (ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED
EXECUTIVE OFFICES) PRINCIPAL PLACE OF BUSINESS)
SCOTT B. CLARK
4205 WEST IRVING PARK ROAD
CHICAGO, IL, 60641
(773) 427-8620
(Name, address and telephone number of agent for service)
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COPIES TO:
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MICHAEL J. CHOATE, ESQ. LAWRENCE B. FISHER, ESQ.
Shefsky & Froelich, Ltd. Orrick, Herrington & Sutcliffe LLP
444 North Michigan Avenue, Ste. 2500 666 Fifth Avenue
Chicago, Illinois 60611 New York, New York 10103
(312) 836-4066 (212) 506-5055
(312) 527-5921 (Facsimile) (212) 506-5151 (Facsimile)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS POSSIBLE AFTER
EFFECTIVENESS.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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NUMBER OF UNITS/ PROPOSED MAXIMUM PROPOSED MAXIMUM
SHARES TO BE OFFERING PRICE PER AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE
Units, consisting of two shares of common stock,
par value $.00001 per share, and one redeemable
common stock purchase warrant to purchase one
share of common stock(2)......... 1,725,000 $24.10 $41,572,500.00
Common stock underlying redeemable warrants
included in the units(3)......... 1,725,000 $14.40 $24,840,000.00
Representative's Warrants(4)(5).... 150,000 $.0001 $15.00
Common stock issuable upon exercise of the
representative's warrants(3)..... 300,000 $14.40 $4,320,000
Redeemable warrants issuable upon exercise of the
representative's warrants(3)..... 150,000 $.12 $18,000
Common stock issuable upon exercise of redeemable
warrants included in the representative's
warrants(3)...................... 150,000 $14.40 $2,160,000
Common stock issuable upon conversion preferred
stock held by selling shareholders... 422,222 $12.00 $5,066,664
Total..............................
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
Units, consisting of two shares of common stock,
par value $.00001 per share, and one redeemable
common stock purchase warrant to purchase one
share of common stock(2)......... $10,975.14
Common stock underlying redeemable warrants
included in the units(3)......... $6557.76
Representative's Warrants(4)(5).... $0
Common stock issuable upon exercise of the
representative's warrants(3)..... $1140.48
Redeemable warrants issuable upon exercise of the
representative's warrants(3)..... $4.75
Common stock issuable upon exercise of redeemable
warrants included in the representative's
warrants(3)...................... $570.24
Common stock issuable upon conversion preferred
stock held by selling shareholders... $1,337.60
Total.............................. $20,585.97
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
(2) Includes 225,000 units that the Underwriters have the option to purchase
from Liquor.com to cover over-allotments, if any.
(3) Pursuant to Rule 416 under the Securities Act, we are registering additional
securities as may become issuable pursuant to the anti-dilution provisions
of the redeemable warrants, the representative's warrants and the redeemable
warrants underlying the representative's warrants.
(4) No registration fee is required pursuant to Rule 457 under the Securities
Act.
(5) Consists of warrants issuable to the Representatives to purchase 300,000
shares of common stock and 150,000 redeemable common stock purchase
warrants.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED APRIL 13, 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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1,500,000 UNITS, EACH CONSISTING OF
TWO SHARES OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT EXERCISABLE
TO PURCHASE ONE SHARE OF COMMON STOCK
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This is an initial public offering of 1,500,000 units of Liquor.com, Inc.,
each unit consisting of two shares of common stock and one redeemable common
stock purchase warrant. The common stock and warrants will trade as separate
securities immediately upon issuance. We anticipate that the initial public
offering price will be $23.10 per unit, consisting of $11.50 per share of common
stock and $0.10 per warrant.
Prior to this offering, no public market exists for any of our securities.
We have made an application to quote our common stock and our redeemable
warrants under the symbols "LIQR" and "LIQRW" on the Nasdaq National Market.
FOR INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER UNIT TOTAL
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Initial public offering price.............................
Underwriting discounts....................................
Proceeds, before expenses, to Liquor.com..................
This prospectus also relates to the registration for resale of 422,222
shares of common stock held by selling shareholders identified in this
prospectus.
We have granted the underwriters an option for forty-five days to purchase
an additional 225,000 units from us at the initial public offering price less
the underwriting discount to cover any over-allotments.
Delivery of the securities offered hereby will be made on or about
, 2000, in New York, New York. The underwriters are offering the
units on a firm commitment basis.
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DIRKS & COMPANY, INC.
The date of this prospectus is , 2000
Inside Front Cover Page of Prospectus
Top of Page--The top of the page contains the Logo of
Liquor.com--"LIQUOR.COM--for the spirited life"--followed by the statement
"Liquor.com--Integrating eCRM and Business-to-Business Solutions for the Alcohol
Beverage Industry."
Body of Page--The body of the page contains a chart with the Logo of
Liquor.com--"LIQUOR.COM-- for the spirited life" in the center of the chart. The
four corners of the chart contain four series of photographs depicting the
various parties of the liquor distribution chain: (1) producers,
(2) wholesalers, (3) retailers and (4) consumers.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Cautionary Note Regarding Forward-Looking Statements........ 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion And Analysis of Financial Condition
And Results of Operations................................. 18
Business.................................................... 23
Management.................................................. 32
Certain Transactions........................................ 40
Principal Stockholders...................................... 42
Description of Securities................................... 43
Shares Available For Future Sale............................ 50
Underwriting................................................ 52
Legal Matters............................................... 54
Experts..................................................... 54
Where You Can Find Additional Information About Us.......... 54
Index to Consolidated Financial Statements.................. F-1
ii
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION IMPORTANT TO YOUR
INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES BEFORE MAKING AN INVESTMENT
DECISION.
OUR BUSINESS
Liquor.com is a customer relationship management, or "eCRM," eCommerce and
business-to-business exchange company whose focus is to integrate producers,
wholesalers, retailers and consumers in the highly fragmented alcohol and
entertainment beverage industry. We build and maintain relations with the
consumer, and also provide eBusiness solutions for all three tiers of the
alcohol beverage distribution system--(a) producers, (b) wholesalers and (c)
retailers. We have created a global network of retail partner affiliates by
offering them the opportunity to generate additional revenue, reduce costs and
build loyal customer relationships. We give our affiliates and customers alike
access to a secure eCommerce and custom content environment that serves as the
hub of a direct-delivery network. We do not sell directly to consumers, and thus
do not maintain inventory. Rather, we utilize our industry relationships,
expertise and in-depth knowledge of our target market to generate demand,
facilitate sales and build loyalty. Currently, the Liquor.com affiliate network
provides direct delivery to thirty-nine states and more than forty countries.
We intend to become an essential marketing and eBusiness solutions partner
for producers, wholesalers and retailers by offering direct access to consumers
through our website and offline promotions and by offering valuable demographic
and product preference information on their purchases and interests. We are
currently developing a hosted, proprietary network for the industry that will
aggregate and streamline product purchasing, reduce costs, build revenue and
effectively disseminate product information and industry news for all three
tiers.
By expanding our existing infrastructure and capitalizing on relationships
developed by our founders and their family over fifty years in the alcohol
beverage industry, it is our goal to alter the $113 billion alcohol beverage
industry and change the manner in which alcohol beverages are marketed,
purchased and sold.
OUR INDUSTRY
We believe that the market for online sales of alcohol beverages and related
products is poised for growth. According to Beverage Dynamics, an industry
publication, annual sales of alcohol beverages in the United States totaled
approximately $113 billion in 1999.
OUR STRATEGY
Our goal is to become the leading provider of eCRM, eCommerce and
business-to-business solutions for the alcohol and entertainment beverage
industry and significantly alter the manner in which alcohol beverages are
marketed, purchased and sold. To achieve this goal, we will continue to focus on
the following strategies:
- Leveraging our relationships with producers, wholesalers and retailers
developed by our founders and their family over fifty years in the alcohol
beverage industry.
- Strengthening and expanding our relationships with our retail affiliate
network through cooperative marketing, custom product development and
other programs.
- Completing the development of our online exchange that unites producers,
wholesalers and retailers to generate additional revenue, reduce costs and
build loyal customer relationships.
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- Focusing our direct marketing efforts on generating increased traffic,
orders and brand recognition through our Liquor.com portal.
- Expanding the proprietary content on our Liquor.com portal through direct
development and partnerships with content providers.
- Increasing our database of Liquor.com users by offering what we believe to
be one of the world's largest selections of wine, champagne, spirits and
complementary products and services, ease of use and high levels of
customer service.
- Further developing our growing list of Liquor.com users into an extensive
database of consumer demographic, product preference and other information
that our partners may use to focus their marketing efforts and obtain
feedback that we believe is not available in the current distribution
system.
CORPORATE BACKGROUND
We were incorporated in Illinois under the name Liquor by Wire, Inc. in
August 1993. In December 1999, we formed a subsidiary named Liquor.com, Inc., a
Delaware corporation. We then merged into this subsidiary, which was the
surviving corporation in the merger, to assume our present form. Our executive
offices are located at 4205 West Irving Park Road, Chicago, Illinois 60641. Our
phone number is (773) 427-8620.
Our website is located at www.liquor.com. We are not incorporating the
information on our website into this prospectus, and we do not intend to make
our website a part of this prospectus. This prospectus includes trademarks,
trade names and service marks of other companies. Each trademark, trade name or
service mark of any other company appearing in this prospectus is the property
of its owner.
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THE OFFERING
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Units, each consisting of two shares of our common
stock and one redeemable common stock purchase
warrant, offered by us............................... 1,500,000 (3,000,000 shares of common stock)
Terms of redeemable common stock purchase warrants... Each warrant entitles the holder to acquire
one share of our common stock, at an exercise
price of $13.80 per share, for a four-year
period beginning twelve months from the date
of issuance. Beginning eighteen months from
the completion of this offering, we will be
able to redeem these warrants at a price equal
to $.10 per warrant if the average closing
price of our common stock on the Nasdaq
National Market is equal to or greater to
$28.75 per share for any 20 trading days
within a 30-day period.
Common stock to be outstanding upon completion of
this offering........................................ 7,053,558 shares
Redeemable warrants to be outstanding upon completion
of this offering..................................... 1,500,000
Use of proceeds...................................... We intend to use the proceeds of this offering
for:
- repaying indebtedness;
- marketing and other promotions;
- technological investments; and
- working capital and general corporate
purposes.
Proposed Nasdaq National Market Symbol for common
stock................................................ LIQR
Proposed Nasdaq National Market Symbol for redeemable
warrants............................................. LIQRW
Unless stated otherwise, all information in this prospectus assumes:
- An initial offering price of $23.10 per unit;
- A 22,500 for 1 stock split which was effectuated on December 22, 1999;
- conversion of all 422,222 shares of our Series A preferred stock into an
aggregate of 422,222 shares of common stock;
- conversion of eleven convertible notes, which includes one note that has
not yet been issued, into an aggregate of 284,090 shares of common stock;
- issuance of a total of 27,582 shares of common stock which certain of our
preferred shareholders have committed to purchase pursuant to the exercise
of preemptive rights but which have not yet been issued;
and excludes:
- 450,000 shares of common stock and 225,000 redeemable common stock
purchase warrants issuable if the underwriter exercises its over-allotment
option in full;
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- 1,500,000 shares issuable upon the exercise of the 1,500,000 redeemable
common stock purchase warrants offered by this prospectus;
- 300,000 shares of common stock issuable upon the exercise of the
representative's warrants;
- 150,000 warrants issuable upon exercise of the representative's warrants;
- 150,000 shares of common stock issuable upon exercise of the 150,000
common stock purchase warrants issuable upon exercise of the
representative's warrants;
- 300,125 shares of common stock issuable upon the exercise of warrants
which we have issued or are contractually obligated to issue to
consultants or in connection with financings;
- 14,205 shares of common stock issuable upon exercise of warrants to be
issued to certain of our preferred shareholders pursuant to the exercise
of preemptive rights, after the date of this prospectus;
- 1,171,617 shares of common stock issuable upon exercise of currently
outstanding options at a weighted average price of $3.52 per share; and
- 328,383 shares available for issue upon the exercise of options which may
be granted under our 2000 stock plan.
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. This
information is derived from, and should be read together with, the historical
financial data for the years ended December 31, 1997, 1998 and 1999. The data
presented below should also be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and accompanying notes appearing elswhere in this prospectus.
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YEAR ENDED DECEMBER 31,
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1997 1998 1999
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STATEMENT OF OPERATIONS:
Revenues................................................. $1,281,453 $1,818,960 $2,788,187
Cost of revenues......................................... 704,486 1,076,197 1,946,758
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Gross profit............................................. 576,967 742,763 841,429
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Marketing expenses....................................... 312,814 339,973 425,236
General and administrative expenses...................... 310,804 360,174 592,613
(Loss) income from operations............................ (46,651) 42,616 (176,420)
Net (loss) income........................................ (54,121) 35,563 (195,200)
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SHARE DATA:
Net (loss) income per share: basic and diluted........... $ (.02) $ .01 $ (.06)
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Shares used in computing basic and diluted net (loss)
income per share....................................... 3,026,956 3,026,956 3,033,216
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BALANCE SHEET DATA:
Cash..................................................... $ 129,324 $ 461,924 $ 340,786
Working capital (deficit)................................ (95,306) (102,729) (218,565)
Total assets............................................. 231,117 603,377 1,212,310
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Total noncurrent liabilities............................. 31,975 31,975 218,487
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Total stockholders' (deficit) equity..................... (127,279) (91,716) (136,916)
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THE RISKS WE FACE BEFORE
INVESTING IN OUR SECURITIES.
WE HAVE A LIMITED OPERATING HISTORY AS A CUSTOMER RELATIONSHIP MANAGEMENT AND
BUSINESS-TO-BUSINESS EXCHANGE COMPANY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS.
We were incorporated in 1993, but we have recently dramatically changed the
focus of our business. Accordingly, we have only a limited operating history in
our current line of business as an eCRM, eCommerce and business-to-business
solutions company upon which prospective investors may judge our performance and
prospects. We are subject to all of the risks associated with a new enterprise,
including lack of financial and human resources. As of December 31, 1999 we had
a working capital deficit of $218,565. We base our need for working capital and
additional employees on operating plans, expected traffic and purchases made
through website. Our revenues and operating results are difficult to forecast
because both generally depend on the volume and timing of orders. We may not be
able to adjust our spending in a timely manner to compensate for any unexpected
revenue shortfall. We may also not have enough working capital to pay for the
advertising or other marketing support needed to generate revenues that we
project.
WE HAVE NOT CONSISTENTLY EARNED PROFITS AND ANTICIPATE FUTURE LOSSES.
We have not consistently made profits, either on a quarterly or annual
basis. In 1997 we lost $54,121. We had a profit of $35,563 in 1998, and in 1999
we lost $195,200. From our inception in August 1993 through December 31, 1999,
we lost a total of approximately $306,000. We plan to make significant
expenditures on marketing and other items during the twelve months following
completion of this offering. We plan to aggressively spend money to upgrade our
technology and to advertise our website to increase the awareness of our brand
and to ensure that we can accommodate increased website traffic and customer
orders as we grow. These expenditures may not increase revenues, and may
therefore prevent us from achieving profitability.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP OUR BUSINESS-TO-BUSINESS ONLINE
EXCHANGE AND GENERATE ADDITIONAL REVENUE BY EXPANDING OUR PARTNERSHIPS WITH
PRODUCERS, WHOLESALERS AND RETAILERS.
A significant portion of our business plan involves generating revenue by
providing business to business services. An important part of our strategy is
the development of an online exchange which links producers, wholesalers and
retailers in the alcohol beverage industry. In addition, we plan to expand our
business by providing a wide variety of marketing and promotional services to
producers, wholesalers and retailers, including offline promotions. Our revenues
depend significantly on our ability to successfully implement this network and
to expand our services. We do not have experience operating an online exchange,
and have not provided marketing and promotional services on a broad scale. If we
cannot develop this exchange or successfully provide these additional services,
or if a significant number of producers, wholesalers and retailers do not use
our exchange or promotional services, we will not be able to achieve our revenue
goals.
WE DEPEND ON RETAIL LIQUOR STORES AND THIRD-PARTY CARRIERS TO FILL CUSTOMER
ORDERS AND MAKE DELIVERIES. PROBLEMS WITH THESE PARTIES COULD IMPAIR OUR
OPERATING RESULTS AND DAMAGE OUR REPUTATION.
We depend on third-party retail affiliates and other vendors to sell and
deliver the products ordered through our website. We may not be able to ensure
that these retailers fill the orders placed on our website accurately or deliver
the products promptly. While we have agreements with many of our affiliated
retailers in the United States, these agreements can be terminated at any time
by either party. We have agreements with only a small number of the retailers in
foreign countries with whom we
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have affiliations. If any of our existing arrangements were terminated, our
business could be disrupted and we could incur significant costs. Our
distribution network depends on third-party carriers. We are, therefore, subject
to the risk that labor shortages, strikes, inclement weather or other factors
may limit the ability of these carriers to meet our shipping needs. The failure
to deliver products to our customers in a timely manner would damage our brand
and adversely affect the demand for our products and services. If the shippers
who currently deliver orders to our customers are unable or unwilling to make
these deliveries, we would need to arrange for alternative carriers. An
alternative carrier might charge more for delivery, or we might not be able to
locate an alternative carrier at all. Changing carriers would likely disrupt our
business. We do not know if we would be able to secure additional vendors and
shippers on commercially reasonable terms.
CONSUMERS MAY NOT REGULARLY PURCHASE ALCOHOL BEVERAGES AND OTHER PRODUCTS WE
OFFER OVER THE INTERNET OR TELEPHONE.
There are many channels other than the Internet and telephone through which
consumers are able to purchase alcohol beverages and related products, including
retail stores, catalogs, supermarkets and other mass merchants. Our business and
results of operations would be adversely affected if consumers purchase these
products over the Internet or by phone only on a limited basis or choose to make
future purchases through more traditional channels.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAKES IT
DIFFICULT TO PREDICT OUR FUTURE RESULTS.
Our quarterly operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside our control. We believe the
seasonal nature of gift giving will cause our revenues to fluctuate because that
portion of our revenues which is derived from online revenues depends to a
significant extent on gift giving. Our revenues and operating results tend to be
lower for the quarter that ends on September 30 because none of the holidays
which produce a significant volume of our orders such as Valentine's Day,
Mother's Day, Father's Day and Christmas fall within that quarter.
Other factors that may affect our quarterly operating results include:
- spending patterns of online shoppers;
- seasonal trends in Internet usage and advertising placements;
- the level of traffic on our website;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
- technical difficulties or system downtime; and
- general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media.
In addition, in response to changes in the competitive environment, we may,
from time to time, make certain pricing, service or marketing decisions that
could cause significant declines in our quarterly or annual operating results.
As a result of fluctuations in our revenue, comparison of our results of
operations from one quarter to the immediately preceding quarter are of limited
relevance in evaluating our historic financial performance or predicting our
future performance.
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WE MAY BE HELD LIABLE IF ORDERS PLACED ON OUR WEBSITE LEAD TO SALES TO MINORS.
The laws of each state in the United States require individuals to be at
least twenty-one years of age to purchase or consume alcohol beverages. We have
put procedures in place which are intended to prevent us from inadvertently
accepting orders from minors. However, we may inadvertently facilitate the sale
of alcohol beverages to a minor, and thus become subject to actions by
governmental bodies seeking fines or orders preventing us from doing business in
a particular state, or lawsuits by private parties seeking compensatory and
punitive damages.
STATES MAY REQUIRE US TO OBTAIN A LIQUOR LICENSE OR ALLOW ONLY NON-ALCOHOL
PRODUCTS TO BE DELIVERED WITHIN THE STATE, WHICH WOULD INCREASE OUR EXPENSES AND
LIMIT OUR PRODUCT OFFERINGS AND OUR REVENUE GROWTH.
We believe we can lawfully receive orders for the full range of products
listed in our catalogs and website in thirty-nine states without the need to
obtain a liquor license. In two of these states, we are allowed to receive
orders for wine and champagne only. In addition, any or all of these states
could change their laws to prohibit us from providing our services without a
liquor license, or change the interpretation of their existing laws in a way
which would require us to obtain a license to provide our services to residents
of these states. If either of these changes occurred, it could greatly increase
our costs of doing business, or prevent us from accepting orders for shipment to
residents in the affected states. In either case, our results of operations
would significantly suffer.
In eleven states we are only permitted to accept orders for non-alcohol
products. If other states imposed similar limitations on us, this could greatly
reduce our product offerings and revenue. In addition, we are currently
appealing a decision by the State of Illinois Department of Revenue that we are
subject to its retailers' occupation tax. If other states held us liable for the
payment of similar taxes, this would impair our ability to achieve profits.
OUR MANAGEMENT HAS BROAD DISCRETION IN USING THE NET PROCEEDS OF THIS OFFERING
AND YOU MAY HAVE NO OPPORTUNITY TO APPROVE THE USE OF PROCEEDS OF THIS OFFERING.
We intend to use approximately 32.9% of the net proceeds from this offering
for working capital and general corporate purposes. Our management will have
broad discretion over how we use these proceeds. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions regarding how to use the proceeds from this offering, and we
may spend these proceeds in ways with which you disagree.
OUR SUCCESS DEPENDS UPON OUR MARKETING EFFORTS AND INCREASING OUR BRAND
RECOGNITION.
We believe that broad recognition and favorable consumer and industry
perception of the Liquor.com brand is essential to our future success.
Successful positioning of the Liquor.com brand will depend largely on the
success of our advertising, marketing and promotional efforts. We currently only
have three full-time marketing employees, and the success of our marketing plan
will depend to a large extent on our ability to attract and retain talented
employees to work in our marketing department. We have not yet engaged in a
broad-based marketing program, and we cannot assure you that our planned
advertising will be effective. If our brand development strategy is
unsuccessful, these expenses may never be recovered and we may not increase
traffic to our website or our catalog revenues and our revenues will not grow as
expected.
WE FACE SIGNIFICANT COMPETITION THAT MAY ADVERSELY AFFECT THE DEMAND FOR OUR
PRODUCTS AND SERVICES.
Our market is highly competitive with few barriers to entry. We do not have
exclusive agreements with the retailers who sell the products ordered on our
website or through or catalog, so our competitors are free to enter into similar
agreements with these retailers. We compete directly with
7
other companies maintaining websites or publishing catalogs through which
consumers can purchase alcohol beverages and related items. We also compete with
traditional "bricks and mortar" liquor stores as well as with businesses which
offer non-alcohol gift items, such as flowers or candy, through catalogs or on
websites. Some of our principal competitors are 800 Spirits, Inc., Drinks.com,
Wine.com, Inc., Internet Wines & Spirits, Geerlings & Wade, Inc., and Ambrosia.
Many of our existing or potential competitors have greater technical expertise,
brand recognition or Internet commerce experience. In addition, many of our
existing or potential competitors may be able to devote far greater resources
than us to marketing campaigns, attracting traffic to their website and
developing their technology.
In addition to competing with online and traditional retailers for customer
orders, we also compete with other websites and traditional media for
advertising dollars. The competition for advertisers could result in significant
price competition. The number of companies selling Web-based advertising and the
available inventory of advertising space has increased substantially.
Accordingly, we may face increased pricing pressure for the sale of
advertisements.
Many of the companies that we compete with for advertising monies have
greater name recognition and more established relationships with advertisers and
advertising agencies than us. These companies may be able to obtain a more
attractive inventory of ad spots, adopt more aggressive pricing policies and
devote substantially more resources to selling advertising inventory.
OUR SUCCESS AND THE DEMAND FOR OUR SERVICES AND PRODUCTS DEPENDS ON THE
CONTINUED GROWTH OF ONLINE COMMERCE.
A material portion of our future revenue depends on the continuing
development of online commerce. The Internet and other online services may not
be accepted as a viable commercial marketplace for a number of reasons,
including inadequate development of enabling technologies and the lack of
performance improvements. As the number and frequency of Internet users
increase, users will require more bandwidth, although the infrastructure for the
Internet may not be able to support the demands placed upon it. In addition, the
Internet could lose its viability due to delays in developing or adopting new
standards required to handle increased levels of Internet activity. Changes in,
or insufficient availability of, telecommunications services to support the
Internet could result in slower response times and adversely affect usage of the
Internet, including our website. These problems would harm our brand and cause a
decrease in the demand for our services and products.
OUR FUTURE REVENUE GROWTH IS DEPENDENT UPON THE INTERNET BEING ACCEPTED AS A
VIABLE ADVERTISING MEDIUM.
A significant portion of our future revenue depends upon the acceptance of
the Internet as a viable advertising medium. The market for Internet advertising
has only recently begun to develop, is rapidly evolving and is characterized by
intense competition. As is typical in the case of a new and rapidly evolving
industry, the level of demand and market acceptance for recently introduced
products and services is extremely uncertain. Our ability to generate
advertising revenue will depend on, among other factors, the following:
- pricing of advertising on other websites or other outlets such as
newspaper, radio and television;
- the amount of traffic on our website;
- our ability to achieve and demonstrate user and member demographic
characteristics that are attractive to advertisers; and
- the development and expansion of our advertising sales force.
Acceptance of the Internet among advertisers and advertising agencies will
depend on the level of use of the Internet by consumers and upon growth in the
commercial use of the Internet. If widespread
8
commercial use of the Internet does not develop, or if the Internet does not
develop as an effective and measurable medium for advertising, our business and
financial condition will be adversely affected.
THE DEMAND FOR OUR SERVICES AND PRODUCTS DEPENDS UPON A STRONG ECONOMY.
We believe that consumer spending on alcohol beverages is influenced by
general economic conditions and the level of discretionary income. Accordingly,
we may experience sustained periods of declines in revenues during periods of
economic downturn.
OUR BUSINESS COULD BE HARMED IF WE ARE UNABLE TO ACHIEVE AND MAINTAIN A
SIGNIFICANT ADVERTISING PRESENCE ON HIGH-TRAFFIC WEBSITES.
In order to increase our revenues, we need to increase the number of visits
to our website, which will require us to establish and maintain an advertising
presence on high-traffic websites, including third party portals and content
sites. We have limited relationships with these websites and do not know if we
will be able to develop these relationships on favorable terms or at all. We may
have to pay significant fees to establish or maintain a presence on these
websites. Websites that we may approach may also provide advertising services to
our competitors. As a result, these sites may be reluctant to enter into or
maintain relationships with us. The demand for our services and products could
be harmed if we do not develop and secure sufficient online advertising or
secure a sufficient presence on commercially reasonable terms or if these
activities do not effectively attract users to our website and lead to a
substantial number of orders.
OUR FUTURE SUCCESS DEPENDS, IN PART, ON THE CONTINUED SERVICE OF NUMEROUS
INDIVIDUALS AND OUR ABILITY TO INTEGRATE BARRY GRIEFF, OUR NEW CHIEF EXECUTIVE
OFFICER AND SCOTT CLARK, OUR NEW CHIEF FINANCIAL OFFICER AND GENERAL COUNSEL,
INTO OUR MANAGEMENT TEAM.
Mr. Olsher, our Chief Operating Officer, Ms. Zelitzky, our Chairman,
Mr. Reiner, our Chief Technology Officer, Mr. McDermott, our Senior Vice
President, Business Development and Jamie Cutburth, our Vice President of Online
Marketing, were until recently the only senior managers we employed. We have
recently hired several senior managers, including Barry Grieff, our Chief
Executive Officer and Scott Clark, our General Counsel and Chief Financial
Officer. Our success will depend to a significant degree on the ability of
Mr. Grieff and Mr. Clark to work effectively with Mr. Olsher, Ms. Zelitzky,
Mr. Reiner, Mr. McDermott and Mr. Cutburth. We have "key man" life insurance
policies only on Mr. Grieff, Ms. Zelitzky and Mr. Olsher.
Our future success also depends on our ability to attract, retain and
motivate highly-skilled employees. Competition for employees in our industry is
intense. We may be unable to retain our key employees or attract, assimilate or
retain other highly qualified employees in the future in the event that we lose
any of our key personnel.
OUR OPERATIONS, INCLUDING THE OPERATION OF OUR WEBSITE, DEPEND ON THIRD PARTY
SERVICE PROVIDERS.
We rely on outside parties to provide many services, including just a single
company for all of the services relating to the technology used to operate our
website. We do not have a contract with this company. Similarly, we rely on
outside companies to provide telephone service to our call center. If these
companies were unable or unwilling to provide these services, we do not know if
other companies would provide these services on terms as favorable as the
current providers. In addition, if one of these companies terminated its
services, or experienced a system failure, this could cause a significant
disruption in service on our website, which could cause damage to our
reputation, and decrease the demand for our products and services.
9
DIFFICULTIES IN INCREASING OUR CAPACITY OR ENHANCING OUR WEBSITE, OR COMPUTER
SYSTEM FAILURES, COULD DAMAGE OUR BRAND AND THE DEMAND FOR OUR PRODUCTS AND
SERVICES.
To generate more traffic on our website, which is a key element of our
strategy, we need to introduce additional or enhanced features to our website
and ensure that the site can accommodate increased numbers of visitors and
orders. If the number of orders handled by our website exceeds available
capacity, we may not be able to add additional hardware and software in time to
process the increased orders. If we cannot upgrade our existing technology or
network infrastructure to accommodate increased traffic or to introduce new
services and features, this could cause customer dissatisfaction and damage our
brand. In addition, if we introduce a feature or service which is not favorably
received, our current users may not use our website as frequently and we may not
be able to attract new users.
The performance, reliability and availability of our website and the
technology used to manage our Internet orders is critical to our reputation and
ability to attract and retain consumers and advertisers. Sudden and significant
increases in traffic on the websites of online businesses can strain the
capacity of the software, hardware and telecommunications systems used by these
businesses, leading to slower response times or system failures. Similarly, an
increase in the volume of calls to our call center could lead to long waits for
callers. Any system error or failure that interrupts the operation of our
website or increases response time could cause us to lose customers or
advertisers. In addition, if these failures or errors were sustained or
repeated, it could reduce the attractiveness of our website, reduce our revenue
and damage our brand.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND COULD BE SUBJECT TO
CLAIMS THAT WE HAVE INFRINGED ON THE INTELLECTUAL PROPERTY OF OTHERS.
The Liquor.com Internet domain name is our brand on the Internet. The
acquisition and maintenance of Internet domain names is generally regulated by
governmental agencies and their designees and we expect the requirements for
registering Internet domain names to be changed. In addition, the relationship
between regulations governing Internet domain names and laws protecting
trademarks and similar proprietary rights is unclear. We may be unable to
prevent third parties from acquiring Internet domain names that are similar to,
infringe upon or otherwise decrease the value of our Internet domain name, the
trademarks and other intellectual property rights used by us. Moreover, we have
not yet applied for trademark protection for proprietary content we intend to
introduce on our website, and cannot be sure such protection is available. If
this protection is not available, this will impair our ability to protect our
content.
We could be subject to claims by others that we infringe upon their
intellectual property rights. Any litigation regarding our proprietary rights
could be costly and divert management's attention, result in the loss of certain
of our proprietary rights or the payment of substantial monetary damages,
require us to seek licenses from third parties or prevent us from selling our
services.
ONLINE SECURITY BREACHES COULD DAMAGE OUR BRAND AND DECREASE THE DEMAND FOR OUR
PRODUCTS AND SERVICES.
To place orders on our website, consumers must submit credit card
information to us. This information and other confidential information may be
misappropriated when transmitted over the Internet. We may be liable to our
customers if a third party is able to penetrate our network security and
misappropriate our customers' personal information. We may be held liable for
claims based on unauthorized purchases with credit card information,
impersonation or other similar fraud claims. These claims could result in
litigation and financial liability. Security breaches would likely damage our
reputation and decrease the demand for our products and services.
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GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET AND
ONLINE COMMERCE COULD HARM OUR BUSINESS OPERATIONS.
Online commerce is new and rapidly changing, and federal and state
regulation relating to the Internet and online commerce is evolving. Currently,
there are few laws or regulations directly applicable to the Internet or online
commerce on the Internet, and the laws governing the Internet that exist remain
largely unsettled. Due to the increasing popularity of the Internet, it is
possible that laws and regulations will be passed covering issues such as user
privacy, pricing, taxation, content, copyrights, distribution, antitrust and
quality of products and services. In addition, it is not clear how existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy will be applied
to the Internet. The growth and development of online commerce may lead to
requests for more stringent consumer protection laws, both in the U.S. and
abroad. We are also subject to regulation laws affecting direct marketers and
advertisers. The adoption or modification of laws or regulations applicable to
the Internet could reduce the demand for our services and products or increase
our cost of doing business.
Due to the increasing use of the Internet and the burden it has placed on
the current telecommunications infrastructure, several telephone carriers have
asked that the FCC regulate Internet 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 reduce the demand for our
services and products.
WE MAY INCUR LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATED THROUGH OUR
WEBSITE OR INFORMATION THAT CAN BE ACCESSED THROUGH OUR WEBSITE.
We provide links to websites operated by other businesses and thus may be
subject to claims for defamation, negligence, copyright or trademark
infringement relating to the information we publish on our website and those
websites that may be accessed through our website. Based on links we provide to
other websites, we could also be subject to claims based upon online content we
do not control that is nevertheless accessible from our website.
CONCERNS RELATED TO COLLECTION AND SALE OF PERSONAL INFORMATION ABOUT OUR USERS
AND OTHER PRIVACY CONCERNS COULD ADVERSELY AFFECT OUR BUSINESS.
We intend to collect demographic information from visitors to our website
and to sell this information to producers of alcohol beverages. Governmental
authorities have proposed regulations to govern this practice. These regulations
may include requirements that we establish procedures to disclose and notify
users of privacy and security policies, obtain consent from users to collect and
use the information and provide users with the ability to access, correct or
delete personal information which we store. These regulations may also provide
for the payment of damages to users of websites. In addition, our website does
not currently place "cookies" on a user's hard drive, but it may do so in the
future. If our website does place cookies on a user's hard drive, this may be
done often without the user's knowledge or consent. Cookies are data retrieval
devices designed to collect personal identifying information from individuals
who visit our website. The Federal Trade Commission has proposed regulations
regarding the collection and use of personal identifying information obtained
from individuals when accessing websites, with particular emphasis on access by
minors. In addition, the Federal Trade Commission is investigating the data
collection practices of an online marketing company. We may become subject to an
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts may restrict our ability to collect demographic and personal information
from users, which could adversely affect our marketing efforts.
11
CHANGING TECHNOLOGY MAY FORCE US TO INVEST SIGNIFICANT FUNDS ON TECHNOLOGY.
The Internet, online commerce and online advertising markets are
characterized by rapidly changing technologies, evolving industry standards,
frequent new product and service introductions and changing customer
preferences. Our future success will depend, in part, on our ability to adapt to
changing technologies and to address our customers' changing preferences. We
may, however, experience difficulties that delay or prevent our being able to do
so. In addition, we may be required to spend significant funds on technology,
and failure to make these expenditures could hurt the performance of our website
and damage our brand and the demand for our services and products.
CERTAIN STOCKHOLDERS WILL CONTROL 36% OF OUR COMMON STOCK AFTER THIS OFFERING
AND THEIR INTERESTS MAY BE DIFFERENT FROM YOURS AND AS A RESULT, YOU MAY HAVE NO
EFFECTIVE VOICE IN OUR MANAGEMENT.
Upon completion of this offering, Ms. Zelitzky, our Chairman, and
Mr. Olsher, our Chief Operating Officer, will continue to own in excess of 36%
of our outstanding voting power. As a result, these two individuals will be able
to exercise control over our business, policies and affairs and exert
substantial influence over the election of our directors, and the approval or
disapproval of actions requiring shareholder approval. This concentration of
stock ownership could have the effect of delaying or preventing, and may
discourage attempts to bring about, a change in control of us or the removal of
existing management.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Our certificate of incorporation and bylaws contain provisions that may be
deemed to have anti-takeover effects and may discourage, delay or prevent a
takeover attempt that a stockholder might consider in its best interest. These
provisions include a requirement that the number of directors not be more than
seven.
Our board of directors has the authority to authorize the issuance of
preferred stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of our company, and may
adversely affect the voting and other rights of the holders of our capital
stock.
THE REDEEMABLE NATURE OF OUR WARRANTS MAY AFFECT YOUR INVESTMENT DECISION AS TO
IF AND WHEN TO EXERCISE THEM.
We may redeem the 1,500,000 redeemable common stock purchase warrants that
we are offering if our stock price exceeds $28.75 per share. If we decide to
redeem the warrants, holders will lose their rights to purchase the underlying
shares of common stock unless the warrant is exercised before we redeem. Holders
may be forced to exercise the warrants prior to the time the investor would
otherwise desire to do so.
YOU CANNOT SELL THE SHARES UNDERLYING THE REDEEMABLE COMMON STOCK PURCHASE
WARRANTS IF WE DO NOT HAVE AN EFFECTIVE REGISTRATION STATEMENT.
The redeemable common stock purchase warrants included in the units offered
by this prospectus are not exercisable unless, at the time of exercise, we have
a current prospectus covering the shares of common stock issuable upon exercise
of the warrants, and the shares have been registered, qualified or deemed to be
exempt under the securities laws of the state of residence of the exercising
holder of the warrants. Although we have agreed to use our best efforts to keep
a registration statement covering the shares of common stock issuable upon the
exercise of the warrants effective for the term of the warrants, if we fail to
do so for any reason, the value of the warrants may decline.
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The common stock and warrants included in the units offered by this
prospectus will be detachable and separately transferable immediately following
completion of this offering. Purchasers may buy warrants in the aftermarket or
may move to jurisdictions in which the shares underlying the warrants are not so
registered or qualified during the period that the warrants are exercisable. In
that event, we would be unable to issue shares to those holders desiring to
exercise their warrants, and these holders would have no choice but to attempt
to sell the warrants in a jurisdiction where a sale is permissible or allow the
warrants to expire unexercised.
THERE HAS BEEN NO PRIOR MARKET FOR OUR SECURITIES, AND A PUBLIC MARKET MAY NOT
DEVELOP OR BE SUSTAINED.
Prior to this offering, you could not buy or sell any of our securities
publicly. An active public market for any of our securities may not develop or
be sustained after this offering, and the market price might fall below the
initial public offering price. The initial public offering price may bear no
relationship to the price at which our common stock or warrants will trade upon
completion of this offering. The initial public offering price will be
determined based on negotiations between us and the representatives of the
underwriters, based on factors that may not be indicative of future market
performance.
A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC
MARKET AFTER THE OFFERING AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Sales of a substantial number of shares of our common stock into the public
market after this offering, or the perception that those sales could occur,
could cause our stock price to decline or impair our ability to raise capital
through an offering of equity securities. After the offering, we will have
outstanding 7,053,558 shares of common stock (7,503,558 shares if the
underwriters' option to purchase additional shares is exercised in full). Of
these shares, the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except for
any shares purchased by our affiliates as defined in Rule 144 under the
Securities Act.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify forward
looking statements. These statements include, but are not limited to, statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus concerning, among other things:
- our ability to maintain and expand current distribution, fulfillment and
other partnering relationships and to enter into new relationships;
- our ability to attract advertisers and increase advertising revenue; and
- our ability to broaden our existing product lines or expand into new
product categories;
You should not rely too extensively on the forward-looking statements
contained in this prospectus, because these statements reflect only our
management's view as of the date of this prospectus. In addition, these
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. The cautionary
statements made in this prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this prospectus. We
assume no obligation to publicly update or revise these forward-looking
statements for any reason, or to update the reasons actual results could differ
from those anticipated in these forward-looking statements, even if new
information becomes available in the future.
13
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 1,500,000 units
offered by this prospectus will be approximately $30,531,750 based on an assumed
initial public offering price of $23.10 per unit. If the representative
exercises its over-allotment option in full, we estimate that the net proceeds
will be approximately $35,183,513. Both of these figures are after deducting
estimated underwriting discounts and commissions and estimated offering expenses
of $480,000 payable by us. We expect to use the net proceeds of this offering as
follows:
[Enlarge/Download Table]
PERCENTAGE
USE AMOUNT OF TOTAL
--- --------------------- ----------------
Repay of indebtedness....................................... $ 500,000 1.6%
Marketing and public relations.............................. $ 10,000,000 32.8%
Technology.................................................. $ 10,000,000 32.8%
Working capital and general corporate purposes.............. $ 10,031,750 32.9%
--------------------- ----------------
Total..................................................... $ 30,531,750 100.0%
===================== ================
- We intend to use approximately $500,000 of the net proceeds of this
offering to repay a note in the principal amount of $500,000 which was
issued in a private placement in January, 2000, which is due and payable
upon the closing of this offering. This note does not bear interest.
- We intend to use approximately $10,000,000 of the proceeds of this
offering for marketing. We plan to advertise in traditional media, such as
print publications, radio and television, and also on online advertising.
We also intend to engage in other promotional activities, including events
at nightclubs and other venues. The purpose of our marketing expenditures
will be to increase brand recognition, revenue and website traffic.
- We intend to use approximately $10,000,000 of the proceeds of this
offering for expenditures relating to the development of technology
allowing us to communicate more effectively with our retailers and the
establishment of an online network linking producers, wholesalers and
retailers.
The remaining proceeds will be used for working capital and general
corporate purposes. These purposes include paying salaries and general
administrative expenses. Our management will have broad discretion concerning
the allocation and use of a significant portion of the net proceeds of this
offering. Pending the use of the net proceeds of this offering, we intend to
invest these proceeds in short-term, investment grade, interest bearing
securities. In the event the representative of the underwriters exercises the
over-allotment option we intend to utilize such additional proceeds for working
capital and general corporate purposes.
The above represents our management's best estimate of the allocation of the
net proceeds, based upon the current state of our business operations, our
current plans for expansion and the current economic and industry conditions. We
reserve the right to reallocate the net proceeds among the categories stated
above. The amount or timing of our actual expenditures will depend on numerous
factors, including our profitability, the availability of alternative financing,
our business development activities and competition.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain future earnings, if any, to operate and expand our
business and do not expect to pay cash dividends in the foreseeable future.
We may not declare or pay any dividends on our common stock without the
approval of either holders of two-thirds of our Series A preferred stock or a
representative of the holders of our Series A preferred stock with written
authority to give this approval.
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CAPITALIZATION
The following table indicates our capitalization at December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the issuance of a $500,000
promissory note, 422,222 shares of Series A preferred stock, 248,236
shares of common stock, eleven convertible notes in the aggregate
principal amount of $1,000,000, 21,428 shares of common stock to Corporate
Capital Strategies, Inc. pursuant to a termination agreement and 27,582
additional shares of common stock pursuant to the exercise of preemptive
rights;
- on a pro forma as adjusted basis to reflect, upon completion of the
offering: (a) the repayment of a $500,000 promissory note, (b) the
conversion of all 422,222 shares of our Series A preferred stock into an
aggregate of 422,222 shares of our common stock, (c) the conversion of
eleven convertible notes issued by us into an aggregate of 284,090 shares
of common stock, and (d) the receipt of net proceeds from the sale by us
of the 1,500,000 units at an assumed initial public offering price of
$23.10 per unit, representing the mid point of the filing range, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
This table should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
[Enlarge/Download Table]
DECEMBER 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
SHORT TERM DEBT:
Short-term liabilities.............................. $ 1,130,739 $ 2,600,739 $ 1,130,739
LONG-TERM DEBT:....................................... $ 218,487 $ 218,487 $ 218,487
STOCKHOLDERS EQUITY (DEFICIT):
Preferred stock, $0.00001 par value per share,
10,000,000 shares authorized, 0 shares issued and
outstanding actual, 422,222 shares outstanding pro
forma, 0 shares outstanding pro forma, as
adjusted.......................................... $ -- $ 4 $ --
Common Stock, $0.00001 par value, 50,000,000 shares
authorized, 3,050,000 shares issued and
outstanding actual, 3,347,246 shares issued and
outstanding pro forma, 7,053,558 shares issued and
outstanding pro forma, as adjusted................ 31 33 71
Warrants............................................ 0 0 150,000
Additional paid-in capital.......................... 169,169 1,191,564 33,043,280
Accumulated deficit................................. (306,116) (306,116) (306,116)
----------- ----------- -----------
Total stockholders' equity (deficit).............. $ (136,916) $ 885,485 $32,887,235
----------- ----------- -----------
Total capitalization.............................. $ 1,212,310 $ 3,704,711 $34,236,461
=========== =========== ===========
The preceding table excludes:
- 450,000 shares of common stock and 225,000 redeemable common stock
purchase warrants issuable upon exercise of the underwriter's
over-allotment option;
- 1,500,000 shares issuable upon the exercise of the 1,500,000 redeemable
common stock purchase warrants offered by this prospectus;
- 300,000 shares issuable upon the exercise of the representative's
warrants;
15
- 150,000 shares issuable upon exercise of the 150,000 common stock purchase
warrants included in the representative's warrants;
- 300,125 shares of common stock issuable upon the exercise of warrants
which we have issued or are contractually obligated to issue to
consultants or in connection with financings;
- 14,205 shares issuable upon exercise of warrants to be issued to certain
of our preferred shareholders pursuant to the exercise of preemptive
rights after date of this prospectus;
- 1,171,617 shares of common stock issuable upon the exercise of currently
outstanding options at a weighted average price of $3.52 per share; and
- 328,383 shares available for issuance upon the exercise of options which
may be granted under our stock plan.
DILUTION
Our pro forma net tangible book value at December 31, 1999, after giving
effect to (a) the issuance of 422,222 shares of Series A convertible preferred
stock, (b) the issuance of 248,236 shares of common stock, and (c) the
anticipated issuance of 27,582 shares of our common stock pursuant to the
exercise of preemptive rights, and (d) the issuance of 21,428 shares of common
stock pursuant to termination of a consulting agreement, was approximately
$885,485, or $.26 per share of common stock. Pro forma net tangible book value
per share represents total tangible assets less total liabilities, divided by
the number of shares of common stock outstanding after giving effect to the
conversion of all outstanding convertible preferred stock.
After giving effect to the sale of 1,500,000 units offered hereby, and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value at December 31, 1999,
would have been $32,887,235, or $4.66 per share. This represents an immediate
increase in net tangible book value of $4.40 per share, or 1,692%, to existing
stockholders and an immediate dilution of $6.84 per share, or 59%, to new
investors. The following table illustrates this dilution:
[Download Table]
Assumed initial public offering price per share............. $11.50
Pro forma net tangible book value (deficit) per share at
December 31, 1999......................................... $ .26
Increase in net tangible book value per share attributable
to new investors.......................................... $ 4.40
Pro forma net tangible book value per share as adjusted for
the offering.............................................. $ 4.66
Dilution per share to new investors......................... $ 6.84
If the over-allotment option is exercised in full, the pro forma net
tangible book value of common stock after the offering would have been
$37,538,998, or $5.00 per share. This represents an immediate increase in net
tangible book value per share to existing stockholders of $4.74, or 1,823% and
an immediate dilution of $6.50 per share, or 56%, to new investors.
The following table summarizes as of December 31, 1999, on a pro forma as
adjusted basis, the total number of shares of common stock and consideration
paid to us and the average price per share paid by existing stockholders and by
new investors purchasing the 1,500,000 units offered by this prospectus at an
assumed initial public offering price of $23.10 per unit and before deducting
the estimated underwriting discounts and commissions and estimated offering
expenses. The following table does not include purchase of or any exercise of
the redeemable warrants offered by this prospectus.
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ----------- -------- -------------
Existing stockholders..................... 4,053,558 57% $ 2,661,601 7% $ .66
New investors............................. 3,000,000 43% $34,500,000 93% $11.50
--------- --- ----------- --- ------
Totals.................................. 7,053,558 100% $37,161,601 100%
========= === =========== ===
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SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from the audited financial statements included
elsewhere in this prospectus. The balance sheet data as of December 31, 1997 is
derived from our unaudited financial statements. The historical results are not
necessarily indicative or results to be expected for future periods.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
------------------------------------
1997 1998 1999
---------- ---------- ----------
STATEMENT OF OPERATIONS:
Revenues............................................... $1,281,453 $1,818,960 $2,788,187
Cost of revenues....................................... 704,486 1,076,197 1,946,758
---------- ---------- ----------
Gross profit........................................... 576,967 742,763 841,429
---------- ---------- ----------
OPERATING EXPENSES:
Marketing.............................................. 312,814 339,973 425,236
General and administrative............................. 310,804 360,174 592,613
Total operating expenses............................. 623,618 700,147 1,017,849
---------- ---------- ----------
(Loss) income from operations.......................... (46,651) 42,616 (176,420)
OTHER INCOME (EXPENSE)
Interest expense....................................... (7,470) (7,053) (18,780)
---------- ---------- ----------
Net (loss) income...................................... $ (54,121) $ 35,563 $ (195,200)
========== ========== ==========
Net (loss) income per share: basic and diluted......... $ (.02) $ .01 $ (.06)
========== ========== ==========
Shares used in computing basic and diluted net (loss)
income per share..................................... 3,026,956 3,026,956 3,033,216
========== ========== ==========
BALANCE SHEET DATA:
Cash................................................... $ 129,324 $ 461,924 $ 340,786
Working capital (deficiency)........................... $ (95,306) $ (102,729) $ (218,565)
Total assets......................................... $ 231,117 $ 603,377 $1,212,310
========== ========== ==========
Total liabilities.................................... $ 358,396 $ 695,093 $1,349,226
Total stockholder's (deficit) equity................. $ (127,279) $ (91,716) $ (136,916)
---------- ---------- ----------
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH OUR
FINANCIAL STATEMENTS, AND THE NOTES WHICH ACCOMPANY THE FINANCIAL STATEMENTS,
APPEARING BELOW.
OVERVIEW
We were incorporated as Liquor by Wire, Inc. in 1993. We first accepted
online orders through the website liquorbywire.com., and in our first five years
a small percentage of our revenues came from online orders. In October 1998, we
acquired the domain name Liquor.com, and in April 1999 we launched Liquor.com as
a separate website. We combined the Liquorbywire.com and Liquor.com websites and
relaunched our website under the domain name Liquor.com in November 1999. In
December 1999, we formed a subsidiary, Liquor.Com, Inc., a Delaware corporation,
and conducted a merger under which this subsidiary was the surviving
corporation.
As we seek to expand our business, we believe that our operating expenses
will significantly increase as a result of increased advertising, marketing and
promotional activities and other expenditures designed to increase the value of
our brand. We anticipate continuing to incur losses and generate negative cash
flow from operations for the foreseeable future.
In light of the rapidly changing nature of our business, our limited
operating history in our current form and the seasonality of our business, we
believe that comparisons of our operating results for any period with those of
the preceding period are not particularly meaningful and should not be relied
upon as an indication of future performance. Our revenues and operating results
may vary from quarter to quarter due to a number of factors, some of which are
beyond our control, and detailed in the "Risk Factors" section of this
prospectus. This fluctuation is primarily due to increased revenues and
advertising expenditures during holiday seasons, particularly the quarter ending
December 31.
REVENUE
Sales of alcohol beverages to visitors who view our website are made by
local retailers with whom we have relationships, not directly by us. As a
result, we do not incur the costs associated with a large distribution network
or with maintaining inventory. We treat the entire purchase price of orders
placed through us as revenue because we assume the risk associated with all
sales made through our catalogs or website, by agreeing to refund a customer's
purchase price in the event a delivery is not made or the customer is
dissatisfied. For the years ended December 31, 1998 and 1999, total refunds as a
percentage of our total revenues were .87% and 3.75%, respectively.
Our largest source of revenue is from the facilitation of sales orders for
alcohol beverages and related products placed on our catalogs and website. Our
revenues from these orders was $2,435,118 in 1999. A smaller percentage of our
revenue is derived from the sale of advertising space. Our revenues from the
sale of advertising space were $353,069 in 1999.
EXPENSES
Our expenses are divided into four general categories: cost of revenues,
marketing, general and administrative, and interest expense.
COST OF REVENUES. Our cost of revenues consists of the portion of the
purchase price of products ordered through us which we pay to our affiliated
retailers, direct costs associated with advertising revenues and shipping and
handling costs paid by us in connection with fulfilling customer orders. We
expect our cost of revenues to increase if we successfully generate more product
orders.
MARKETING EXPENSES. Marketing expenses consist primarily of advertising
costs, commission payments to affiliated websites, purchases of customer lists,
the costs of printing and mailing our
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catalogs and direct mailing expenses. We expect that these expenses will
increase significantly in future periods. We anticipate that our marketing
expenses will increase substantially as we increase our advertising and other
promotional expenditures with a view to further developing our brand name.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel costs, facilities expenses, professional fees and
other general corporate expenses. We expect our general and administrative
expenses to grow as we hire additional personnel and incur expenses related to
the growth of our business and our operation as a public company.
INTEREST EXPENSE. Interest expense consists of interest on our bank debt
and other borrowings.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our selected
statements of operations data.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
REVENUE AND COST OF REVENUES:
Revenues............................................... $1,281,453 $1,818,960 $2,788,187
Cost of revenues....................................... 704,486 1,076,197 1,946,758
---------- ---------- ----------
Gross profit........................................... 576,967 742,763 841,429
OPERATING EXPENSES:
Marketing.............................................. 312,814 339,973 425,236
General and administrative............................. 310,804 360,174 592,613
---------- ---------- ----------
Total operating expenses............................. 623,618 700,147 1,017,849
---------- ---------- ----------
(Loss) income from operations.......................... (46,651) 42,616 (176,420)
OTHER EXPENSE:
Interest expense....................................... (7,470) (7,053) (18,780)
---------- ---------- ----------
Net (loss) income........................................ $ (54,121) $ 35,563 $ (195,200)
========== ========== ==========
Net (loss) income per share: basic and diluted........... $ (.02) $ .01 $ (.06)
========== ========== ==========
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Our revenues increased approximately $969,000, or 53.3%, to
approximately $2,788,000 in 1999 from approximately $1,819,000 million in 1998.
This increase was primarily the result of increased order volume.
COST OF REVENUES. Our cost of revenues increased approximately $871,000, or
80.9%, to approximately $1,947,000 million in 1999 from approximately $1,076,000
in 1998. This increase was primarily the result of the increased order volume
described above as well as increases in the costs of developing and maintaining
our website. As a percentage of revenues, cost of revenues increased from 59.2%
in 1998 to 69.8% in 1999. This increase was due primarily to our lowering of our
retail prices to generate additional orders while the prices paid to our
affiliated retailers remained relatively constant.
MARKETING EXPENSES. Our marketing expenses increased approximately $85,000,
or 25.0%, to approximately $425,000 in 1999 from approximately $340,000 in 1998.
This increase was primarily due to increased advertising expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased approximately $233,000 or 64.7%, to approximately $593,000 in
1999 from approximately $360,000 in
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1998. This change was primarily due to increased personnel costs associated with
our hiring additional employees.
INTEREST EXPENSE. Our interest expense increased about $11,700, or 164.8%,
to approximately $18,800 in 1999 from approximately $7,100 in 1998. This
increase is due to the fact that we increased our debt by borrowing $192,000,
which we used to purchase the building in which our offices are located and to
make improvements on the property.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Our revenues increased approximately $538,000, or 41.9%, to
approximately $1,819,000 in 1998 from approximately $1,281,000 million in 1997.
This increase was primarily the result of increased Internet and catalog order
volume.
COST OF REVENUES. Our cost of revenues increased approximately $372,000, or
52.8%, to approximately $1,076,000 million in 1998 from approximately $704,000
in 1997. This increase was primarily the result of the increased Internet and
catalog order volume described above. As a percentage of revenues, cost of
revenues increased from 55.0% in 1997 to 59.2% in 1998. This increase was due
primarily to our lowering of our retail prices to generate additional orders
while the prices paid to our affiliated retailers remained relatively constant.
MARKETING EXPENSES. Our marketing expenses increased approximately $30,000,
or 8.6%, to approximately $340,000 in 1998 from approximately $313,000 in 1997.
This change was primarily due to increased advertising and catalog expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased about $49,000, or 15.8%, to approximately $360,000 in 1998
from approximately $311,000 in 1997. This increase was primarily due to
increased personnel costs.
INTEREST EXPENSE. Our other expenses decreased approximately $400, or 5.3%,
to approximately $7,100 in 1998 from approximately $7,500 in 1997. This decrease
was primarily due to our cash flow improving, which allowed us to draw less on
our bank line of credit, and declining interest rates, which provided a more
favorable interest rate on the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our requirements for working capital primarily through
operating cash flows and more recently from the proceeds of the private
placement of our securities as well as borrowings under our line of credit. As
of December 31, 1999, we had a working capital deficit of $218,565 and a capital
deficiency of $136,916. In contrast, as of December 31, 1998, we had a working
capital deficit of $102,729 and a capital deficit of $91,716.
In September 1999, we obtained a $120,000 line of credit from LaSalle Bank
FSB. Draws on the line currently bear interest at the rate of 9.75% and are
evidenced by a note that is payable on demand of the bank. In March 1999, we
borrowed $192,000 from Bank One, Illinois, N.A. The loan must be repaid by
September 19, 2004. The loan bears interest at a rate equal to 7.74% on a per
annum basis. Our Chief Operating Officer, Steven Olsher and our Chairman, Gail
Zelitzky, have each guaranteed our obligations under these two loans.
Since December, 1999, we have obtained a total of $2,466,974 in proceeds
from the private placement of securities. On December 23, 1999, we sold a total
of 50,000 shares of our common stock for $50,000. In January 2000 we issued a
promissory note in the principal amount of $500,000 to the Gem Global Yield Fund
Limited, and 422,222 shares of Series A Preferred Stock to the Gem Global Yield
Fund and four other entities, for total consideration of $500,000. In March 2000
we issued ten units, each consisting of one convertible promissory note and one
warrant to purchase shares of our
20
common stock, for total consideration of $900,000. In addition, the holders of
our Series A have made a committment to purchase one unit for total
consideration of $100,000 by exercising their preemptive rights with regard to
this offering. The holders will make payment for their unit, and we will issue
their note and warrant, after the date of this prospectus. Each convertible note
bears interest at the prime rate plus two percent. Each note automatically
converts into shares of our common stock at a conversion price of $3.52 per
share upon completion of this offering, but may be converted earlier, at the
same conversion price, at the option of the holder. Each warrant allows the
holder, for a period of five years from the date of issuance, to purchase a
number of shares equal to 50% of the number issuable upon conversion of the
convertible note, at a price of $2.64 per share. From January through March
2000, we sold a total of 248,236 shares of common stock for total consideration
of $825,276. The first 42,194 shares sold in this offering were sold at a price
of $2.37 per share, and the remainder were sold at a price of $3.52 per share.
In addition, in March 2000 the holders of our Series A Preferred Stock, in
exercise of their preemptive rights with regard to these sales, committed to
purchase an additional 4,688 shares at a price of $2.37 per share for total
consideration of $11,111, and an additional 22,894 shares at a price of $3.52
for total consideration of $80,857. These shares will be issued after the date
of this prospectus.
Our principal uses of cash are to fund expanded marketing and advertising
expenses as well as improvements and enhancements to our technology. While there
can be no assurance, we believe that the proceeds of this offering, funds
currently on hand and funds to be provided by operations will be sufficient to
meet our need for working capital for at least the next twelve months. Actual
results and working capital needs could differ materially from those estimated
due to a number of factors. We may require additional financing within this time
frame. Additional funding may not be available on terms acceptable to us, or at
all.
Cash used in operating activities was approximately $8,000 in 1999, and cash
generated by operating activities was approximately $401,000 in 1998. We used
cash primarily to pay professional fees and to fund the increase in accounts
receivable. A substantial portion of the increase in receivables was due to
processing delays associated with credit card orders placed in 1999, but for
which we did not receive payment until 2000.
Cash used in investing activities was approximately $56,000 for 1999. We
used this cash to purchase our office facility and make related improvements.
Financing activities provided approximately $69,000 comprised of $20,000 in
draws on our line of credit and $50,000 from the placement of securities
discussed above, less a $1,000 reduction in our long-term debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that all the
costs related to the development of internal use software other than those
incurred during the application development stage be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. We adopted SOP
98-1 on January 1, 1999. Our adoption of SOP 98-1 did not have a material effect
on our financial position or results of operations.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instrument and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair market value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income (loss) depending on whether a derivative is designed
as part of a hedge transaction and, if so, the type of
21
hedge transaction involved. We do not expect adoption of SFAS No. 133 to have a
material impact on our consolidated financial position or results of operation.
In December 1998, we adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This standard requires that reportable
segments be reported consistent with how management assesses segment
performance. It also requires disclosure of certain information by reportable
segment, geographic area and major customer. As a result, we will separately
report information on the two operating segments: (1) catalog and website, and
(2) advertising. We do not calculate operating income by segment. Instead, we
present our gross profit. In addition, because we do not rely on segment asset
allocation, information regarding segment assets is not meaningful and is not
reported.
We have elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
in accounting for our employee stock options, rather than the alternative fair
value accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation." APB No. 25 provides that the compensation expense relative to our
employee stock options is measured based on the intrinsic value of stock options
granted. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123. This method recognizes the fair value of stock options granted
at the date of grant in earnings over the vesting period of the options.
We account for non-employee stock-based awards in which goods or services
are the consideration received for the equity instruments issued based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
22
BUSINESS
OVERVIEW
Liquor.com is a customer relationship management, or eCRM, eCommerce and
business-to-business exchange company whose focus is to integrate producers,
wholesalers, retailers and consumers in the highly fragmented prestige alcohol
and entertainment beverage industry. We build and maintain relationships with
the consumer, as well as provide eBusiness solutions for all three tiers of the
alcohol beverage distribution system--(a) producers, (b) wholesalers and (c)
retailers. We have created a global network of retail partner affiliates by
offering them the opportunity to generate additional revenue, reduce costs and
build loyal customer relationships. We give our affiliates and customers alike
access to a secure eCommerce and custom content environment that serves as the
hub of a direct delivery network. We are currently developing a hosted,
proprietary network for the industry that will aggregate and streamline product
purchasing, reduce costs, build revenue and effectively disseminate product
information and industry news for all three tiers.
We do not sell directly to customers, but rather utilize our industry
relationships, expertise and in-depth knowledge of our target markets to
generate demand, facilitate sales and build loyalty. Currently, the Liquor.com
affiliate network provides direct delivery to thirty-nine states and more than
forty countries. By expanding our existing infrastructure and capitalizing on
relationships developed by our founders and their family over fifty years in the
alcohol beverage industry, it is our goal to alter the $113 billion alcohol
beverage industry and change the manner in which alcohol beverages are marketed,
purchased and sold.
INDUSTRY BACKGROUND
GROWTH OF ONLINE COMMERCE. The Internet is a global medium which enables
millions of people to share information, conduct business and communicate
electronically. In a September 1999 report Forrester Research estimated that
17 million U.S. households will have purchased items online in 1999, increasing
to 49 million by 2004. In this report, Forrester Research also estimated that
Internet purchases of goods and services by United States consumers would
increase from $20.3 billion in 1998 to over $143 billion in 2003.
ECRM, ECOMMERCE AND BUSINESS-TO-BUSINESS INTERNET APPLICATIONS. We believe
that the Internet offers increasing opportunities to provide
business-to-business services which link participants at all levels of a product
distribution system, improving efficiency and lowering costs. In addition, the
Internet allows sellers to directly market their products and obtain customer
feedback and demographic information in ways which are not possible through
traditional distribution and advertising channels. We also believe that
businesses which offer goods and services over the Internet have potential
advantages over traditional retailers who sell exclusively through catalogs or
in fixed locations, because eCommerce companies typically can avoid many
overhead costs associated with traditional businesses, such as the expenses of
large inventory systems.
MARKET FOR ALCOHOL BEVERAGES. According to Beverage Dynamics, an industry
publication, annual sales of alcohol beverages in the United States totaled
approximately $113 billion in 1999.
CORPORATE HISTORY
Liquor.com is the product of three generations of family service in the
alcohol beverage industry. Irving Robins, our Chairman's father and Chief
Operating Officer's grandfather, founded Foremost Sales Promotions, Inc. in
1949, and focused on providing services to the alcohol beverage industry as well
as the franchising of Foremost Liquor Stores. Our predecessor, Liquor by Wire,
was created as a division of Foremost Sales Promotions to facilitate the
worldwide delivery of wine, champagne, spirits and gifts and as a means with
which to help differentiate the Foremost franchisees from their
23
competition. In 1991, after recognizing the significant opportunity for the
further development of the Liquor by Wire division, our founders began to focus
on expanding the revenues and reach of this division, which led to our Internet
efforts.
We were incorporated in Illinois with the name Liquor by Wire, Inc. in
August 1993. Also in 1993, we launched liquorbywire.com, beginning our
transition into an eCRM, eCommerce and business-to-business exchange company. In
1994, our founders discontinued their franchise operations to fully concentrate
on the opportunity within the online and direct segment of the market. Since
1995, the majority of our revenue has been derived from the online and catalog
gift revenues for entertainment beverages and related products. In
October 1998, we acquired the URL liquor.com and began to implement the next
generation of our Internet strategy.
In December 1999, we formed a subsidiary, Liquor.com, Inc., a Delaware
corporation, and conducted a merger under which this subsidiary was the
surviving corporation. Our executive offices are located at 4205 West Irving
Park Road, Chicago, IL 60641. Our phone number is (773) 427-8620.
Our website is located at www.liquor.com. We are not incorporating the
information on our website into this prospectus, and we do not intend to make
our website a part of this prospectus. This prospectus includes trademarks,
trade names and service marks of other companies. Each trademark, trade name or
service mark of any other company appearing in this prospectus is the property
of its owner.
OUR STRATEGY
To achieve our mission of becoming the leading provider of eCRM, eCommerce
and business-to-business solutions for the alcohol and entertainment beverage
industry and significantly altering the manner in which alcohol beverages are
marketed, purchased and sold, we will continue to focus on the following
strategies:
- Leveraging our relationships with producers, wholesalers and retailers
developed by our founders and their family over fifty years in the alcohol
beverage industry.
- Strengthening and expanding our relationships with our retail affiliate
network through cooperative marketing, custom product development and
other programs.
- Completing the development of our online exchange that unites producers,
wholesalers and retailers to generate additional revenue, reduce costs and
build loyal customer relationships.
- Focusing our direct marketing efforts on increasing traffic, orders and
brand recognition through our Liquor.com portal.
- Expanding proprietary content on our Liquor.com portal through direct
development and partnerships with content providers.
- Increasing our database of Liquor.com users by offering what we believe to
be one of the world's largest selections of wine, champagne, spirits and
complementary products and services, ease of use and high levels of
customer service.
- Further developing our growing list of Liquor.com users into an extensive
database of consumer demographic, product preference and other information
enabling our partners to focus their marketing efforts and obtain feedback
in ways that we believe are not available in the current distribution
system.
DEVELOPMENT OF AN ECRM, ECOMMERCE AND BUSINESS-TO-BUSINESS EXCHANGE COMPANY
Alcohol beverages are typically sold through a three-tier system, from the
producer to the wholesaler and then to the retailer. We are a partner in the
alcohol beverage distribution chain, serving
24
businesses at all three levels. As an eCRM, eCommerce and business-to-business
exchange company, we attempt to integrate the three tiers through a central BtoB
network that:
- Reduces costs;
- Generates revenues; and
- Build relationships.
PRODUCER SERVICES.
We are developing and implementing an online network of hosted software
solutions and business relationships that incorporate our expertise in sourcing
and delivering alcohol and related entertainment beverages, as well as custom
products and services related to the upscale entertainment lifestyle. As this
network is deployed, we intend to link producers with wholesalers and retailers
via the Internet, offering increasing opportunity to (a) reduce order costs,
(b) manage inventory, (c) compare strategies and marketing techniques, and
(d) generally operate their businesses more efficiently and effectively. We
intend to offer producers access to specific intranet applications within the
Liquor.com website. We intend for these areas to be accessible through password
only and will provide access to product sales information, such as "This Week's
Top 10 Selling Items," information on new products, consumer comments on
products of interest and news related to the industry.
Through our network, we attempt to offer producers a one-to-one relationship
with the consumer that we believe is non-existent within the current
distribution system. We believe producers will be able to utilize this
relationship to educate and inform their customers, reach new markets, and
introduce new products. We believe our ability to provide direct access to
consumers specifically interested in the purchase of alcohol beverages at the
point of sale, both online and offline, is a significant asset in the producers'
marketing efforts. In addition, we maintain a database of names, addresses,
e-mails and other relevant information regarding consumers who purchase and
receive producers' brands as well as competitive products within the category of
choice, such as vodka or gin. Using this database, we hope to become an integral
marketing partner and alter the manner in which producers' marketing dollars are
allocated. We also intend to offer producers the opportunity to receive feedback
directly from consumers through our website. Utilizing interactive forums, we
will forward consumer comments, such as product or drink reviews, directly to
producers.
From May 1999 to April 2000, we signed agreements with nineteen producers in
which the producers have agreed to pay us an aggregate of over $600,000 for
advertising on our website and in our catalogs. We plan to increase the
opportunities available to producers for the direct promotion of their products
beyond placement on our website and in our catalogs. Online, we plan to offer
"Category Exclusive" positioning, the sponsorship of online events, such as Q &
A LIVE!, and the offering of online coupons. Utilizing liquor.com as a calendar
and events hub, we intend for producers to have the opportunity to sponsor
nightclub-based events, such as Liquor.com LIVE!, a nationwide nightclub tour,
or The Bartender Olympics, a cross-country search for the world's most talented
bartender. We also intend for producers to be able to utilize our existing
retailer relationships for new product introductions and advertise in our
various direct mail pieces, such as a publication we intend to develop called
"Loungin'--the Liquor.com Magalog." We believe offering these increased services
will increase our advertising revenues and create additional sources of revenue,
such as payments for our services in organizing offline events.
WHOLESALER SERVICES.
We believe we benefit wholesalers by driving incremental sales through this
middle tier. Every order we receive benefits wholesalers across the country
since all of our orders are fulfilled by local, licensed retailers who purchase
their product from the wholesale tier. We also believe that our online
25
network will benefit wholesalers by linking them with producers and retailers,
improving their ability to reduce costs, manage inventory, and otherwise improve
their efficiency. We plan to offer wholesalers access to password-protected
sales and marketing information available only to participants at the wholesale
tier, along with industry news.
RETAILER SERVICES.
We believe sales generated through our website complement retailers' current
operational structure. Each order received by our retailers is typically
additional business they would not otherwise have received. For example, through
orders processed through our website and catalogs as business-to-business gifts,
our network of retailers reaps the benefit of receiving orders for delivery in
their local area that have originated from outside of their immediate vicinity.
Like producers and wholesalers, we believe retailers will be able to improve
efficiency and reduce costs by using our online network. In addition, we believe
increasing the size of our affiliate network will create the potential for
buying power and product leverage as the affiliates are aggregated. The retail
alcohol beverage industry is highly fragmented, and we intend to leverage the
combined purchasing power of these accounts into a nationally recognized buying
cooperative, and aggregate these accounts for on-site product placements and
cooperative marketing. By aggregating our member retailers, we believe we can
affect the current alcohol beverage distribution structure through the pooling
of these retailers for the bulk purchase of their products. Although this
practice is commonly conducted on a market by market basis, we are not aware of
any dominant industry player affecting sales in this manner on a national basis
which we believe provides us with a market opportunity.
OUR WEBSITE
Liquor.com was officially launched in November 1999, and we have been
developing it into an online community in which visitors can encounter a host of
interesting products, content and services. The site is designed to enable our
visitors to select and purchase fine wine and beverages, learn the art of mixing
drinks, understand the history of products such as single malt scotch, plan
parties and events, hire professional bartenders or send unique gifts.
Furthermore, the site acts as an e-commerce portal, providing access to the
direct delivery of beverages and related goods through our affiliate network. By
utilizing the Internet as a point of contact, commerce and service, we hope to
be able to broaden our network of affiliates, products and services, thereby
helping develop stronger relationships with the consumer. As our website traffic
and membership increase, we expect to be able to generate increasing revenue
from online advertising and marketing to these visitors. We are already selling
advertising space to producers and others wishing to target our constituency.
Our website provides what we believe to be a compelling experience
combining:
- Custom content, including:
- "The Libation Library" -- an extensive database of drink recipes; and
- An "Ask The Bartender!" feature, which allows consumers to receive answers
to questions on alcohol beverages, such as the difference between a
"blended" scotch and a single malt scotch;
- A "party planner" service called "Party Central" that provides product and
serving recommendations for consumer and corporate events; and
- What we believe to be one of the world's largest selections of wines,
champagnes, spirits and alcohol beverage related products.
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We intend to add the following features to our website during the year:
- Entertainment, such as celebrity profiles and live interaction, including
online chat and Q & A LIVE!, to allow consumers to ask questions of
celebrities and industry notables;
- Information on offline events, such as tastings and nightclub promotions;
- The ability to create a personalized home page which will allow consumers
to receive information tailored to their specific interests;
- A Liquor.com membership program, under which consumers will be assigned a
customer identification number and we will store their demographic
information and previous order information. We intend for Liquor.com
members to be entitled to product discounts, invitations to members-only
events, and primary access to limited allocations or new products; and
- Online coupons, which will allow consumers to access daily specials and
receive immediate discounts on their orders.
AFFILIATE NETWORK
Our retail affiliate network provides individual alcohol beverage retailers
access to a broad range of services and products, business leverage and
marketing opportunities. In addition, it provides customers with a resource for
product information, service and direct delivery. We have agreements with over
130 alcohol beverage retailers to provide fulfillment for Liquor.com according
to our specifications. We believe these retailers are among the industry's
largest and most recognized stores. We intend to expand our affiliate network by
adding retailers of similar size.
In our role as a revenue-enhancer, we provide our affiliates with online
access to retail sales by offering custom links, or "eLinks," and icons on the
Liquor.com website, which lead to the affiliate's websites. We are currently in
the process of implementing an "eStore" builder that will enable retailers to
create their own personalized storefronts. "eStores" will be a series of web
pages, maintained on and accessed through our website, containing background
information on a particular affiliate. We believe these links and storefronts
will offer Liquor.com affiliates the opportunity to enhance revenues by:
- offering our selection of custom products that may not be normally
available to these affiliates; and
- offering their products to a broader geographic range of customers.
Additionally, because we operate the portal, source its products directly
with producers, and manage its technology, we believe affiliates will be able to
offer a greater level of product and service to their customers with virtually
no initial capital investment on behalf of the affiliate. We intend for
affiliates to be able to create their own "eLinks" and "eStores" in an
automated, Internet-based environment, enabling new affiliates to join the
network and quickly go online with links and icons. We believe many of our
affiliates will take advantage of the "eStore" program, which is intended to be
a free service. This system will also allow us to reduce our costs, by improving
the speed and efficiency of our communications with retailers. In addition, we
intend to process all orders placed through an "eStore" on our website.
We believe our "eLinks" and "eStores" will allow our affiliates to utilize
Liquor.com content to assist their patrons in planning and supporting their
professional and personal entertainment lifestyle. Liquor.com's corporate and
personal gift services provide our affiliates with an array of custom packaged,
private label wines, champagnes and alcohol beverages, as well as an array of
custom related goods.
We are expanding the range of services and marketing opportunities offered
to our member affiliates. Affiliates currently receive the benefit of processing
orders for delivery in their immediate
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locale that are generated by Liquor.com. These opportunities will include
activities for which we will receive a percentage of the revenues, such as
aggregating our member affiliates for the bulk purchase of their products and
thereby lowering their cost of goods.
Our relationships and infrastructure give us the ability to facilitate the
worldwide delivery of alcohol beverages and related items. We have entered into
marketing partnerships under which orders for alcohol beverages from the
websites of our partners are fulfilled through our network of retail affiliates,
generating additional revenue for us and for the affiliates.
DISTRIBUTION AND ORDER PROCESSING
Our distribution model allows us to offer a wide selection of products
without the need to maintain any inventory. Consumers order products through our
website, which is designed internally. We retrieve orders electronically from
our server located in Hoffman Estates, Illinois which is maintained by an
outside company. We believe that hiring an outside company to maintain our
server makes it easier for us to accommodate a larger number of customer orders
without significantly increasing our work force. In connection with processing
orders at our office, we plan to invest in technology designed to allow us to
communicate more effectively with our retailers, which we believe will improve
the method of communication between us and these retailers, while allowing us to
process a higher volume of orders.
Under our current system, once we retrieve these orders at our offices, we
transmit them by facsimile to our affiliated retailers. These retailers then
confirm acceptance of the order by telephone or facsimile. As part of developing
our online network, we intend to transmit these orders to our retailers and
receive their confirmation electronically. We process customers' credit card
orders for the retailers, but the retailers make the actual sale to the
consumer, and also deliver the product to the consumer. Domestic orders are
generally delivered by the retailers in one to three business days.
International orders are typically delivered in five to seven business days.
Since we do not sell directly to our affiliate's customers, local tax and
regulatory considerations remain the responsibility of the local affiliates.
MARKETING
Liquor.com's marketing approach focuses on incorporating the choice of fine
alcohol beverages and packaging them with other elements of the entertainment
lifestyle, offering meaningful alternatives to traditional liquor-store
concepts. A key part of our strategy is to solidify the relationship between
alcohol beverage producers and related lifestyle product marketers, creating a
broad base of related products through our affiliate network. We also believe
that our online eStore and eLink models will offer opportunities for thousands
of retail outlets across the U.S. and abroad to provide informative content to
their customers. In addition, we plan to establish a range of services and
marketing opportunities for "on-premise accounts," such as bars, nightclubs and
restaurants. These services and opportunities are intended to include
implementing traffic-generating, Liquor.com LIVE! events at their
establishments. As our brand name gains additional recognition, we believe this
will drive additional traffic into our partner's establishments and increase
services we provide to our member accounts, allowing us to implement monthly
fees for our on-premise accounts' continued participation. We also intend to
introduce private label products to participating liquor.com retailers,
nightclubs, bars, restaurants and consumers.
To increase traffic on our website, we offer an online partnership program.
This program is managed by LinkShare, an online partnership management company
whose website is located at www.linkshare.com. Online partners who place a
Liquor.com banner on their website receive commissions of between five and ten
percent for revenues generated as a result of the banner, which provides a link
to our website.
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We intend to aggressively implement marketing programs to further strengthen
the Liquor.com name. In addition to enhancing our website, we intend to conduct
promotional events, such as product tastings at nightclubs and restaurants. We
also plan to launch a Liquor.com "Magalog" which will feature articles on
entertaining and other issues of interest to consumers of alcohol beverages, in
addition to product listings. We believe this Magalog will increase our catalog
sales and increase our brand recognition. Our marketing strategy will also
target specific groups such as purchasing agents and individuals responsible for
corporate gift-giving. In addition, we intend to create specific
business-to-business gift programs, such as developing gift items tailored to
specific corporations and creating a business-to-business marketing staff.
We believe we have achieved relatively broad exposure from our limited
advertising efforts to date. In December 1999, we received approximately
6,700,000 "hits" on our website, with an average session length of nine minutes
and ten seconds. This was accomplished with a total marketing and advertising
budget of under $450,000 for 1999. We believe the implementation of our planned
multi-million dollar marketing campaign, combined with the ease of recall of our
brand name, will lead to a significant increase in traffic to our website.
After this offering, we will seek to promote our brand name with extensive
advertising, both in traditional media and on the Internet. Our traditional
advertising will consist of print advertising, direct mail campaigns, local
radio and cable television commercials, a business-to-business print campaign,
television infomercials and targeted outdoor media. We intend for our Internet
advertising efforts to include establishing partnerships with search engines,
directories, and award sites; generating reciprocal links with other sites,
using banner advertising, purchasing banner exchange services, postings to news
groups and Internet mailing lists, and gaining certification on shopping
channels of major Internet portals. Our non-traditional marketing will include
advertising on taxi-cab rooftops and bus stands and marketing in smaller local
publications and local nightclubs. An additional marketing effort will involve
preparing a media guide to distribute press releases describing major product
offerings. We also intend to create a launch promotion to generate the largest
possible registered user base in the shortest amount of time, and we will reward
consumers for registering with our site. We plan to focus our initial marketing
efforts on the largest United States cities and on executives of large
corporations and individuals responsible for corporate gift giving.
COMPETITION
The business of marketing and selling alcohol beverages is highly
competitive, and there are few barriers to entry in the markets in which we
compete. The number of e-commerce sites competing for consumers' attention and
advertising dollars has increased rapidly during the past several years. We
compete with other marketers of alcohol beverages who sell through various
channels, including retail stores, the Internet, telephone and catalogs. Many of
our competitors have greater resources and more established customer bases than
ours. Our principal competitors are 800-Spirits, Inc., Drinks.com,
Wine.com, Inc., Internet Wines & Spirits, Geerlings & Wade, Inc. and Ambrosia.
In addition, many of our affiliated retailers have their own websites, so
customers can make online purchases from these retailers without using our
website.
We believe that the primary competitive factors in our markets are:
(a) brand recognition, (b) site content, (c) ease of use, (d) price,
(e) capacity to fill orders, (f) customer service and (g) reliability. Our
success will depend on our ability to provide value-added services to our
marketing partners and a compelling shopping experience to consumers. Some of
our competitors have and may continue to adopt aggressive pricing and marketing
strategies. Increased competition may prevent us from achieving our financial
goals and result in the loss of market share and a reduced value for our brand.
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EMPLOYEES
As of April 10, 2000 we had eighteen full-time employees. Five of these
employees are executive officers. In addition, we have (a) one employee devoted
to office management, (b) one to accounting, (c) three to customer service,
(d) four to marketing, and (e) four to technology. We have reached an agreement
with an individual who will serve as our vice president of strategic marketing.
We also hire temporary employees, when necessary, to aid in order processing at
our busiest times. Following the completion of this offering, we intend to hire
a vice president of industry relations, vice president of operations, chief
marketing officer, senior vice president of sales, ten additional customer
service representatives, three sales associates, five additional marketing
associates, two additional industry relations personnel, two additional
accounting clerks, and two administrative assistants. None of our employees are
represented by a labor union and we consider our relations with our employees to
be good.
GOVERNMENT REGULATION
The distribution of alcohol beverages is highly regulated by various
governmental agencies. In particular, retail stores which sell alcohol beverages
must obtain liquor licenses and are subject to extensive regulation. We do not
believe that we are required to obtain a liquor license in any state or are
otherwise subject to laws which govern retail liquor stores, because we provide
a service which connects buyers and sellers of liquor, and do not sell liquor
ourselves. We believe we can lawfully receive orders for the full range of
products listed in our catalogs and website in thirty-seven states and the
District of Columbia without the need to obtain a liquor license and that in two
additional states, Oregon and Washington, we can receive orders for wine and
champagne only. Any or all of these states could change their laws to prohibit
us from providing our services without a liquor license, or change the
interpretation of their existing laws in a way which would require us to obtain
a license to provide our services to residents of these states. If either of
these changes occurred in one or more of the states, it could greatly increase
our costs of doing business, or prevent us from accepting orders for shipment to
residents of those states.
In the following eleven states we are only permitted to receive orders for
non-alcohol products: Alabama, Delaware, Georgia, Kentucky, New Hampshire, North
Carolina, North Dakota, Utah, Vermont, Tennessee and Pennsylvania. These
limitations have had the effect of limiting our ability to expand our business,
and if other states adopted similar systems this could greatly reduce our
revenues and profitability. To date, no foreign government has imposed
limitations on our ability to accept orders for shipment to a particular
country. However, there is nothing to prevent foreign governments from imposing
these types of limitations.
FACILITIES
We currently own a building Chicago, Illinois occupying approximately 5,000
square feet in which our executive offices are located. We have mortgaged this
property to secure a loan. We used the proceeds of the loan to purchase this
property and to make improvements to it. We anticipate that our future growth
will require us to procure additional space. We have no agreements,
understandings or arrangements with regard to any additional space as of the
date of this prospectus.
INSURANCE
We maintain insurance in such amounts and with such coverages and
deductibles as our management believes are adequate. The primary risks that we
insure against are professional liability, workers' compensation, personal
injury, bodily injury, property damage and fidelity losses. We cannot assure you
that our insurance will adequately protect us from potential losses and
liabilities. In addition, we do not maintain business interruption insurance
covering losses which could result if
30
consumers were unable to access our website due to system failure or some other
cause. We signed an agreement in connection with a $500,000 loan to us in which
we agreed to obtain key man life insurance policies on Ms. Zelitzky and
Mr. Olsher naming the lender as the beneficiary, and to obtain other key man
life insurance policies at the discretion of our board of directors.
LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings arising in
the ordinary course of business. In October 1999, the Illinois Department of
Revenue issued a decision denying our claim for a refund of approximately of
$9,000 in payments of Illinois' retailers' occupation tax. We disagree with the
Department of Revenue's conclusion, and have filed an appeal of this decision in
the Circuit Court of Cook County, Illinois. If we lose this appeal, it could
increase the likelihood that other states would seek to impose similar taxes on
us. We are not a party to any other current or threatened legal proceedings that
our management believes would materially adversely affect our business, results
of operations or financial condition.
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MANAGEMENT
The following table sets forth information regarding our officers, directors
and key personnel as of March 31, 2000:
[Enlarge/Download Table]
NAME AGE POSITION
---- -------- ------------------------------------------
Barry L. Grieff........................... 53 Chief Executive Officer and Director
Scott B. Clark............................ 42 Chief Financial Officer and General
Counsel
Gail P. Zelitzky.......................... 58 Chairman of the Board and Director
Steven Olsher............................. 30 Chief Operating Officer
Jonathan McDermott........................ 35 Senior Vice President, Business
Development
Eric Reiner............................... 33 Chief Technology Officer
Jamie Cutburth............................ 31 Vice President, Online Marketing
Bryan D. Legate........................... 33 Director
Ralph J. Sorrentino....................... 47 Director
John G. Vandegrift........................ 33 Director
BARRY L. GRIEFF, CHIEF EXECUTIVE OFFICER Barry L. Grieff became our Chief
Executive Officer in March 2000. From March 1999 to March 2000, Mr. Grieff was
the Chairman and Chief Executive Officer of Dormrat LLC, which is developing
interactive content and a website designed for the college market. Since May
1999, he has served on the board of directors of Volatile Media, Inc., which
operates Ezcd.com, a music website, and acted as a marketing consultant. From
August 1997 to March 1999, Mr. Grieff was the President of Broadway Video
Entertainment, an entertainment and talent management company. From 1988 to
August 1997, Mr. Grieff was the President and Chief Executive Officer of
Promotional Concept Group, an affiliate of The Interpublic Group of
Companies, Inc. which creates and markets entertainment promotional packages.
Mr. Grieff received a Bachelor of Arts in 1967 from the University of Rochester.
SCOTT B. CLARK, CHIEF FINANCIAL OFFICER AND GENERAL COUNSEL. Scott B. Clark
became our Chief Financial Officer and General Counsel in March 2000. From
October 1999 through March 2000, Mr. Clark acted as an independent consultant to
Internet and telecommunications companies. From October 1997 through September
1999, Mr. Clark was a partner with the accounting firm of
Pricewaterhousecoopers. Mr. Clark was Associate Tax Counsel at GTE Corporation
from July 1993 through October 1997. Mr. Clark received a B.B.A. in Accounting
in 1978 from George Washington University, and a J.D. from Pace University
School of Law in 1984. Mr. Clark also received an L.L.M. in Taxation in 1992
from Quinnipiac University. Mr. Clark is a Certified Public Accountant.
GAIL P. ZELITZKY, CHAIRMAN OF THE BOARD. Gail P. Zelitzky became the
President and Chief Operating Officer of Foremost Sales Promotions, Inc. in 1981
and in this position was directly responsible for advertising and marketing in
addition to overseeing the operations of the business. She became our President
and Chief Executive Officer when we were formed in 1993. As our President and
Chief Executive Officer, in addition to overseeing all aspects of the business,
her responsibilities included strategic planning, advertising sales and
oversight of our financial operations. In December 1999, she relinquished her
position as President and Chief Executive Officer and Steven Olsher became our
President. Since December 1999, Ms. Zelitzky has been our Chairman.
Ms. Zelitzky received her Bachelor of Education degree with honors in 1962 from
National-Louis University.
STEVEN OLSHER, CHIEF OPERATING OFFICER. Steven Olsher started with Foremost
Sales Promotions, Inc. as Vice President in 1991. He became our Vice President
when we were formed in 1993 and in this position was responsible for strategic
planning and the creation of our operational structure.
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Mr. Olsher's responsibilities included brand development, maintaining relations
with our retail partner affiliates, business development. and the launch of
liquorbywire.com in 1993. Mr. Olsher became our President in December 1999 and
held this position until March 2000 when he became our Chief Operating Officer.
Mr. Olsher received a Bachelor of Science degree in Speech Communications in
1991 from Southern Illinois University.
JONATHAN MCDERMOTT, SENIOR VICE PRESIDENT, BUSINESS DEVELOPMENT. Jonathan
McDermott became our Senior Vice President, Business Development in
February 2000. From August 1999 to January 2000, Mr. McDermott was the Managing
Director and a founding partner of Corporate Capital Strategies, Inc., which
provides consulting services to businesses in the areas of capital formation,
mergers and acquisitions and forming strategic alliances. Corporate Capital
Strategies provided services to us under the terms of a contract which was
terminated in March 2000. From July 1999 to December 1999, and June 1998 to
October 1998, Mr. McDermott worked as a registered representative at Security
Capital Trading, Inc. From February 1998 to June 1998 Mr. McDermott was a
registered representative at Dirks & Company, Inc., the representative of this
offering. From October 1998 to July 1999, Mr. McDermott was President and
strategic advisor of Spotlight Entertainment Group, Inc., a start-up business in
the entertainment industry. From October 1994 to February 1998, Mr. McDermott
was the President of John Magee, Inc., a financial publishing company. From
September 1995 to May 1997, Mr. McDermott was employed with Access Financial
Group, Inc., a broker-dealer. Mr. McDermott received a Bachelor of Science
degree in business in 1986 from the University of Arizona.
BRYAN D. LEGATE, DIRECTOR. Bryan D. Legate was elected to our board of
directors in March 2000 by the holders of our Series A Preferred Stock, who were
granted the right to elect one director. Mr. Legate has been a Managing Director
of The GEM Group, a New York and London based private equity investment firm
since September 1998. Mr. Legate co-founded River Oaks Trading, L.P., a
securities trading firm, in January 1997 and served as its Chairman of the Board
until May 1998. Mr. Legate was an associate in the Houston law firm of Porter &
Hedges, L.L.P., where he practiced corporate and securities law, from June 1992
to June 1995. From July 1995 to December 1997, Mr. Legate operated the Ku Legate
Group, an intellectual property consulting firm specializing in the licensing of
underutilized patents, trademarks for small and middle market companies.
Mr. Legate is a Captain in the United States Army Reserve and a member of the
State Bar of Texas. He holds his law degree from the University of Houston Law
Center in 1994 and an undergraduate degree, with distinction, in 1989 from
Princeton University.
RALPH J. SORRENTINO, DIRECTOR. Ralph J. Sorrentino joined our board of
directors in March 2000. Since 1998, Mr. Sorrentino has been an Executive Vice
President and the Chief Financial Officer of Liberty Digital Inc., a new media
company with strategic holdings in Internet content and interactive television
businesses, and its predecessor, TCI Music, Inc. From 1994 to 1997,
Mr. Sorrentino was the President and Chief Operating Officer of Bohbot
Entertainment & Media Inc., an independent children's television syndication and
advertising company. Mr. Sorrentino received a Bachelor of Science in Accounting
in 1979 from Brooklyn College. Mr. Sorrentino is a Certified Public Accountant.
JOHN G. VANDEGRIFT, DIRECTOR. John G. Vandegrift joined our Board of
Directors in March 2000. Since January 2000, Mr. Vandegrift has provided
consulting services to technology companies through Whodoweknow, LLC. We have
entered into a contract under which Whodoweknow has agreed to provide us
consulting services. From March 1999 to January 2000, Mr. Vandegrift worked as a
strategic advisor for yesmail.com, Inc. From July 1997 to March 2000,
Mr. Vandegrift served on the board of directors of yesmail.com, Inc. From
January 1999 to March 1999, Mr. Vandegrift was the Interim Chief Executive
Officer of Frictionless Commerce, Inc., an Internet software company. From
December 1997 to December 1998, Mr. Vandegrift was Marketing Senior Executive
with Compaq Computer Corp. From May 1993 to July 1998, Mr. Vandegrift was
Executive Vice President of Marketing and Business
33
Development and then President of TAC Systems, a communications company.
Mr. Vandegrift received a Bachelor of Science in Engineering in 1989 from Texas
A&M University and a Master of Science in Engineering in 1997 from the
University of Alabama.
In addition to our directors and executive officers, we employ the following
key employees:
JAMIE CUTBURTH, VICE PRESIDENT, ONLINE MARKETING. Jamie Cutburth became our
Vice President of Marketing in January 2000. From April 1999 to August 1999, Mr.
Cutburth was a Channel Account Manager for Covad Communications. From January
1995 to March 1999, Mr. Cutburth was employed by U.S. Robotics Corporation,
holding the positions of Inside Sales Representative, Senior Retail Sales
Representative, Sales Program Manager, and ISP Marketing Manager. Mr. Cutburth
received a B.S. Degree in Business Administration in 1994 from the University of
Kansas.
ERIC REINER, CHIEF TECHNOLOGY OFFICER. Eric Reiner joined us as our Chief
Technology Officer in February 2000. From October 1997 to February 2000,
Mr. Reiner was the Director of Product Development of Florists' Transworld
Delivery. From October 1993 to October 1997, Mr. Reiner was Manager of the
Client/Server Development Group and Manager of the Internet Development Group
for the Chicago Board Options Exchange. Mr. Reiner received a B.S. in Computer
Science in 1988 from Iowa State University.
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
Our bylaws require us to have at least two, but no more than seven,
directors. We currently have a board comprised of five members. Once elected,
our directors hold office until our next annual meeting of shareholders or until
a successor has been elected and qualified, unless they resign at some earlier
time. As a result, all of our director positions will be filled at each annual
meeting. The holders of our Series A Preferred Stock have the right to elect one
director to our board, and have chosen Mr. Legate to serve on the board.
In addition, we have agreed to grant to Dirks & Co., Inc., the
representative of the underwriters, the right for one year from completion of
this offering to designate one person to attend all meetings of our board of
directors. We have also agreed to reimburse the person designated by Dirks & Co.
for expenses incurred in attending these meetings.
Our executive officers are appointed by our board on an annual basis until
their successors have been elected and qualified. Gail Zelitzky, our Chairman,
is the mother of our Chief Operating Officer, Steven Olsher. Samantha McDermott,
our Manager of Marketing and Creative Services, is the wife of Jonathan
McDermott, our Senior Vice President, Business Development. There are no other
family relationships among any of our directors, officers or key employees.
In addition to the members of our management listed above, upon completion
of this offering, we intend to hire a vice president of industry relations, vice
president of operations, chief marketing officer, and senior vice president of
sales. We have entered into a contract with Redwood Partners, Ltd., an executive
recruiting firm in connection with our search for executives. Under this
contract, we have agreed to pay Redwood a placement fee of 25% of the first
year's cash compensation paid to any employee hired as he result of Redwood's
search, and 10% of the guaranteed stock options or warrants paid to the
employee. We have also agreed to pay Redwood a $7,500 non-refundable retainer
fee for each individual search assignment, along with an additional $7,500 fee
which is payable after 60 days for each search if Redwood has presented several
viable candidates for each search and we are satisfied with Redwood's services.
In addition, the contract provides that we will pay Redwood a fee of $250 per
month for each active search assignment to pay for Redwood's expenses. As of the
date of this prospectus, we have paid Redwood $30,500. In addition, we are
obligated to issue to Redwood options to purchase approximately 11,800 shares of
our common stock.
34
DIRECTOR COMPENSATION AND COMMITTEES
We do not currently pay any compensation to our directors apart from that
which they receive as officers of ours, although our bylaws permit us to do so.
We intend to pay our directors compensation of $1,000 per month and from time to
time to grant options to our directors in the discretion of our compensation
committee. We have agreed to pay a $10,000 bonus to Mr. Sorrentino upon his
becoming a member of our board of directors, but do not intend to typically pay
such bonuses in the future. We also intend to provide expense reimbursements to
directors for attendance at board meetings or performing other business of the
board of directors.
AUDIT COMMITTEE. Our audit committee consists of our three independent
directors, Mr. Legate, Mr. Sorrentino and Mr. Vandegrift. The duties of the
audit committee are generally: (a) to recommend to our board of directors the
selection of the independent auditors to conduct annual audits of our books and
records, (b) to review the activities and reports of our independent auditors
and (c) to report the results of such review to our board of directors. The
audit committee also periodically reviews the adequacy of our internal controls.
COMPENSATION COMMITTEE. Our compensation committee consists of Mr. Grieff,
Mr. Vandegrift and Mr. Sorrentino. None of the members of the compensation
committee is currently or has been, at any time, one of our officers or
employees. None of our executive officers serves or has served as a member of
the board of directors or compensation committee or any entity that has one or
more executive officers serving on our board or compensation committee. Prior to
forming the compensation committee, all compensation decisions were made by our
entire board of directors. The duties of the compensation committee are
generally to review employment, development, reassignment and compensation
matters involving corporate officers and other executive level associates as may
be appropriate including, without limitation, issues relating to salary, bonus,
stock options and other incentive arrangements.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Barry L. Grieff, our Chief
Executive Officer which has a one-year term beginning on March 1, 2000.
Following the initial one-year term, the agreement will automatically renew for
one-year terms, unless terminated by either party upon ninety days written
notice prior to the end of any term, or for cause. Under the terms of his
employment agreement, Mr. Grieff has agreed to work for us full time, and will
receive an annual base salary of $225,000, which will be reviewed annually by
our board of directors to determine whether it should be increased, but cannot
be decreased. If we terminate Mr. Grieff without cause, if he voluntarily
terminates the agreement based on our breach of the agreement or similar
reasons, or if his employment term ends because we choose not to renew his
agreement, he is entitled to receive both salary and bonus severance payments.
The salary severance payment is equal to the salary due through the date of
termination plus an additional amount equal to one year of his current base
salary, and the bonus severance payment is equal to any bonus earned through the
date of termination and an additional amount designed to approximate one-half of
his annual performance bonus, calculated based on the actual percentage of his
performance target which he had reached as of the date his employment ended or
50% of the target, whichever is greater.
The employment agreement with Mr. Grieff provides for our payment of annual
performance bonuses to Mr. Grieff to be established by our board of directors
based on our achieving certain financial goals. Under the agreement Mr. Grieff
is eligible to receive performance bonuses for the period from the execution of
the agreement to twelve months after the completion of this offering. The
performance bonuses are to be paid as follows based on our achieving certain
revenue goals over a twelve-month period: (i) a payment of $25,000 if we reach
$8 million in revenue, (ii) $100,000 if we reach $10 million in revenue,
(iii) incremental cash bonuses in amounts determined by our board if we
35
reach gross revenue targets established by our board of between $10.1 and
$11.9 million in gross revenue, and (iv) $100,000 if we reach $12 million in
gross revenue. Under the agreement Mr. Grieff is also entitled to a $50,000
bonus within fourteen days of completion of this offering. Mr. Grieff is also
entitled to receive options of up to seven percent of the number of shares of
our common stock, on a fully diluted basis, after the completion of this
offering. Upon execution of his agreement we granted to Mr. Grieff an option to
purchase 727,117 shares of our common stock, which is our estimate of a number
of shares which will equal seven percent of our stock after completion of this
offering, at an exercise price of $3.52 per share. We will adjust this number,
if necessary, upon completion of the offering. Approximately 11% of the shares
which Mr. Grieff may purchase under the option vested upon execution of the
agreement, approximately 46% will vest in equal monthly installments over a
two-year period, and an additional 14% will vest on completion of this two-year
period. The remaining 29% will vest if Mr. Grieff meets certain performance
goals, including approximately 14.5% if we reach $8 million in revenue and 14.5%
between March 2001 and 2002 under a vesting schedule agreed upon between
Mr. Grieff and our board of directors if Mr. Grieff meets performance goals
agreed upon between him and our board. Mr. Grieff's employment agreement also
provides for health insurance benefits, and our paying the premiums on a
$1 million life insurance policy for Mr. Grieff.
We have entered into an employment agreement with Scott B. Clark, our Chief
Financial Officer and General Counsel. Mr. Clark's employment with us is at
will, but he can be terminated only by our Chief Executive Officer or our board.
If he is terminated without cause, he will receive a severance payment of six
months's salary. Under the employment agreement Mr. Clark will receive an annual
salary of $175,000. Upon execution of the agreement we granted Mr. Clark options
to purchase 160,000 shares of our common stock at an exercise price of $3.52 per
share. An option to purchase 40,000 shares vested upon Mr. Clark's starting
date, and the remainder are to vest over a period of two years. We agreed to
provide Mr. Clark with a two-year, non-interest bearing loan to allow him to
immediately exercise vested stock options on a cashless basis. Under the
agreement, Mr. Clark is entitled to a bonus of $25,000 upon completion of this
offering, and an additional $25,000 bonus on the first anniversary of the
agreement. After the first year of the agreement, Mr. Clark is to receive a
bonus determined by our board of directors but no less than $50,000.
Mr. Clark's agreement also provides for health insurance benefits.
We have entered into an employment agreement with our Chairman, Gail P.
Zelitzky. Ms. Zelitzky's employment agreement has a term of three years
beginning March 1, 2000. After the initial three-year term, the agreement will
automatically renew for one-year periods, unless terminated by either party on
upon sixty days written notice prior to the end of any term, or for cause. If
Ms. Zelitzky voluntarily terminates the agreement based on our breach of the
agreement or similar reasons, prior to March 1, 2002, she will receive her
salary due for the entire term, and a performance bonus equal to the previous
year's bonus multiplied by the number of years remaining in the agreement. If
she voluntarily terminates the agreement based on our breach of the agreement or
similar reasons, after March 1, 2002, she will receive a severance payment equal
to one year's salary and the prior year's performance bonus. Ms. Zelitzky's base
salary is $150,000 per year, and she also is to receive annual performance
bonuses to be established by our board of directors based on our achieving
certain financial goals. Under the agreement, Ms. Zelitzky is also entitled to a
$50,000 bonus within thirty days of completion of this offering. Ms. Zelitzky
also receives a car allowance of $500 per month, and health insurance benefits.
We have entered into an employment agreement with our Chief Operating
Officer, Steven Olsher, which has a term of three years beginning March 1, 2000.
After the initial three-year term, the agreement will automatically renew for
one-year periods, unless terminated by either party on upon sixty days written
notice prior to the end of any term, or for cause. If Mr. Olsher voluntarily
terminates the agreement based on our breach of the agreement or similar
reasons, prior to March 1, 2002, he will receive his salary due for the entire
term and a performance bonus equal to the previous year's bonus
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multiplied by the number of years remaining in the agreement. If he voluntarily
terminates the agreement based on our breach of the agreement or similar
reasons, after March 1, 2002, he will receive a severance payment equal to one
year's salary and the prior year's performance bonus. Mr. Olsher's base salary
is $150,000 per year, and he also is to receive annual performance bonuses to be
established by our board of directors based on our achieving certain financial
goals. Under the agreement, Mr. Olsher is also entitled to a $50,000 bonus
within thirty days of completion of this offering. Mr. Olsher also receives a
car allowance of $500 per month, and health insurance benefits.
We have entered into an employment agreement with Jonathan McDermott, our
Executive Vice President, Business Development. Mr. McDermott's employment began
March 1, 2000 and may be terminated by us at any time. If we terminate
Mr. McDermott and he signs a separation agreement containing a general release
and reaffirms a confidentiality agreement he has previously signed, we will make
a severance payment to him equal to six months salary. Mr. McDermott's base
salary is $150,000 per year, and he also is to receive annual performance
bonuses to be established by our board of directors based on our achieving
certain financial goals. In addition, upon execution of the agreement we issued
to Mr. McDermott options to purchase 50,000 shares of our common stock at an
exercise price of $3.52 per share. An option to purchase 20,000 shares vested
upon execution of the agreement, and the remainder of the option shares are to
vest at a rate of 2,000 per month. Mr. McDermott also receives health insurance
benefits under the agreement.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of our most highly compensated executive officers for services in their
capacities to us for fiscal years 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
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ANNUAL COMPENSATION
-------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND CURRENT YEAR ENDED COMPENSATION COMPENSATION
PRINCIPAL POSITION DEC. 31, SALARY ($) BONUS ($) (1) ($) ($)
------------------ ---------- ---------- --------- ------------ ------------
Gail P. Zelitzky............................. 1999 $48,100 0 $20,062 0
Chairman 1998 $37,600 0 $28,931 0
1997 $34,750 0 $26,256 0
------------------------
(1) For the years 1997 through 1999, Ms. Zelitzky received a commission equal to
7.5% of our total advertising revenues. Ms. Zelitzky's current employment
contract does not provide for the payment of any commissions to her.
The total compensation we paid to all persons who served as directors and
executive officers of ours in 1999, two persons, was $136,324.
2000 STOCK PLAN
We have adopted the 2000 stock plan which we will use to attract, reward and
retain our key employees, directors and consultants. The maximum number of
shares of common stock reserved for issuance under the plan is 1,500,000 shares,
subject to adjustment for certain anti-dilution provisions. As of April 7, 2000,
we had granted options to purchase 1,171,617 shares of our common stock under
the 2000 plan, with an average exercise price of $3.52 per share.
Awards under the 2000 stock plan may be in the form of incentive stock
options, or "ISOs", or non-qualified stock options; or stock purchase rights.
Awards may be paid in shares, cash or a combination thereof.
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ADMINISTRATION. The plan is administered by the compensation committee,
which has the authority to select the participants to be granted awards under
the plan, determine the size and terms of an award, and determine the time when
grants of awards will be made. The committee is authorized to, among other
powers, interpret the plan, and establish, amend and rescind any rules and
regulations relating to the plan.
OPTIONS. An option may be granted as an ISO, as defined in the Internal
Revenue Code of 1986, as amended, or as a non-qualified stock option. The
exercise price per share of common stock is determined by the committee but
cannot be less than 110% of the fair market value of the shares on the date of
grant for any employee owning 10% or more of our voting stock, or 100% of the
fair market value of the shares on the date of grant for all other employees.
Options granted under the plan are exercisable at the time and upon the terms
determined by the committee, but in no event will an option be exercisable more
than ten years after the date it is granted.
STOCK PURCHASE RIGHTS. The committee may also grant a stock purchase right
independent of an option or in conjunction with an option or other award granted
under the plan.
EXERCISE OF OPTIONS. Except as otherwise provided in the stock plan or in
an applicable award agreement, an award may be exercised for all, or any part,
of the shares of common stock for which it is then exercisable. The purchase
price for the shares of common stock as to which an award is exercised shall be
paid to us in full at the time of exercise:
- in cash;
- by issuing a promissory note to us;
- in shares of common stock having a fair market value equal to the
aggregate option price for the shares of common stock being purchased and
satisfying such other requirements as may be imposed by the compensation
committee;
- some combination of the above forms of payment.
TRANSFERABILITY. Except to the extent provided by the committee, each
option and stock purchase right granted under the plan is non-transferable
during the lifetime of the participant, except in limited circumstances.
TERMINATION, AMENDMENT AND TERM. The plan will terminate on January 9, 2010
unless terminated earlier by our board of directors. Our Board of Directors may
suspend, amend or terminate the plan, in whole or in part. Furthermore, no
amendment, suspension or termination of the plan may, without the consent of a
participant, impair any of the rights or obligations existing under any award
previously granted to any participant under the plan.
ADJUSTMENTS. In the event of any change in the outstanding shares of our
common stock by reason of any dividend or split, or merger, the committee, in
its sole discretion, may make such substitution or adjustment as it deems to be
equitable to the number or kind of shares or securities issued or reserved under
the plan or to any affected terms of the awards.
OPTION GRANTS
We did not grant any stock options or stock appreciation rights in 1999 or
any previous year.
LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation will, upon the closing of this offering,
limit the liability of directors to the maximum extent permitted by Delaware
law. Delaware law provides that directors of a
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corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or - any transaction from which the director derived an
improper personal benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in their
capacity as an officer, director, employee or other agent, regardless of whether
the bylaws would permit indemnification.
We intend to enter into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws, prior
to the completion of this offering. These agreements, among other things, will
provide for indemnification for judgments, fines, settlement amounts and certain
expenses, including attorneys' fees incurred by the director, executive officer
or controller in any action or proceeding, including any action by or in our
right, arising out of the person's services as a director, executive officer or
controller of us, any of our subsidiaries or any other company or enterprise to
which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers. The limited liability and indemnification
provisions in our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against our directors for breach of their
fiduciary duty and may reduce the likelihood of derivative litigation against
our directors and officers, even though a derivative action, if successful,
might otherwise benefit us and our stockholders. A stockholder's investment in
us may be adversely affected to the extent we pay the costs of settlement or
damage awards against our directors and officers under these indemnification
provisions. At present, there is no pending litigation or proceeding involving
any of our directors, officers or employees in which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
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CERTAIN TRANSACTIONS
Other than the employment agreements described under "Management" and the
transactions described below, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of these people had or will have a direct
or indirect material interest.
GUARANTEES BY EXECUTIVE OFFICERS
Steven Olsher, our Chief Operating Officer, and Gail Zelitzky, our Chairman,
have each guaranteed our obligations under two loans. The first guaranty applies
to draws on a line of credit with LaSalle Bank, FSB, which has an interest rate
of 9.75% per year and is payable on demand. As of March 31, 2000 we had an
outstanding balance of $125,000 on this line of credit. The second guaranty
relates to a $192,000 promissory note that we issued in March 1999 to Bank One
Illinois, N.A., which has an interest rate of 7.75% and a maturity date of
September 19, 2004. We used the proceeds of this loan to purchase, and to make
improvements to, the building in which our offices are located. As of March 31,
2000, we owed approximately $189,000 on this loan.
OTHER TRANSACTIONS
On August 31, 1999, we entered into an agreement, entitled "Founder's
Service Agreement, Acknowledgment and Receipt" with Corporate Capital
Strategies, Inc. Jonathan McDermott, who is now our Senior Vice President,
Business Development, was the Managing Director of Corporate Capital Strategies
at the time we entered into these agreements. Mr. McDermott formerly worked as a
registered representative at Dirks & Co., Inc., the representative of the
underwriter. Mr. McDermott is no longer an officer of Corporate Capital
Strategies, but is still a shareholder. Under the agreement with Corporate
Capital Strategies it has agreed to: (a) assist us in preparing our business
plan; (b) identify possible strategic partners or sources of capital;
(c) assist us in developing our financial and business models; and (d) consult
with us on the composition of our board of directors, website development and
other matters. Under the agreement, we paid Corporate Capital Strategies a total
of $16,000, and issued to Corporate Capital Strategies ten percent of our
shares, on a fully diluted basis as of August 1999, the date of issuance. We
issued 13 1/3 shares to Corporate Capital Strategies under this agreement, which
converted into 300,000 shares when we effectuated a stock split in
December 1999. Corporate Capital Strategies later distributed all of these
shares to its owners, including 118,000 to Mr. McDermott, and certain other
individuals. We terminated this agreement in April 2000, and pursuant to the
termination issued to Corporate Capital Strategies an additional 21,428 shares
of our common stock and agreed to pay it $50,000 upon completion of this
offering.
On December 7, 1999, we entered into a consulting agreement with
e-Consulting, Inc. which is owned by Mr. McDermott, our Senior Vice President,
Business Development. The term of the agreement began on January 1, 2000 and was
to terminate on the later of six months after its execution or the date of an
initial public offering of our securities. Pursuant to this agreement we agreed
to pay e-Consulting compensation of $10,000 per month, and to reimburse
Mr. McDermott or e-consulting for reasonable business expenses. e-Consulting
agreed to provide us with business development, financial and investment banking
consulting services. This agreement terminated on February 29, 2000, due to
Mr. McDermott's joining us as a full-time employee. We paid Mr. McDermott a
total of $20,000 under the agreement.
Samantha McDermott, who is now our Manager of Marketing and Creative
Services and the wife of Mr. McDermott, previously provided website and graphic
design services as a consultant. We did not
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have a contract with Ms. McDermott. From September 1999 to December 1999, we
paid her a total of approximately $3,800 for her services.
In March 2000, we entered into a consulting agreement with Ron Bloom and
Whodoweknow, LLC under which Mr. Bloom and Whodoweknow agreed to provide us with
consulting services, including assisting us with investor relations and further
developing our business plan and providing advice on our capital structure. John
G. Vandegrift, one of our directors, owns approximately 20% of Whodoweknow. The
agreement has a one-year term beginning on March 14, 2000. Upon execution of the
agreement, agreed to provide Mr. Bloom and Whodoweknow with five-year warrants
to purchase our common stock at a price of $3.52 per share, to be divided among
them in any manner they choose, on the following terms: (a) a warrant to
purchase 80,000 shares upon execution of the agreement, (b) a warrant to
purchase 5,000 shares for each of the six months beginning with April 2000, and
(c) on October 1, 2000, in the discretion of our Chief Executive Officer, a
warrant to purchase an additional 30,000 shares. If the employment of our Chief
Executive Officer is terminated for any reason before October 1, 2000, we are
required to immediately issue the final warrants to purchase 30,000 shares to
the consultants. Under the agreement we have also agreed to grant "piggyback"
and demand registration rights to the consultants. The agreement also requires
that if we raise capital through a securities offering, or acquire another
entity during the term of the agreement or within one year of the termination of
the agreement, and the transaction arises as a result of an introduction made by
Mr. Bloom to us, we will pay Mr. Bloom five percent of the value of the
consideration for the transaction up to $5,000,000, and three percent of the
value of the transaction in excess of $5,000,000. We have also agreed to
indemnify the consultants for losses or expenses arising from any breach of a
representation or warranty we make in the agreement or activities performed by
the consultants under the agreement, unless the losses resulted from intentional
misconduct or gross negligence of the consultants or from information provided
by the consultants.
We believe that the transactions described above were fair and reasonable
and on terms at least as favorable as we would expect to negotiate with an
unaffiliated third party. In the future, we intend to present all proposed
transactions between us and our officers, directors or 5% shareholders, and
affiliates, to our board of directors for consideration and approval. Any such
transaction will require approval by a majority of the directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.
OPTIONS GRANTS TO EXECUTIVE OFFICERS AND DIRECTORS
BARRY L. GRIEFF. In March 2000 we granted to Barry L. Grieff an option to
purchase 727,117 shares of our common stock at an exercise price of $3.52 per
share.
SCOTT B. CLARK. In March 2000 we granted to Scott B. Clark an option to
purchase 160,000 shares of our common stock at an exercise price of $3.52 per
share.
JONATHAN MCDERMOTT. In March 2000 we granted to Jonathan McDermott an option
to purchase 50,000 shares of our common stock at an exercise price of $3.52 per
share.
JOHN G. VANDEGRIFT. In March 2000 we granted to John G. Vandegrift an option
to purchase 17,500 shares of our common stock at an exercise price of $3.52 per
share.
RALPH J. SORRENTINO. In March 2000 we granted to Ralph J. Sorrentino an
option to purchase 17,500 shares of our common stock at an exercise price of
$3.52 per share.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of the date of this
prospectus, regarding the beneficial ownership of our common stock by:
- our directors;
- each of our named executive officers;
- each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
- each of our directors, director nominees and executive officers, as a
group.
Unless otherwise indicated, each of the stockholders listed below has sole
voting and investment power with respect to the shares beneficially owned.
A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus upon the
exercise of warrants or options. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such person,
but not those held by any other person, and which are exercisable within
60 days from the date of this prospectus, have been exercised. Unless otherwise
indicated, we believe that all persons named in this table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them. Common stock beneficially owned is based on 3,319,664 shares
outstanding prior to the offering and 7,053,558 shares outstanding after the
offering.
Unless otherwise indicated, the address of each person listed below is 4205
West Irving Park Road, Chicago, Illinois, 60641.
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BENEFICIAL OWNERSHIP
PRIOR TO OFFERING
----------------------------------
SHARES ISSUABLE PERCENT
NUMBER OF PURSUANT TO OPTIONS BENEFICIALLY OWNED
SHARES AND WARRANTS -----------------------------------
BENEFICIALLY EXERCISABLE WITHIN BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED 60 DAYS OF OFFERING OFFERING
------------------------------------ ------------ ------------------- ---------------- ----------------
Barry L. Grieff................. 0 246,674 6.92% 3.38%
Scott B. Clark.................. 0 65,000 1.92% *
Steven Olsher................... 1,282,500 0 38.63% 18.18%
Gail P. Zelitzky................ 1,282,500 0 38.63% 18.18%
Jonathan McDermott.............. 118,000 32,000 4.48% 2.12%
Bryan D. Legate................. 42,222(1) 0 1.27% *
Ralph J. Sorrentino............. 0 6,563 * *
John G. Vandergrift............. 0 164,830(2) 4.73% 2.28%
All directors, director nominees and
executive officers, as a group (8
persons)...................... 3,105,222 427,056 94.41% 47.83%
------------------------
* Less than 1% of our outstanding shares.
(1) Consists of 42,222 shares of our Series A Preferred Stock owned by Tazmanic
Corporation, for which Mr. Legate has voting power, and which will
automatically convert into shares of our common stock upon completion of
this offering.
(2) Includes an option to purchase 6,563 shares of our common stock held by Mr.
Vandegrift, 35,511 shares of our common stock to be issued to Mr. Vandegrift
upon the conversion of a promissory note held by him when this offering is
completed, a warrant to purchase 17,756 shares of our common stock issued to
Mr. Vandegrift in connection with his purchase of the convertible promissory
note, and warrants to purchase 105,000 shares of our common stock which
could be granted to Whodoweknow, LLC, a company in which Mr. Vandegrift has
an ownership interest, pursuant to a consulting agreement with us.
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DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue 50,000,000 shares of common stock, par value
$.00001 per share, of which 3,050,000 shares were issued and outstanding on
December 31, 1999 and 10,000,000 shares of preferred stock, par value $.00001
per share, the rights and preferences of which may be established from time to
time by our board of directors, none of which is outstanding. Except as
otherwise expressly stated, all references in this prospectus to us or our
capital stock (including the common stock) are to such after completion of the
offering. Immediately following completion of the offering, there are expected
to be 7,053,558 shares of common stock (7,503,558 shares of common stock if the
underwriters' over-allotment options is exercised in full) and no shares of
preferred stock outstanding. This amount excludes:
- 1,171,617 shares issuable pursuant to options which have been granted
pursuant to our 2000 stock plan;
- 328,383 shares of common stock available for future issuance under our
incentive plans;
- 1,500,000 shares issuable pursuant to the exercise of the redeemable
warrants offered by this prospectus;
- 300,000 shares issuable upon the exercise of the representative's
warrants; and
- 150,000 shares issuable upon exercise of the 150,000 common stock purchase
warrants included in the representative's warrants.
The following description of our capital stock and related matters is
qualified in its entirety by reference to our certificate of incorporation and
our bylaws, copies of which have been filed as exhibits to the registration
statement of which this prospectus forms a part.
COMMON STOCK
Our certificate of incorporation authorizes 50,000,000 shares of common
stock, par value $.00001 per share. Stockholders are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive dividends if, as and when dividends are declared
from time to time by our Board of Directors out of funds legally available,
after payment of dividends required to be paid on outstanding preferred stock.
In the event of our liquidation, dissolution or winding up, the holders of our
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and accrued but unpaid dividends and liquidation preferences on
any outstanding preferred stock. The shares of common stock have no preemptive
or conversion rights and are not subject to our further calls or assessment.
There are no redemption or sinking fund provisions applicable to the common
stock. All of our currently issued and outstanding common stock is, and the
common stock we are selling in this offering will be when sold to the
underwriters in the manner described in this prospectus, duly authorized,
validly issued, fully paid and non-assessable.
Our certificate of incorporation does not provide for cumulative voting.
Therefore, our shareholders do not have the right to aggregate their votes for
the election of directors and, accordingly, the shareholders of more than 50% of
all of our outstanding shares can elect all of the directors and approve
significant corporate transactions.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to 10,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of these shares,
including dividend rights, conversion rights, voting rights, terms of
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redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series. These shares may
have rights senior to our common stock. The issuance of preferred stock may have
the effect of delaying or preventing a change in control of us. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of our common stock. At present, we have
not plans to issue any additional shares of our preferred stock.
SERIES A PREFERRED STOCK
ISSUANCE OF SERIES A PREFERRED STOCK. All 422,222 shares of our Series A
Preferred Stock were issued in January 2000 in connection with a bridge loan we
received from a third party. The lender agreed to loan us $500,000, to be paid
out of the proceeds of this offering. In exchange for the bridge loan, we issued
a promissory note which does not bear interest, and also issued the 422,222
shares of Series A Preferred Stock.
LIQUIDATION PREFERENCE OVER COMMON STOCK. The holders our Series A
Preferred Stock have the right to receive payments from any assets or funds of
ours before the holders of common stock in the event we are subject to a
liquidation, dissolution or winding up. The liquidation preference of each
holder is equal to approximately $3.55 per share if the promissory note held by
the holders of Series A Preferred Stock has been paid at the time of
liquidation, dissolution or winding up, and approximately $4.74 per share if the
note has been paid off at this time. In addition, the amount of this liquidation
preference will be increased by the amount of any unpaid dividends on the
Series A Preferred Stock. If we do not have enough assets to make the
liquidation payments to which the holders of the Series A Preferred Stock and
any other classes of stock with priority over the common stock are entitled,
then the holders of the Series A Preferred Stock will receive a portion of the
available assets in proportion to their ownership interests.
DIVIDENDS. If we declare a dividend, the holders of our Series A Preferred
Stock will share equally with the holders of our common stock in the dividend.
The share of the dividend to which the holders of the Series A Preferred Stock
will be entitled will be calculated based on the number of shares of common
stock to be received upon conversion of the Series A Preferred Stock.
CONVERSION. The holders of the Series A Preferred Stock have the right to
convert their shares into shares of our common stock at any time. The shares of
Series A Preferred Stock will automatically convert into shares of our common
stock upon completion of this offering. The number of shares of common stock
which the holders of the Series A Preferred Stock are entitled to receive for
each share of Series A Preferred Stock is calculated by dividing the original
issue price of the Series A Preferred Stock of approximately $1.18 per share by
a conversion price which is subject to adjustment. The initial conversion price
was equal to the issue price of the Series A Preferred Stock of approximately
$1.18 per share, so the initial conversion rate was one share of common stock
for each share of Series A Preferred Stock. The conversion price will be
adjusted for the following:
- certain issuances of shares at a price less than the conversion price for
the Series A Preferred Stock at the time of the issuance;
- certain issuances of options with an exercise price of less than the
conversion price of the Series A Preferred Stock; and
- stock splits, dividends or combinations.
VOTING RIGHTS. On each matter submitted to our stockholders for a vote, the
holders of the Series A Preferred Stock are entitled to the number of votes to
which they would be entitled if their shares were converted to shares of common
stock.
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SPECIAL VOTING RIGHTS. The holders of the Series A Preferred Stock have the
option to elect a Series A Director to our board of directors. If they choose to
exercise this right, the Series A Director will be elected by holders of a
majority of the shares of Series A Preferred Stock or by a written consent of
the holders of Series A Preferred Stock. The holders of the Series A Preferred
Stock have exercised their right to elect Mr. Legate to our board of directors.
We are required to obtain the approval of either 66 2/3% of outstanding shares
of Series A Preferred Stock, or a representative of the holders of Series A
Preferred Stock unanimously designated in writing by these holders, to take the
following actions:
- selling all or substantially all of our assets or engaging in a merger in
which we are not the surviving company;
- paying dividends on our common stock;
- making any loans or advances to our officers, directors, employees or
consultants other than in the ordinary course of business or for the
purchase of stock in exchange for a secured promissory note;
- making any guarantees outside of the ordinary course of business;
- creating a security interest in any of our property in an amount over
$100,000, unless unanimously approved by our board of directors;
- owning the securities of another corporation, partnership or similar
entity unless we own the entire entity;
- creating a new class of securities which are convertible into common stock
and which have rights with regard to voting, dividends or liquidation
which are equal or superior to the rights of the Series A Preferred Stock;
- make any changes to our certificate of incorporation or bylaws which would
change the rights, preferences or privileges of the Series A Preferred
Stock;
- enter into a business other than the development, marketing and support of
a website related to the sale of alcoholic beverages on the Internet and
related activities;
- increase or decrease the authorized number of shares of our common stock,
preferred stock, or Series A Preferred Stock;
- increase the number of shares available to be issued under our stock
option plan or a similar plan to greater than 750,000;
- increase the size of our board of directors to more than five members; or
- repay any money we owe to any shareholder of ours.
PREEMPTIVE RIGHTS. If we offer any equity securities for sale before
conducting a public offering at a price of at least four times the initial issue
price of the Series A Preferred Stock, as adjusted for any stock dividends,
splits or similar transactions, the holders of the Series A Preferred Stock have
the right, with certain exceptions, to purchase a number of the equity
securities option which allows them to maintain their percentage of ownership in
us. The preemptive rights of the holders of the Series A Preferred Stock will no
longer exist once the Series A Preferred Stock is converted into shares of our
Common Stock upon completion of this offering.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
GENERALLY. Each redeemable common stock purchase warrant entitles the
registered holder to purchase, at any time commencing twelve months after the
date of this prospectus until 60 months
45
after the date of this prospectus, one share of our common stock at a price
equal to 120% of the initial public offering price of the common stock.
REDEMPTION PROVISIONS. Commencing eighteen months after the date of this
prospectus, we may redeem these warrants in whole but not in part, at $.10 per
warrant on 30 days' prior written notice. The warrants may only be redeemed if
the average closing sale price of our common stock as reported on the Nasdaq
National Market equals or exceeds 250% of the initial public offering price per
share of the common stock for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
notice of redemption. The holder of any redeemable warrant may exercise the
warrant by surrendering the certificate representing the warrant and paying the
exercise price. No fractional shares will be issued upon the exercise of the
warrants. The exercise price of the redeemable warrants bears no relationship to
any objective criteria of value and should in no event be regarded as an
indication of any future market price of the securities offered in this
offering.
ADJUSTMENTS. The exercise price of the redeemable warrants and the number
of shares of common stock issuable upon exercise are subject to adjustment in
certain events, including (a) stock dividends, (b) stock splits,
(c) combinations or (d) reclassifications of the common stock. Additionally, an
adjustment would be made in the case of a (a) reclassification or exchange of
common stock, (b) consolidation or merger of us with or into another
corporation, other than a consolidation or merger in which we are the surviving
corporation, or (c) sale of all or substantially all of our assets, in order to
enable warrant holders to acquire the kind and number of shares of stock or
other securities or property receivable in such event by a holder of the number
of shares of common stock that might otherwise have been purchased upon the
exercise of the redeemable warrant.
TRANSFER, EXCHANGE AND EXERCISE. The redeemable warrants are in registered
form and may be presented to the warrant agent for transfer, exchange or
exercise at any time on or prior to their expiration date, at which time they
will be void and have no value. The redeemable warrants may not be exercised
until 12 months after the date of this prospectus. If a market for the
redeemable warrants develops, the holder may sell the redeemable warrants
instead of exercising them. However, we do not know if a market for the
redeemable warrants will develop or, if developed, will continue.
MODIFICATION OF REDEEMABLE WARRANTS. We and the warrant agent may make such
modifications to the redeemable warrants as we deem necessary and desirable that
do not adversely affect the interests of the redeemable warrant holders. We may,
in our sole discretion, lower the exercise price of the redeemable warrants for
a period of no less than 30 days on not less than 30 days' prior written notice
to the warrant holders and the representative. Modification of the number of
securities purchasable upon the exercise of any redeemable warrant, the exercise
price, other than as provided in the preceding sentence, and the expiration date
with respect to any redeemable warrant requires the consent of at least
two-thirds of the redeemable warrant holders.
The redeemable warrants are not exercisable unless, at the time of the
exercise, we have a current prospectus covering the shares of common stock
issuable upon exercise of the redeemable warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities or blue sky
laws of the state of residence of the exercising holders of the redeemable
warrants. Although we have undertaken to use our best efforts to have all of the
shares of common stock issuable upon exercise of the redeemable warrants
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the redeemable warrants. We
do not know if we will be able to do so.
Although the securities will not knowingly be sold to purchasers in
jurisdictions in which the securities are not registered or otherwise qualified
for sale, investors in those jurisdictions may purchase redeemable warrants in
the secondary market or investors may move to jurisdictions in which the shares
underlying the redeemable warrants are so registered or qualified during the
period that the
46
warrants are exercisable. If this happens, we would be unable to issue shares to
those persons desiring to exercise their warrants, and holders of redeemable
warrants would have no choice but to attempt to sell the warrants in
jurisdictions where such sale is permissible or allow them to expire
unexercised.
REPRESENTATIVE WARRANTS
At the closing of this offering, we will issue and sell to the
representative of the underwriters or persons designated by the representative,
five-year warrants at a price of $.0001 per warrant. The representative's
warrants will entitle the holder to purchase up to 300,000 shares of our common
stock at a price per share equal to 120% of the initial public offering price
for the shares of common stock offered by this prospectus and up to 150,000
warrants at a price per warrant equal to 120% of the initial public offering
price for the redeemable warrants offered by this prospectus. The
representative's warrants are exercisable at any time for four years commencing
on the one-year anniversary from the date of issuance. The shares of common
stock, redeemable warrants and the shares of common stock underlying the
redeemable warrants issuable upon exercise of the representative's warrants are
identical to those offered to the public and the securities underlying the
representative's warrants are being registered in this offering. The
representative's warrants contain anti-dilution provisions providing for
adjustment of the number of securities issuable upon exercise of the
representative's warrants under specific circumstances, including (a) stock
dividends, (b) stock splits, (c) mergers, (d) recapitalizations and
(e) acquisitions.
WARRANTS
With respect to $900,000 in convertible notes purchased in a private
placement, in March 2000 we issued five-year warrants to purchase a total of
127,843 shares of our common stock at a price of $2.64 per share. In addition,
after the date of this prospectus we will issue to the holders of our Series A
Preferred Stock Five-Year Warrants to purchase a total of 14,205 shares of our
common stock. These warrants are issuable pursuant to the exercise by the
preferred holders of their preemptive rights in connection with the convertible
note offering. In March 2000, under a consulting agreement, we issued to two
consultants five-year warrants to purchase a total of 80,000 shares. One of the
consultations is Whodoweknow, a company in which John G. Vanderift, one of our
directors, has an ownership interest. Under the agreement we are obligated to
issue warrants to purchase up to an additional 90,000 shares of common stock at
an exercise price of $3.52 per share. The warrants issued to the noteholders and
the consultants are each exercisable only upon payment in cash. The warrants
include features for adjustment in the event of a common stock split, stock
dividend, reverse common stock split, merger, consolidation or other change in
our capital structure. Holders of the warrants have no voting rights until such
time as our underlying common stock is issued to the holder. Upon the issuance
of our common stock to the holders of the warrants, the holders shall have the
same rights as any other stockholder owning our common stock.
CONVERTIBLE NOTES
We have issued a total of ten convertible notes. In addition, the holders of
our Series A Preferred Stock have made a commitment to purchase an additional
note. Each convertible note bears interest at the prime rate, as published in
The Wall Street Journal, plus two percent. The interest rate on each note will
be adjusted each month based on changes in the prime rate. Each note has a
maturity date of December 31, 2002, but automatically converts into shares of
our common stock at a conversion price of $3.52 per share upon completion of
this offering, but may be converted earlier, at the same conversion price, at
the option of the holder.
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REGISTRATION RIGHTS
We have agreed to provide the holders of the representative's warrants with
"piggyback" registration rights for a period of seven years. Under the terms of
the piggyback registration rights, if we intend to register additional
securities for sale to the public, we will notify all registered holders of the
representative's warrants and/or the securities underlying the representative's
warrants. If requested by the holders of the representative's warrants, we will
provide, at our expense, material to permit a public offering of the securities
underlying the representative warrants. Additionally, we have agreed to provide
the holders of the representative's warrants with "demand" registration rights
for a period of five years from closing. Under the terms of the demand
registration rights, a majority of the holders of representative's warrants may,
on one occasion, make a demand for registration which obligates us to promptly
register the underlying securities at our own expense.
We have also granted piggyback and demand registration rights to purchasers
of our Series A Preferred Stock. The piggyback registration rights allow these
purchasers to include the shares of common stock received on conversion of the
Series A Preferred Stock in a registration statement which we file. The demand
registration rights allow holders of a majority of the Series A Preferred Stock,
or common stock into which it is converted, on one occasion, to have us file a
registration statement registering their shares of common stock at our own
expense. In addition, we have agreed to use our best efforts to qualify for the
use of Form S-3 under the Securities Act, and have granted the holders of the
Series A Preferred Stock the right to request two registrations on Form S-3. All
of the piggyback and demand registration rights of a particular holder of the
Series A Preferred Stock will terminate if an active public trading market
exists for our stock and the holder can sell all of his securities within a
ninety-day period pursuant to Rule 144 under the Securities Act. In addition,
the demand registration rights expire in January 2002. The holders of the Series
A Preferred Stock have exercised their registration rights in connection with
the registration statement of which this prospectus forms a part. We have
granted registration rights which are identical to those granted to the holders
of our Series A Preferred Stock to Ronald Bloom and Whodoweknow,LLC with respect
to shares of common stock issuable upon exercise of warrants granted under an
agreement with these two consultants. Mr. Bloom and Whodoweknow have waived
their registration rights in connection with this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise to remove incumbent officers and directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
uninterested stockholder, unless, with certain exceptions, the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to
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transactions not approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
Our bylaws provide that our board of directors shall not have more than
seven members. This provision may have the effect of deterring hostile takeovers
or delaying changes in control or management of us. In addition, we must obtain
the approval of the holders of 66 2/3% of the outstanding shares of our Series A
Preferred Stock before taking certain actions, including engaging in a merger or
increasing the size of our board to more than five members. These voting rights
may also have the effect of deterring takeovers or delaying changes in control.
TRANSFER AND WARRANT AGENT
We intend to appoint Continental Stock Transfer and Trust Company as our
transfer and warrant agent.
RESALES BY SELLING SHAREHOLDERS
The registration statement, of which this prospectus forms a part, also
relates to the registration by us, for the account of selling shareholders, of
an aggregate of 422,222 shares of our common stock to be issued upon conversion
of all of our shares of Series A Preferred Stock. The selling shareholders'
shares are not being underwritten by the underwriters in connection with this
offering. The selling shareholders have agreed not to directly or indirectly
offer, sell, transfer or otherwise encumber or dispose of any of their shares of
common stock for a period of six months after the date of this prospectus. The
sale of the selling shareholders' shares may be conducted from time to time in
transactions, which may include block transactions by or for the account of the
selling shareholders, in the over-the-counter market or in negotiated
transactions, or through the writing of options on the selling shareholders'
shares, a combination of such methods of sale, or otherwise. Sales may be made
at fixed prices which may be changed, at market prices prevailing at the time of
sale, or at negotiated prices. The selling shareholders may conduct such
transactions by selling their shares directly to purchasers, through
broker-dealers acting as agents for the selling shareholders, or to
broker-dealers who may purchase shares as principals and afterwards sell their
shares from time to time in the over-the-counter market, in negotiated
transactions, or otherwise. These broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders or the purchaser for whom which broker-dealers may act as
agents or to whom they may sell as principals, or both. The compensation as to a
particular broker-dealer may exceed customary commissions. The selling
shareholders and broker-dealers, if any, acting in connection with such sales,
might be deemed to be 'underwriters' within the meaning of Section 2(11) of the
Securities Act and any commission received by them and any profit upon the
resale of such securities might be deemed to be underwriting discounts and
commissions under the Securities Act. Sales of any shares of common stock by the
selling shareholders may depress the price of the common stock in any market
that may develop for the stock.
[Enlarge/Download Table]
SHARES OWNED
COMMON STOCK AFTER OFFERING(2)
SHARES OWNED OFFERED BY -------------------
NAME OF SELLING SHAREHOLDER BEFORE OFFERING(1) BENEFICIAL OWNER NUMBER PERCENT
------------------------------------------------ ------------------ ---------------- -------- --------
GEM Global Group Yield Fund Limited(3).......... 168,890 168,890 0 0%
Global Strategic Holdings Limited............... 84,444 84,444 0 0%
Ocean Strategic Holdings Limited................ 84,444 84,444 0 0%
Tazmanic Corporation (4)........................ 42,222 42,222 0 0%
W.R. Timken Trust fbo Alexander C. Timken....... 42,222 42,222 0 0%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus upon
the exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that
49
are held by such person, but not those held by any other person, and which
are exercisable within 60 days from the date of this prospectus, have been
exercised. Unless otherwise indicated, we believe that all persons named in
this table have sole voting and investment power with respect to all shares
of common stock beneficially owned by them.
(2) Assumes the sale of all of the shares registered in the registration
statement of which this prospectus forms a part.
(3) Consists of shares of our Series A Preferred Stock which will automatically
convert into shares of our common stock upon completion of this offering.
(4) Bryan D. Legate, one of our directors, is also considered to beneficially
own these shares because he has the power to vote the shares.
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there was no market for any of our securities and we
do not know if significant public market will develop for any of our securities
following completion of this offering. We cannot predict the effect, if any,
that sales of shares of our common stock will have on the market price of our
common stock. However, sales of substantial amounts of such shares in the public
market could cause the market price of our common stock to decline or impair our
ability to raise money through an offering of our equity securities.
Upon completion of this offering, we will have 7,053,558 shares of common
stock outstanding, and 1,500,000 warrants to purchase common stock, in each case
assuming that the underwriters do not exercise their over-allotment option to
purchase additional shares or warrants. The 3,000,000 shares of common stock
sold in this offering and the 1,500,000 warrants to purchase a like number of
common stock also sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act; provided, however,
that none of the shares or warrants are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act, their sales of shares would be
subject to certain limitations and restrictions that are described below.
The remaining 4,053,558 shares of common stock held by our existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. We had warrants to purchase
300,125 shares outstanding prior to this offering. All 4,353,683 shares owned by
our existing stockholders or underlying warrants currently outstanding will be
subject to "lock-up" agreements described below on the effective date of this
offering. On the effective date of this offering, shares not subject to the
lock-up will not be eligible for sale pursuant to Rule 144(h). All of our
officers and directors as well as stockholders collectively holding more than
100% of the outstanding common stock have entered into lock-up agreements with
the underwriters that provide that the shares set forth in the table below will
become eligible for sale on the dates set forth in the table below, subject in
most cases to the limitations of Rule 144. In addition, holders of stock options
could exercise these options and sell shares issued on exercise as described
below.
[Enlarge/Download Table]
APPROXIMATE
SHARES ELIGIBLE FOR
RELEVANT DATES FUTURE SALE COMMENT
-------------- ------------------- -------
On effective date(1).......................... 3,000,000 Shares sold in this offering
90 days after effective date(2)............... -- Shares tradeable under Rules 144 and
701.
180 days after effective date(2).............. 4,353,683 All shares subject to lock-up
released; shares tradeable under
Rule 144 and 701.
------------------------
(1) Assumes no exercise of the underwriter's over-allotment option to purchase
additional shares in the offering.
(2) The effective date is .
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We have agreed not to offer or sell any of our securities for a period of
thirteen months from the date of this prospectus without the consent of the
representative, except that we may conduct a secondary public offering of our
securities in an amount of at least $30,000,000 if the representative is given
the opportunity to participate in the secondary offering. Our officers and
directors and all of our current stockholders have agreed not to offer, pledge,
sell, contract to sell, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, any of our securities for a period of six months
following the date of this prospectus, without the prior written consent of the
representative.
RULE 144
In general, under Rule 144, as currently in effect, beginning 90 days after
completion of this offering, a person or persons, including an affiliate, whose
shares are aggregated and who has satisfied a one-year holding period including
the period of any prior owner who is not an affiliate of ours, may sell within
any three-month period a number of shares which does not exceed the greater of:
- 1% of the then outstanding shares of our common stock; or
- the average weekly trading volume during the four calendar weeks preceding
the sale
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and to the availability of current public information about us.
RULE 144(K)
Rule 144(k) also permits the sale of shares, without any volume limitation
or manner of sale or public information requirements, by a person who is not an
affiliate of ours and who has not been an affiliate of ours for at least the
three months preceding the sale, and who has satisfied a two-year holding
period.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates", as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by "affiliates" under Rule 144 without compliance
with its one year minimum holding period requirement.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the form
of which is filed as an exhibit to the registration statement filed with the
Commission of which this prospectus is a part, the underwriters named below,
have agreed through Dirks & Company, Inc. as the representative of the
underwriters, to purchase from us, and we have agreed to sell to the
underwriters, the aggregate number of units set forth opposite their respective
names:
[Download Table]
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
Dirks & Company, Inc........................................
---------
Total..................................................... 1,500,000
=========
The underwriting agreement provides that the obligations of the several
underwriters under that agreement depend on various conditions, including:
- the absence of any material adverse change in our business;
- the absence of any event that has materially disrupted or in the
representative's opinion will in the immediate future materially adversely
disrupt the financial markets;
- the absence of our default under any of our agreements or contracts;
- the continued truth of the statements made in this prospectus;
- the absence of any event that in the representative's opinion that would
make it inadvisable to proceed with this offering,
- the continued employment of some of our officers and directors; and
- the receipt of certificates, opinions and letters from us, our counsel and
our independent public accountants.
This section contains the material conditions upon which the underwriting
agreement depends, although we direct you to the underwriting agreement, the
form of which is filed in an exhibit to the registration statement, of which
this prospectus forms a part, for a complete list of the conditions of the
underwriters' obligations.
The underwriters are committed to take and to pay for all of the units
offered by this prospectus, if any are purchased. In the event of a default by
any of the underwriters, the purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
The underwriters will offer the units to the public at the public offering
price set forth on the cover page of this prospectus. The underwriters may allow
some dealers concessions of not more than $ per unit. The underwriters also
may allow, and those dealers may re-allow, a concession of not more than
$ per unit to some other dealers. The public offering price,
concessions and re-allowances may be changed after the completion of this
offering.
We have agreed to indemnify the underwriters and their controlling persons
against some liabilities, as more fully set forth in the underwriting agreement,
including liabilities under the Securities Act, and to contribute to payments
the underwriters and their controlling persons may be required to make.
We have also agreed to pay to the representative a non-accountable expense
allowance equal to two and one half percent of the gross proceeds of this
offering, less $25,000 which has been paid to a prior underwriter.
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We have also agreed to pay all expenses in connection with qualifying the
securities under the laws of those states that the representative may designate,
including fees and expenses of counsel retained for these purposes by the
representative, and the costs and expenses in connection with qualifying the
offering with the National Association of Securities Dealers, Inc.
The representative of the underwriters has informed us that the underwriters
do not expect sales of the units offered by this prospectus to be made to
discretionary accounts to exceed five percent of the total number of units
offered.
We, have agreed not to offer or sell any of our securities for a period of
thirteen months from the date of this prospectus without the consent of the
representative, except that we may conduct a secondary public offering of our
securities in an amount of at least $30,000,000 if the representative is given
the opportunity to participate in the secondary offering. Our officers and
directors and all of our current stockholders have agreed that, for a period of
six months from the completion of this offering, we and they will not, without
the prior written consent of the representative:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock.
We have agreed to issue and sell to the representative of the underwriters
or its designees, for nominal consideration, warrants to purchase 100,000 shares
of our common stock and/or 50,000 redeemable common stock purchase warrants. The
representative's warrants are exercisable for a period of four years commencing
one year after the date of issuance at a price equal to $ per share of
common stock and $0.12 per redeemable common stock purchase warrant. The
representative's warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares issuable upon
exercise, upon the occurrence of specific events, including (a) stock dividends,
(b) stock splits and (c) recapitalizations. The representative's warrants
contain demand and piggyback registration rights relating to the shares of
common stock issuable upon exercise of these warrants. For the life of the
representative's warrants, the representative will have the opportunity to
profit from a rise in the market price of our shares of common stock. The
representative's warrants are restricted from sale, transfer, assignment or
hypothecation for the one-year period from the date of this prospectus, except
to officers or partners of the underwriters and members of the selling group
and/or their officers or partners.
We have agreed to grant the representative the right, for one year from the
date of this prospectus, to designate one person to attend all meetings of our
board of directors. The representative has not yet exercised its right to
designate this person. We have agreed to reimburse the representative's designee
for all out-of-pocket expenses incurred in connection with the designee's
attendance at meetings of our board of directors. As a results of our agreements
with the representative of the underwriters, the representative will continue to
have influence over us following the completion of this offering.
Prior to this offering, there has been no public market for any of our
securities. The initial public offering price of the units and the underlying
securities offered by this prospectus will be determined by negotiations between
the representative and us. Among the factors considered in determining the price
include:
- prevailing market conditions,
- the history of and the prospects for the industry in which we compete,
- an assessment of our management,
- our prospects, and
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- our capital structure.
The offering price does not necessarily bear any relationship to our assets,
results of operations or net worth. There can be no assurance that an active
trading market will develop for any of the securities offered by this
prospectus, or that such securities will trade in the public market at or above
the initial public offering price.
The representative, on behalf of the underwriters, may engage in:
- over-allotments,
- stabilizing transactions,
- syndicate covering transactions, and
- penalty bids.
An over-allotment involves syndicate sales in excess of this offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the shares of common stock and warrants being offered so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the shares of common stock and warrants
originally sold by the syndicate member are purchased in a syndicate covering
transaction and penalty bids may cause the price of the shares of common stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise,
and if commenced, may be discontinued at any time. In addition, the underwriters
may engage in passive market making transaction in our securities on the Nasdaq
National Market in accordance with Rule 103 of Regulation M. Neither we nor the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the securities offered by this prospectus.
LEGAL MATTERS
Certain legal matters in connection with the offering, including the
validity of the shares of common stock and the redeemable common stock purchase
warrants offered hereby, and the shares of common stock underlying the warrants
offered hereby, will be passed on for us by Shefsky & Froelich, Ltd., Chicago,
Illinois. Certain shareholders of Shefsky & Froelich, Ltd. own shares of our
common stock. Certain legal matters will be passed upon for the underwriters by
Orrick, Herrington & Sutcliffe LLP, New York, New York.
EXPERTS
Our consolidated financial statements for the years ended December 31, 1997,
1998 and 1999 appearing in this prospectus and registration statement, have been
audited by Blackman Kallick Bartelstein, LLP, independent auditors, Chicago,
Illinois, as set forth in their reports thereon appearing elsewhere herein and
in the registration statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement, of which this prospectus is a part, on Form SB-2 under the Securities
Act with respect to the securities offered by this prospectus. This prospectus
does not contain all the information set forth in the registration statement. We
have omitted certain portions of this information as allowed by the rules and
regulations of the Commission. Statements contained in this prospectus as to the
content of any contract or other
54
document are not necessarily complete. To gain a complete understanding of any
such contract or other documents, you should read the copies which are filed as
exhibits to the registration statement.
For further information regarding us and the securities we are offering, you
may read the registration statement, including all amendments, and the exhibits
and schedules which may be obtained from the Commission in Room 1024 of the
Commission's main offices at 450 Fifth Street, N.W., Washington, DC 20549, and
at the Commission's regional offices located at the Citicorp Center, 500 West
Madison, Suite 1400, Chicago, IL 60661 and 7 World Trade Center, 13(th)Floor,
New York, New York 10048. You can inspect this material for free at the
Commission's offices, and you can make copies of the material if you pay fees
established by the Commission. The Commission's phone number is 1-800-SEC-0330
(1-800-732-0330).
The Commission maintains a website that contains registration statements,
reports, proxy material and other information regarding registrants that file
electronically with the Commission. The address for the website is
http://www.sec.gov.
Upon effectiveness of the registration statement, we will be subject to the
reporting requirements of the Securities Exchange Act and intend to furnish our
stockholders annual reports containing financial statements audited by our
independent accountants and to make available quarterly reports containing
unaudited financial statements for each of the first three quarters of each
fiscal year.
We have applied for listing of our securities on the Nasdaq National Market
and upon listing, investors can obtain information about us on its website
http://www.nasdaqamex.com.
55
LIQUOR.COM, INC.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
[Download Table]
PAGE
--------
Independent Auditor's Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7-15
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Liquor.com, Inc.
We have audited the accompanying balance sheets of LIQUOR.COM, INC. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LIQUOR.COM, INC. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, on January 7, 2000, the
Company obtained $500,000 of bridge financing. Repayment of this promissory note
is highly dependent upon the success of the upcoming public offering.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
February 15, 2000
F-2
LIQUOR.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
[Enlarge/Download Table]
PRO FORMA
STOCKHOLDERS'
EQUITY 1999
1998 1999 (UNAUDITED)
--------- ---------- -------------
ASSETS
CURRENT ASSETS
Cash.................................................... $ 461,924 $ 340,786
Accounts receivable, less allowance for doubtful
accounts of $10,000 in 1999 and $0 in 1998............ 74,155 520,312
Prepaid expenses and other current assets............... 24,310 51,076
--------- ----------
Total Current Assets.................................. 560,389 912,174
PROPERTY AND EQUIPMENT (Net of accumulated depreciation
and amortization)....................................... 20,742 248,361
OTHER..................................................... 22,246 51,775
--------- ----------
$ 603,377 $1,212,310
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings--Bank............................. $ 5,000 $ 25,000
Accounts payable--Trade................................. 654,100 1,074,942
Long-term debt due within one year...................... -- 4,432
Accrued expenses........................................ 4,018 26,365
--------- ----------
Total Current Liabilities............................. 663,118 1,130,739
--------- ----------
NONCURRENT LIABILITIES
Long-term debt (Net of portion included in current
liabilities).......................................... -- 186,512
Due to related party.................................... 31,975 31,975
--------- ----------
Total Noncurrent Liabilities.......................... 31,975 218,487
--------- ----------
Total Liabilities..................................... 695,093 1,349,226
--------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock--$.00001 par value; authorized--6,000,000;
shares issued--2,700,000 shares and 3,050,000 shares
as of December 31, 1998, 1999, respectively; pro forma
3,472,222 issued and outstanding at December 31....... 27 31 $ 35
Additional paid-in capital.............................. 19,123 169,169 699,165
Preferred stock--$.00001 par value;
authorized--1,000,000 shares; issued 0 shares as of
December 31, 1998 and 1999............................ -- -- --
Accumulated deficit..................................... (110,916) (306,116) (306,116)
--------- ---------- ---------
Total Stockholders' (Deficit) Equity.................. (91,716) (136,916) $ 393,084
--------- ---------- =========
$ 603,377 $1,212,310
========= ==========
The accompanying notes are an integral part of the financial statements.
F-3
LIQUOR.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
[Enlarge/Download Table]
AMOUNT % OF NET SALES
------------------------------------ ------------------------------------
1997 1998 1999 1997 1998 1999
---------- ---------- ---------- -------- -------- --------
REVENUES.......................... $1,281,453 $1,818,960 $2,788,187 100.0% 100.0% 100.0%
COST OF REVENUES.................. 704,486 1,076,197 1,946,758 55.0 59.2 69.8
---------- ---------- ---------- ----- ----- -----
GROSS PROFIT...................... 576,967 742,763 841,429 45.0 40.8 30.2
---------- ---------- ---------- ----- ----- -----
OPERATING EXPENSES
Marketing....................... 312,814 339,973 425,236 24.4 18.7 15.3
General and administrative...... 310,804 360,174 592,613 24.3 19.8 21.3
---------- ---------- ---------- ----- ----- -----
Total Operating Expenses...... 623,618 700,147 1,017,849 48.7 38.5 36.5
---------- ---------- ---------- ----- ----- -----
(LOSS) INCOME FROM OPERATIONS..... (46,651) 42,616 (176,420) (3.6) 2.3 (6.3)
INTEREST EXPENSE.................. (7,470) (7,053) (18,780) (.6) (.4) (.7)
---------- ---------- ---------- ----- ----- -----
NET (LOSS) INCOME................. $ (54,121) $ 35,563 $ (195,200) (4.2)% 1.9% (7.0)%
========== ========== ========== ===== ===== =====
NET (LOSS) INCOME PER SHARE:
BASIC AND DILUTED............... $ (0.02) $ 0.01 $ (0.06)
========== ========== ==========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET (LOSS) INCOME PER
SHARE........................... 3,026,956 3,026,956 3,033,216
========== ========== ==========
PRO FORMA NET LOSS
PER SHARE:
BASIC AND DILUTED (UNAUDITED)... $ (0.06)
==========
SHARES USED IN COMPUTING
PRO FORMA NET LOSS
PER SHARE
BASIC AND DILUTED (UNAUDITED)... 3,034,373
==========
The accompanying notes are an integral part of the financial statements.
F-4
LIQUOR.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
[Enlarge/Download Table]
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
-------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- -------- --------- -------- ---------- ----------- -------------
BALANCE, JANUARY 1, 1997... 2,700,000 $ 27 -- $ -- $ 19,173 $ (92,358) $ (73,158)
Net loss................. -- -- -- -- -- (54,121) (54,121)
--------- ------ --------- -------- -------- --------- ---------
BALANCE, DECEMBER 31,
1997..................... 2,700,000 27 -- -- 19,173 (146,479) (127,279)
Net income............... -- -- -- -- -- 35,563 35,563
--------- ------ --------- -------- -------- --------- ---------
BALANCE, DECEMBER 31,
1998..................... 2,700,000 27 -- -- 19,173 (110,916) (91,716)
Issuance of common stock
for professional
services............... 300,000 3 -- -- 99,997 -- 100,000
Issuance of common stock
for cash............... 50,000 1 -- -- 49,999 -- 50,000
Net loss................. -- -- -- -- -- (195,200) (195,200)
--------- ------ --------- -------- -------- --------- ---------
BALANCE, DECEMBER 31,
1999..................... 3,050,000 31 -- -- 169,169 (306,116) (136,916)
Issuance of convertible
preferred stock on
January 7, 2000........ -- -- 422,222 30,000 -- -- 30,000
Assumed conversion of
convertible preferred
stock to common
stock.................. 422,222 4 (422,222) (30,000) 529,996 -- 500,000
--------- ------ --------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 1999,
PRO FORMA (UNAUDITED).... 3,472,222 $ 35 -- $ -- $699,165 $(306,116) $ 393,084
========= ====== ========= ======== ======== ========= =========
The accompanying notes are an integral part of the financial statements.
F-5
LIQUOR.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
[Enlarge/Download Table]
1997 1998 1999
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income......................................... $(54,121) $ 35,563 $(195,200)
-------- -------- ---------
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities
Depreciation and amortization........................... 7,340 11,216 20,546
Professional fees paid in common stock.................. -- -- 100,000
(Increase) decrease in
Receivables........................................... (7,259) (5,043) (445,218)
Prepaid expenses and deposits......................... (713) (22,332) (57,234)
Increase (decrease) in
Accounts payable...................................... 49,480 382,799 420,842
Accrued expenses...................................... (3,026) (1,408) 22,347
-------- -------- ---------
Total Adjustments................................... 45,822 365,232 61,283
-------- -------- ---------
Net Cash (Used in) Provided by Operating
Activities........................................ (8,299) 400,795 (133,917)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from insurance for loss of assets................ 13,063 -- --
Capital expenditures...................................... (15,798) (23,500) (56,165)
-------- -------- ---------
Net Cash Used in Investing Activities............... (2,735) (23,500) (56,165)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit.......... (24,600) (44,695) 20,000
Payment of long-term debt................................. -- -- (1,056)
Proceeds from issuance of common stock.................... -- -- 50,000
-------- -------- ---------
Net Cash (Used in) Provided by Financing
Activities........................................ (24,600) (44,695) 68,944
-------- -------- ---------
NET (DECREASE) INCREASE IN CASH............................. (35,634) 332,600 (121,138)
CASH, BEGINNING OF YEAR..................................... 164,958 129,324 461,924
-------- -------- ---------
CASH, END OF YEAR........................................... $129,324 $461,924 $ 340,786
======== ======== =========
The accompanying notes are an integral part of the financial statements.
F-6
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS AND RECAPITALIZATION
Liquor.com, Inc. (the Company) provides services and information to
producers, sellers and consumers of alcohol beverages over the Internet.
Consumers order products via the Company's Web site or catalog. The orders are
filled through the Company's network of over 1,300 alcohol beverage retailers
worldwide as the Company does not sell directly to the consumer. Producers and
sellers of alcohol beverages are provided with demographic information and
product advertising through the Company's Web site and catalog. Substantially
all of the Company's revenues are generated in the United States. Credit is
extended to the Company's corporate customers under normal trade terms without
security.
On August 16, 1993, Liquor By Wire, Inc. was incorporated in the State of
Illinois. On December 15, 1999, Liquor.com, Inc., a wholly owned subsidiary of
Liquor By Wire, Inc. was incorporated in the State of Delaware. On December 22,
1999, Liquor By Wire, Inc. was merged into Liquor.com, Inc., with
Liquor.com, Inc. being the surviving corporation. Following the merger, each
outstanding share of common stock of Liquor By Wire, Inc. was converted into
22,500 shares of the common stock of Liquor.com, Inc. so that all 133 1/3 shares
outstanding of Liquor By Wire, Inc. were converted into 3,000,000 shares of
Liquor.com, Inc. and all of the outstanding shares of Liquor.com, Inc. held by
Liquor By Wire, Inc. were canceled. All references in the financial statements
to the number of shares and to the per share amounts have been retroactively
restated to reflect these changes.
(B) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of credit card and trade receivables
arising in the normal course of business. The Company has arranged with its
network of alcohol beverage retailers that goods sold to customers be shipped
directly from the retailer.
(C) PROPERTY AND EQUIPMENT
The company's policy is to depreciate or amortize the original cost of the
assets over the estimated useful lives of the assets by use of the straight-line
method.
[Download Table]
YEARS
--------
Building and improvements................................... 39
Furniture and fixtures...................................... 7
Computer softwrae and hardware.............................. 3-5
(D) DEFERRED EXPENSES
As of December 31, 1999, external costs directly attributable to the planned
initial public offering have been deferred. The costs will be charged against
the Company's additional paid-in-capital in connection with the consummation of
its initial public offering.
F-7
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(E) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable, long-term debt and miscellaneous other
assets and liabilities, approximate fair value.
(F) REVENUE RECOGNITION
Net revenues include the dollar amount of orders placed on our website, net
of returns and allowances, and advertising revenues. The Company recognizes
revenue on customer orders, net of estimated sales returns, when the products
are shipped to the customer. For all sales made through its website, the Company
bears credit risk and bears inventory risk for returned products that are not
successfully returned to the suppliers.
The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months. To
the extent that advertising customers may have paid for advertisements that have
yet to be published in the Company's catalog or on the Company's Web site, the
Company defers revenue recognition until such advertisements are delivered.
(G) COST OF REVENUES
The cost of goods sold includes product costs, direct costs associated with
advertising revenues and shipping and handling costs paid by the Company in the
fulfillment of customer orders.
(H) ADVERTISING
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999 the Company incurred advertising expenses of
$185,575, $210,499 and $229,143, respectively.
(I) INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. Under the Tax Reform
Act of 1986, the benefits from net operating losses carried forward may be
impaired or limited in certain circumstances. In addition, a valuation allowance
has been provided for deferred tax assets when it is more likely than not that
all or some portion of the deferred tax asset will not be realized. The Company
has established a full valuation allowance on the aforementioned deferred tax
assets due to the uncertainty of realization.
(J) COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income (loss) and its
components in the financial statements. Components of comprehensive income
(loss) include amounts that, under SFAS No. 130, are included in the
F-8
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
comprehensive income (loss) but are excluded from net income (loss). There were
no significant differences between the Company's net loss and comprehensive
loss.
(K) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all
the costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. The
Company adopted SOP 98-1 on January 1, 1999. Adoption did not have a material
effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133 is
effective for the fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair market value. Changes in the fair value of derivatives are recorded
each period in the current earnings or other comprehensive income (loss)
depending on whether a derivative is designed as part of a hedge transaction
and, if so, the type of hedge transaction involved. The Company does not expect
that adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operation, as the Company does not currently
hold any derivative financial instruments.
(L) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(M) SEGMENT REPORTING
In December 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The adoption of this
standard requires that reportable segments be reported consistent with how
management assesses segment performance. This statement requires disclosure of
certain information by reportable segment, geographic area and major customer.
See Note 10, "Segment Information," for further information. As a result, the
Company will separately report information on the two operating segments:
catalog and advertising. The Company does not calculate operating income by
segment. Accordingly, gross profit is instead presented. In addition, because
management does not rely on segment asset allocation, information regarding
segment assets is not meaningful and therefore is not reported.
F-9
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(N) CONCENTRATION RISKS
Substantially all of the company's cash is held at one financial
institution.
(O) STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its employee stock options rather than
alternative fair value accounting allowed by SFAS No. 123, "Accounting for
Stock-Based Compensation." APB No. 25 provides that the compensation expense
relative to the company's employee stock options is measured based on the
intrinsic value of stock options granted. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123. This method recognizes the fair
value of stock options granted at the date of grant in earnings over the vesting
period of the options.
(P) STOCK-BASED COMPENSATION (CONTINUED)
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
NOTE 2--PROPERTY AND EQUIPMENT
[Download Table]
1998 1999
-------- --------
Land.................................................... $ -- $ 18,000
Building and improvements............................... -- 202,192
Furniture and fixtures.................................. 10,573 19,921
Computer software and hardware.......................... 23,500 42,125
-------- --------
34,073 282,238
Accumulated depreciation and amortization............... (13,331) (33,877)
-------- --------
$ 20,742 $248,361
======== ========
NOTE 3--SHORT-TERM BORROWINGS--BANK
As of December 31, 1999, the Company was obligated under a line of credit
with LaSalle Bank for $25,000. Borrowings under this line of credit bear
interest at the prime rate plus 1.5% and are secured by substantially all of the
Company's assets. Certain conditions stipulated in the borrowing agreement
relating to net income must be met on an annual basis. As of December 31, 1999,
the Company was in violation of this covenant. As of December 31, 1999, maximum
additional available borrowings on this line of credit were $95,000. This
agreement is payable on demand. The Company's two principal stockholders have
personally guaranteed the borrowings under this line of credit.
F-10
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 4--LONG-TERM DEBT
[Download Table]
Mortgage note payable to bank, payable in monthly
installments of $1,590, including interest at 7.75% per
annum, due September 2004; secured by a mortgage on the
building and land and guaranteed by the company's two
principal stockholders.................................... $190,994
Less current maturities..................................... (4,432)
--------
$186,512
========
Maturities on long-term debt are as follows as of December 31, 1999:
[Download Table]
Year Ending December 31:
2001...................................................... $ 4,788
2002...................................................... 5,173
2003...................................................... 5,588
2004...................................................... 170,963
--------
$186,512
========
NOTE 5--INCOME TAXES
The Company incurred taxable losses for federal and state purposes for the
years ended December 31, 1997, 1998 and 1999. Accordingly, the Company did not
incur any federal income tax expense for those periods other than the minimum
required taxes for certain state and local jurisdictions.
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $220,000 related to federal and state income taxes which can be
used to offset future federal and state taxable income from operations.
Substantially all of these carryforwards will begin to expire in 2010.
Significant components of the Company's deferred tax asset as of
December 31, 1997, 1998 and 1999 are as follows:
[Download Table]
1997 1998 1999
-------- -------- --------
Net operating loss carryforward................ $ 34,300 $ 19,600 $ 85,500
Other.......................................... -- -- 2,000
-------- -------- --------
Gross deferred tax assets...................... 34,300 19,600 87,500
Valuation allowance............................ (34,300) (19,600) (87,500)
-------- -------- --------
Net Deferred Income Tax Asset.................. $ -- $ -- $ --
======== ======== ========
Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50.0% over a three-year period. The
impact of any limitations that may be imposed for future issuances of equity
securities, including issuances with respect to acquisitions, has not been
determined.
F-11
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 5--INCOME TAXES (CONTINUED)
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
[Enlarge/Download Table]
1997 1998 1999
-------- -------- --------
U.S. Federal statutory rate................................ 35% 35% 35%
Change in valuation allowance.............................. (35) (35) (35)
--- --- ---
--% --% --%
=== === ===
NOTE 6--STOCKHOLDERS' EQUITY
As of December 31, 1998, 6,000,000 shares of $.00001 par value common stock
of the Company were authorized, 2,700,000 of which were issued and outstanding.
As of December 31, 1999, 6,000,000 shares of $.00001 par value common stock were
authorized, of which 3,050,000 shares were issued and outstanding; and 1,000,000
shares of $.00001 par value Series A convertible preferred stock were
authorized, but none were issued until January 7, 2000. See Notes 1 and 13.
Each share of preferred stock is convertible into common stock as determined
by dividing the original issue price by the conversion price at the time in
effect for a share of Series A convertible preferred stock. The preferred stock
is automatically convertible upon the consummation of a corporate transaction
that meets certain minimum conditions in a qualified public offering as defined,
or at the option of the preferred stockholders upon the completion of a public
offering which does not meet the minimum conditions.
On August 31, 1999, the company issued 300,000 shares of common stock at
$.33 per share in exchange for $100,000 of business consulting services rendered
by an outside consulting firm. On December 31, 1999, the company issued 50,000
shares of common stock at $1.00 per share for $50,000 in cash to a previously
unrelated party.
NOTE 7--OTHER CASH FLOW INFORMATION
Cash payments for interest were $9,181, $7,053 and $18,780 in 1997, 1998 and
1999, respectively.
During 1999, the Company financed the purchase of its office building and
land for $192,000.
NOTE 8--EARNINGS (LOSS) PER SHARE
The Company computes net loss per share under the provisions of SFAS
No. 128, "Earnings per Share" (SFAS 128), and SEC Staff Accounting Bulletin
No. 98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss per
share is computed by dividing the net (loss) income available to common
stockholders for the period by the weighted-average number of shares of common
stock outstanding during the period. The calculation of diluted net (loss)
income per share excludes potential common shares if the effect is antidilutive.
Basic earnings per share is computed by dividing income or loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding during this period.
F-12
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 8--EARNINGS (LOSS) PER SHARE (CONTINUED)
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's preferred stock. In addition, income or
loss would be adjusted for dividends and other transactions relating to
preferred shares for which conversion is assumed. The weighted average number of
shares utilized in arriving at diluted earnings per share for all periods
presented reflect an adjustment for the 350,000 shares of common stock issued as
described in Note 6 above which were issued for consideration below the proposed
initial public offering price. As the Company had a net loss, the impact of the
assumed preferred stock conversion is anti-dilutive and as such, these amounts
have been excluded from the calculation of diluted earnings per share.
NOTE 9--UNAUDITED PRO FORMA FINANCIAL INFORMATION
On December 16, 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of the Company's stock in connection
with a proposed initial public offering ("IPO"). If the IPO is consummated under
the terms presently anticipated, upon the closing of the proposed IPO, all of
the then outstanding shares of the Company's preferred stock will automatically
convert into shares of common stock on a 1-for-1 basis, subject to antidilution
provisions, including stock splits, stock dividends and recapitalizations.
Unaudited pro forma net (loss) income per share is computed by dividing net
(loss) income by the sum of the weighted number of shares of common stock
outstanding, including the shares resulting from the conversion of the preferred
stock as though such conversion occurred at December 31, 1999. Each share of
preferred stock converts into one share of common stock subject to antidilution
provisions, including stock splits, stock dividends and recapitalizations. The
conversion of the preferred stock has been reflected in the accompanying
unaudited pro forma statements of stockholders' equity as if these events had
occurred on December 31, 1999.
The unaudited pro forma net loss per share assumes the conversion of the
preferred stock to common stock, at a conversion price of $1.18 as if it had
been converted as of December 31, 1999, even though the result is anti-dilutive.
The following tables present the calculation of basic and diluted net loss
per share and pro forma net loss per share for the year ended December 31, 1999:
[Download Table]
DENOMINATOR
NUMERATOR (WEIGHTED--
(NET LOSS) AVERAGE SHARES) PER SHARE
---------- --------------- ---------
Basic and diluted net loss per common
share..................................... $(195,200) $3,033,216 $(0.06)
Assumed conversion of shares of preferred
stock into share of common stock at
December 31, 1999......................... -- 1,157 --
--------- ---------- ------
Pro forma basic and diluted net loss per
common share.............................. $(195,200) $3,034,373 $(0.06)
========= ========== ======
F-13
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 9--UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
The unaudited pro forma equity presented in the balance sheet assumes the
conversion of the preferred stock issued on January 7, 2000.
NOTE 10--SEGMENT INFORMATION
[Download Table]
1997 1998 1999
---------- ---------- ----------
Revenues
Catalog and website.................... $ 970,475 $1,452,079 $2,435,118
Advertising............................ 310,978 366,881 353,069
---------- ---------- ----------
Total revenues....................... 1,281,453 1,818,960 2,788,187
---------- ---------- ----------
Gross Profit
Catalog and website.................... 273,551 375,882 488,360
Advertising............................ 303,416 366,881 353,069
---------- ---------- ----------
Total Gross Profit................... 576,967 742,763 841,429
---------- ---------- ----------
Less: Marketing expenses................ 312,814 339,973 425,236
General and administrative
expenses............................... 310,804 360,174 592,613
Interest expense................... 7,470 7,053 18,780
---------- ---------- ----------
Net (Loss) Income........................ $ (54,121) $ 35,563 $ (195,200)
========== ========== ==========
All amounts have been stated in accordance with the provisions of SFAS
No. 131. There were no sales to any individual customer during any of the years
in the three-year period ended December 31, 1999 that represented 10% or more of
net sales. The Company has no long-lived assets located in foreign countries.
The Company attributes net sales to an individual country based upon the
location of the customer. The majority of the customers are located in the
United States.
NOTE 11--RELATED PARTY
Demand notes payable to a stockholder of the Company amounted to $31,975 as
of December 31, 1998 and 1999. The note is non-interest bearing and is
classified as long-term as the stockholder has committed to not demanding
payment prior to December 31, 2000.
NOTE 12--COMMITMENTS AND CONTINGENCIES
On October 11, 1999, the Company entered into an agreement with a business
consulting firm and a minority stockholder to pay a finder's fee in cash equal
to 2% of the equity capital or other financing raised. The agreement expires on
September 1, 2000.
The Company has also entered into an agreement with this stockholder
whereby, if a successful public offering does not occur on or before
September 1, 2000, the stockholder will return all stock issued to the Company
or its designee.
On December 7, 1999, the Company entered into a consulting agreement with a
minority stockholder to provide business development and financial and
investment banking consulting services
F-14
LIQUOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
from January 1, 2000 to February 29, 2000. The agreement calls for monthly
compensation of $10,000 plus reasonable expenses.
NOTE 13--SUBSEQUENT EVENTS
On January 7, 2000, in consideration for $500,000 in bridge financing, the
Company issued to The Gem Group a non-interest bearing promissory note in the
principal amount of $500,000 and 422,222 shares of Series A Preferred Stock. The
proceeds from the bridge financing have been allocated between debt and
preferred stock based upon their relative fair values of $470,000 and $30,000,
respectively. The promissory note is due on or before the earlier of a qualified
public offering, upon demand or December 31, 2001. If demand is made, it shall
be repaid in two equal annual installments, each covering one-half the principal
sum of the note, the first to be made within 60 days of the demand for payment
and the second payment to be made one year after the due date of the first
payment or a qualified public offering. Repayment of this note is highly
dependent upon the success of the upcoming public offering.
In January 2000, the Company implemented a stock option plan which reserves
1,000,000 shares of common stock. Nonstatutory Stock Options and Stock Purchase
Rights may be granted to service providers at a price determined by the
administrator. Incentive Stock Options may be granted only to employees. The per
share exercise price of the incentive stock options is 110% of the fair market
value of the shares on the date of the grant for employees owning more than 10%
of the voting stock of the Company and 100% of the fair market value for
employees owning less than 10% of the voting stock. The term of each option
shall be stated in the option agreement; however, that term shall be no more
than 10 years from the date of the grant. No options or purchase rights have
been granted as of February 15, 2000.
F-15
Inside Back Cover Page of Prospectus
Top of Page--The top of the page contains the words "Corporate Accounts
Page" and depicts the corporate accounts page to be maintained on Liquor.com's
website.
Middle of Page--The middle of the page contains the words "Home Page" and
depicts the home page to be maintained on Liquor.com's website.
Bottom of Page--The bottom of the page contains the words "Affiliate Network
Page" and depicts the affiliate network page to be maintained on Liquor.com's
website.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION OR REPRESENT ANYTHING THAT IS NOT CONTAINED IN THIS
PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE AS OF THE
DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. THIS
PROSPECTUS IS AN OFFER TO SELL ONLY THE UNITS, AND COMPONENTS THEREOF, OFFERED
HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO
DO SO.
------------------------
[Download Table]
PAGE
--------
Prospectus Summary.................... 1
Risk Factors.......................... 5
Cautionary Note Regarding Forward-
looking Statements.................. 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion And Analysis
of Financial Condition And Results
of Operations....................... 18
Business.............................. 23
Management............................ 32
Certain Transactions.................. 40
Principal Stockholders................ 42
Description of Securities............. 43
Shares Available For Future Sale...... 49
Underwriting.......................... 51
Legal Matters......................... 53
Experts............................... 53
Where You Can Find Additional
Information About us................ 53
Index to Consolidated Financial
Statements.......................... F-1
------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the units, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters with
respect to their unsold allotments or subscriptions.
1,500,000 UNITS CONSISTING OF
TWO SHARES OF COMMON STOCK
AND ONE REDEEMABLE COMMON
STOCK PURCHASE WARRANT
[LOGO]
---------------------
PROSPECTUS
---------------------
DIRKS & COMPANY, INC.
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes corporations
to limit or eliminate the personal liability of directors and officers to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. Our Certificate
of Incorporation limits the liability of our directors and officers to us or our
stockholders to the fullest extent permitted by the Delaware statute. The
inclusion of this provision in the Certificate of Incorporation may have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even thought such an action,
if successful, might otherwise have benefitted us and our stockholders. The
Employment Agreements of certain directors and offices contain a provision
similar to the provisions of the Certificate of Incorporation.
We intend to obtain directors' and officers' insurance providing
indemnification for certain of our directors, officers and employees against
certain liabilities, prior to the completion of this offering.
Reference is also made to the underwriting agreement filed as Exhibit 1.1 to
the Registration Statement for information concerning the underwriters'
obligation to indemnify us and our officers and directors in certain
circumstances, and our obligation to indemnify the underwriters. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of ours pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a schedule of the estimated expenses to be incurred by us
in connection with the issuance and sale of the securities being registered
hereby:.
[Download Table]
Registration Fee............................................ $ 20,585.97
Nasdaq Listing Fee.......................................... $ 72,875.00
NASD Filing Fee............................................. $ 4,657.00
Blue Sky Fees and Expenses.................................. $ 15,000.00*
Accounting Fees and Expenses................................ $ 90,000.00*
Legal Fees and Expenses..................................... $140,000.00*
Printing Expenses........................................... $125,000.00*
Transfer Agent and Registrar Fees........................... $ 2,500.00
Miscellaneous............................................... $ 9,382.23
-----------
Total................................................... $480,000.00
===========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have sold unregistered securities as
described below. Unless otherwise indicated, there were no underwriters involved
in the transactions and there was no
II-1
underwriting discounts or commissions paid in connection with the transactions.
Unless otherwise indicated, the issuances of these securities were considered to
be exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and the regulations promulgated thereunder. The purchasers of the
securities in these transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution of the securities, and appropriate legends were affixed to
the certificates for the securities. The purchasers of the securities received
adequate information about us or had access, through employment or other
relationships, to such information.
1. In August 1999 we issued 13 1/3 shares of common stock, which
represented ten percent of our shares, on a fully diluted basis, at the time of
issuance, to Corporate Capital Strategies, Inc. in exchange for business
planning and business development services to be rendered pursuant to a Founders
Service Agreement dated August 31, 1999. The 13 1/3 shares were later converted
into 300,000 shares of our shares pursuant to a merger, and were later
transferred to certain persons affiliated with Corporate Capital Strategies,
Inc., including 118,000 shares to Jonathan McDermott, our Senior Vice President,
Business Development. Under this agreement, as amended, we also are obligated to
issue 21,428 shares to Corporate Capital Strategies upon completion of this
offering.
2. In December 1999 we sold a total of 50,000 shares of our common stock at
$1.00 per share to four individuals affiliated with Wink Communications, Inc.,
which maintains our website.
3. In January 2000 we sold a promissory note in the principal amount of
$500,000 and 422,222 shares of Series A Preferred Stock to GEM Global Group
Yield Fund Limited, Global Strategic Holdings Limited, Ocean Strategic Holdings
Limited, Tazmanic Corporation, and W.R. Timken Trust FBO Alexander C. Timken for
a total of $500,000.
4. In March 2000 we issued ten units, each consisting of one convertible
promissory note and one warrant to purchase shares of our common stock, to ten
purchasers for total consideration of $900,000. Each convertible note bears
interest at the prime rate plus two percent. Each note automatically converts
into shares of our common stock at a conversion price of $3.52 per share upon
completion of this offering, but may be converted earlier, at the same
conversion price, at the option of the holder. Each warrant allows the holder,
for a period of five years from the date of issuance, to purchase a number of
shares equal to the number issuable upon conversion of the convertible note, at
a price of $2.64 per share. In addition, the holders of our Series A have made a
committment to purchase one unit for total consideration of $100,000 by
exercising their preemptive rights with regard to this offering.
5. From January through March 2000, we sold a total of 248,236 shares of
common stock to
accredited investors for total consideration of $825,276. The first 42,194
shares sold in this offering were sold at a price of $2.37 per share, and the
remainder were sold at a price of $3.52 per share. In addition, in March 2000
the holders of our Series A Preferred Stock, in exercise of their preemptive
rights with regard to these sales, committed to purchase an additional 4,688
shares at a price of $2.37 per share for total consideration of $11,111, and an
additional 22,894 shares at a price of $3.52 for total consideration of $80,587.
These shares will be issued after the date of this prospectus.
ITEM 27. EXHIBIT INDEX
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
**1.1 Form of Underwriting Agreement
**1.2 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant
*3.1 Articles of Incorporation of Liquor by Wire, Inc. as filed
with the Illinois Secretary of State on August 16, 1993
II-2
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
*3.2 Certificate of Incorporation of Liquor.com, Inc. as filed
with the Delaware Secretary of State on December 15, 1999
*3.3 Articles of Merger of Liquor.com, Inc. as filed with the
Illinois Secretary of State on December 22, 1999
*3.4 Certificate of Ownership and Merger Merging Liquor by Wire,
Inc. into Liquor.com, Inc. as filed with the Delaware
Secretary of State on December 22, 1999
*3.5 Certificate of Designation of Series A Preferred Stock of
Liquor.com, Inc. as filed with the Delaware Secretary of
State on January 7, 2000
*3.6 Bylaws of the Liquor.com, Inc.
**4.1 Specimen Common Stock Certificate
**4.2 Form of Warrant Agreement
**4.3 Specimen Warrant Certificate
**5 Opinion of Shefsky & Froelich Ltd. Regarding Legality of
Shares
**10.1 Master Merchant-Partner Agreement for The LinkShare Network
**10.2 Network Membership Agreement between LinkShare Corporation
and Liquor by Wire, Inc.
*10.3 Founder's Services Agreement, Acknowledgment and Receipt
between Liquor by Wire, Inc. and Corporate Capital
Strategies, Inc.
**10.4 Termination of Founder's Services Agreement
**10.5 Consulting Agreement between Liquor by Wire, Inc. and
e-consulting, Inc.
**10.6 Termination of e-consulting agreement
**10.7 Investors' Rights Agreement between Liquor.com, Inc. and
holders of shares of Liquor.com Inc.'s Series A Preferred
Stock
**10.8 Partner Agreement between Liquor by Wire, Inc. and Concierge
Club
**10.9 Marketing Agreement between Damark International, Inc. and
Liquor by Wire, Inc.
**10.10 Merchant Agreement between Camdens and Liquor.com, Inc.
**10.11 Advertising Agreement between Liquor.com, Inc. and Seagram
Americas
**10.12 Consulting Agreement between Liquor.com, Inc., Whodowekrow,
LLC and Ronald Bloom
*10.13 Liquor.com, Inc. 2000 Stock Option Plan and Agreement
*10.14 Employment Agreement between Liquor.com, Inc. and Gail P.
Zelitzky
**10.15 Employment Agreement between Liquor.com, Inc. and Barry L.
Grieff
*10.16 Employment Agreement between Liquor.com, Inc. and Steven
Olsher
**10.17 Employment Agreement between Liquor.com, Inc. and Scott
Clark
**10.18 Employment Agreement between Liquor.com, Inc. and Jonathan
McDermott
*23.1 Consent of Blackman Kallick Bartelstein LLP
II-3
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
**23.2 Consent of Shefsky & Froelich Ltd. (incorporated into
Exhibit 5)
*24 Power of Attorney (see signature page to this registration
statement)
*27 Financial Data Schedule.
------------------------
* Filed with the registration statement.
** To be filed by amendment.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant in all instances will provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the undersigned Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of the registration statement as of the time it was
declared effective;
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be in the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(1) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended;
(2) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (for the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(d) The undersigned Registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless, in the opinion of counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized the this registration
statement to be signed on its behalf by the undersigned, in the City of Chicago,
State of Illinois, on April 13, 2000.
[Download Table]
LIQUOR.COM, INC.
(Registrant)
By: /s/ BARRY L. GRIEFF
-----------------------------------------
Barry L. Grieff, CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that Liquor.com, Inc., and each person whose
signature appears below, constitutes and appoints Barry L. Grieff and Scott B.
Clark, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution for him and in his name or in the
name of the Company and in any and all capacities, to sign any and all
amendments to the Form SB-2 Registration Statement under the Securities Act of
1933 and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
each said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises as full to all items and purposes as they might or could do in person,
hereby ratifying and confirming all that each said attorney-in-fact and agent or
his substitute or substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BARRY L. GRIEFF Chief Executive Officer and April 13, 2000
------------------------------------------- Director (Principal Executive
Barry L. Grieff Officer)
/s/ SCOTT B. CLARK Chief Financial Officer April 13, 2000
------------------------------------------- (Principal Financial and
Scott B. Clark Accounting Officer)
/s/ GAIL P. ZELITZKY April 13, 2000
------------------------------------------- Director
Gail P. Zelitzky
/s/ JOHN G. VANDEGRIFT April 13, 2000
------------------------------------------- Director
John G. Vandegrift
II-5
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RALPH J. SORRENTINO April 13, 2000
------------------------------------------- Director
Ralph J. Sorrentino
/s/ BRYAN D. LEGATE April 13, 2000
------------------------------------------- Director
Bryan D. Legate
II-6
Dates Referenced Herein
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